As filed with the Securities and Exchange Commission on March 9, 2006
Registration No. 333-126604
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
¨ | REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
¨ | Pre-Effective Amendment No. |
x | Post-Effective Amendment No. 3 |
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:
Christopher J. Austin, Esq.
Ropes & Gray LLP
One Embarcadero Center, Suite 2200
San Francisco, California 94111
Telephone: (415) 315-6300
Facsimile: (415) 315-6350
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 x
If appropriate, check the following box:
¨ | This amendment designates a new date for a previously filed registration statement. |
¨ | 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 . |
Registration No. 333-126604
3,801,965 Shares Common Stock
And
673,223 Warrants to Purchase Common Stock
And
673,223 Shares of Common Stock Issuable upon
Exercise of the Warrants
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 capital provider of choice for 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.
This prospectus relates to:
| the resale of up to 3,801,965 shares of our common stock, par value $0.001 per share; |
| the resale of up to 673,223 warrants to purchase shares of our common stock; and |
| the issuance and sale of up to 673,223 shares of our common stock which are initially issuable upon the exercise of the warrants. |
The common stock and warrants which are offered for resale by this prospectus are offered for the accounts of the current holders of such common stock and warrants, whom we refer to as the selling holders. The selling holders may sell the common stock, the warrants, and the common stock issuable upon exercise of the warrants, from time to time, directly to purchasers or through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, concessions or commissions. The common stock and warrants may be sold in one or more transactions at fixed prices, prevailing market prices at the time of sale, prices related to prevailing market prices, varying prices determined at the time of sale or negotiated prices.
We will not receive any of the proceeds from the shares of common stock and warrants sold by the selling holders. We may, however, receive cash consideration in connection with the exercise of the warrants for cash. We have agreed to bear specific expenses in connection with the registration and sale of the common stock and warrants being offered by the selling holders.
Our common stock is traded on the Nasdaq National Market under the symbol HTGC. The last reported sale price for our common stock on March 7, 2006 was $11.04 per share. Our warrants are quoted on the OTC Bulletin Board under the symbol HTGCW There can be no assurance that an active public market for the warrants will develop, or if such a market develops, it will be maintained. We do not intend to apply, and are not obligated to apply, to list the warrants on any national securities exchange or the Nasdaq National Market.
An investment in our common stock and warrants 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 12 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 or warrants. 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 March 9, 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 or warrants 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 or warrants 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.
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F-1 |
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.
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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 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. 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.
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 seek 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
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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 ConsiderationsConversion 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. 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 December 31, 2005, we had approximately $171.8 million of outstanding structured mezzanine debt investments in 31 portfolio companies and equity investments of $4.9 million, for a total investment portfolio at fair value of $176.7 million. In addition, at December 31, 2005, we had unfunded contractual commitments of $30.2 million.
At December 31, 2005, the weighted average yield to maturity of our loan obligations was approximately 12.87%. Yields to maturity are computed using interest rates as of December 31, 2005 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.
The following table summarizes our investments in our portfolio companies at fair value as of December 31, 2005.
Company |
Principal Business |
Fair Value of
Investment |
|||
Acceleron Pharmaceuticals, Inc. | Biopharmaceuticals | $ | 4,000,593 | ||
Guava Technologies, Inc. | Biopharmaceuticals | 4,500,948 | |||
Labopharm USA, Inc. | Biopharmaceuticals | 11,236,688 | |||
Merrimack Pharmaceuticals, Inc. | Biopharmaceuticals | 9,019,343 | |||
Omrix Biopharmaceuticals, Inc. | Biopharmaceuticals | 4,760,181 | |||
Paratek Pharmaceuticals, Inc. | Biopharmaceuticals | 10,031,201 | |||
Atrenta, Inc. | Software | 5,005,741 | |||
Concuity, Inc. | Software | 4,567,873 | |||
Gomez, Inc. | Software | 2,207,542 | |||
Inxight Software, Inc. | Software | 5,003,014 | |||
Metreo, Inc. | Software | 1,266,000 | |||
Proficiency, Inc. | Software | 4,011,907 | |||
Sportvision, Inc. | Software | 3,526,642 | |||
Talisma Corp. | Software | 3,422,242 | |||
Wageworks, Inc. | Consumer and business products | 19,827,725 | |||
IKANO Communications, Inc. | Communications and networking | 16,517,499 | |||
Interwise, Inc. | Communications and networking | 2,809,653 | |||
Occam Networks, Inc. | Communications and networking | 3,195,320 | |||
Optovia Corporation | Communications and networking | 5,000,000 | |||
Pathfire, Inc. | Communications and networking | 5,002,626 | |||
Adiana, Inc. | Medical devices and equipment | 2,510,383 | |||
Optiscan Biomedical, Corp. | Medical devices and equipment | 2,764,248 | |||
Power Medical Interventions, Inc. | Medical devices and equipment | 4,026,005 | |||
Xillix Technologies Corp. | Medical devices and equipment | 5,521,190 |
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Company |
Principal Business |
Fair Value of
Investment |
|||
Affinity Express, Inc. | Internet consumer and business services | 2,011,367 | |||
Invoke Solutions, Inc. | Internet consumer and business services | 1,501,546 | |||
RazorGator Interactive Group, Inc. | Internet consumer and business services | 5,160,686 | |||
Cornice, Inc. | Electronics and computer hardware | 12,844,786 | |||
Sling Media, Inc. | Electronics and computer hardware | 4,910,394 | |||
Ageia Technologies | Semiconductors | 8,508,104 | |||
Cradle Technologies | Semiconductors | 2,001,779 | |||
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Total investments | $ | 176,673,226 | |||
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Our management team, which includes Manuel A. Henriquez, our co-founder, Chairman, President and Chief Executive Officer, is currently comprised of 13 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.
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.
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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 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 December 31, 2005, our proprietary SQL-based database system included over 7,900 technology-related companies and over 1,480 venture capital private equity sponsor/investors, as well as various other industry contacts.
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Distributions
On December 9, 2005, we declared a dividend of $0.30 per share for stockholders of record on January 6, 2006. The dividend totaled approximately $2.9 million and was distributed on January 27, 2006. On October 27, 2005, we declared a dividend of $0.025 per share for stockholders of record on November 1, 2005. The dividend totaled approximately $245,000, which was distributed on November 17, 2005. We intend to continue to distribute quarterly dividends to our stockholders. The amount of our quarterly distributions will be determined by our Board of Directors out of assets legally available for distribution. We intend to seek to be treated as a regulated investment company, or a RIC, for United States federal income tax purposes upon the filing of our federal corporate income tax return for 2006, which election, when actually made, would be effective as of January 1, 2006, and as such, to distribute thereafter to our stockholders annually 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. However, such an election and qualification to be treated as a RIC requires that we comply with certain requirements that may affect our ability to pursue additional business opportunities. 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.
Assuming we are successful in attaining and maintaining our RIC status, 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 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 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 Certain United States Federal Income Tax Considerations.
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 seek election 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 ConsiderationsConversion 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. As of the date of this report 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 do not make a RIC election, we would continue to be taxed as a C corporation.
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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 December 31, 2005 was approximately 255%. 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 December 31, 2005, we had outstanding $25.0 million in aggregate principal amount of indebtedness under our bridge loan facility and $51.0 million drawn under our securitization credit facility. See Obligations and Indebtedness. If our subsidiary is able to obtain a license under the Small Business Investment Act of 1958, we intend to borrow money from the Small Business Administration.
Recent Developments
At December 31, 2005, we 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 we received a cash distribution of approximately $1.3 million. On February 6, 2006, we received an additional contingent cash distribution of $239,000 which will be accounted for as a loss recovery in the first quarter of 2006. Terms of the asset sale agreement call for two additional contingent payments of up to $500,000 each from which we are contractually entitled to receive approximately $350,000 each, but the conditions of the agreement make receipt and amount of payments uncertain and we will account for any future receipts as loss recoveries at the time of payment.
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 March 6, 2006, we increased our Citibank credit facility from $100 million to $125 million. As of February 28, 2006, we had $61.0 million outstanding under the Citibank credit facility.
On March 6, 2006, we entered into an agreement to repay $10.0 million of the $25.0 million outstanding under our loan with an affiliate of Farallon Capital. We 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%.
As of March 2, 2006, various funds affiliated with Farallon agreed to purchase $5.0 million of our common stock at a price per share equal to our NAV per share as of February 28, 2006.
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.
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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 13 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.
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.
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The Offering
Common Stock Offered By the Selling
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Up to 4,475,188 shares | |
Warrants Offered By the Selling
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Up to 673,223 warrants | |
Common Stock to be Outstanding
|
9,801,965 shares | |
Exercisability |
The warrants are exercisable at any time or from time to time until the expiration date. | |
Expiration Date |
June 17, 2009 | |
Exercise Price |
Each warrant entitles the holder thereof to purchase 1 share of common stock at $10.57 per share. | |
Use of Proceeds |
We will not receive any proceeds from the sale of the common stock or warrants by the selling holders. However, upon any exercise of the warrants for cash, we will receive cash consideration equal to the exercise price of the warrants. We anticipate that proceeds received by us from the exercise of the warrants, if any, will be used to invest in portfolio companies in accordance with our investment objective and strategy described in this prospectus and to pay our operating expenses. 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 one year or less from the time of investment. See Use of Proceeds. | |
Listing |
Our common stock is traded on the Nasdaq National Market under the symbol HTGC. Our warrants are quoted on the OTC Bulletin Board under the symbol HTGCW. We do not intend to apply, and are not obligated to apply, to list the warrants on any national securities exchange or the Nasdaq National Market. | |
Trading |
There can be no assurance that an active public market for the warrants will develop, or if such a market develops, it will be maintained. Our warrants are quoted on the OTC Bulletin Board under the symbol HTGCW. We do not intend to apply, and are not obligated to apply, to list the warrants on any national securities exchange or the Nasdaq National Market. | |
Shares of closed-end investment companies have in the past frequently traded at discounts to their net asset values. 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 our shares will trade above, at or below our net asset value. | ||
Taxation |
From incorporation through December 31, 2005, we were taxed as a corporation under Subchapter C of the Internal Revenue Code. We will seek to be treated for federal income tax purposes as a RIC when we file our 2006 federal income tax returns. 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 U.S. Federal Income Tax ConsequencesConversion 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. |
(1) | Includes 673,223 shares of common stock issuable upon exercise of the warrants. |
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The following table is intended to assist you in understanding the various costs and expenses that an investor in our common stock or warrants 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): | |||
Offering expenses borne by us |
0.1 | % (1) | |
Dividend reinvestment plan fees |
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Total stockholder transaction expenses (as a percentage of the public offering price) |
0.1 | % | |
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Annual Expenses (as a percentage of net assets attributable to common stock): (3) |
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Operating expenses |
5.5 | % (4)(5) | |
Interest payments on borrowed funds |
1.6 | % (6) | |
Fees paid in connection with borrowed funds |
1.0 | % (7) | |
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Total annual expenses |
8.0 | % (8) | |
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(1) | The percentage reflects estimated offering expenses of approximately $100,000. |
(2) | 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. |
(3) | Net assets attributable to common stock equals net assets (i.e., total assets less total liabilities), which were approximately $114 million at December 31, 2005. |
(4) | Operating expenses represent our annual operating expenses for fiscal 2005. |
(5) | 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. |
(6) | Interest payments on borrowed funds represents interest payments on borrowed funds in fiscal 2005. The Company did not borrow funds until April 12, 2005 and therefore did not make interest payments prior to that date. |
(7) | Fees paid in connection with borrowed funds represents fees paid in connection with borrowed funds in fiscal 2005. The Company did not borrow funds until April 12, 2005 and therefore did not incur fees in connection with the borrowed funds prior to that date. |
(8) | 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
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3 years
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5 years
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10 years
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You would pay the following expenses on a $1,000 investment, assuming a 5% annual return |
$ | 79.74 | $ | 230.30 | $ | 372.09 | $ | 691.48 | ||||
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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.
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The following consolidated financial data is derived from our audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations on page 34 and the consolidated financial statements and related notes included elsewhere herein. The historical data are not necessarily indicative of results to be expected for any future period.
Year ended December 31, 2005 (1) |
Period from
February 2, 2004
2004 (1) |
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Statement of Operations Data: |
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Investment Income: |
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Interest |
$ | 9,791,214 | $ | 214,100 | ||||
Fees |
875,429 | | ||||||
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Total investment income |
10,666,643 | 214,100 | ||||||
Operating expenses: |
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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 (2) |
252,000 | 680,000 | ||||||
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Total operating expenses |
9,141,865 | 2,255,922 | ||||||
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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 | ) | | |||||
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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 | | ||||||
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Net gain on investments |
834,787 | | ||||||
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Net increase (decrease) in net assets resulting from operations |
$ | 2,104,565 | $ | (2,041,822 | ) | |||
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As of December 31, 2005 |
As of December 31, 2004 |
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Balance Sheet Data: |
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Investments, at value |
$ | 176,673,226 | $ | 16,700,000 | ||||
Cash and cash equivalents |
15,362,447 | 8,678,329 | ||||||
Total assets |
193,647,879 | 25,232,672 | ||||||
Total liabilities (3) |
79,295,549 | 154,539 | ||||||
Total net assets |
$ | 114,352,330 | $ | 25,078,133 | ||||
Other Data: |
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Total debt investments, at value |
$ | 171,805,963 | $ | 16,700,000 | ||||
Total equity investments, at value |
4,867,263 | | ||||||
Unfunded commitments |
30,200,000 | 5,000,000 | ||||||
Net asset value per share (4) |
$ | 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 65. |
(4) | Based on common shares outstanding at period-end. |
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Investing in our common stock and warrants involves a high degree of risk. Before you invest in shares of our common stock or warrants, 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 or warrants. 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 and warrants 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.
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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 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 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
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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.
As of December 31, 2005, we had outstanding indebtedness of $25 million pursuant to our bridge loan from an affiliate of Farallon Capital Management, L.L.C. On August 1, 2005, the Company, through Hercules Funding Trust I, an affiliated statutory trust, executed a $100 million securitized credit facility with Citigroup Global Market Realty Corp., which we refer to as the Citigroup Facility. As of December 31, 2005, we had drawn $51.0 million under 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 Obligations and IndebtednessWarehouse Facility. In addition, we expect to continue to pursue financing from the Small Business Administration under its Small Business Investment Company program. See Obligations and IndebtednessSBIC Financing and RegulationSmall 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.
Assumed Return on our Portfolio (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) |
-21.0 | % | -12.6 | % | -4.1 | % | 4.4 | % | 12.8 | % |
(1) | Assumes $193.6 million in total assets, $76.0 million in debt outstanding, $114.4 million in stockholders equity, and an average cost of funds of 6.15%, which is the approximate cost of funds of the warehouse facility we entered into on August 1, 2005. Actual interest payments may be different. |
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.
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. 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. 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. 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.
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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 RegulationQualifying 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.
The SEC has 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.
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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 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 ConsiderationsTaxation 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.
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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 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.
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 December 31, 2005, we had borrowed $25 million pursuant to our Bridge Loan Credit Facility. On August 1, 2005, the Company, through Hercules Funding Trust I, an affiliated statutory trust, executed a $100 million securitized credit facility with Citigroup Global Market Realty Corp., which we refer to as the Citigroup
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Facility. As of December 31, 2005, we had drawn $51.0 million under the Citigroup Facility. We expect to incur additional indebtedness if our subsidiary obtains a small business investment company license, from the Small Business Administration. There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful.
It is likely that the terms of any long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business.
On August 1, 2005, the Company, through Hercules Funding Trust I, an affiliated statutory trust, executed a $100 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.
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 seek 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 ConsiderationsConversion 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.
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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.
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
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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.
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 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
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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.
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 lose money on our investments. Also, privately-held companies frequently 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
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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.
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 ConsiderationsTaxation 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
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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 are not publicly traded 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 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.
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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 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.
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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 this Offering
Our common stock price may be volatile and may decrease substantially.
The trading price of our common stock and warrants following this offering may fluctuate substantially. The price of the common stock and warrants that will prevail in the market after this offering may be higher or lower than the price you paid and the liquidity of our common stock and warrants may be limited, in each case depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
| price and volume fluctuations in the overall stock market from time to time; |
| significant volatility in the market price and trading volume of securities of RICs, business development companies or other financial services companies; |
| any inability to deploy or invest our capital; |
| fluctuations in interest rates; |
| any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| operating performance of companies comparable to us; |
| changes in regulatory policies or tax guidelines with respect to RICs or business development companies; |
| our not electing or losing RIC status; |
| actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of securities analysts; |
| changes in the value of our portfolio of investments; |
| realized losses in investments in our portfolio companies; |
| general economic conditions and trends; |
| loss of a major funded source; or |
| departures of key personnel. |
In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price and warrant 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.
Investing in shares of our common stock or warrants 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, warrants, and warrants shares may not be suitable for investors with lower risk tolerance.
We cannot assure you that the market price of our common stock or warrants will not decline following the offering.
We cannot predict the price at which our common stock or warrants 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
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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 or warrants 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 or warrants.
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 warrants 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 or warrants.
If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock or warrants could decline.
If our stockholders sell substantial amounts of our common stock or warrants in the public market following this offering, the market price of our common stock or warrants could decrease. Upon completion of this offering we will have 9,801,965 shares of common stock (not including any shares of common stock that may be issued upon exercise of warrants registered under this offering) and 673,223 warrants outstanding. Of these shares, the 6,000,000 shares sold in our initial public offering are freely tradable. We and our executive officers and directors are subject to agreements with the underwriters that restrict our and their ability to transfer our stock for a period of 180 days from the date of our initial public offering, and our other current stockholders were subject to agreements that restricted their ability to transfer our stock for a period of 120 days from the date of our initial public offering, subject to limited exceptions, including our filing of a registration statement, as described below. For a detailed description of these agreements see Shares Eligible for Future Sale. After the lock-up agreements expire, an aggregate of 3,801,965 additional shares of our common stock and 673,223 warrants will be freely tradeable.
There is no established trading market for the warrants, which could make it more difficult for you to sell warrants and could adversely affect their price.
There can be no assurances that an active public market for the warrants will develop as a result of the offering of the warrants by any selling holder or that, if such a market develops, it will be maintained. The warrants are quoted on the OTC
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Bulletin Board under the symbol HTGCW. We do not intend to apply, and are not obligated to apply, to list the warrants on any national securities exchange or the Nasdaq National Market. Future trading prices of the warrants will depend on many factors, including the companys operating results, the market for similar securities and the performance of the companys common stock.
Our warrants are quoted on the OTC Bulletin Board, which limits the liquidity and price of our warrants more than if our warrants were quoted or listed on the Nasdaq National Market or a national securities exchange.
Our warrants are traded in the over-the-counter market. The warrants are quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the Nasdaq National Market. Quotation of our warrants on the OTC Bulletin Board limits the liquidity and price of our securities more than if our warrants were quoted or listed on the Nasdaq National Market or a national securities exchange.
The warrants may have no value in bankruptcy.
In the event a bankruptcy or reorganization is commenced by or against us, a bankruptcy court may hold that unexercised warrants are executory contracts which may be subject to rejection by us with approval of the bankruptcy court. As a result, holders of the warrants may, even if sufficient funds are available, not be entitled to receive any consideration or may receive an amount less than they would be entitled to if they had exercised their warrants prior to the commencement of any such bankruptcy or reorganization.
As a holder of warrants, you will not receive dividends on our common stock.
Holders of the warrants will not have the right to receive any dividends so long as their warrants are unexercised.
There may be limitations on the ability of the holders of warrants to exercise their warrants and receive the underlying common stock.
We have agreed to use our reasonable efforts to maintain effective this shelf registration statement on an appropriate form under the Securities Act covering the common stock, the warrants and the common stock issuable upon exercise of the warrants until the earlier of (i) the date on which the common stock, warrants and common stock issuable upon exercise of the warrants are sold in accordance with the intended distribution of such common stock or warrants, (ii) the date on which none of the shares of common stock or warrants are registrable securities, or (iii) the second anniversary of the effective date of the shelf registration statement of which this prospectus is a part. During any period when the shelf registration statement is not effective, U.S. holders of the warrants will not be able to exercise their warrants unless they are an accredited investor or a qualified institutional buyer, within the meaning of the Securities Act, and make certain representations to us in connection with their exercise.
We cannot assure you that we will be able to keep the shelf registration statement continuously effective until all of the warrants have been exercised or expired. Shares of common stock issued upon exercise of the warrants at a time when the shelf registration statement is not effective will be restricted securities for purposes of Rule 144 under the Securities Act and will be subject to restrictions on transfer.
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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:
| our future operating results; |
| our business prospects and the prospects of our prospective portfolio companies; |
| the impact of investments that we expect to make; |
| our informal relationships with third parties; |
| the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| our expected financings and investments; |
| our regulatory structure and tax status; |
| our ability to operate as a business development company and a regulated investment company; |
| the adequacy of our cash resources and working capital; and |
| the timing of cash flows, if any, from the operations of our portfolio companies. |
For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this 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.
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ELECTION TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY AND
A REGULATED INVESTMENT COMPANY
Since our incorporation, we have seen taxed as a corporation under Subchapter C. We currently intend to seek 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 ConsiderationsConversion 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. As of the date of this report, 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 do not elect to make a RIC election, we would continue to be taxed as a C corporation.
We were initially capitalized in February 2004 and in June 2004 we completed a private placement of 904,635 units at a price of $30.00 per unit, raising an aggregate of approximately $23.9 million in net proceeds. Each such unit consisted of two shares of our common stock, one warrant to purchase one share of our common stock with up to a 1-year term and one warrant to purchase one share of our common stock with a 5-year term. We paid a placement fee to JMP Securities LLC, the initial purchaser in such private placement, of $2.10 per unit.
In January 2005, investment funds managed by JMP Asset Management LLC completed the purchase of 72,000 units at a price of $30.00 per unit, less a placement fee of $2.10 per unit pursuant to an option granted to JMP Asset Management LLC in connection with our June 2004 private offering. In addition, in January 2005 Mr. Henriquez, our Chief Executive Officer, and Mr. Howard, our Senior Managing Director, purchased the equivalent of 40,000 units and 13,500 units, respectively, and four other employees purchased an aggregate of 8,567 units, in each case at a price of $30.00 per unit. In connection with such transactions, we raised an aggregate of approximately $3.9 million in net proceeds. In addition, 1-year warrants to purchase 1,175,963 shares of our common stock were exercised in February 2005, generating proceeds to us of approximately $12.4 million.
In June 2005, we completed a public offering of 6,000,000 shares of our common stock, par value $0.001 per share, at a price of $13.00 per share, which we refer to as our initial public offering. Our initial public offering resulted in net proceeds to the company of approximately $70.9 million after deducting the offering costs.
Our election to be regulated as a business development company and our election to be treated as a RIC will require certain actions and effect a number of changes to our activities and policies.
We will report our investments at market value or fair value with changes in value reported through our statement of operations.
In accordance with the requirements of Article 6 of Regulation S-X, we will report all of our investments, including loans, at market value or for investments that do not have a readily available market value, their fair value determined by our Board of Directors, with changes in these values reported through our consolidated statement of operations under the caption of unrealized appreciation (depreciation) on investments. See Determination of Net Asset Value.
Our income tax expense should be reduced or eliminated.
With the filing of our 2006 tax return, we intend to seek to be treated as a RIC under Subchapter M of the Code effective as of January 1, 2006. This election should reduce or eliminate the federal corporate-level income tax we will be required to pay after such election. So long as we meet certain minimum distribution, source-of-income and asset diversification requirements, we generally should be required to pay income taxes only on the portion of our taxable income we do not distribute (actually or constructively) and certain built-in gains.
Change in Dividend Policy.
On October 27, 2005, we declared a dividend of $0.025 per share for stockholders of record on November 1, 2005. The dividend totaled approximately $245,000 and was distributed on November 17, 2005. On December 9, 2005 we declared a dividend of $0.30 per common share for stockholders of record on January 6, 2006. The dividend was approximately $2.9 million and was distributed on January 27, 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 our election to be treated as a RIC. We intend to distribute to our stockholders all or substantially all of our income, except for certain realized net long-term capital gains. 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 earnings and profits from the period prior to our RIC election. We intend to make deemed distributions to our stockholders of any retained net long-term capital gains. If this happens, you will be treated as if you received an actual distribution of the capital gains and reinvested the net after-tax proceeds in us. 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 pay on the deemed distribution.
29
Changes to 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. The following steps were taken in accordance with the terms of our outstanding warrants in order to comply with this requirement:
| Pursuant to terms of our outstanding warrants, the expiration date of all of our outstanding 1-year common stock warrants was accelerated to the date immediately prior to our filing of an election with the SEC to be regulated as a business development company under the 1940 Act. |
| As a result of the acceleration of the expiration date of the 1-year warrants, the exercise price of all 1-year warrants and 5-year warrants was adjusted on January 14, 2005 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 the warrants based on an estimate of cancellation of 5-year warrants in connection with our election to be regulated as a business development company. |
| 1-year warrants to purchase 1,175,963 shares of our common stock were exercised generating proceeds to us of approximately $12.4 million and 94,457 then outstanding 1-year warrants that remained unexercised at the close of business on February 21, 2005 expired by their terms. |
| Immediately prior to filing our business development company election with the SEC, 5-year warrants to purchase 597,197 shares of our common stock were cancelled and simultaneously with such cancellation, we issued to the holders of such 5-year warrants one share of our common stock for every two 5-year warrants so cancelled. |
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. We have received comments from the SEC staff and have filed our initial response.
On May 3, 2005 Hercules Technology II, L.P. filed an application with the Small Business Administration to become licensed as a small business investment company. Subsequently, on September 28, 2005 we filed an exemptive relief application requesting that the SEC permit us to exclude the indebtedness of our wholly-owned subsidiary, Hercules Technology II, L.P., from the 200% asset coverage requirements applicable to us.
We intend to request exemptive relief to permit us to grant restricted stock awards to our officers and employees. However, there is no assurance that we will receive any such exemptive relief. If we do not receive such exemptive relief we may have to change our compensation structure.
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The registration of the common stock, warrants and common stock issuable upon exercise of the warrants, is to satisfy certain of our obligations under the registration rights agreement covering the securities sold in the unit offering in June 2004. We will not receive any proceeds from the resale, by the selling holders, of common stock, warrants, or common stock issuable upon exercise of the warrants. We may, however, receive cash consideration in connection with the exercise of the warrants for cash. We anticipate that any proceeds we receive from the exercise of warrants into shares of our common stock will be used to invest in portfolio companies in accordance with our investment objective and strategy described in this prospectus and to pay our operating expenses. 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.
31
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the Nasdaq National Market under the symbol HTGC. We completed the initial public offer of our common stock in June 2005 at the 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 closing prices of our common stock as reported on the Nasdaq National 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.
Price Range
|
Premium/
Discount of High Sales Price to NAV |
Premium/
Discount of Low Sales Price to NAV |
Cash
Dividend Per Share (2) |
|||||||||||||||
NAV
(1)
|
High
|
Low
|
||||||||||||||||
2005 |
||||||||||||||||||
Second quarter (June 9, 2005 through June 30, 2005) |
$ | 11.55 | $ | 13.19 | $ | 12.45 | 114.2 | % | 107.8 | % | | |||||||
Third quarter |
$ | 11.71 | $ | 14.41 | $ | 11.90 | 123.1 | % | 101.6 | % | $ | 0.025 | ||||||
Fourth quarter |
$ | 11.67 | $ | 12.68 | $ | 9.71 | 108.7 | % | 83.2 | % | $ | 0.300 | ||||||
2006 |
||||||||||||||||||
First quarter (through March , 2006) |
* | $ | $ | * | * | |
(1) | Net asset value per share is 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. |
(2) | Represents the dividend declared in the specified quarter. |
* | Net asset value has not yet been calculated for this period. |
The last reported price for our common stock on March 7, 2006 was $11.04 per share. As of February 10, 2005, we had 1,237 stockholders of record.
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.
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. We generally intend 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.
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The following table sets forth our capitalization as of December 31, 2005 on an actual basis.
This table should be read together with Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
December 31, 2005
|
||||
(in thousands) | ||||
Cash & cash equivalents |
$ | 15,362 | ||
|
|
|
||
Borrowings |
76,000 | |||
Stockholders Equity: |
||||
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 9,801,965 shares issued and outstanding, actual |
10 | |||
Additional paid-in capital |
114,525 | |||
Distributable earnings |
(182 | ) | ||
|
|
|
||
Total stockholders equity |
114,353 | |||
|
|
|
||
Total capitalization |
$ | 190,353 |
33
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 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 that may affect our ability to pursue additional business opportunities or strategies which, if we were to determine we should pursue such strategies, may diminish the desirability of or impede our ability to qualify as a RIC. 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 of the date of this report, we cannot determine the probability that during 2006 we will qualify as RIC when we file our 2006 federal tax return. See Certain United States Federal Tax ConsiderationsTaxation as a Regulated Investment Company.
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 $176.7 million at December 31, 2005 as compared to $16.7 million at December 31, 2004. The increase in investments was due to newly originated debt and equity investments in 2005. During 2005, we made debt investments in 28 new portfolio companies totaling $175.3 million, including two companies that fully repaid outstanding loans totaling $12.5 million, as compared to debt investments in five portfolio companies totaling $16.7 million in 2004. We also made equity investments
34
in six portfolio companies in 2005 totaling $3.5 million, including $1.0 million of debt converted into equity. In addition, we exercised a warrant in one public company bringing total equity investments at fair value to approximately $4.9 million at December 31, 2005. At December 31, 2005 we have unfunded contractual commitments of $30.2 million to six portfolio companies.
Total portfolio investment activity (exclusive of unearned income) as of and for the periods ended December 31, 2005 and 2004 was as follows:
($ in millions) |
Year Ended
December 31, 2005 |
Period Ended
December 31, 2004 |
|||||
Beginning portfolio |
$ | 16.7 | $ | | |||
Loan originations |
175.3 | 16.7 | |||||
Equity investments |
2.5 | | |||||
Gross payments/Reductions |
(6.3 | ) | | ||||
Early pay-offs |
(12.5 | ) | | ||||
Accretion of loan discounts |
0.4 | | |||||
Unrealized appreciation in investments |
4.0 | | |||||
Unrealized depreciation in investments |
(3.4 | ) | | ||||
|
|
|
|
|
|||
Ending portfolio |
$ | 176.7 | $ | 16.7 | |||
|
|
|
|
|
The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2005 and 2004 (excluding unearned income):
Year Ended December 31, 2005 |
Period Ended December 31, 2004 |
|||||||||||
($ in millions) |
Investments at Fair Value
|
Percentage of Total
Portfolio |
Investments at Fair Value
|
Percentage of Total
Portfolio |
||||||||
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 | % | |||||
|
|
|
|
|
|
|
|
The following table shows the fair value of our portfolio by industry sector at December 31, 2005 and 2004 (excluding unearned income):
Year Ended December 31, 2005 |
Period Ended December 31, 2004 |
|||||||||||
($ in millions) |
Investments at Fair Value
|
Percentage of Total
Portfolio |
Investments at Fair Value
|
Percentage of Total
Portfolio |
||||||||
Biopharmaceuticals |
$ | 43.6 | 24.7 | % | $ | | | |||||
Software |
29.0 | 16.4 | % | 12.0 | 71.8 | % | ||||||
Consumer & business products |
19.8 | 11.2 | % | 1.7 | 10.2 | % | ||||||
Communications & networking |
32.5 | 18.4 | % | 3.0 | 18.0 | % | ||||||
Medical devices |
14.8 | 8.4 | % | | | |||||||
Internet & computer services |
8.7 | 4.9 | % | | | |||||||
Electronics & computer hardware |
17.8 | 10.1 | % | | | |||||||
Semiconductors |
10.5 | 5.9 | % | | | |||||||
|
|
|
|
|
|
|
|
|||||
$ | 176.7 | 100.0 | % | $ | 16.7 | 100.0 | % | |||||
|
|
|
|
|
|
|
|
35
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 both the debt investments and related warrants or equity positions for each investment in our portfolio. See BusinessInvestment ProcessLoan 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 December 31, 2005 and 2004:
December 31, 2005
|
December 31, 2004
|
||||||||||||
($ in millions) |
Investments at Fair Value
|
Percentage of Total
Portfolio |
Investments at Fair Value
|
Percentage of Total
Portfolio |
|||||||||
Investment Grading |
|||||||||||||
1 |
$ | 9.9 | 5.8 | % | $ | 12.7 | 76.0 | % | |||||
2 |
150.3 | 87.4 | | | |||||||||
3 |
5.8 | 3.4 | 4.0 | 24.0 | |||||||||
4 |
4.5 | 2.7 | | | |||||||||
5 |
1.3 | (1) | 0.7 | | |||||||||
|
|
|
|
|
|
|
|
|
|||||
$ | 171.8 | 100.0 | % | $ | 16.7 | 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 $239,000 in February 2006. We may receive approximately $700,000 of future distributions related to this sale but such distributions are contingent on future deliverables. |
As of December 31, 2005, our investments had a weighted average investment grading of 2.05.
At December 31, 2005, the weighted average yield to maturity of our loan obligations was approximately 12.87%. Yields to maturity are computed using interest rates as of December 31, 2005 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.
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
We commenced operations on February 2, 2004 but did not commence investment activities until September 2004. As a result, the period from February 2, 2004 to December 31, 2004 is not comparable to the period from
36
January 1, 2005 to December 31, 2005 and is not indicative of the results to be expected for any future period. Except as noted, references to 2004 refer to the period from February 2, 2004 to December 31, 2004 and references to 2005 refer to the twelve month period ended December 31, 2005.
For the 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. See Recent Developments. 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.
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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 that may affect our ability to pursue additional business opportunities or strategies which, if we were to determine we should pursue such strategies, may diminish the desirability of or impede our ability to qualify as a RIC. 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 of the date of this report, we cannot determine the probability that during 2006 we will qualify as RIC when we file our 2006 federal tax return. See Certain United States Federal Tax ConsiderationsTaxation 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
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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 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.
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. 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. 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.
On January 19, 2006, we filed a registration statement to sell approximately 3.3 million shares of our common stock with estimated net proceeds to the company of approximately $34 million. In addition, we amended our Citigroup Facility agreement to increase the borrowing capacity from $100.0 million to $125.0 million. We believe these funding sources will allow us to continue investing activities for 3 to 6 months. In
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order to fund new originations, we intend to pursue additional equity financings and additional borrowing facilities.
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 December 31, 2005, we had unfunded commitments of approximately $30.2 million. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
Contractual Obligations
The following table shows our contractual obligations as of December 31, 2005:
Payments due by period (dollars in thousands) |
|||||||||||||
Contractual Obligations (1) |
Total
|
Less than 1 year |
1-3 years
|
4-5 years
|
After
5 Years |
||||||||
Borrowings (2) |
$ | 76,000 | $ | 25,000 | $ | 51,000 | | | |||||
Operating lease obligations |
244 | 244 | | | | ||||||||
|
|
|
|
|
|
|
|
||||||
Total |
$ | 76,244 | $ | 25,244 | $ | 51,000 | | | |||||
|
|
|
|
|
|
|
|
(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. See Recent Developments. |
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 is a $25 million secured term loan, which provides 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. See Obligations and Indebtedness. 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 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. 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
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January 2007. 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 0.50% until the earlier of borrowing $50.0 million under the facility or February 1, 2006, and 0.25% thereafter. 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. There was $51.0 million of outstanding borrowings under the Citigroup Facility at December 31, 2005. We recently increased the size of our Citigroup Facility. See Recent Developments.
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. See Obligations and Indebtedness.
There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us, or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful. 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 additional securitized credit facilities. 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. See Obligations and Indebtedness.
Distributions
On October 27, 2005, we declared our first dividend of $0.025 per common share for holders of record on November 1, 2005. This dividend totaled approximately $245,000 and was distributed on November 17, 2005. On December 9, 2005 we declared a dividend of $0.30 per share for stockholders of record on January 6, 2006. The dividend totaled approximately $2.9 million and was distributed on January 27, 2006.
RIC Election
We intend to seek to be taxed 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 that may affect our ability to pursue additional business opportunities or strategies which, if we were to determine we should pursue, may diminish the desirability of or impede our ability to qualify as a RIC. For example, in order to qualify as a RIC and obtain the tax benefits of such status, a corporation must meet certain requirements, including a qualified 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 of the date of this report, we cannot determine the probability that during 2006 we will qualify as RIC when we file our 2006 federal tax return.
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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 for 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 the 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 will reverse any income tax expense recorded during 2006 and charge to income tax expense the $1.4 million deferred tax asset on 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.
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. See Certain United States Federal Income Tax ConsiderationsConversion to Regulated Investment Company Status. 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, 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. See Certain United States Federal Income Tax ConsiderationsTaxation as a Regulated Investment Company and Dividend Reinvestment Plan. 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 financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets
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and liabilities, disclosure of contingent assets and liabilities at the date of the 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 financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.
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 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 December 31, 2005, approximately 91% of our total assets represented investments in portfolio companies recorded at fair value. 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 of Directors pursuant to a valuation policy and a consistent valuation process. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments, and the differences could be material.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses. Instead, we must determine the fair value of each individual investment on a quarterly basis. We will record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan or realization of an equity security is doubtful. Conversely, where appropriate, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, that our investment has also appreciated in value.
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. Original issue discounts are amortized into interest income as adjustments to the related loans yield over the contractual life of the loan. We stop accruing interest on our investments when it is determined that interest is no longer collectible.
Fee Income . Fee income includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. These fees are generally recognized as income over the life of the loan or when the services are rendered.
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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. 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 forfeitures and expected option life.
Recent Developments
At December 31, 2005, we 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 we received a cash distribution of approximately $1.3 million. On February 6, 2006, we received an additional contingent cash distribution of $239,000 which will be accounted for as a loss recovery in the first quarter of 2006. Terms of the asset sale agreement call for two additional contingent payments of up to $500,000 each from which we are contractually entitled to receive approximately $350,000 each, but the conditions of the agreement make receipt and amount of payments uncertain and we will account for any future receipts as loss recoveries at the time of payment.
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 March 6, 2006, we increased our Citibank credit facility from $100 million to $125 million. As of February 28, 2006, we had $61.0 million outstanding under the Citibank credit facility.
On March 6, 2006, we entered into an agreement to repay $10.0 million of the $25.0 million outstanding under our loan with an affiliate of Farallon Capital. We 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 2, 2006, various funds affiliated with Farallon agreed to purchase $5.0 million of our common stock at a price per share equal to the NAV at February 28, 2006.
Recent Accounting Pronouncements
Recent accounting pronouncements are not considered to have a significant impact on the Companys financial statements.
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On April 12, 2005, we entered into a Bridge Loan Credit Facility with an affiliate of Farallon Capital Management, L.L.C. to provide us with additional capital to invest prior to the completion of our initial public offering. In addition, on August 1, 2005, we completed the Citigroup Facility, a securitized credit facility. We expect to pursue additional debt financing from the Small Business Administration under its Small Business Investment Company program. We may seek to enter into additional securitization facilities. These various types of facilities are described below.
There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us, or at all. If we are unable to obtain debt capital, then positive investment returns for our equity investors, if any, will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful. 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 additional securitized credit facilities. 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 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.
Bridge Financing
On April 12, 2005, we entered into a Bridge Loan Credit Facility with Alcmene Funding, L.L.C., a special purpose vehicle that is an affiliate of Farallon Capital Management, L.L.C., a shareholder of the Company. The Bridge Loan Credit Facility consists of a $25 million senior secured first lien term loan, plus up to an additional $25 million of discretionary supplemental senior secured first lien term loans. The supplemental loans, if any, will be made on terms to be agreed upon between us and Alcmene. The Bridge Loan Credit Facility initially matured on October 12, 2005, subject to one six-month extension at our election. Under the original terms of the Bridge Loan Credit Facility, if we elected to extend the maturity date, we would have paid an extension fee of 1% of the principal amount of the outstanding loan. The Bridge Loan Credit Facility is prepayable by us at any time without premium or penalty. The entire principal amount of the Loan is due at maturity. Borrowings under the Bridge Loan Credit Facility originally bore interest at 8.0% per annum through the initial maturity date, and, if we elected to extend the maturity date of the Bridge Loan Credit Facility beyond the initial six-month term, borrowings were to bear interest at 11.5% per annum during any such extension period. In addition, we paid an upfront fee of $500,000 at the time of our initial draw down under the facility and will be obligated to pay a maturity fee of $500,000 upon repayment of the Bridge Loan Credit Facility, whether upon maturity or upon earlier repayment. The Bridge Loan Credit Facility contains a mandatory prepayment provision requiring that we turn over to Alcmene all principal payments that we receive from our loans to portfolio companies if at such time we have less than $5 million in cash or cash equivalents on hand. The Bridge Loan Credit Facility is secured by a first priority lien on substantially all of our assets. Interest on our Bridge Loan Credit Facility is payable in arrears monthly, on the maturity date and on any prepayment date. As of December 31, 2005 we had approximately $25.0 million outstanding under the Bridge Loan Credit Facility. In addition, at December 31, 2005, we had approximately $198,000 of prepaid fees related to the upfront draw down fee and accrued $302,000 for fees related to the maturity fee.
On August 1, 2005, we amended the Bridge Loan Credit Facility. The amendment agreement extended the term of the Bridge Loan Credit Facility 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.
Our Bridge Loan Credit Facility requires us to meet financial tests with respect to a minimum fixed charge coverage ratio, a minimum senior secured debt coverage ratio, minimum net assets and minimum net assets per share as well as concentration and default limits with respect to portfolio company loans. In addition, our Bridge Loan Credit Facility contains negative covenants limiting, among other things, additional liens and indebtedness, transactions with affiliates, mergers and consolidations, liquidations and dissolutions, sales of assets, dividends, loans and advances (other than to our portfolio companies), and other matters customarily restricted in such agreements. Our Bridge Loan Credit Facility contains customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and
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insolvency, failure of any security document supporting the Bridge Loan Credit Facility to be in full force and effect, and a change of control of our business. At December 31, 2005 we were in compliance with the covenants of the Bridge Loan Credit Facility.
Securitized Credit Facility
On August 1, 2005, we, through Hercules Funding Trust I, an 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 draw 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. The Citigroup Facility will be 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 0.50% until the earlier of our borrowing $50.0 million under the facility or February 1, 2006, and 0.25% thereafter. 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. There was $51.0 million of borrowings outstanding under the Citigroup Facility at December 31, 2005.
SBIC Financing
We are pursuing, through our wholly-owned subsidiary Hercules Technology II, L.P., additional debt financing from the Small Business Administration under its Small Business Investment Company program. If we are able to obtain financing under such program, we will be subject to regulation and oversight by the Small Business Administration, including requirements with respect to maintaining certain minimum financial ratios and other covenants. The Small Business Investment Company regulations currently limit the amount that is available to borrow by any SBIC to $119 million. There is no assurance that we will draw up to the maximum limit available under the Small Business Investment Company program.
In January 2005, we formed Hercules Technology II, L.P. (HT II) and Hercules Technology SBIC Management, LLC (HTM). On May 3, 2005, HT II filed an application with the Small Business Administration (the SBA) to become licensed as a Small Business Investment Company (SBIC) and on June 24, 2005, the HT II received a letter of acknowledgement of receipt of this application. Upon receipt of this letter from the SBA, HT II was eligible to make pre-approved investments. If HT IIs application to the SBIC program is ultimately approved by the SBA, then it will be able to borrow funds from the SBA against eligible pre-approved investments. During 2005, HT II funded two preapproved loans of which one was fully repaid in October 2005. At December 31, 2005, Hercules had 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 our wholly-owned subsidiary. Hercules is the sole limited partner of HT II and HTM is the general partner.
Securitization
We plan to aggregate pools of funded loans using the Citigroup Facility or other conduits that we may seek until a sufficiently large pool of funded loans is created which can then be securitized. We expect that any loans included in a securitization facility will be securitized on a non-recourse basis with respect to the credit losses on the loans. There can be no assurance that we will be able to complete this securitization strategy, or that it will be successful.
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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. 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.
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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 seek 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 ConsiderationsConversion 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. 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 December 31, 2005, we had outstanding structured mezzanine debt investments in 31 portfolio companies representing approximately $171.8 million and equity investments of $4.9 million for a total investment portfolio at fair value of $176.7 million. In addition, at December 31, 2005, we had unfunded contractual commitments of $30.2 million.
At December 31, 2005, the weighted average yield to maturity of our loan obligations was approximately 12.87%. Yields to maturity are computed using interest rates as of December 31, 2005 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, Mr. Howard, our Senior Managing Director, 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 $71.0 million after deducting the offering costs.
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
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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:
| Technology-related companies are underserved by traditional lending sources; |
| Unfulfilled demand exists for structured debt financing by technology-related companies; |
| Structured mezzanine debt products are less dilutive and complement equity financing from venture capital and private equity funds; and |
| Average valuations for private technology-related companies are lower than in recent years. |
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.
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/Ernst & Young. According to Dow Jones VentureOne/Ernst & Young, 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.
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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/Ernst & Young, 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.
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.
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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.
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 December 31, 2005, our proprietary SQL-based database system included over 7,900 technology-related companies and over 1,480 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.
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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 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:
|
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 |
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investments with restrictive affirmative and negative covenants, default penalties, lien protection, equity calls, take control provisions and board observation rights. |
| 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. |
| 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. |
A comparison of the typical features of our various investment alternatives is set forth in the chart below.
Senior Debt | Structured Mezzanine Debt | Equity Securities | ||||
Typical Structure |
Term or revolving debt | Term debt with warrants |
Preferred stock or common
stock |
|||
Investment Horizon |
Usually under 3 years |
Long term, ranging from 2 to 7
years, with an average of 3 years |
Long term | |||
Ranking/Security |
Senior/First lien | Senior or junior lien | None/unsecured | |||
Covenants |
Generally
comprehensive |
Less restrictive; Mostly
financial; Maintenance-based |
None | |||
Risk Tolerance |
Low | Medium | High | |||
Coupon/Dividend |
Cash payFloating or fixed
rate |
Cash Payfixed rate; Payment-
in-kind in limited cases |
Payment-in kind in limited
cases |
|||
Customization or Flexibility | Standard | More flexible | Flexible | |||
Equity Dilution |
None to low | Low | 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 nine 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 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.
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Investment Process
We have organized our management team around the four key elements of our investment process:
| Origination; |
| Underwriting; |
| Documentation; and |
| Loan and Compliance Administration. |
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 nine professionals headed by our Chief Executive Officer, Mr. Henriquez, will be responsible for 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 December 31, 2005, our proprietary SQL-based database system included over 7,900 technology-related companies and over 1,480 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.
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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 Senior Managing Director, our Chief Legal Officer and our Vice President of Finance. 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.
Loan and Compliance Administration
Our loan and compliance administration group, headed by our Vice President of Finance, 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
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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 that 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 that 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 December 31, 2005, our investments had a weighted average investment rating of 2.05.
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.
57
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 FactorsRisks Related to our Business and StructureWe 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, has applied to be licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company. See Regulation below 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 and Chicago, Illinois.
Employees
As of December 31, 2005, we had 19 employees, including 12 investment and portfolio management professionals, operations professionals and legal counsel, 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.
58
The following tables set forth certain information as of December 31, 2005 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 BusinessOur 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.
Investments at December 31, 2005
Name and Address of
|
Nature of its
Principal Business |
Title of Securities held by Us |
Percentage of
Class Held (1) |
Cost of Investment (2) |
Fair Value of
Investment (3)(4) |
||||||||
Acceleron Pharmaceuticals, Inc. 24 Emily Street Cambridge, Massachusetts 02139 |
Biopharmaceuticals |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
$ | 3,932,539 | $ | 3,932,539 | |||||
69,106 | 68,054 | ||||||||||||
|
|
|
|
||||||||||
4,001,645 | 4,000,593 | ||||||||||||
Adiana, Inc. 2684 Middlefield Rd. Redwood City, California 94063 |
Medical devices &
equipment |
Senior Debt
Preferred Stock Warrants Preferred Stock |
100
100 <5 |
%
% % |
|
1,943,979
67,225 500,000 |
|
1,943,979
66,404 500,000 |
|||||
|
|
|
|
||||||||||
2,511,204 | 2,510,383 | ||||||||||||
Affinity Express, Inc. 630 Tollgate Road, Suite E Elgin, Illinois 60123 |
Internet consumer &
business services |
Senior Debt
Common Stock Warrants Common Stock Warrants Preferred Stock |
100
100 100 |
%
% % |
|
1,560,450
17,000 15,000 250,000 |
|
1,560,450
187,922 12,995 250,000 |
|||||
|
|
|
|
||||||||||
1,842,450 | 2,011,367 | ||||||||||||
Ageia Technologies 82 Pioneer Way Mountain View, California 94041 |
Semiconductors |
Senior Debt
Preferred Stock Warrants Preferred Stock |
100
100 |
%
% |
|
7,914,586
99,190 500,000 |
|
7,914,586
93,518 500,000 |
|||||
|
|
|
|
||||||||||
8,513,776 | 8,508,104 | ||||||||||||
Atrenta, Inc. 2001 Gateway Place, Suite 440W San Jose, California 95110 |
Software |
Senior Debt
Preferred Stock Warrants Preferred Stock Warrants |
100
100 100 |
%
% % |
|
4,869,095
102,396 33,760 |
|
4,869,095
102,886 33,760 |
|||||
|
|
|
|
||||||||||
5,005,251 | 5,005,741 | ||||||||||||
Concuity, Inc. 22320 Foothill Blvd., Suite 500 Hayward, California 94541 |
Software |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
4,567,873
3,500 |
|
4,567,873
|
|||||
|
|
|
|
||||||||||
4,571,373 | 4,567,873 | ||||||||||||
Cornice, Inc. 1951 S. Fordham Street Building 105 Longmont, CO 80503 |
Electronics &
computer hardware |
Senior Debt
Revolving Line of Credit Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants |
100
100 100 100 100 |
%
% % % % |
|
4,915,455
7,663,375 101,597 35,353 135,403 |
|
4,915,455
7,663,375 99,336 34,230 132,390 |
|||||
|
|
|
|
||||||||||
12,851,183 | 12,844,786 | ||||||||||||
Cradle Technologies |
Semiconductors | Senior Debt | 100 | % | 1,923,049 | 1,923,049 | |||||||
1197 Borregas Avenue |
Preferred Stock Warrants | 100 | % | 79,150 | 78,730 | ||||||||
|
|
|
|
||||||||||
Sunnyvale, California 94089 |
|||||||||||||
2,002,199 | 2,001,779 | ||||||||||||
Gomez, Inc. |
Software | Senior Debt | 100 | % | 2,175,075 | 2,175,075 | |||||||
610 Lincoln Street |
Preferred Stock Warrants | 100 | % | 35,000 | 32,467 | ||||||||
|
|
|
|
||||||||||
Waltham, Massachusetts 02451 |
|||||||||||||
2,210,075 | 2,207,542 | ||||||||||||
Guava Technologies, Inc. |
Biopharmaceuticals | Senior Debt | 100 | % | 4,397,111 | 4,397,111 | |||||||
25801 Industrial Blvd. |
Preferred Stock Warrants | 100 | % | 105,399 | 103,837 | ||||||||
|
|
|
|
||||||||||
Hayward, California 94545 |
|||||||||||||
4,502,510 | 4,500,948 | ||||||||||||
IKANO Communications, Inc. 265 East 100 South, Suite 245 Salt Lake City, Utah 84111 |
Communications &
networking |
Senior Debt
Preferred Stock Warrants Preferred Stock Warrants |
100
100 100 |
%
% % |
|
16,402,789
45,460 72,344 |
|
16,402,789
43,710 71,000 |
|||||
|
|
|
|
||||||||||
16,520,593 | 16,517,499 |
59
Name and Address of
|
Nature of its
Principal Business |
Title of Securities held by Us |
Percentage of
Class Held (1) |
Cost of Investment (2) |
Fair Value of
Investment (3)(4) |
||||||||
Interwise, Inc. 25 First Street Cambridge, Massachusetts 02141 |
Communications &
networking |
Senior Debt | 100 | % | $ | 2,809,653 | $ | 2,809,653 | |||||
|
|
|
|
||||||||||
2,809,653 | 2,809,653 | ||||||||||||
Invoke Solutions, Inc. 375 Totten Pond Road, Suite 400 Waltham, Massachusetts 02451 |
Internet Consumer
& business services |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
1,457,391
43,826 |
|
1,457,391
44,155 |
|||||
|
|
|
|
||||||||||
1,501,217 | 1,501,546 | ||||||||||||
Inxight Software, Inc. 500 Macara Avenue Sunnyvale, California 94085 |
Software |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
4,956,279
55,963 |
|
4,956,279
46,735 |
|||||
|
|
|
|
||||||||||
5,012,242 | 5,003,014 | ||||||||||||
Labopharm USA, Inc. 53 State Street Boston, Massachusetts 02109 |
Biopharmaceuticals |
Senior Debt
Common Stock |
100
<5 |
%
% |
|
9,869,420
112,335 |
|
9,869,420
1,367,268 |
|||||
|
|
|
|
||||||||||
9,981,755 | 11,236,688 | ||||||||||||
Merrimack Pharmaceuticals, Inc. 101 Binney Street Cambridge, Massachusetts 02142 |
Biopharmaceuticals |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
8,878,668
155,456 |
|
8,878,668
140,675 |
|||||
|
|
|
|
||||||||||
9,034,124 | 9,019,343 | ||||||||||||
Metreo, Inc. 3500 West Bayshore Road Palo Alto, California 94303 |
Software |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
4,525,714
50,000 |
|
1,266,000
|
|||||
|
|
|
|
||||||||||
4,575,714 | 1,266,000 | ||||||||||||
Occam Networks, Inc. 77 Robin Hill Road Santa Barbara, California 93117 |
Communications &
networking |
Senior Debt
Preferred Stock Warrants Common Stock Warrants |
100
100 100 |
%
% % |
|
2,540,021
14,000 17,000 |
|
2,540,021
286,364 368,935 |
|||||
|
|
|
|
||||||||||
2,571,021 | 3,195,320 | ||||||||||||
Omrix Biopharmaceuticals, Inc. MDA Bloodcenter Tel Hashmar Hospital Tel Aviv, Israel |
Biopharmaceuticals |
Senior Debt
Common Stock Warrants |
100
100 |
%
% |
|
4,701,782
11,370 |
|
4,701,782
58,399 |
|||||
|
|
|
|
||||||||||
4,713,152 | 4,760,181 | ||||||||||||
Optiscan Biomedical, Corp. 1105 Atlantic Avenue, Suite 101 Alameda, California 94501 |
Medical devices &
equipment |
Senior Convertible Term Loan
Preferred Stock Warrants Preferred Stock |
100
100 <5 |
%
% % |
|
1,683,063
80,486 1,000,000 |
|
1,683,063
81,185 1,000,000 |
|||||
|
|
|
|
||||||||||
2,763,549 | 2,764,248 | ||||||||||||
Optovia Corporation 100 Nagog Park Acton, Massachusetts 01720 |
Communications &
networking |
Senior Debt | 100 | % | 5,000,000 | 5,000,000 | |||||||
|
|
|
|
||||||||||
5,000,000 | 5,000,000 | ||||||||||||
Paratek Pharmaceuticals, Inc. 75 Kneeland Street Boston, Massachusetts 02111 |
Biopharmaceuticals |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
9,889,320
137,396 |
|
9,889,320
141,881 |
|||||
|
|
|
|
||||||||||
10,026,716 | 10,031,201 | ||||||||||||
Pathfire, Inc. 245 Hembree Park Drive Roswell, Georgia 30076 |
Communications &
networking |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
4,938,482
63,276 |
|
4,938,482
64,144 |
|||||
|
|
|
|
||||||||||
5,001,758 | 5,002,626 | ||||||||||||
Power Medical Interventions, Inc. 2021 Cabot Blvd. West Langhorn, Pennsylvania 19047 |
Medical devices &
equipment |
Senior Debt
Common Stock Warrants |
100
100 |
%
% |
|
3,969,515
39,195 |
|
3,969,515
56,490 |
|||||
|
|
|
|
||||||||||
4,008,710 | 4,026,005 | ||||||||||||
Proficiency, Inc. 880 Winter Street, Suite 320 Waltham, Massachusetts 02415 |
Software |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
3,917,802
96,370 |
|
3,917,802
94,105 |
|||||
|
|
|
|
||||||||||
4,014,172 | 4,011,907 | ||||||||||||
RazorGator Interactive Group, Inc. 9464 Wilshire Blvd. Beverley Hills, California 90212 |
Internet consumer
& business services |
Senior Debt
Preferred Stock Warrants Preferred Stock |
100
100 <5 |
%
% % |
|
4,095,853
13,050 1,000,000 |
|
4,095,853
64,833 1,000,000 |
|||||
|
|
|
|
||||||||||
5,108,903 | 5,160,686 |
60
Name and Address of
|
Nature of its
Principal Business |
Title of Securities held by Us |
Percentage of
Class Held (1) |
Cost of Investment (2) |
Fair Value of
Investment (3)(4) |
||||||||
Sling Media, Inc. 1840 Gateway Drive, Suite 224 San Mateo, California 94494 |
Electronics & computer
hardware |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
$
|
3,965,029
38,968 |
$
|
3,965,029
945,365 |
|||||
|
|
|
|
||||||||||
4,003,997 | 4,910,394 | ||||||||||||
Sportvision, Inc. 4619 Ravenswood Road Chicago, Illinois 60640 |
Software |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
3,488,119
39,339 |
|
3,488,119
38,523 |
|||||
|
|
|
|
||||||||||
3,527,458 | 3,526,642 | ||||||||||||
Talisma Corp. 10900 NE 4th Street, Suite 1610 Bellevue, Washington 98004 |
Software |
Subordinated Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
3,378,814
49,000 |
|
3,378,814
43,428 |
|||||
|
|
|
|
||||||||||
3,427,814 | 3,422,242 | ||||||||||||
Wageworks, Inc. Two Waters Park Drive, Suite 250 San Mateo, California 94403 |
Consumer &
business products |
Senior Debt
Preferred Stock Warrants Preferred Stock |
100
100 <5 |
%
% % |
|
18,379,995
251,964 249,995 |
|
18,379,995
1,197,735 249,995 |
|||||
|
|
|
|
||||||||||
18,881,954 | 19,827,725 | ||||||||||||
Xillix Technologies Corp. #100-13775 Commerce Parkway Richmond, British Columbia |
Medical devices &
equipment |
Senior Debt
Preferred Stock Warrants |
100
100 |
%
% |
|
5,195,589
313,108 |
|
5,195,589
325,601 |
|||||
|
|
|
|
||||||||||
5,508,697 | 5,521,190 | ||||||||||||
|
|
|
|
||||||||||
Total Investments | $ | 176,004,865 | $ | 176,673,226 | |||||||||
|
|
|
|
(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 $4,035,788, $3,367,428 and $668,360, 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) | Citigroup has an equity participation right on warrants collateralized under the Citigroup facility (see Note 5 to our Audited Consolidated Financial Statements included elsewhere in this Prospectus). 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. |
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.
61
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.
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.
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.
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.
62
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.
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.
Metreo, Inc.
Metreo delivers e-business software that enables suppliers to evaluate customer sales requests and recommend profitable responses. Metreo offers manufacturers and distributors a suite of supplier-driven solutions that they can use to negotiate profitable deals.
Occam Networks, Inc.
Occam Networks, Inc., which is traded on the Nasdaq Over-the-Counter Bulletin Board (NASDAQ: OCCM.OB), designs, develops and markets a suite of broadband loop carriers (BLCs). Occams BLCs are Ethernet and Internet protocol (IP) based and enable telecommunications service providers to offer voice, broadband and IP services from a single access network. Occam supplies its products to local and regional telecommunications carriers, independent telephone companies and international telecommunications carriers that deliver or wish to deliver voice, data, Internet access and video services to the residential, small and medium business and large enterprise markets over existing copper telephone lines.
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.
63
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.
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.
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.
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
Information about our senior securities is shown in the following table for the periods ended December 31, 2005 and 2004. The information has been derived from our financial statements which have been audited by Ernst & Young LLP.
Class and Year |
Total Amount
Outstanding
|
Asset Coverage per Unit (1) |
Average
per Unit |
|||
Bridge Loan Credit Facility with Alcmene Funding L.L.C. |
||||||
2004 |
| | N/A | |||
2005 |
25,000,000 | 2,505 | N/A | |||
Securitized Credit Facility with Citigroup Global Markets Realty Corp. |
||||||
2004 |
| | N/A | |||
2005 |
51,000,000 | 2,505 | 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. |
65
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 three members, one who is an interested person of Hercules Technology Growth Capital as defined in Section 2(a)(19) of the 1940 Act and two who are not interested persons and who we refer to as our independent directors. We anticipate that an additional independent director will be elected to our Board of Directors by June 2006.
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.
Name |
Age
|
Positions |
||
Interested Director: (1) |
||||
Manuel A. Henriquez |
42 | Chairman of the Board of Directors, President and Chief Executive Officer | ||
Independent Directors: |
||||
Joseph W. Chow (2)(3)(4)(5) |
53 | Director | ||
Allyn C. Woodward, Jr. (2)(3)(4)(5) |
65 | Director | ||
Executive Officers: |
||||
Manuel A. Henriquez |
42 | Chairman of the Board of Directors, President and Chief Executive Officer | ||
H. Scott Harvey |
51 | Chief Legal Officer and Chief Compliance Officer | ||
David M. Lund |
52 | Vice President of Finance and Corporate Controller | ||
Shane A. Stettenbenz |
35 | Chief Technology Officer | ||
Key Employees: |
||||
Glen C. Howard |
49 | Senior Managing Director | ||
Samir Bhaumik |
42 | Managing Director | ||
Kathleen Conte |
59 | Managing Director | ||
John Hershey |
44 | Managing Director | ||
Roy Y. Liu |
45 | Managing Director | ||
Edward M. Messman |
35 | Managing Director | ||
Parag I. Shah |
34 | 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 and because he is a beneficial owner of securities of JMP Group LLC. |
(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, a $2.5 billion multi-stage technology venture fund, from August 2000 through July 2003. Prior to VantagePoint Venture Partners, Mr. Henriquez was the
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President and Chief Investment Officer of Comdisco Ventures, a division of 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
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.
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 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
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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 PresidentInformation 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. Mr. Bhaumik previously served as Vice PresidentWestern 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.
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.
Glen C. Howard is a co-founder of the company, served as our President from December 2003 until April 2005 and is currently a Senior Managing Director. Mr. Howard has over 18 years of experience with structured finance and financing public and private technology-related companies. Prior to co-founding our company, Mr. Howard served as a Principal with Pearl Street Group, a specialty finance company, from May 2001 to October 2003. From September 1999 to May 2001, Mr. Howard was a Managing Director of Comdisco Ventures, a division of Comdisco, Inc., a leading technology and financial services company. Prior to that, Mr. Howard was a Senior Associate of Comdisco Ventures from February 1997 to September 1999. Mr. Howard was a senior member of the investment team at Comdisco Ventures that originated over $2.5 billion of equipment lease, debt and equity transactions from 1997 to 2001. Prior to joining Comdisco Ventures, Mr. Howard was Vice President of Comdisco, Inc. where he was actively involved in the management and marketing of structured finance products to private and public technology-related companies. Mr. Howard received a B.S. in Systems Industrial Engineering from the University of Arizona and an M.B.A. from Saint Marys College.
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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. 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.
Board of Directors
The number of directors is currently fixed at three directors. We expect that at least one additional independent director will be elected to our Board of Directors by June 2006.
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 2006, a second class holds office for a term expiring at the annual meeting of stockholders to be held in 2007, and a third class holds office initially for a term expiring at the annual meeting of stockholders to be held in 2008. 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. Woodwards term expires in 2006, Mr. Henriquezs term expires in 2007 and Mr. Chows term expires in 2008. 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.
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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 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. If we do not receive exemptive relief we intend to put in place and consider alternative compensation benefits for the independent directors, which would include an 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. Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the Nasdaq National Market listing standards, and we will add another independent director to our board by June 2006 who will become a member of the Audit Committee. Mr. Chow serves as Chairman of the Audit Committee. 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 two meetings.
Valuation Committee . Our Board of Directors has established a Valuation Committee. The Valuation Committee is comprised of Messrs. Chow and Woodward, each of whom is an independent director and, we will add another independent director to our board by June 2006 who will become a member of the Valuation Committee. Mr. Woodward 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. Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the Nasdaq National Market listing standards, and we will add another independent director to our board by June 2006 who will become a member of the Compensation Committee. 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 National Market listing standards, and we will add another independent director to our board by June 2006 who will become a member of the nominating and corporate governance committee. Mr. Chow 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
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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.
Until investment funds controlled by JMP Asset Management LLC beneficially own less than 10% of our outstanding common stock, JMP Asset Management LLC has the right to recommend two people to our Nominating and Corporate Governance Committee for consideration as a nominee to our Board of Directors, provided that such persons qualify as independent directors 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
Name |
Aggregate
Compensation from the Company |
Pension or
Retirement Benefits
of Company Expenses (1) |
Number of
Underlying Options/SARS |
Directors Fees Paid by the Company (2) |
|||||||
Independent Directors: |
|||||||||||
Joseph W. Chow |
$ | 77,500 | | | $ | 77,500 | |||||
Allyn C. Woodward, Jr. |
79,000 | | | 79,000 | |||||||
Executive Officers: |
|||||||||||
Manuel A. Henriquez |
1,008,506 | | 605,000 | (3) | | ||||||
H. Scott Harvey |
251,200 | | 141,000 | (4) | | ||||||
David M. Lund (5) |
124,490 | 40,000 | (6) | | |||||||
Shane A. Stettenbenz |
189,446 | | 95,000 | (7) | | ||||||
Former Officer: |
|||||||||||
Glen C. Howard |
216,731 | | 32,000 | (8) | |
(1) | 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. |
(2) | Consists only of directors fees we paid in 2005. Such fees are also included in the column titled Aggregate Compensation from the Company. |
(3) | 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. |
(4) | 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. |
(5) | Mr. Lund joined us in July 2005, and his compensation reflects less than a full year of service. |
(6) | 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. |
(7) | 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. |
(8) | 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 Senior Managing Director, our Chief Legal Officer and our Vice President of Finance, 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. The compensation program is designed so that a substantial portion of each member of the investment committees compensation is dependent upon the performance of our portfolio of investments and our profitability.
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
Name |
Number of Securities Underlying Option |
Expiration Date |
Percent of Total Options Granted to Employees in Fiscal Year |
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (3) |
||||||||||
5%
|
10%
|
|||||||||||||
Manuel A. Henriquez |
605,000 | (1) | 6/17/12 | 47.64 | % | $ | 3,201,845 | $ | 7,461,660 | |||||
H. Scott Harvey |
141,000 | (1) | 6/17/12 | 11.10 | % | 746,215 | 1,738,998 | |||||||
David M. Lund |
40,000 | (2) | 7/15/12 | 3.15 | % | 211,692 | 493,333 | |||||||
Shane A. Stettenbenz |
95,000 | (1) | 6/17/12 | 7.48 | % | 502,769 | 1,171,666 | |||||||
Glen C. Howard |
32,000 | (1) | 6/17/12 | 2.52 | % | 169,354 | 394,666 |
(1) | Issued in connection with the Companys initial public offering. |
(2) | Issued in connection with employment. |
(3) | 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 provide a base salary of $ and provide that he is entitled to participate in an annual incentive performance based bonus and long term retention program. 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 8,000,000 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 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
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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 Stock5-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:
| options to purchase an aggregate of 266,000 shares common stock to our officers and employees other than Messrs. Henriquez, Howard, Harvey and; |
| 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 |
| an option to Mr. Harvey to purchase 141,000 shares of common stock. |
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.
Option Grants to Non-Employee Directors
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 of Directors. We cannot provide any assurance that we will receive any exemptive relief from the SEC.
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 intend to apply for exemptive relief from the SEC to permit us to issue restricted stock 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.
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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.
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 StockRegistration 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. The letter agreement also provides that if, after a shelf registration statement filed in accordance with the requirements of the registration rights agreement entered into in connection with our June 2004 private offering is declared effective, investment funds controlled by Farallon Capital Management, L.L.C. acquire registrable securities (or warrants that are then eligible for registration under such shelf registration statement) with an aggregate market value in excess of $1 million, then we will, subject to certain provisions of the registration rights agreement, prepare and file a supplement or post-effective amendment to such shelf registration statement following receipt of a written request therefor from Farallon Capital Management, L.L.C. Such right will terminate when those registrable securities are eligible for resale by Farallon Capital Management, L.L.C. without volume limitation under Rule 144(k) under the Securities 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.
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We have also entered into a letter agreement with JMP Asset Management LLC that provides that until such time as investment funds controlled by JMP Asset Management LLC beneficially own less than 10% of our outstanding common stock, JMP Asset Management LLC will have the right to recommend two people to our nominating committee for consideration as nominees to our Board of Directors, provided that such persons would not be considered interested persons of the Company under the 1940 Act. The letter agreement also provides that if, after a shelf registration statement filed in accordance with the requirements of the registration rights agreement entered into in connection with our June 2004 private offering is declared effective, investment funds controlled by JMP Asset Management LLC acquire registrable securities (or warrants that are then eligible for registration under such shelf registration statement) with an aggregate market value in excess of $1 million, then we will, subject to certain provisions of the registration rights agreement, prepare and file a supplement or post-effective amendment to such shelf registration statement following receipt of a written request therefor from JMP Asset Management LLC. Such right will terminate when those registrable securities are eligible for resale by JMP Asset Management LLC without volume limitation under Rule 144(k) under the Securities 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 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 Obligations and IndebtednessBridge Financing. 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 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.
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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 March 1, 2006, information with respect to the beneficial ownership of our common stock by:
| 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. |
| each of our directors and each executive officers; and |
| all of our directors and executive officers as a group. |
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 March 1, 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 9,801,965 shares of common stock outstanding as of March 1, 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.
Shares of Common Stock Beneficially Owned |
||||
Name and Address |
Number Of Shares |
Percentage of Class |
||
Principal Stockholders: |
||||
JMP Group LLC (1)
600 Montgomery Street,
|
1,233,882 | 12.4% | ||
Farallon Capital Management, L.L.C. (2)
One Maritime Plaza,
|
941,240 | 9.5% | ||
T. Rowe Price Associates, Inc. (3)
100 E. Pratt Street
|
656,900 | 6.7% | ||
Cornell Place, LLC (4)
225 Broadway, 15th Floor
|
627,496 | 6.3% | ||
Wellington Management Company, LLP (3)
75 State Street
|
536,600 | 5.5% | ||
Jolson 1996 Trust (5) |
487,698 | 4.9% |
(1) |
Information as of January 17, 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 |
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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. |
(2) | 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. |
(3) | Information about the beneficial ownership of our principal stockholders is derived from filings made by them with the SEC. |
(4) | Includes 88,323 shares of common stock that can be acquired upon the exercise of outstanding 5-year warrants. D.B. Zwirn Special Opportunities Fund, L.P. manages Cornell Place, LLC. D.B. Zwirn & Co., L.P. is the manager of D.B. Zwirn Special Opportunities Fund, L.P. Daniel B. Zwirn controls Zwirn Holdings, LLC, which in turn is the managing member of and thereby controls DBZ GP, LLC, which in turn is the general partner of and thereby controls D.B. Zwirn & Co., L.P. |
(5) | Includes 337,200 shares of our common stock and 52,994 shares of our common stock issuable upon the exercise of outstanding 5-year warrants held by the 1996 Jolson Trust. Joseph A. Jolson serves as the trustee of the Jolson 1996 Trust and, as a result, may be deemed to beneficially own such shares of common stock, including such 5-year warrants to purchase shares of common stock. This does not include 54,996 shares of our common stock and 9,008 shares of our common stock issuable upon the exercise of 5-year warrants held by the Jolson Family Foundation. Mr. Jolson may be deemed to beneficially own the shares of common stock, including the 5-year warrants to purchase common stock held of record by the Jolson Family Foundation, for which he serves as the President. Mr. Jolson disclaims beneficial ownership of all such shares held by the Jolson Family Foundation. |
Shares of Common Stock
Beneficially Owned |
|||||
Name and Address |
Number of Shares |
Percentage of Class |
|||
Directors and Executive Officers |
|||||
Manuel A. Henriquez (1) |
543,572 | 5.5 | % | ||
H. Scott Harvey (2) |
23,933 | * | |||
David M. Lund |
2,000 | * | |||
Shane A. Stettenbenz |
* | ||||
Allyn C. Woodward, Jr. |
4,000 | * | |||
Joseph W. Chow (3) |
5,647 | * | |||
All directors and executive officers as a group (5 persons) (4) |
579,152 | 5.9 | % |
* | Less than 1%. |
(1) | Includes 75,075 shares of common stock that can be acquired upon the exercise of outstanding 5-year warrants and 125,000 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. |
(2) | Includes 4,279 shares of common stock that can be acquired upon the exercise of outstanding 5-year warrants and 12,821 shares of common stock that can be acquired upon the exercise of outstanding options. |
(3) | Includes 794 shares of common stock that can be acquired upon the exercise of outstanding 5-year warrants. |
(4) | Includes 80,148 shares of common stock that can be acquired upon the exercise of outstanding 5-year warrants and 137,821 shares of common stock that can be acquired upon the exercise of outstanding options. |
The following table sets forth as of February , 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.
Name |
Dollar Range of Equity Securities in the Company |
Aggregate Dollar Range of Equity Securities in all Registered Investment Companies Overseen By Director in Family of Investment Companies |
||
Independent Directors: |
||||
Joseph W. Chow |
$50,001-$100,000 | $50,001-$100,000 | ||
Allyn C. Woodward, Jr. |
$10,001-$50,000 | $10,001-$50,000 | ||
Interested Director/Portfolio Management Employee: |
||||
Manuel A. Henriquez |
over $1,000,000 | over $1,000,000 | ||
Portfolio Management Employees: |
||||
Glen C. Howard |
over $1,000,000 | over $1,000,000 | ||
H. Scott Harvey |
$50,001-$100,000 | $50,001-$100,000 |
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We have two wholly-owned subsidiaries, Hercules Technology II and Hercules Technology SBIC Management LLC, formed in January 2005. The Company is the sole limited partner of Hercules Technology II, L.P., and Hercules Technology SBIC Management, LLC is the general partner. At December 31, 2005, we had a net investment of $2.5 million in Hercules Technology II, L.P. and there was one outstanding loan in the amount of $2.0 million.
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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.
We are generally not permitted to sell shares of our common stock at a price below their net asset value per share, determined as of a time within 48 hours, excluding Sundays and holidays, of the time of sale.
At December 31, 2005, approximately 91% of our total assets represented investments in portfolio companies recorded at fair value. 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 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.
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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 share of our common stock at the close of regular trading on the Nasdaq National 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 National 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 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.
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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 seek 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.
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:
| 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: |
| is organized under the laws of, and has its principal place of business in, the United States; |
| 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 |
| satisfies any of the following: |
| does not have outstanding any class of securities with respect to which a broker or dealer may extend margin credit; |
| 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 |
| 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. |
| Securities of any eligible portfolio company that we control. |
| 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. |
| 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. |
| Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. |
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.
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.
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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 FactorsBecause 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.
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
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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.
In addition, on September 28, 2005, we filed an exemptive relief application that requesting the SEC permit us to exclude the indebtedness that our wholly-owned subsidiary, Hercules Technology II, L.P., which is seeking to be qualified as a small business investment company, issues to the Small Business Administration from the 200% asset coverage requirement applicable to us. On May 3, 2005 Hercules Technology II, L.P. filed an application with the Small Business Administration to become licensed as a small business investment company.
We may also request exemptive relief to permit us to grant dividend equivalent rights or other similar rights to our optionholders and restricted stock awards to our officers and employees. However, there is no assurance that we will receive any such exemptive relief if such exemptive relief is required.
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 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 seeking to be 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.
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If we receive a small business investment company license, 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, the Company formed Hercules Technology II, L.P. (HT II) and Hercules Technology SBIC Management, LLC (HTM). On May 3, 2005, HT II filed an application with the Small Business Administration (the SBA) to become licensed as a Small Business Investment Company (SBIC) and on June 24, 2005, the HT II received a letter of acknowledgement of receipt of this application. Upon receipt of this letter from the SBA, HT II was eligible to make pre-approved investments. If HT IIs application to the SBIC program is ultimately approved by the SBA, then it will be able to borrow funds from the SBA against eligible pre-approved investments and additional deposits to regulatory capital. We have received comments from the SBA on our license application and have filed responses.
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.
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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:
| 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; |
| 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; |
| 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 |
| an estate, the income of which is subject to United States federal income taxation regardless of its source. |
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 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 seek 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
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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 seek 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 that may affect our ability to pursue additional business opportunities or strategies which, if we were to determine we should pursue, may diminish the desirability of or impede our ability to qualify as a RIC. 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 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 federal tax return.
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 ConsiderationsConversion 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 seek 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 is payable at the time the 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
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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. On December 9, 2005, we declared a dividend of $0.30 per share for stockholders of record on January 6, 2006. The dividend totaled approximately $2.9 million and was distributed on January 27, 2006. As of December 31, 2005, our accumulated deficit was $182,305. On October 27, 2005, the Company declared a dividend of $0.025 per share for stockholders of record on November 1, 2005. The dividend totaled approximately $245,000 and was distributed on November 17, 2005.
Taxation as a Regulated Investment Company
For any taxable year in which we:
| qualify as a RIC; and |
| satisfy the Annual Distribution Requirement; |
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.
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:
| 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 |
| diversify our holdings so that at the end of each quarter of the taxable year: |
| 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 |
| 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). |
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 RegulationSenior 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 offset investment company taxable income, not net capital gain. Due to these limits on the
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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 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
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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 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.
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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 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:
| that has not provided a satisfactory statement that the beneficial owner is not a U.S. person; |
| 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; |
| that is within certain foreign countries that have inadequate information exchange with the United States; or |
| 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. |
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
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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 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.
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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 9,801,965 shares are currently outstanding. 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.
We were initially capitalized in February 2004 and in June 2004 we completed a private placement of 904,635 units at a price of $30.00 per unit, raising an aggregate of approximately $23.9 million in net proceeds. Each such unit consisted of two shares of our common stock, one warrant to purchase one share of our common stock with up to a 1-year term and one warrant to purchase one share of our common stock with a 5-year term. We paid a placement fee to JMP Securities LLC, the initial purchaser in such private placement, of $2.10 per unit.
In January 2005, investment funds managed by JMP Asset Management LLC completed the purchase of 72,000 units at a price of $30.00 per unit, less a placement fee of $2.10 per unit pursuant to an option granted to JMP Asset Management LLC in connection with our June 2004 private offer. In addition, in January 2005 Mr. Henriquez, our Chief Executive Officer, purchased the equivalent of 40,000 units and 13,500 units, respectively, and four other employees purchased an aggregate of 8,567 units, in each case at a price of $30.00 per unit. In connection with such transactions, we raised an aggregate of approximately $3.9 million in net proceeds. In addition, 1-year warrants to purchase 1,175,963 shares of our common stock were exercised in February 2005, generating proceeds to us of approximately $12.4 million.
In June 2005, we completed our initial public offer of 6,000,000 shares of our common stock. The following table sets forth certain information regarding our authorized shares and shares outstanding as of December 31, 2005.
Title of Class |
Amount Authorized |
Amount Held By Company for its Account |
Amount Outstanding |
|||
Common Stock, $0.001 par value per share |
30,000,000 | | 9,801,965 |
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, 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
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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 December 31, 2005, 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.
Pursuant to the registration rights agreement and subject to certain exceptions, we agreed to use our best efforts to file with the SEC a shelf registration statement to cover resales of the shares of common stock
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underlying the units, including the shares of common stock underlying the warrants, held by substantially all of our existing stockholders. Holders of approximately 3,480,000 shares of our common stock and holders of approximately 584,000 warrants were entitled to have such shares and such warrants (as well as the common stock underlying such warrants) included in the shelf registration statement. In addition to registering the securities of the holders subject to the registration rights agreement, we elected to allow all holders of our unregistered securities to register their common stock, warrants, and shares of common stock underlying the warrants, under the shelf registration statement. 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.
Because we have elected to be regulated as a business development company under the 1940 Act, holders of our common stock or warrants that beneficially own three percent of our outstanding common stock, which includes substantially all current holders of our common stock and warrants, are entitled to have any or all of their warrants included in the shelf registration statement on the same terms and subject to the same conditions as holders of registrable securities.
Notwithstanding the foregoing, we will be permitted to prohibit offers and sales of common stock and warrants pursuant to the registration rights agreement under certain circumstances and subject to certain conditions. Each security will cease to be a registrable security under the registration rights agreement on the earlier of (i) the date on which it has been registered effectively pursuant to the Securities Act and, in the case of an underwritten offer, disposed of in accordance with the registration statement relating to it, (ii) the date on which either it is distributed to the public pursuant to Rule 144 or may be sold pursuant to Rule 144(k) under the Securities Act, (iii) the date on which it is sold to us, or (iv) the date on which all registrable securities proposed to be sold by a holder may be sold in a three-month period without registration under the Securities Act pursuant to Rule 144 under the Securities Act.
If, after the shelf registration statement ceases to be effective or usable in connection with resales of registrable securities during the period in which it is required to be effective, then a registration default will be deemed to have occurred under the registration rights agreement. In the case of a registration default, we will pay additional dividends to each holder of shares of our common stock. The amount of additional dividends payable during the fiscal quarter in which a registration default has occurred and is continuing will equal $0.0625 per share of common stock (subject to adjustment in the event of a stock split, stock recombination, stock dividend and the like) and will escalate at the end of such quarter and at the end of each quarter thereafter by an additional $0.0625 per share of common stock (subject to adjustment in the event of a stock split, stock recombination, stock dividend and the like), up to a maximum amount of additional dividends of $0.25 per share of common stock (subject to adjustment in the event of a stock split, stock recombination, stock dividend and the like) per quarter. Following the cure of all registration defaults, additional dividends will cease to accrue with respect to such registration default.
We expect that the terms of Mr. Henriquezs employment agreement will provide that his base salary will be reduced to an annual rate of 50% of his then base salary and his incentive bonus opportunity will be reduced to zero in the event of, and during the continuation of, a registration default.
We will use our best efforts to cause the shelf registration statement to remain effective, subject to permitted exceptions, until June 22, 2006 (the date that is two years from the date of the registration rights agreement) or such shorter period of time that will terminate when each of the registrable securities ceases to be a registrable security under the registration rights agreement.
The foregoing summary of certain provisions of the registration rights agreement may not include all of the provisions that are important to you and is subject to, and qualified in its entirety by reference to, the provisions of the registration rights agreement. Copies of the registration rights agreement are available as set forth under the heading Available Information.
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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 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,
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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 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
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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.
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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 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:
| one-tenth or more but less than one-third; |
| one-third or more but less than a majority; or |
| a majority or more of all voting power. |
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.
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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 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:
| any person who beneficially owns 10% or more of the voting power of the corporations shares; or |
| 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. |
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:
| 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| 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. |
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.
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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 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., is seeking 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.
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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.
We have 9,801,965 shares of our common stock outstanding, none of which are restricted securities under the meaning of Rule 144 promulgated under the Securities Act. We have the certain restricted securities comprised of 3,801,965 shares of common stock, 673,223 warrants, and 673,223 shares of common stock issuable upon exercise of the warrants, 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:
| 1% of the total number of securities then outstanding, or |
| 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. |
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. See Risk FactorsRisks Related to this Offering.
Stock Options
As of December 31, 2005, there were options to purchase 1,337,436 shares as well as 5-year warrants to purchase 56,551 shares of our common stock outstanding under our 2004 Equity Incentive Plan. All of these shares will be eligible for sale in the public market from time to time, subject to vesting provisions, Rule 144 volume limitations applicable to our affiliates and, in the case of some of the options, the expiration of lock-up agreements.
We intend to file a registration statement under the Securities Act covering 8,000,000 shares of common stock reserved for issuance under our 2004 Equity Incentive Plan.
105
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.
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.
Certain legal matters regarding the securities offered by this prospectus will be passed upon for us by Ropes & Gray LLP, San Francisco, California and Venable LLP, Baltimore, Maryland.
Ernst & Young LLP, independent registered public accounting firm, has audited our consolidated financial statements and financial highlights at December 31, 2005 and for the period February 2, 2004 (commencement of operations) to December 31, 2004, as set forth in their report. We have included our consolidated financial statements and financial highlights 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.
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
106
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.
107
AUDITED FINANCIAL STATEMENTS |
||
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 | |
F-9 | ||
F-10 | ||
F-11 | ||
F-12 |
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.
/s/ Ernst & Young LLP
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.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
December 31, 2005 |
December 31, 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.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2005
Portfolio Company |
Industry |
Type of Investment (1) |
Principal Amount
|
Cost
(2)
|
Value
(3)(4)
|
||||||||
Acceleron Pharmaceuticals, Inc. (3.50%)* |
Biopharmaceuticals |
Senior Debt
|
$ | 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
|
$ | 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%) |
Biopharmaceuticals |
Senior Debt
|
$ | 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%) |
Biopharmaceuticals |
Senior Debt
|
$ | 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
|
$ | 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%) |
Biopharmaceuticals |
Senior Debt
|
$ | 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
|
$ | 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
|
$ | 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%) |
Software |
Senior Debt
|
$ | 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 |
See notes to consolidated financial statements.
F-4
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)
December 31, 2005
Portfolio Company |
Industry |
Type of Investment (1) |
Principal Amount
|
Cost
(2)
|
Value
(3) (4)
|
||||||||
Inxight Software, Inc. (4.38%) |
Software |
Senior Debt
|
$ | 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
|
$ | 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
|
$ | 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%) |
Software |
Senior Debt
|
$ | 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%) |
Software |
Subordinated Debt
|
$ | 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%) |
Consumer & business prodcuts |
Senior Debt
|
$ | 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%) |
Communications & networking |
Senior Debt 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%) |
Communications & networking |
Senior Debt
|
$ | 2,809,653 | 2,809,653 | 2,809,653 | |||||||
|
|
|
|
||||||||||
Total Interwise, Inc. |
2,809,653 | 2,809,653 | |||||||||||
Occam Networks, Inc. (2.79%) |
Communications & networking |
Senior Debt
|
$ | 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 |
See notes to consolidated financial statements.
F-5
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)
December 31, 2005
Portfolio Company |
Industry |
Type of Investment (1) |
Principal Amount
|
Cost
(2)
|
Value
(3)(4)
|
||||||||
Optovia Corporation (4.37%) |
Communications & networking |
Senior Debt
|
$ | 5,000,000 | $ | 5,000,000 | $ | 5,000,000 | |||||
|
|
|
|
||||||||||
Total Optovia Corporation |
5,000,000 | 5,000,000 | |||||||||||
Pathfire, Inc. (4.38%) |
Communications & networking |
Senior Debt
|
$ | 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%) |
Medical devices & equipment |
Senior Debt
|
$ | 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%) |
Medical devices & equipment |
Senior Convertible Term Loan
|
$ | 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 & equipment |
Senior Debt
|
$ | 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 & equipment |
Senior Debt
|
$ | 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%) |
Internet consumer & business services |
Senior Debt
|
$ | 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 & business services |
Senior Debt
|
$ | 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 |
See notes to consolidated financial statements.
F-6
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS(Continued)
December 31, 2005
Portfolio Company |
Industry |
Type of Investment (1) |
Principal
Amount |
Cost
(2)
|
Value
(3)(4)
|
||||||||
RazorGator Interactive Group, Inc. (3.64%) |
Internet consumer & business services |
Senior Debt
|
$ | 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%) |
Electronics & computer hardware |
Senior Debt
|
$ | 5,000,000 | 4,915,455 | 4,915,455 | |||||||
Revolving Line of Credit
|
$ | 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%) |
Electronics & computer hardware |
Senior Debt
|
$ | 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%) |
Semiconductors |
Senior Debt
|
$ | 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
|
$ | 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) | Citigroup has an equity participation right on warrants collateralized under the Citigroup facility (see Note 5). 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)
Portfolio Company |
Industry |
Type of Investment (1) |
Principal Amount |
Cost
(2)
|
Value
(3)
|
||||||||
Affinity Express, Inc. (6.78%)* |
Internet Consumer and business services |
Senior Debt
|
$ | 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 & networking |
Senior Debt
|
$ | 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
|
$ | 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
|
$ | 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
|
$ | 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31, 2005 |
Period from
February 2, 2004 (commencement of operations) to December 31, 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.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Common Stock
|
Preferred Stock
|
Paid-In
Capital |
Distributable earnings (accumulated deficit) |
Net Assets
|
||||||||||||||||||||
Shares
|
Par Value
|
Shares
|
Par Value
|
|||||||||||||||||||||
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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
December 31, 2005 |
Period from
February 2, 2004 (commencement of operations) to December 31, 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 May 3, 2005, HT II filed an application with the Small Business Administration (the SBA) to become licensed as a Small Business Investment Company (SBIC) and on June 24, 2005, the HT II received a letter of acknowledgement of receipt of this application. Upon receipt of this letter from the SBA, HT II was eligible to make pre-approved investments. If HT IIs application to the SBIC program is ultimately approved by the SBA, then it will be able to borrow funds from 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
F-13
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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.
F-14
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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 $2.9 million for the periods ended December 31, 2005 and 2004, respectively.
Stock-Based Compensation
The Company follows Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R) , to account for stock options granted. Under FAS 123R, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rate and expected option life.
Earnings per share
Basic earnings per share is computed by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing such net income by the sum of the weighted average number of shares outstanding for the period, the dilutive effect of potential shares that could occur upon exercise of warrants and common stock options.
Segments
The Company lends to and invests in customers in various sectors of technology-related and life-sciences sectors. The Company separately evaluates the performance of each of its lending and investment relationships. However, because each of these loan and investment relationships has similar business and economic characteristics, they have been aggregated into a single lending and investment segment. All segment disclosures are included in or can be derived from the Companys consolidated financial statements.
F-15
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Investments
A summary of the composition of the Companys investment portfolio as of December 31, 2005 and 2004 at fair value is shown as follows:
December 31, 2005
|
December 31, 2004
|
|||||||||||
($ in millions) |
Investments at Fair
Value |
Percentage of Total
Portfolio |
Investments at Fair
Value |
Percentage of Total
Portfolio |
||||||||
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 | % | |||||
|
|
|
|
|
|
|
|
A Summary of the Companys investment portfolio, at fair value, by geographic location is as follows:
December 31, 2005
|
December 31, 2004
|
|||||||||||
($ in millions) |
Investments at Fair
Value |
Percentage of Total
Portfolio |
Investments at Fair
Value |
Percentage of Total
Portfolio |
||||||||
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.
4. Credit Facility
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
F-16
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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.
F-17
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6. Income Taxes
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.
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.
F-18
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
7. Shareholders Equity
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 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.
F-19
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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
Warrants |
Five-Year
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 | ||
|
|
8. Equity Incentive Plan
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.
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.
F-20
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 Options |
One-Year Warrants |
Five-Year Warrants |
|||||||||
Outstanding at February 2, 2004 (commencement of operations) |
| | | ||||||||
Granted2004 |
273,436 | 106,718 | 106,718 | ||||||||
Exercised2004 |
| | | ||||||||
Expired2004 |
| | | ||||||||
|
|
|
|
|
|
|
|
||||
Outstanding, December 31, 2004 |
273,436 | 106,718 | 106,718 | ||||||||
Granted2005 |
1,270,000 | ||||||||||
Exercised2005 |
| (95,595 | ) | | |||||||
Cancelled2005 |
(206,000 | ) | (11,123 | ) | (50,167 | ) | |||||
Expired2005 |
| | | ||||||||
|
|
|
|
|
|
|
|
||||
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 | % |
9. Earnings per Share
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 | ||
|
|
F-21
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
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, semicondutor 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.
F-22
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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-23
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. Financial Highlights
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:
Year Ended
December 31, 2005 |
Period from
February 2, 2004 (commencement of operations) to December 31, 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. |
(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. |
(7) | Not annualized. |
F-24
HERCULES TECHNOLOGY GROWTH CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Indemnification
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.
16. Subsequent Events
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 March 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 August 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 6, 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-25
PART COTHER 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 AInformation Required in a Prospectus:
AUDITED FINANCIAL STATEMENTS |
||
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 | |
F-9 | ||
F-10 | ||
F-11 | ||
F-12 |
2. Exhibits
Exhibit
Number |
Description |
|
a* |
Articles of Amendment and Restatement. |
|
b* |
Amended and Restated Bylaws. |
|
d* |
Specimen certificate of the Companys common stock, par value $.001 per share. |
|
e* |
Form of Dividend Reinvestment Plan. |
|
f.1* |
Credit Agreement dated as of April 12, 2005 between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C. |
|
f.2* |
Pledge and Security Agreement dated as of April 12, 2005 between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C. |
|
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. |
|
f.4** |
Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc. dated as of August 1, 2005. |
|
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. |
|
f.6** |
Indenture between Hercules Funding Trust I and U.S. Bank National Association dated as of August 1, 2005. |
|
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. |
|
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. |
|
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. |
|
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. |
|
h* |
Form of Underwriting Agreement. |
|
i.1* |
Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2005 Amendment and Restatement). |
|
i.2* |
Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan. |
|
i.3* |
Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan. |
C-1
Exhibit
Number |
Description |
|
j* | Form of Custody Agreement between the Company and Union Bank of California. | |
k.1* | Form of Registrar, Transfer Agency and Service Agreement between the Company and American Stock Transfer & Trust Company. | |
k.2* | Warrant Agreement dated June 22, 2004 between the Company and American Stock Transfer & Trust Company, as warrant agent. | |
k.3* | Side Letter dated February 2, 2004 between the Company and Jolson Merchant Partners Group LLC (now known as JMP Group LLC). | |
k.4* | Registration Rights Agreement dated June 22, 2004 between the Company and JMP Securities LLC. | |
k.5* | Letter Agreement dated February 22, 2005 between the Company and JMP Asset Management LLC. | |
k.6* | Letter Agreement dated February 22, 2005 between the Company and Farallon Capital Management, L.L.C. | |
k.7 | Subscription Agreement among Hercules Technology Growth Capital, Inc. and the subscribers named therein dated March 2, 2006. | |
k.8 | Registration Rights Agreement among Hercules Technology Growth Capital, Inc. and the purchasers named therein dated March 2, 2006. | |
l* | Opinion of Venable LLP. | |
n.1 | Consent of Ernst & Young LLP. | |
n.2* | Consent of Venable LLP (included in Exhibit l). | |
n.3 | Consent of VentureOne. | |
p* | Subscription Agreement dated February 2, 2004 between the Company and the subscribers named therein. | |
r* | Code of Ethics. |
* | Previously filed as part of a Registration Statement filed with the Commission on June 8, 2005 (Registration No. 333-122950). |
** | Previously filed as part of a Form 8-K filed with the Commission on August 5, 2005. |
|
||
Item 26. Marketing Arrangements
None.
Item 27. 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):
Amount
|
|||
SEC registration fee |
$ | 7,799 | |
Accounting fees and expenses |
20,000 | ||
Legal fees and expenses |
50,000 | ||
Printing expenses |
10,000 | ||
Blue sky qualification fees and expenses |
500 | ||
Transfer Agents fee |
5,000 | ||
Miscellaneous |
6,701 | ||
|
|
||
Total |
$ | 100,000 | |
|
|
The amounts set forth above, except for the SEC fees, are in each case estimated.
Item 28. Persons Controlled by or Under Common Control
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 is the sole limited partner of 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:
Name |
Jurisdiction of Organization
|
|
Hercules Technology SBIC Management, LLC |
Delaware | |
Hercules Technology II, L.P. |
Delaware | |
Hercules Funding I LLC |
Delaware | |
Hercules Funding Trust I |
Delaware |
C-2
Item 29. Number of Holders of Securities
The following table sets forth the approximate number of record holders of the Companys common stock as of February 10, 2006.
Title of Class |
Number of
Record Holders |
|
Common stock, par value $.001 per share |
1,237 | |
Warrants to purchase shares of common stock |
31 |
Item 30. Indemnification
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 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.
C-3
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.
Item 31. Business and Other Connections of Investment Advisor
Not applicable.
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.
Item 33. Management Services
Not applicable.
Item 34. Undertakings
1. The Registrant undertakes to suspend the offering of shares until the prospectus is amended if (1) 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 (2) the net asset value increases to an amount greater than the net proceeds as stated in the prospectus.
2. The Registrant undertakes that:
(a) For purposes of determining any liability under the Securities Act, 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 shall be deemed to be part of this registration statement as of the time it was declared effective; and
(b) For the purpose of determining any liability under the Securities Act, 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.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Post-effective Amendment No. 3 to the 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 9 th day of March, 2006.
H ERCULES T ECHNOLOGY G ROWTH C APITAL , I NC . |
||
By: |
/s/ M ANUEL A. H ENRIQUEZ |
|
Name: | Manuel A. Henriquez | |
Title: |
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.
Signature |
Title |
Date |
||||
/s/ M ANUEL A. H ENRIQUEZ Manuel A. Henriquez |
Chairman of the Board, President and Chief Executive Officer (principal executive officer) |
March 9, 2006 |
||||
/s/ D AVID M. L UND David M. Lund |
Vice President of Finance (principal financial and accounting officer) |
March 9, 2006 |
||||
* Allyn C. Woodward, Jr. |
Director |
March 9, 2006 |
||||
* Joseph W. Chow |
Director |
March 9, 2006 |
||||
The undersigned, by signing his name hereto, does sign and execute this Post-effective Amendment No. 3 to the registration statement pursuant to the Power of Attorney executed by the above named directors of the Registrant and previously filed with the Securities and Exchange Commission on behalf of such directors.
|
||||||
*By: |
/s/ M ANUEL A. H ENRIQUEZ |
Attorney-in-fact |
March 9, 2006 |
|||
Manuel A. Henriquez |
EXHIBIT INDEX
Exhibit
Number |
Description |
|
a* |
Articles of Amendment and Restatement. |
|
b* |
Amended and Restated Bylaws. |
|
d* |
Specimen certificate of the Companys common stock, par value $.001 per share. |
|
e* |
Form of Dividend Reinvestment Plan. |
|
f.1* |
Credit Agreement dated as of April 12, 2005 between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C. |
|
f.2* |
Pledge and Security Agreement dated as of April 12, 2005 between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C. |
|
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. |
|
f.4** |
Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc. dated as of August 1, 2005. |
|
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. |
|
f.6** |
Indenture between Hercules Funding Trust I and U.S. Bank National Association dated as of August 1, 2005. |
|
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. |
|
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. |
|
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. |
|
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. |
|
h* |
Form of Underwriting Agreement. |
|
i.1* |
Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2005 Amendment and Restatement). |
|
i.2* |
Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan. |
|
i.3* |
Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan. |
|
j* |
Form of Custody Agreement between the Company and Union Bank of California. |
|
k.1* |
Form of Registrar Transfer Agency and Service Agreement between the Company and American Stock Transfer & Trust Company. |
|
k.2* |
Warrant Agreement dated June 22, 2004 between the Company and American Stock Transfer & Trust Company, as warrant agent. |
|
k.3* |
Side Letter dated February 2, 2004 between the Company and Jolson Merchant Partners Group LLC (now known as JMP Group LLC). |
|
k.4* |
Registration Rights Agreement dated June 22, 2004 between the Company and JMP Securities LLC. |
|
k.5* |
Letter Agreement dated February 22, 2005 between the Company and JMP Asset Management LLC. |
|
k.6* |
Letter Agreement dated February 22, 2005 between the Company and Farallon Capital Management, L.L.C. |
|
k.7 |
Subscription Agreement among Hercules Technology Growth Capital, Inc. and the subscribers named therein dated March 2, 2006. |
|
k.8 |
Registration Rights Agreement among Hercules Technology Growth Capital, Inc. and the purchasers named therein dated March 2, 2006. |
|
l* |
Opinion of Venable LLP. |
|
n.1 | Consent of Ernst & Young LLP. | |
n.2* | Consent of Venable LLP (included in Exhibit 1). | |
n.3 | Consent of VentureOne. | |
p* | Subscription Agreement dated February 2, 2004 between the Company and the subscribers named therein. | |
r* | Code of Ethics. |
* | Previously filed as part of a Registration Statement filed with the Commission on June 8, 2005 (Registration No. 333-122950). |
** | Previously filed as part of a Form 8-K filed with the Commission on August 5, 2005. |
Exhibit F.8
SECOND AMENDMENT
TO
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this Amendment) is entered into as of March 6, 2006 by and among HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland corporation (the Company), ALCMENE FUNDING, L.L.C., as a Lender and as Administrative Agent (the Administrative Agent) for the Lenders party from time to time to the Credit Agreement referred to below, and such lenders.
W I T N E S S E T H:
WHEREAS, Company, Administrative Agent and Lenders have entered into that certain Credit Agreement dated as of April 12, 2005 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement); and
WHEREAS, the parties to the Credit Agreement desire to amend the Credit Agreement on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows:
Defined Terms . Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Credit Agreement, as amended by this Amendment.
Amendments to Credit Agreement .
Amendment to Definitions .
Restated Definitions . The following definitions are hereby amended by deleting such definitions in their entirety and substituting the following therefor:
Maturity Date means June 30, 2006, or such earlier date on which all of the Obligations hereunder become due and payable, whether at such stated maturity date, by declaration of acceleration, or otherwise.
Warrant Pledge and Security Agreement means an agreement pursuant to which a Person participating in a Securitization Transaction pledges certain Warrants and certain other collateral related thereto as security for the payment and performance of such Persons obligations under a Warrant Participation Agreement or under or in connection with any of the operative documents for such Securitization Transaction.
Amendment to Interest Provision . Section 2.06(a) of the Credit Agreement is hereby amended by deleting such section in its entirety and substituting the following therefor:
Each Loan shall bear interest on the outstanding principal amount thereof (i) from the applicable Borrowing Date until July 31, 2005 at a rate per annum equal to 8.0%; (ii) from August 1, 2005 through December 31, 2005 at a rate per annum equal to LIBOR plus 5.60%; (iii) from January 1, 2006
1
through March 6, 2006 at a rate per annum equal to 13.5%; (iv) from March 6, 2006 and thereafter until the Maturity Date, at a rate per annum equal to 10.81%.
Amendment to Financial Covenant.
Section 6.13(b) of the Credit Agreement is hereby amended by deleting the 2:1 therein and substituting 1.5:1 therefor.
Amendment to Limitation on Liens Covenant.
Clause (m) of Section 7.01 of the Credit Agreement is hereby amended by deleting clause (m) therein and substituting the following therefor:
(m) Liens granted pursuant to a Warrant Pledge and Security Agreement and/or a Warrant Participation Agreement.
Amendment to Disposition of Assets Covenant . Section 7.02 of the Credit Agreement is hereby amended by deleting such section in its entirety and substituting the following therefor:
Disposition of Assets . The Company shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any property (including the equity interests in Subsidiaries, Borrowing Loans, accounts, accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except (x) sales of interests in Borrowing Loans for Cash or Cash Equivalents in an amount that is not less than ninety percent (90%) of the principal amount of such Borrowing Loans , dispositions of excess, used, worn-out or surplus equipment, all in the ordinary course of business; (y) sales, contributions, conveyances or other transfers of Securitization Transaction Borrowing Loans, provided that such sale, conveyance, contribution or transfer complies with Section 7.14 hereof; and (z) dispositions of interests or participations in Warrants made pursuant to a Warrant Participation Agreement and in compliance with the proviso to the definition thereof or dispositions of Warrants or the proceeds thereof in a foreclosure or similar action pursuant to a Warrant Pledge and Security Agreement.
Amendment to Contingent Obligations Covenant . Clause (d) of Section 7.08 of the Credit Agreement is hereby amended by deleting such clause in its entirety and substituting the following therefor:
(d) Contingent Obligations consisting of guarantees provided by the Company or a Subsidiary in connection with a Securitization Transaction so long as the guarantees provided in connection with such Securitization Transactions are secured in a manner that does not violate the terms of this Agreement.
2
Effectiveness . This Amendment shall be effective upon the occurrence of each of the following (the Second Amendment Effective Date )
the delivery to Administrative Agent of signature pages to this Amendment signed on behalf of the Company, the Administrative Agent and each Lender;
the payment in full, in cash, to Administrative Agent of $21,531.13 for reimbursement of previous legal fees paid on behalf of the Company; and
the payment in full, in cash, to Kramer Levin Naftalis & Frankel LLP of all fees and expenses as legal counsel to Administrative Agent and Lender outstanding as of the date hereof including the fees and expenses incurred in connection with the negotiation and drafting of this Amendment.
Representations and Warranties . Company hereby represents and warrants to Administrative Agent and each Lender as follows:
Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Maryland;
Company has the power and authority to execute, deliver and perform its obligations under this Amendment;
Companys execution, delivery and performance of this Amendment has been duly authorized by all necessary action;
this Amendment constitutes the legal, valid and binding obligation of Company, enforceable against Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors rights generally or by equitable principles relating to enforceability;
the representations of the Company contained in the Credit Agreement are true and correct as of the date hereof as if such representations and warranties had been made as of such date; and
no Default or Event of Default has occurred and is continuing.
No Waiver . Nothing contained herein shall be deemed to constitute a waiver of compliance with any term or condition contained in the Credit Agreement or any of the other Loan Documents or constitute a course of conduct or dealing among the parties. Except as amended hereby, the Credit Agreement and other Loan Documents remain unmodified and in full force and effect. All references in the Loan Documents to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby.
Counterparts . This Amendment may be executed by one or more of the parties to this Amendment and any number of separate counterparts, each of which when so executed, shall be deemed an original and all said counterparts when taken together shall be deemed to constitute but one and the same instrument.
3
Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of Company, Administrative Agent, the Lenders and their successors and assigns.
Further Assurance . The Company hereby agrees from time to time, as and when requested by the Administrative Agent, to execute and deliver or cause to be executed and delivered, all such documents, instruments and agreements and to take or cause to be taken such further or other action as the Administrative Agent may reasonably deem necessary or desirable in order to carry out the intent and purposes of this Amendment, the Credit Agreement and the Loan Documents.
GOVERNING LAW AND JURISDICTION . THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES. The provisions of Section 10.15 of the Credit Agreement shall apply to this Amendment.
Severability . Wherever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Amendment.
[Remainder of this page has been intentionally left blank; signature page follows]
4
IN WITNESS WHEREOF , the parties have executed this Amendment as of the date set forth above.
COMPANY | ||
HERCULES TECHNOLOGY GROWTH CAPITAL, INC., a Maryland corporation | ||
By: | ||
Name: | ||
Title: |
||
ADMINISTRATIVE AGENT AND LENDER | ||
ALCMENE FUNDING, L.L.C., as Administrative Agent and as a Lender |
||
By: | ||
Name: | ||
Title: |
5
Exhibit F.9
EXECUTION COPY
FIRST OMNIBUS AMENDMENT
(Hercules Funding Trust I)
THIS FIRST OMNIBUS AMENDMENT , dated as of March 6, 2006 (this Amendment), is entered into by and among:
HERCULES FUNDING TRUST I , as the issuer (together with its successors and assigns in such capacity, the Issuer );
HERCULES FUNDING I, LLC , as the depositor (together with its successors and assigns in such capacity, the Depositor );
HERCULES TECHNOLOGY GROWTH CAPITAL, INC ., ( Hercules ), as the originator (together with its successors and assigns in such capacity, the Originator ) and as the servicer (together with its successors and assigns in such capacity, the Servicer );
U.S. BANK NATIONAL ASSOCIATION , ( U.S. Bank ), as the indenture trustee (together with its successors and assigns in such capacity, the Indenture Trustee ) and as the collateral custodian (together with its successors and assigns in such capacity, the Collateral Custodian );
LYON FINANCIAL SERVICES, INC . d/b/a/ U.S. Bank Portfolio Services, as the backup servicer (together with its successors and assigns in such capacity, the Backup Servicer ); and
CITIGROUP GLOBAL MARKETS REALTY CORP. , ( Citigroup ), as the initial noteholder (together with its successors and assigns in such capacity, the Initial Noteholder ).
Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Sale and Servicing Agreement (as defined below).
R E C I T A L S
WHEREAS , the Issuer, the Depositor, the Originator, the Indenture Trustee and the Backup Servicer entered into that certain Sale and Servicing Agreement, dated as of August 1, 2005 (as further amended, supplemented, modified, replaced or restated from time to time, the Sale and Servicing Agreement );
WHEREAS , Hercules and Citigroup entered into that certain Warrant Participation Agreement, dated as of August 1, 2005 (further amended, supplemented modified, replaced or restated from time to time, the Warrant Participation Agreement );
WHEREAS , Hercules, Citigroup, Alcmene Funding, L.L.C. and U.S. Bank entered into that certain Warrant Pledge and Security Agreement, dated as of August 1, 2005 (further amended, supplemented modified, replaced or restated from time to time, the Warrant Pledge
Agreement and, together with the Sale and Servicing Agreement and the Warrant Participation Agreement, the Amended Agreements );
WHEREAS , the Issuer, the Depositor, the Originator, the Indenture Trustee and the Backup Servicer entered into that certain First Amendment to the Sale and Servicing Agreement, dated as of November 30, 2005; and
WHEREAS , the applicable parties hereto desire to amend and restate the Warrant Pledge Agreement, to amend the Warrant Participation Agreement and to further amend the Sale and Servicing Agreement in certain respects as provided herein;
NOW, THEREFORE , based upon the above Recitals, the mutual premises and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned, intending to be legally bound, hereby agree as follows:
SECTION 1. AMENDMENTS TO THE SALE AND SERVICING AGREEMENT
(a) The front cover of the Sale and Servicing Agreement is hereby amended by inserting, beginning on the line following the words Backup Servicer, the words:
and
CITIGROUP GLOBAL MARKETS REALTY CORP.,
as Initial Noteholder.
(b) The introductory paragraph of the Sale and Servicing Agreement is hereby amended by inserting, after the text the Servicer ), the words Citigroup Global Markets Realty Corp., a New York corporation, as initial noteholder (in such capacity, the Initial Noteholder ),.
(c) The definition of Advance Rate in Section 1.1 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:
Advance Rate : On any date (a) prior to April 3, 2006, a percentage equal to 60%, and (b) on and after April 3, 2006 a percentage equal to 55%..
(d) The definition of Eligible Obligor in Section 1.1 of the Sale and Servicing Agreement is hereby amended by inserting, at the beginning of subclause (ix) thereof, the words except as the Initial Noteholder shall otherwise agree in writing,.
(e) The definition of Facility Amount in Section 1.1 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:
Facility Amount : On any date of determination (i) during the Revolving Period, an amount equal to $125,000,000, and (ii) after the end of the Revolving Period, an amount equal to $0..
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(f) The definition of Fee Letter in Section 1.1 of the Sale and Servicing Agreement is hereby amended by inserting, at the end thereof, the words , as amended, supplemented, modified, restated or replaced from time to time..
(g) The definition of Required Equity Contribution in Section 1.1 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:
Required Equity Contribution : As of any date of determination, an amount equal to $25,000,000..
(h) The definition of Warrant Participation Agreement in Section 1.1 of the Sale and Servicing Agreement is hereby amended by inserting, at the end thereof, the words , as amended, supplemented, modified, restated or replaced from time to time..
(i) The definition of Warrant Pledge and Security Agreement in Section 1.1 of the Sale and Servicing Agreement is hereby amended and restated in its entirety as follows:
Warrant Pledge and Security Agreement : The amended and restated warrant pledge and security agreement relating to the Warrant Assets and certain other equity purchase warrants or similar rights convertible into or exchangeable or exercisable for any equity interests received by Hercules in connection with its origination activities, dated as of March 6, 2006, by and among the Originator, the Initial Noteholder and U.S. Bank, as the escrow agent thereunder, as amended, supplemented, modified, restated or replaced from time to time..
(j) Section 9.01 of the Sale and Servicing Agreement is hereby amended by deleting, from the end of clause (a)(15) thereof, the word or, by replacing the period at the end of clause (a)(16) thereof with ; or and by inserting a new clause (a)(17) as follows:
(17) The Servicer shall have failed to deliver to the Initial Noteholder on or prior to March 6, 2006, opinions of Winston & Strawn LLP with respect to (i) the bring-down of opinions initially delivered August 1, 2005, addressing certain true sale and non-consolidation issues and (ii) addressing certain enforceability and perfection issues.
(k) Citigroup Global Markets Realty Corp., in its capacity as Initial Noteholder, shall be deemed to be a signatory to the Sale and Servicing Agreement upon delivery of a duly executed counterpart to this Amendment.
SECTION 2. AMENDMENTS TO THE WARRANT PARTICIPATION AGREEMENT .
(a) The definition of Maximum Participation Limit in Section 1 of the Warrant Participation Agreement is hereby amended by replacing the words $3 million in clause (b) thereof with the text $3,750,000.
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SECTION 3. AMENDMENTS TO THE WARRANT PLEDGE AGREEMENT
The Warrant Pledge Agreement is hereby amended and restated in its entirety in the form attached hereto as Exhibit A .
SECTION 4. AGREEMENTS IN FULL FORCE AND EFFECT AS AMENDED .
Except as specifically amended hereby, all provisions of the Amended Agreements shall remain in full force and effect. This Amendment shall not be deemed to expressly or impliedly waive, amend or supplement any provision of the Amended Agreements other than as expressly set forth herein and shall not constitute a novation of any of the Amended Agreements .
SECTION 5. REPRESENTATIONS .
Each of the Issuer, the Originator, the Depositor and the Servicer represents and warrants as of the date of this Amendment as follows:
(a) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization;
(b) the execution, delivery and performance by it of this Amendment are within its powers, have been duly authorized, and do not violate (A) its charter, by-laws, or other organizational documents, or (B) any Applicable Law;
(c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with any governmental authority is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment by or against it;
(d) this Amendment has been duly executed and delivered by it;
(e) this Amendment constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors rights generally or by general principles of equity; and
(f) there is no Servicer Default, Event of Default or termination or optional termination, each as described in the Sale and Servicing Agreement.
SECTION 6. CONDITIONS PRECEDENT .
The effectiveness of this Amendment is conditioned upon the following:
(i) the delivery of executed signature pages by all parties hereto;
(ii) the surrender and cancellation of the Note, dated August 1, 2005, in a maximum principal amount of $100,000,000 and the delivery to the Initial Noteholder of a duly executed and authenticated Note in a maximum principal amount of $125,000,000 (the Replacement Note ); and
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(iii) delivery of evidence reasonably satisfactory to the Initial Noteholder of the effectiveness of the Second Amendment, dated of even date herewith, to that certain Credit Agreement, dated as of April 12, 2005, as previously amended by an amendment thereto dated as of August 1, 2005, with the Alcmene Funding, L.L.C., as lender and administrative agent (the Credit Agreement ), and the effectiveness of that certain Intercreditor and Subordination Agreement, dated of even date herewith, by and among Hercules, Citigroup and Alcmene Funding, L.L.C. (the Intercreditor Agreement ) relating to the subordination of the liens and security interest created pursuant to the Pledge and Security Agreement, dated as of April 12, 2005, as amended by an amendment thereto dated as of August 1, 2005 (the Pledge Agreement ).
SECTION 7. MISCELLANEOUS .
(a) This Amendment may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.
(b) The descriptive headings of the various sections of this Amendment are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified except as provided in the Sale and Servicing Agreement.
(d) The failure or unenforceability of any provision hereof shall not affect the other provisions of this Amendment.
(e) Whenever the context and construction so require, all words used in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine.
(f) This Amendment represents the final agreement between the parties only with respect to the subject matter expressly covered hereby and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.
(g) Depositor hereby instructs Wilmington Trust Company, a Delaware banking corporation, as owner trustee for the Issuer (Owner Trustee), to execute and deliver, not in its individual capacity but solely as Owner Trustee, (i) the Issuer Order, addressed to the Indenture Trustee and delivered pursuant to Section 2.08 of the Indenture, (ii) the Replacement Note and (ii) this Amendment.
(h) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAWS
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PROVISIONS (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF , the undersigned have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
Exhibit F.10
INTERCREDITOR AND LIEN SUBORDINATION AGREEMENT
(RE: GUARANTY PLEDGED WARRANTS)
THIS INTERCREDITOR AND LIEN SUBORDINATION AGREEMENT (RE GUARANTY PLEDGED WARRANTS), dated as of March 6, 2006 (as amended, supplemented or otherwise modified from time to time, this Agreement ), is by and among:
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. , a Maryland corporation (the Borrower );
CITIGROUP GLOBAL MARKETS REALTY CORP., a New York corporation (together with its successors and assigns, in such capacity, the Senior Secured Party ) under the terms of that certain Amended and Restated Warrant Pledge and Security Agreement, dated as of March 6, 2006, among the Borrower, the Senior Secured Party and U.S. Bank National Association, as the Escrow Agent (as amended, restated, supplemented or otherwise modified from time to time, the Senior Security Agreement ); and
ALCMENE FUNDING, L.L.C. , a Delaware limited liability company, as the secured Party (together with its successors and assigns, the Second Lien Secured Party ) under the terms of that certain Pledge and Security Agreement dated as of April 12, 2005 by and among the Borrower and the Second Lien Secured Party (as amended, restated, supplemented or otherwise modified from time to time, the Second Lien Security Agreement ).
WITNESSETH :
WHEREAS, in connection with that certain Sale and Servicing Agreement dated as of August 1, 2005, by and among Hercules Funding Trust I, as the Issuer, Hercules Funding I LLC, as the Depositor, the Borrower as the Originator and Servicer, U.S. Bank National Association, as the Indenture Trustee and Collateral Custodian and Lyon Financial Services, Inc., d/b/a U.S. Bank Portfolio Services, as the Back-Up Servicer (as amended, restated, supplemented or otherwise modified from time to time, the Sale and Servicing Agreement ), the Borrower and the Senior Secured Party have entered into the Warrant Participation Agreement, dated as of August 1, 2005 (as as amended, restated, supplemented or otherwise modified from time to time, the Warrant Participation Agreement , together with the Sale and Servicing Agreement and the Senior Security Agreement, and the other documents executed in connection therewith, the Senior Collateral Documents ). Pursuant to and in connection with the transactions contemplated by the the Sale and Servicing Agreement and the Warrant Participation Agreement, the Borrower agreed to pledge and assign to the Senior Secured Party the Securitization Pledged Warrants (as defined in the Senior Security Agreement), and certain other collateral related thereto as security for the payment and performance of the Borrowers obligations under the Warrant Participation Agreement pursuant to the terms of the Senior Security Agreement;
WHEREAS, Alcmene Funding, L.L.C., in its capacity as a Lender and Administrative Agent (the Second Lien Administrative Agent ) is party to that certain Credit Agreement with
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the Borrower and the other lenders from time to time party thereto (the Second Lien Lenders ), dated as of April 12, 2005 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement ), under which the obligations of the Borrower are secured, pursuant to the Second Lien Security Agreement (together with the Credit Agreement and the other Collateral Documents executed in connection therewith, the Second Lien Collateral Documents ), by all assets of the Borrower, excluding the Securitization Pledged Warrants but including the Guaranty Pledged Warrants (as defined below);
WHEREAS, pursuant to the Senior Security Agreement, the Borrower wishes to grant with respect to the Guaranty Pledged Warrants (the Collateral ), a first priority security interest to the Senior Secured Party to secure the obligations of the Borrower under a guaranty in favor of the Senior Secured Party undertaken in connection with the transactions contemplated by the Sale and Servicing Agreement, and a second priority security interest to the Second Lien Secured Party;
WHEREAS, the Senior Secured Party and the Second Lien Secured Party, on behalf of itself and the Second Lien Administrative Agent and the Second Lien Lenders, desire to enter into this Agreement to evidence their agreement with respect to, among other things, the relative priorities of their respective security interests in and liens on the Collateral.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and to induce the Senior Secured Party to enter into the Senior Security Agreement, and to induce the Second Lien Secured Party to enter into the Second Amendment to the Credit Agreement, dated as of the date hereof, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Recitals of this Agreement.
Section 1.2 For purposes of this Agreement, the following terms shall have the following meanings:
Agreement means this Intercreditor and Lien Subordination Agreement, as amended, supplemented or otherwise modified from time to time.
Bankruptcy Events means, with respect to the Borrower, or any of its Subsidiaries, the commencement or initiation of any voluntary or involuntary dissolution, winding-up, total or partial liquidation or reorganization, or bankruptcy, insolvency, receivership or other similar statutory or common law proceedings or arrangements involving the Borrower, or any of its Subsidiaries, or the readjustment of liabilities or any assignment for the benefit of creditors or any marshalling of its assets or liabilities with respect thereto.
Borrower shall have the meaning ascribed to such term in the Recitals to this Agreement, and includes all successors in interest, together with any other related entity which
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grants collateral or other security to the Senior Secured Party to secure the First Lien Obligations and/or to the Second Lien Secured Party to secure the Second Lien Obligations.
Business Day means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York, are authorized or required by law to close.
Collateral shall have the meaning ascribed to such term in the Recitals to this Agreement.
First Lien Obligations means any and now existing or hereafter arising obligations of the Borrower to the Senior Secured Party pursuant to the Guaranty, whether primary or secondary, direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not, liquidated or unliquidated, arising by operation of law or otherwise, whether for principal, interest, fees, expenses or otherwise (including, without limitation, interest, fees, costs or other payments on the First Lien Obligations paid or accrued after the commencement of a Bankruptcy Event and whether or not such claims are deemed allowed or recoverable in any Bankruptcy Event, and payment of or for adequate protection pursuant to any Bankruptcy Event), together with all costs of collection or enforcement, including, without limitation, reasonable attorneys fees incurred in any collection efforts or in any action or proceeding.
First Priority Liens has the meaning provided in Section 2.1.
Guaranty means the guaranty obligation of the Borrower in favor of the Senior Secured Party under Section 10.01 of the Note Purchase Agreement.
Guaranty Pledged Warrants shall have the meaning assigned thereto in the Senior Security Agreement.
Note Purchase Agreement means that certain Note Purchase Agreement, dated as of August 1, 2005, among Hercules Funding Trust I, as the Issuer, Hercules Funding I LLC, as the Depositor, the Borrower, as Originator and the Senior Secured Party, as the Purchaser.
Second Lien Obligations means any and now existing or hereafter arising obligations of the Borrower to the Second Lien Secured Party, whether primary or secondary, direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not, liquidated or unliquidated, arising by operation of law or otherwise, whether for principal, interest, fees, expenses or otherwise (including, without limitation, interest, fees, costs or other payments on the Second Lien Obligations paid or accrued after the commencement of a Bankruptcy Event and whether or not such claims are deemed allowed or recoverable in any Bankruptcy Event, and payment of or for adequate protection pursuant to any Bankruptcy Event), together with all costs of collection or enforcement, including, without limitation, reasonable attorneys fees incurred in any collection efforts or in any action or proceeding.
Second Priority Liens has the meaning provided in Section 2.1.
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ARTICLE II
GENERAL INTERCREDITOR AND LIEN SUBORDINATION PROVISIONS
Section 2.1 Agreement to Subordinate Liens . The Second Lien Secured Party hereby acknowledges that it has been granted liens on and security interests in the Collateral pursuant to the Second Lien Collateral Documents. The Borrower, for itself and its successors and assigns, covenants and agrees, and the Second Lien Secured Party for itself and for its successors and assigns, hereby agrees, that, to the extent and in the manner set forth in this Agreement, all liens now held or hereafter acquired by the Senior Secured Party in any or all of the Collateral (the First Priority Liens ) to secure the First Lien Obligations shall at all times be prior and superior to any lien now held or hereafter acquired by the Second Lien Secured Party in the Collateral (the Second Priority Liens ), and the Second Lien Secured Party agrees that the existence of the First Priorty Liens shall not constitute an event of default under the Credit Agreement or the Second Lien Collateral Documents. Such priority shall be applicable irrespective of the time or order of attachment or perfection of any security interest or the time or order of filing of any financing statements, deeds of trust or other documents, or any statutes, rules or law, or judicial interpretations to the contrary. In the event and to the extent, if any, that the liens arising pursuant to the Second Lien Collateral Documents attach to or encumber property of the Borrower constituting Collateral but upon which First Priority Liens do not exist or attach, then the Second Priority Liens shall be deemed to secure the First Lien Obligations (in addition to the Second Lien Obligations) and any proceeds derived from any such Collateral which is paid to or received or obtained by the Second Lien Secured Party shall be held for the benefit of and paid over to the Senior Secured Party until such time as the Senior Secured Party obtains a lien on such Collateral or the First Lien Obligations are indefeasibly paid in full in cash and satisfied, whichever occurs first. The lien subordination provisions in this Agreement are for the benefit of and shall be enforceable directly by the Senior Secured Party.
Section 2.2 Disposition of Collateral; Senior Secured Partys Limited Appointment as Attorney-in-Fact .
(a) The Second Lien Secured Party hereby agrees that, until all First Lien Obligations have been indefeasibly paid in full in cash and satisfied, the Senior Secured Party may for the purpose of seeking the repayment of the First Lien Obligations, dispose of, and exercise any other rights with respect to any or all of the Collateral (including, without limitation, release its liens on any of the Collateral, as permitted by the Senior Collateral Documents, in connection with a consensual disposition thereof by the Borrower), free of the Second Priority Liens, provided that (i) the Second Lien Secured Party retains any rights it may have as a junior secured creditor with respect to the surplus, if any, arising from any such disposition or enforcement after payment in full in cash of any amounts then payable under the Guaranty , and the Senior Secured Party shall deliver any such surplus paid to or received by the Senior Secured Party to the Second Lien Secured Party; and (ii) any net cash proceeds received or obtained by the Senior Secured Party from the disposition of the Collateral shall be applied in accordance with the Senior Collateral Documents as in effect on the date hereof, and to the extent of the application of such amounts to the amount of the First Lien Obligations, such application shall permanently reduce the amount of the First Lien Obligations. In the event that the Senior Secured Party intends to release any of its liens on all or any material portion of the Collateral in connection with any such disposition or exercise, the Senior Secured Party agrees to use its reasonable best efforts to give the Second Lien Secured Party prompt notice thereof, which notice shall state (i) the portion of the Collateral to be sold
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or disposed of, (ii) that such Collateral shall be sold free and clear of the First Priority Liens and Second Priority Liens, and the amount of the First Lien Obligations, if any, to be permanently reduced as a result thereof.
(b) The Second Lien Secured Party hereby irrevocably constitutes and appoints the Senior Secured Party and any authorized officer or agent thereof, with full power of substitution and re-substitution, as its true and lawful attorney-in-fact upon failure in the due performance or observance by the Second Lien Secured Party of the provisions set forth in Section 2.2(a) of this Agreement, within five (5) Business Days request by the Senior Secured Party, with the irrevocable power and authority, in the place and stead of the Second Lien Secured Party, and in the name of the Second Lien Secured Party, or in the Senior Secured Partys own name, from time to time, in the Senior Secured Partys discretion, for the purpose of carrying out any such failed term of Section 2.2(a) of this Agreement and the Second Lien Secured Party hereby gives the Senior Secured Party the power and right, on behalf of the Second Lien Secured Party to (in connection with such failure) take any and all reasonably appropriate action and to execute any and all documents and instruments which may be necessary, in the reasonable determination of the Senior Secured Party, for the Senior Secured Party to enforce the terms of, dispose of, or exercise any other rights with respect to, any or all of the Collateral, free of the Second Priority Liens, as provided by Section 2.2 of this Agreement, including but not limited to the execution of any endorsements, releases, terminations, assignments or other instruments of conveyance or transfer or lien cancellation with respect to the Collateral. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until all First Lien Obligations have been indefeasibly paid in full in cash. The Senior Secured Party shall use commercially reasonable efforts to give prompt notice to the Second Lien Secured Party of any action taken by the Senior Secured Party pursuant to the powers granted under this Section 2.2(b).
(c) Notwithstanding anything to the contrary contained herein, in the event that the Senior Secured Party releases its liens on the Collateral as a result of the prior or concurrent indefeasible payment in full in cash or other extinguishment of the First Lien Obligations, the Second Lien Secured Party shall not be obligated to release its liens on any Collateral remaining after giving effect to such payment or other extinguishment and termination (and any sale, transfer or other disposition of Collateral occurring in connection therewith).
Section 2.3 Limitations on Rights and Remedies .
(a) Until all First Lien Obligations have been indefeasibly paid in full in cash and satisfied, the Second Lien Secured Party shall not be entitled to exercise any rights or remedies with respect to the Second Priority Liens or the Collateral, including without limitation the right to (A) enforce any Second Priority Liens or sell or otherwise foreclose on any portion of the Collateral or (B) request any action, institute any suit or proceedings, give any instructions, make any election, notice account debtors or make collections with respect to any portion of the Collateral; provided , however , that the Second Lien Secured Party may, with the prior written consent of the Senior Secured
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Party, which consent shall not be unreasonably withheld, join with the Senior Secured Party in any enforcement, collection, execution, levy or foreclosure proceeding with respect to any Collateral, including, without limitation, petitioning, filing or joining in any involuntary bankruptcy proceeding.
Section 2.4 No Proceedings . In no event shall any party to this Agreement institute, encourage, or join as a party in the institution of, or assist in the prosecution of, any action, suit or other proceeding (including any contested matter in any bankruptcy or insolvency proceeding) seeking a determination that the lien of any other party in any of the Collateral is invalid, unenforceable, unperfected or avoidable, or is or should be subordinated to the interests of any person, other than as expressly set forth in this Agreement.
Section 2.5 Obligations of the Borrower Unconditional .
(a) Nothing contained in this Agreement is intended to or shall relieve the obligations of the Borrower respectively to the Senior Secured Party or the Second Lien Secured Party to pay any amount in respect of the First Lien Obligations or the Second Lien Obligations, as the case may be, as and when such amount shall become due and payable in accordance with the terms thereof, or to affect the relative rights of the Senior Secured Party or the Second Lien Secured Party, on the one hand, and the other creditors of the Borrower, on the other hand. All rights, interests, and obligations of the Senior Secured Party, the Second Lien Secured Party, and the Borrower hereunder, shall remain in full force and effect irrespective of:
(i) any lack of validity or enforceability of any loan document or other financing document, including, without limitation, the Sale and Servicing Agreement and any of the Basic Documents described therein or any other agreement or instrument relating to any of the foregoing;
(ii) any change in the time, manner or place of, or in any other term of, all or any of the First Lien Obligations or the Second Lien Obligations, or any amendment or waiver of or any consent to departure from any provision of the Senior Collateral Documents, the Second Lien Collateral Documents, or any other loan or collateral document relating to either of the foregoing;
(iii) any exchange, release, non-perfection, invalidity, unenforceability or avoidability of any lien or security interest in any Collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the First Lien Obligations or the Second Lien Obligations; or
(iv) any other circumstances which might otherwise constitute a defense available to, or a discharge of, the Borrower in respect of the First Lien Obligations, or of the Second Lien Obligations.
(b) Nothing contained in this Agreement shall affect or excuse the obligation of the Borrower to make, or prevent the Borrower from making, at any time, payment of any amount in respect of the First Lien Obligations and the Second Lien Obligations.
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Section 2.6 No Other Beneficiaries of Lien Subordination . This Agreement and the subordination provisions contained herein are intended only for the benefit of the holders of First Lien Obligations and no other creditor of the Borrower.
Section 2.7 Remedies .
(a) Rights Cumulative . The rights and remedies of the Senior Secured Party under this Agreement, the Senior Collateral Documents, or any other loan or collateral documents relating to the First Lien Obligations shall be cumulative and not exclusive of any rights or remedies which any of them would otherwise have. The Second Lien Secured Party agrees that it will not ask for, demand, sue for, take, receive, or repossess any of the Collateral from the Borrower by setoff or in any other manner, or otherwise take any enforcement action to realize upon the whole or any part of the Collateral, whether by judicial action or under power of sale, by self-help repossession or otherwise, unless and until all of the First Lien Obligations have been indefeasibly paid in full in cash and satisfied. If the Second Lien Secured Party, in violation hereof, initiates any enforcement action against any of the Collateral, the Senior Secured Party may intervene in the enforcement action and interpose this Agreement as a defense in the Senior Secured Partys name or in the name of the Borrower. In exercising such rights and remedies the Senior Secured Party may be selective and no failure or delay by the Senior Secured Party in exercising any right shall operate as a waiver of such right, nor shall any partial or single exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. The rights and remedies of the Second Lien Secured Party under this Agreement, the Second Lien Collateral Documents, or any other loan or collateral documents relating to the Second Lien Obligations shall be cumulative and not exclusive of any rights or remedies which any of them would otherwise have. In exercising such rights and remedies, subject to the terms of this Agreement, the Second Lien Secured Party may be selective and no failure or delay by the Second Party in exercising any right shall operate as a waiver of such right, nor shall any partial or single exercise of any power or right preclude its other or further exercise or the exercise of any other power or right.
Section 2.8 Consent to Recording of Second Priority Liens . The Senior Secured Party and the Borrower each hereby consent to the recording of the Second Priority Liens from time to time in the appropriate public registries.
Section 2.9 Senior Secured Party As Bailee for Perfection of Interest in Possessory Collateral . The Second Lien Secured Party hereby appoints the Senior Secured Party (and the Senior Secured Party hereby accepts such appointment) as the agent for the Second Lien Secured Party solely for purposes of perfecting the Second Lien Secured Partys liens on Collateral which is of a type such that perfection of a lien thereon may be accomplished by possession or control thereof. In the event all Senior First Lien Obligations shall have been indefeasibly paid in full in cash, the Senior Secured Party shall deliver to the Second Lien Secured Party all Collateral remaining in the possession or control of the Senior Secured Party (and shall promptly take whatever action is necessary in the reasonable judgment of the Senior Secured Party to vest in the Second Lien Secured Party control of all such Collateral of which the Senior Collateral Agent has control), and the Borrower hereby irrevocably authorizes any such delivery of
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Collateral by the Senior Secured Party. The obligations of the Senior Secured Party and the Borrower under the preceding sentence shall survive the termination of this Agreement. As of the date of this Agreement, the Senior Secured Party holds in its physical possession or control, to secure the First Lien Obligations, the Collateral identified on Exhibit A attached hereto.
Section 2.10 Certain Notices . Each of the Senior Secured Party and the Second Lien Secured Party hereby agrees to use its reasonable best efforts to give written notice to the other of any declaration of acceleration (as permitted hereunder), event of default declared in writing by it or, in the case of the Senior Secured Party, commencement of any action enforcing its rights or remedies under the Senior Collateral Documents; provided , however , that failure to give any such notice shall not result in liability to the Senior Secured Party or the Second Lien Secured Party, or modify in any way the terms and provisions of this Agreement, or otherwise relieve any party of its respective obligations under this Agreement. No party hereto shall have any obligation to cure any such default and any payment made or act done by any such party to cure any such default shall not constitute an assumption of or participation in the Senior Collateral Documents or the Second Lien Collateral Documents or the documents executed and delivered in connection therewith or of any of the respective obligations thereunder.
ARTICLE III
MISCELLANEOUS
Section 3.1 Successors; Continuing Effect . This Agreement is being entered into for the benefit of, and shall be binding upon, (a) the Senior Secured Party and each of its successors and assigns, including subsequent holders of First Lien Obligations, and the term holders of First Lien Obligations shall include any such subsequent or additional holder of First Lien Obligations, wherever the context permits, and (b) the Second Liesn Secured Party, the Second Lien Administrative Agent and the Second Lien Lenders and each of their respective successors and assigns, including subsequent holders of the Second Lien Obligations, and the term holders of Second Lien Obligations shall include any such subsequent or additional holder of Second Lien Obligations, wherever the context permits. The Senior Secured Party agrees that it will not cease to act as Senior Secured Party unless its successor agrees to perform the obligations of the Senior Secured Party set forth in Section 2.9 hereof and accepts the appointment as agent for the Second Lien Administrative Agent as provided for in Section 2.9 hereof.
Section 3.2 Further Assurances . (a) The Borrower and Second Lien Secured Party will, at the expense of the Borrower, and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action, that Senior Secured Party may reasonably request in order to perfect or otherwise protect any right or interest granted or purported to be granted hereby or to enable the Senior Secured Party to exercise and enforce its rights and remedies hereunder, including, without limitation making appropriate amendments to financing statements executed by the Borrower in favor of the Second Lien Secured Party in order to refer to this Agreement (but this Agreement shall remain fully effective notwithstanding any failure to execute any additional documents or instruments).
(b) Each party hereto will, upon the written request of the other party, from time to time execute and deliver or cause to be executed and delivered such further
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instruments and agreements and do or cause to be done such further acts as may be reasonably necessary or proper to carry out more effectively the provisions of this Agreement. Upon written request, the Senior Secured Party shall provide the Second Lien Secured Party with copies of all Senior Collateral Documents in effect at the time of such request.
Section 3.3 Expenses . The Borrower shall pay to the Senior Secured Party and the Second Lien Secured Party, as the case may be, upon demand, the amount of any and all reasonable expenses, including, without limitation, the reasonable fees and expenses of counsel for the Senior Secured Party or the Second Lien Secured Party, as the case may be, which either of them may incur from time to time in connection with the exercise or enforcement of any of their respective rights or interests vis-a-vis the Borrower, the Collateral, or under this Agreement. All such amounts shall constitute part of the First Lien Obligations or the Second Lien Obligations, as the case may be.
Section 3.4 Notices; Amendments etc .
(a) All notices, requests and demands to or upon the parties to this Agreement to be effective shall be in writing (including by facsimile or telecopy transmission) and shall be deemed to have been duly given or made (i) when delivered by hand or (ii) three Business Days after being deposited in the mail, postage prepaid or (iii) one Business Day after being sent by priority overnight mail with an internationally recognized overnight delivery carrier or (iv) if by telecopy or facsimile, when received, at the addresses or transmission numbers for notices set forth as follows or to such other address or transmission number as may be hereafter notified in writing by the respective parties hereto:
Borrower:
Hercules Technology Growth Capital, Inc.
525 University Avenue
Suite 700
Palo Alto, CA 94301
Attn: Manuel Henriquez
Fax: 650-473-9194
mhenriquez@herculestech.com
Senior Secured Party:
Citigroup Global Markets Realty Corp.
390 Greenwich Street
6 th Floor
New York, NY 10013
Attne. Monitoring Group: James Xanthos,
Martin Lifschultz & Christian Anderson
Fax: 212-723-8591
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Second Lien Secured Party:
Alcmene Funding, L.L.C.
c/o Farallon Capital Management, L.L.C.
One Maritime Plaza
Suite 1325
San Francisco, CA 94111
Attn: Derek Schrier
Fax: 415-421-2133
dschrier@faralloncapital.com
(b) This Agreement may be amended and the terms hereof may be waived only with the written consent of each of the parties hereto, or their authorized successors and assigns.
Section 3.5 Severability . Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.
Section 3.6 WAIVER OF JURY TRIAL . EACH OF THE BORROWER, THE SENIOR SECURED PARTY AND THE SECOND LIEN SECURED PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.
Section 3.7 Entire Agreement: Governing Law . This Agreement embodies the entire agreement and understanding of the parties hereto regarding the subject matter hereof. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CHOICE OF LAW PRINCIPLES.
Section 3.8 Counterparts . This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement.
Section 3.9 Headings . The headings of the several sections in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.
Section 3.10 Termination . After all First Lien Obligations have been indefeasibly paid in full in cash and satisfied, this Agreement shall immediately terminate and cease to be effective and the Senior Secured Party, the Second Lien Administrative Agent, the Second Lien Lenders, and the Borrower shall be released from their respective obligations hereunder (other than such obligations that by their terms are stated to survive the termination of this Agreement); provided, however, that this Agreement shall be automatically reinstated if at any time payment of, in whole or in part, any of the First Lien Obligations is challenged by the initiation of any suit or
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proceeding by any party, or is rescinded or must otherwise be restored or returned by the Senior Secured Party as a preference, fraudulent conveyance or otherwise under any bankruptcy, insolvency or similar law, or under any other state or federal law, the common law or any ruling in equity, all as though such payment had not been made, and in such event, all reasonable documented costs and expenses including, without limitation, any reasonable documented legal fees and disbursements) incurred by the Senior Secured Party in defending any such action or proceeding or enforcing such reinstatement shall be deemed included as part of the First Lien Obligations.
[Remainder of this page intentionally left blank.]
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IN WITNESS WHEREOF the undersigned have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date and year first above written.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. , |
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as Borrower |
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By: |
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Name: |
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Title: |
CITIGROUP GLOBAL MARKETS REALTY CORP. , |
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as Senior Secured Party |
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By: |
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Name: |
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Title: |
ALCMENE FUNDING, L.L.C. , |
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as Second Lien Secured Party |
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By: |
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Name: |
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Title: |
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Exhibit K.7
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE SECURITIES PURCHASED HEREUNDER ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND RESALE UNDER A STOCKHOLDERS AGREEMENT AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND OTHER APPLICABLE LAWS PURSUANT TO REGISTRATION OR EXEMPTION FROM REGISTRATION REQUIREMENTS THEREUNDER.
S UBSCRIPTION A GREEMENT
This S UBSCRIPTION A GREEMENT (the Agreement ) is made as of March 2, 2006 among Hercules Technology Growth Capital, Inc., a Maryland corporation (the Company ), and each of the investors listed on Schedule 1 hereto (each a Subscriber , and collectively, the Subscribers ).
Recitals
Under the Articles of Incorporation of the Company, as amended and in effect on the date hereof, the Company is authorized to issue shares of Common Stock, par value $.001 per share (the Common Stock ).
Each Subscriber is willing to purchase, and the Company is willing to issue and sell to such Subscriber, the number of shares of Common Stock set forth opposite the name of such Subscriber on Schedule 1 hereto, all on the terms and conditions set forth herein.
Agreement
In consideration of the foregoing, and the representations, warranties, covenants and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions . The following terms shall have the following meanings:
1.1. Funding Date shall mean a date that is on or before March 9, 2006, on which date the Subscribers shall pay the aggregate consideration for the purchase of the Subscription Securities to the Company.
1.2. Legal Requirement shall mean any federal, state, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, or any order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit or similar right granted under any of the foregoing, or any similar provision having the force and effect of law.
1.3. Lien means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset.
1.4. NAV means the Net Asset Value of a share of the Common Stock, calculated in accordance with United States GAAP.
1.5. Person means an individual, corporation, limited liability company, partnership, association, trust or other legal entity.
1.6. Registration Rights Agreement shall mean that certain Registration Rights Agreement dated as of even date herewith by and among the Company and the Subscribers.
1.7. Share Issue Date shall mean the date on which the Company issues the Subscription Securities to the Subscribers pursuant to Section 2.3, provided that the conditions to the obligation of the Subscribers to accept the Subscription Securities pursuant to Section 5.2 shall have been satisfied on or before the date of issuance.
1.8. Subscription Securities has the meaning set forth in Section 2.1.
2. Sale and Purchase of Subscription Securities .
2.1. On the terms and subject to the conditions hereof, the Company hereby agrees to sell to each Subscriber, and by the acceptance hereof such Subscriber agrees, severally and not jointly, to purchase from the Company for investment, a number of shares of the Companys Common Stock equal in the aggregate to the quotient obtained by dividing $5,000,000 by NAV as of February 28, 2006, such shares to be allocated among the Subscribers as set forth opposite the name of such Subscribers on Schedule 1. The price per share shall be equal to the NAV of the Common Stock on February 28, 2006. The shares of Common Stock being purchased by the Subscribers hereunder are referred to herein as the Subscription Securities .
2.2. On the Funding Date, the Subscribers shall wire the consideration for the Subscription Securities to the Company.
2.3. On the Share Issue Date, subject to the satisfaction of the conditions to issuance set forth in Section 5.1, the Company will either (i) deliver to the Subscribers certificates for the Subscription Securities purchased by the Subscribers, registered in the respective names of the Subscribers, or (ii) issue the Subscription Securities to the Subscribers in book-entry form to the account of a Depository Trust Company (DTC) participant designated by the respective Subscribers.
2.4. In the event that the Funding Date has occurred and the subscription price has been wired to the Company on or before March 31, 2006 but the Share Issue Date has not occurred, the Subscribers, each of them acting individually, shall, in their respective sole discretion, have the option of either (a) requiring specific performance of the Company of its obligations to issue the Subscription Securities (subject to the satisfaction of the conditions to issuance set forth in Section 5.1) or (b) terminating this Agreement. In the event that the Subscribers terminate this Agreement, the Company shall return the entire $5,000,000
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subscription price, or if less than all of the Subscribers terminate, the entire subscription price paid by the terminating Subscribers, to the account or accounts designated by the terminating Subscribers within one business day of written notice of termination.
3. Representations and Warranties of the Company . The Company represents and warrants as of each of i) the date hereof, ii) the Funding Date and iii) the Share Issue Date to each Subscriber that:
3.1. The Company is duly organized, validly existing and in good standing under the laws of the State of Maryland. The Company has made available to the Subscribers true and complete copies of the Companys Articles of Incorporation and the By-Laws of the Company as in effect on the date hereof.
3.2. The Company has taken all corporate action required to authorize the execution and delivery of this Agreement and the issuance of the Subscription Securities. The Company has full legal capacity, power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by the Company and is the legal, valid and binding obligation of the Company enforceable against it in accordance with the terms hereof.
3.3. Neither the execution and delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby or thereby, will (i) constitute a breach of or a default under any contractual obligation of the Company, (ii) require any unobtained consent, waiver or amendment to any such contractual obligation, (iii) violate or constitute a default under, or give rise to any other right or cause of action under the Companys Articles of Incorporation, bylaws or any Legal Requirement, except for events or conditions described in clauses (i) and (ii) above that do not and may not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the business, operations, assets or condition, financial or otherwise, of the Company and its subsidiaries (on a consolidated basis).
3.4. The Subscription Securities, when issued and upon receipt of the purchase price therefor, will be duly authorized, validly issued, fully paid and non-assessable.
3.5. The Company has filed with the Securities and Exchange Commission ( SEC ) all required reports, schedules, forms, statements and other documents since its initial public offering (the Reports ). As of its filing date, each such Report (as amended or supplemented, if applicable), filed pursuant to the Securities Exchange Act of 1934 (the Exchange Act ) and all registration statements and other materials filed with the SEC under the Securities Act of 1933, as amended (the 1933 Act ), complied in all material respects with the applicable rules and regulations of the SEC thereunder, and did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. All financial statement contained in the Reports present fairly the financial position of the Company at the respective dates thereof and the results of its operations for the periods covered thereby in conformity with generally accepted accounting principles applied on a consistent basis.
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3.6. Except as disclosed in the Reports, the Company has no liabilities (absolute, accrued, contingent or otherwise), except liabilities (i) in the aggregate adequately provided for in Companys unaudited balance sheet (including any related notes thereto) as of September 30, 2005 included in the Companys Quarterly Report on Form 10-Q for the fiscal period ended on that date (the Balance Sheet ), (ii) incurred in the ordinary course of business and not required under GAAP to be reflected on the Balance Sheet, (iii) incurred since September 30, 2005 in the ordinary course of business, or (iv) which would not reasonably be expected, individually or in the aggregate, to have a material adverse effect on the business, operations, assets, properties, profits or condition, financial or other, of the Company.
3.7. Except as disclosed in the Reports, since December 31, 2004, the Company has conducted its business in the ordinary course there has been no material adverse change in the business, operations, assets, properties, profits or condition, financial or other, of the Company.
3.8. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock. As of February 28, 2006:
(i) 9,801,965 shares of Common Stock were issued and outstanding, of which all are validly issued, fully paid and nonassessable, and no shares were held in treasury;
(ii) no shares of Common Stock were held by subsidiaries of the Company;
(iii) 673,273 shares of Common Stock were reserved for future issuance pursuant to outstanding warrants; and
(iv) up to 3,500,000 shares of Common Stock were reserved for issuance pursuant to the proposed rights offering of the Company reflected in its registration statement on Form N-2 initially filed with the SEC on January 19, 2006, it being understood that in no event will the Company issue in such rights offering rights to acquire in excess of one share for each three shares of Common Stock outstanding on the record date for the offering.
Except as set forth in this Section 3.8 or in the Reports, since February 28, 2006, the Company has not issued or entered into any options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries.
Except as disclosed in this Section 3.8 or in the Reports, there are no obligations, contingent or otherwise, of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Common Stock or the capital stock of any subsidiary or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such subsidiary or any other entity other than guarantees of bank obligations of subsidiaries entered into in the ordinary course of business. Except as expressly contemplated by this Agreement, there are no preemptive or similar rights to purchase or otherwise acquire shares
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of capital stock of the Company pursuant to any provision of law, the Articles of Incorporation, the By-Laws of the Company or any agreement to which the Company is a party.
4. Representations and Warranties of the Subscribers . Each Subscriber individually (but not on behalf of any other Subscriber) represents and warrants that:
4.1. Such Subscriber has full legal capacity, power and authority to execute and deliver this Agreement and to perform such Subscribers obligations hereunder. This Agreement has been duly executed and delivered by such Subscriber and is the legal, valid and binding obligation of such Subscriber enforceable against such Subscriber in accordance with the terms hereof.
4.2. Such Subscriber has been advised that the Subscription Securities have not been registered under the Securities Act or any state securities laws and, therefore, cannot be resold unless they are registered under the Securities Act and applicable state securities laws or unless an exemption from such registration requirements is available. Such Subscriber is purchasing the Subscription Securities to be acquired by such Subscriber hereunder for such Subscribers own account and not with a view to, or for resale in connection with, the distribution thereof in violation of the Securities Act. Such Subscriber has such knowledge and experience in financial and business matters that such Subscriber is capable of evaluating the merits and risks of such investment, is able to incur a complete loss of such investment and is able to bear the economic risk of such investment for an indefinite period of time. Each Subscriber is an accredited investor as that term is defined in Regulation D under the Securities Act. The address of such Subscriber is as set forth under such Subscribers name on Schedule 1. The parties hereto intend that the sale of shares of the Companys Common Stock pursuant to this Agreement shall be pursuant to Regulation D under the Securities Act.
5. Conditions to Issuance and Acceptance of the Subscription Securities .
5.1. The Companys obligation to issue the Subscription Securities shall be subject to the satisfaction of the following conditions:
5.1.1. All representations and warranties of each Subscriber contained in this Agreement shall be true and correct as of the Share Issue Date, and issuance of the Subscription Securities shall constitute a reaffirmation by each Subscriber that all representations and warranties of such Subscriber contained in this Agreement are true and correct as of the Share Issue Date
5.1.2. The Funding Date has occurred.
5.2. Each Subscribers obligation to accept delivery of the Subscription Securities shall be subject to the satisfaction of the following conditions:
5.2.1. The Company shall have delivered to each of the Subscribers a certificate signed by the chief financial officer on behalf of the Company, dated as of the Share Issue Date, confirming the accuracy of the Companys representations and warranties as of the Share Issue Date and confirming the accuracy of the NAV.
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5.2.2. The NAV is equal to or greater than $11.00.
5.2.3. The Subscription Securities shall be issued on or prior to March 31, 2006.
6. Indemnities . Each Subscriber agrees to indemnify and hold harmless the Company, and the Company agrees to indemnify and hold harmless each Subscriber, from and against all losses, damages, liabilities and expenses (including without limitation reasonable attorneys fees and charges) resulting from any breach of any representation, warranty or agreement of such indemnifying party or any misrepresentation by such indemnifying party in this Agreement.
7. Miscellaneous .
7.1. This Agreement and the other agreements referred to herein set forth the entire understanding among the parties with respect to the subject matter thereof.
7.2. This Agreement can be changed only by an instrument in writing signed by the party against whom enforcement of such change is sought.
7.3. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors, assigns, heirs and representatives.
7.4. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same instrument.
8. Governing Law .
8.1. Governing Law . This Agreement shall be governed by and construed in accordance with the domestic substantive laws of the State of New York without giving effect to any choice or conflict of laws provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction
8.2. Consent to Jurisdiction . Each of the parties agrees that all actions, suits or proceedings arising out of or based upon this Agreement or the subject matter hereof shall be brought and maintained exclusively in the federal and state courts of the State of New York, provided that the Company may bring any such action, suit or proceeding against any Subscriber in any jurisdiction in which such Subscriber is subject to personal jurisdiction. Each of the parties hereto by execution hereof (i) hereby irrevocably submits to the jurisdiction of the federal and state courts in the State of New York for the purpose of any action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof and (ii) hereby waives to the extent not prohibited by applicable law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such action, suit or proceeding, any claim that he or it is not subject personally to the jurisdiction of the above-named courts, that he or it is immune from extraterritorial injunctive relief or other injunctive relief, that his or its property is exempt or immune from attachment or execution, that any such action, suit or proceeding may not be brought or maintained in one of the above-named courts, that any such action, suit or proceeding brought or maintained in one of the above-named courts should be dismissed on grounds of
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forum non conveniens, should be transferred to any court other than one of the above-named courts, should be stayed by virtue of the pendency of any other action, suit or proceeding in any court other than one of the above-named courts, or that this Agreement or the subject matter hereof may not be enforced in or by any of the above-named courts. Each of the parties hereto hereby consents to service of process in any such suit, action or proceeding in any manner permitted by the laws of the State of New York, agrees that service of process by registered or certified mail, return receipt requested, at the address specified in Schedule 1 hereto is reasonably calculated to give actual notice and waives and agrees not to assert by way of motion, as a defense or otherwise, in any such action, suit or proceeding any claim that such service of process does not constitute good and sufficient service of process. The provisions of this Section 8.2 shall not restrict the ability of any party to enforce in any court any judgment obtained in a federal or state court of the State of New York.
8.3. Waiver of Jury Trial . To the extent not prohibited by applicable law which cannot be waived, each of the parties hereto hereby waives, and covenants that he or it will not assert (whether as plaintiff, defendant, or otherwise), any right to trial by jury in any forum in respect of any issue, claim, demand, cause of action, action, suit or proceeding arising out of or based upon this Agreement or the subject matter hereof, in each case whether now existing or hereafter arising and whether in contract or tort or otherwise. Any of the parties hereto may file an original counterpart or a copy of this Section 8.3 with any court as written evidence of the consent of each of the parties hereto to the waiver of his or its right to trial by jury.
8.4. Reliance . Each of the parties hereto acknowledges that he has been informed by each other party that the provisions of Section 8 constitute a material inducement upon which such party is relying and will rely in entering into this Agreement and the transactions contemplated hereby.
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I N WITNESS WHEREOF , the parties hereto, intending to be legally bound by the terms hereof, have caused this Agreement to be executed, under seal, as of the date first above written by their officers or other representatives thereunto duly authorized.
T HE C OMPANY : |
H ERCULES T ECHNOLOGY G ROWTH C APITAL , I NC . | |||||||
By: |
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Name: |
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Title: |
T HE S UBSCRIBERS : |
F ARALLON C APITAL I NSTITUTIONAL P ARTNERS II, L.P. | |||||||
By: Farallon Partners, L.L.C., its general partner | ||||||||
By: |
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Name: |
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Title: |
F ARALLON C APITAL I NSTITUTIONAL P ARTNERS III, L.P. | ||||||||
By: Farallon Partners, L.L.C., its general partner | ||||||||
By: |
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Name: |
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Title: |
T INICUM P ARTNERS , L.P. | ||||||||
By: Farallon Partners, L.L.C., its general partner | ||||||||
By: |
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Name: |
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Title: |
S CHEDULE I
SUBSCRIBERS
Name and Address |
Shares of
Common Stock |
Total Price |
Exhibit K.8
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this Agreement ) is made and entered into as of March 2, 2006, by and among Hercules Technology Growth Capital, Inc., a Maryland corporation (the Company ), and the purchasers listed on Schedule I hereto (the Purchasers ).
This Agreement is being entered into to register for resale certain shares of Common Stock (as defined below) issued or issuable to the Purchasers pursuant to the Subscription Agreement dated as of the date hereof among the Company and the Purchasers (the Subscription Agreement ).
The Company and the Purchasers hereby agree as follows:
1. | Definitions . |
Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Subscription Agreement. As used in this Agreement, the following terms shall have the following meanings:
Advice shall have meaning set forth in Section 3(m).
Affiliate means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, control , when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of affiliated , controlling and controlled have meanings correlative to the foregoing.
Board shall have meaning set forth in Section 3(n).
Business Day means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close.
Commission means the Securities and Exchange Commission.
Common Stock means the Companys Common Stock, par value $0.001 per share.
Effectiveness Date means with respect to the Registration Statement the earlier of the one hundred twentieth (120 th ) day following the date of this Agreement) or the date which is within five (5) Business Days of the date on which the Commission informs the Company that (i) the Commission will not review the Registration Statement or (ii) the Company may request the acceleration of the effectiveness of the Registration Statement and the Company makes such request; provided that , if the Effectiveness Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by
law or other government actions to close, the Effectiveness Date shall be the following Business Day.
Effectiveness Period shall have the meaning set forth in Section 2.
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Exchange Act means the Securities Exchange Act of 1934, as amended.
Filing Date means the thirtieth (30 th ) day following the date of this Agreement; provided that , if the Filing Date falls on a Saturday, Sunday or any other day which shall be a legal holiday or a day on which the Commission is authorized or required by law or other government actions to close, the Filing Date shall be the following Business Day.
Holder or Holders means the holder or holders, as the case may be, from time to time of Registrable Securities.
Indemnified Party shall have the meaning set forth in Section 7(c).
Indemnifying Party shall have the meaning set forth in Section 7(c).
Losses shall have the meaning set forth in Section 7(a).
Person means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind.
Proceeding means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
Prospectus means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus.
Registrable Securities means the shares of Common Stock issued pursuant to the Subscription Agreement.
Registration Statement means the registration statements and any additional registration statements contemplated by Section 2, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement.
Rule 144 means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
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Rule 158 means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
Rule 415 means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
Rule 424 means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
Securities Act means the Securities Act of 1933, as amended.
Special Counsel means Kramer Levin Naftalis & Frankel LLP (or such other counsel as a majority of the holders of Registrable Securities may designate from time to time by notice provided as set forth herein) , for which the Holders will be reimbursed by the Company pursuant to Section 4.
Underwritten Offering shall have the meaning set forth in Section 5(a).
2. | Resale Registration . |
On or prior to the Filing Date the Company shall prepare and file with the Commission a resale Registration Statement providing for the resale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form N-2 (except if the Company is not then eligible to register for resale the Registrable Securities on Form N-2, in which case such registration shall be on another appropriate form in accordance with the Securities Act and the rules promulgated thereunder). The Company shall (i) not permit any securities other than the Registrable Securities and the securities to be listed on Schedule II hereto to be included in the Registration Statement and (ii) use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until such date as is the earlier of (x) the date when all Registrable Securities covered by such Registration Statement have been sold or (y) the date on which the Registrable Securities may be sold without any restriction pursuant to Rule 144(k) promulgated under the Securities Act as determined by counsel to the Company pursuant to a written opinion letter addressed to the Companys transfer agent to such effect (the Effectiveness Period ).
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3. | Registration Procedures . |
In connection with the Companys registration obligations hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on Form N-2 (or if the Company is not then eligible to register for resale the Registrable Securities on Form N-2 such registration shall be on another appropriate form in accordance with the Securities Act and the rules promulgated thereunder) in accordance with the method or methods of distribution thereof as specified by the Holders, and use its reasonable best efforts to cause the Registration Statement to become effective and remain effective as provided herein; provided , however , that not less than three (3) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated therein by reference), the Company shall (i) furnish to the Special Counsel, copies of all such documents proposed to be filed, which documents (other than those incorporated by reference) will be subject to the review of such Special Counsel, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of Special Counsel, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities or the Special Counsel shall reasonably object in writing within two (2) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements as necessary in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as possible, but in no event later than fifteen (15) Business Days, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as possible provide the Special Counsels true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Special Counsel as promptly as possible (and, in the case of (i)(A) below, not less than three (3) days prior thereto) (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is filed, (B) when the Commission notifies the Company whether there will be a review of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to the Registration Statement or any post-effective amendment,
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when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(d) Use its reasonable best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.
(e) If requested by the Holders of a majority in interest of the Registrable Securities, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the Company reasonably agrees should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment.
(f) Furnish to the Special Counsel, and to each Holder upon request, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder and the Special Counsel, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its reasonable best efforts to register or qualify or cooperate with the selling Holders and the Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky
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laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided , however , that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends (provided that the issuance of such unlegended certificates is in compliance with applicable securities laws), and to enable such Registrable Securities to be in such denominations and registered in such names, or issue and deliver such Registrable Securities to a participant account at the Depository Trust Company (DTC) account on such Holders behalf via the Deposit Withdrawal Agent Commission (DWAC) system, as any Holder may request in writing at least three (3) Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(k) Use its reasonable best efforts to cause all Registrable Securities relating to the Registration Statement to be listed on the Nasdaq National Market or any other securities exchange, quotation system or market, if any, on which similar securities issued by the Company are then listed or traded.
(l) The Company shall comply with all applicable rules and regulations of the Commission and the Securities Act, and make available to its stockholders, as soon as practicable, an earnings statement covering a period of twelve (12) months, beginning within three (3) months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
(m) The Company may require each selling Holder to furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request.
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If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required.
Each Holder covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement until it has received or has access to copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(n), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holders receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), or until it is advised in writing (the Advice ) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement.
(n) If (i) there is material non-public information regarding the Company which the Companys Board of Directors (the Board ) reasonably determines not to be in the Companys best interest to disclose and which the Company is not otherwise required to disclose, or (ii) there is a significant business opportunity (including, but not limited to, the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board reasonably determines not to be in the Companys best interest to disclose, then the Company may (x) postpone or suspend filing of a registration statement for a period not to exceed thirty (30) consecutive days or (y) postpone or suspend effectiveness of a registration statement for a period not to exceed thirty (30) consecutive days; provided that the Company may not postpone or suspend effectiveness of a registration statement under this Section 3(n) for more than sixty (60) days in the aggregate during any three hundred sixty (360) day period.
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4. | Registration Expenses . |
All fees and expenses incident to the performance of or compliance with this Agreement by the Company, except as and to the extent specified in this Section 4, shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Nasdaq National Market or any other securities exchange or market on which Registrable Securities are required hereunder to be listed, (B) with respect to filing fees required to be paid to the National Association of Securities Dealers, Inc. and the NASD Regulation, Inc. and (C) in compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and the Special Counsel, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, the Companys independent public accountants. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement.
5. | Piggy-Back Rights . |
(a) Participation . If at any time on or after the date of this Agreement the Company proposes to effect an underwritten public offering (an Underwritten Offering ) of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities, by the Company for its own account or for stockholders of the Company for their account or by the Company and by stockholders of the Company (other than a registration statement filed in connection with any employee stock option or other benefit plan), then the Company shall (x) give written notice of such proposed filing to the holders of Registrable Securities as soon as practicable but in no event less than fifteen (15) days before the anticipated pricing date for the Underwritten Offering, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing underwriter or underwriters of the offering, and (y) offer to the holders of Registrable Securities in such notice the opportunity to participate in such Underwritten Offering with respect to the sale of such number of shares of Registrable Securities as such holders may request in writing within five (5) days following receipt of such notice.
The Company shall use its best efforts to (i) cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Registrable Securities requested to be included in the Underwritten Offering on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Registrable
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Securities in accordance with the intended method(s) of distribution thereof and (ii) as promptly as practicable file and cause to become effective any post-effective amendment to the Registration Statement and to file any Prospectus or Prospectus supplement necessary to allow Registrable Securities to be sold in the Underwritten Offering. All holders of Registrable Securities proposing to distribute their securities through an Underwritten Offering shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected by the Company for such Underwritten Offering.
(b) Reduction of Offering . If the managing underwriter or underwriters for an Underwritten Offering advises the Company and the Holders in writing that the dollar amount or number of shares of Registrable Securities which the Holders desire to sell, taken together with all other shares of Common Stock or other securities which the Company desires to sell and the shares of Common Stock, if any, as to which registration has been requested pursuant to written contractual piggy-back registration rights held by other stockholders of the Company who desire to sell, exceeds the maximum dollar amount or maximum number of shares that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution method, or the probability of success of such offering (such maximum dollar amount or maximum number of shares, as applicable, the Maximum Number of Shares ), then the Company shall include in such registration: (i) first, the shares of Common Stock or other securities for the account of persons, if any, who initiated the Underwritten Offering pursuant to written contractual arrangements with such persons and that can be sold without exceeding the Maximum Number of Shares; (ii) second, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (i), the shares of Common Stock or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; (iii) third, to the extent that the Maximum Number of Shares has not been reached under the foregoing clauses (i) and (ii), Registrable Securities as to which participation in the Underwritten Offering has been requested by the Holders on a Pro Rata (as defined below) basis with any other stockholders of the Company who have registration rights that are not expressly subordinated to the rights of the Holders (pro rata in accordance with the number of shares that each such person has requested be included in such registration, regardless of the number of shares held by each such person (such proportion is referred to herein as Pro Rata )) that can be sold without exceeding the Maximum Number of Shares; and (iv) fourth, to the extent that the Maximum Number of Shares have not been reached under the foregoing clauses (i), (ii), and (iii), the shares of Common Stock or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual arrangements that are subordinate to the rights of the Holders under this Agreement and that can be sold without exceeding the Maximum Number of Shares.
(c) Withdrawal . Any holder of Registrable Securities may elect to withdraw such holders request for inclusion of Registrable Securities in any Underwritten Offering by giving written notice to the Company of such request to withdraw prior to the effectiveness of the Registration Statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may also elect to withdraw or terminate an Underwritten Offering at any time prior to the sale of securities
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thereunder. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by the Holders of Registrable Securities in connection with such Underwritten Offering.
(d) Other Shares Held by Purchasers . The Company agrees that in addition to the Registrable Securities, the Purchasers and any of their Affiliates shall have the same rights with respect to an Underwritten Offering pursuant to this Section 5 with respect to any other shares of Common Stock (or shares of Common Stock issuable upon the exercise or conversion of any convertible securities) beneficially owned by the Purchasers or any of their Affiliates at the time thereof and which are registered pursuant to an effective registration statement under the Securities Act.
6. | Rule 144 . |
As long as any Holder owns any Registrable Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Holders with true and complete copies of all such filings. As long as any Holder owns any Registrable Securities, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Holders and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any Holder may reasonably request all to the extent required from time to time to enable such Person to sell the Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including providing any legal opinions relating to such sale pursuant to Rule 144.
7. | Indemnification . |
(a) Indemnification by the Company . The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys fees) and expenses (collectively, Losses ), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be
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stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder or such other Indemnified Party furnished in writing to the Company by such Holder expressly for use therein and (ii) that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, allegedly untrue statement, omission or alleged omission made in any preliminary prospectus but eliminated or remedied in the final prospectus (filed pursuant to Rule 424 of the Securities Act), such indemnity agreement shall not inure to the benefit of any Holder, underwriter, broker or other Person acting on behalf of holders of the Registrable Securities, from whom the Person asserting any loss, claim, damage, liability or expense purchased the Registrable Securities which are the subject thereof, if a copy of such final prospectus had been made available to such Person and such Holder, underwriter, broker or other Person acting on behalf of holders of the Registrable Securities and such final prospectus was not delivered to such Person with or prior to the written confirmation of the sale of such Registrable Securities to such Person. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders . Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents and employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review), as incurred, arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder or other Indemnifying Party to the Company specifically for inclusion in the Registration Statement or such Prospectus. Notwithstanding anything to the contrary contained herein, each Holder shall be liable under this Section 5(b) for only that amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement.
(c) Conduct of Indemnification Proceedings . If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an Indemnified Party ), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the Indemnifying Party ) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not
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subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel (which shall be reasonably acceptable to the Indemnifying Party) that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution . If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party on the one hand and the Indemnified Party on the other from the offering of the Common Stock. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault, as applicable, of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question,
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including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. In no event shall any selling Holder be required to contribute an amount under this Section 5(d) in excess of the net proceeds received by such Holder upon sale of such Holders Registrable Securities pursuant to the Registration Statement giving rise to such contribution obligation.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. Notwithstanding anything to the contrary contained herein, the Holders shall be liable under this Section 5(d) for only that amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement.
8. | Miscellaneous . |
(a) Remedies . In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements . Neither the Company nor any of its subsidiaries has, as of the date hereof entered into and currently in effect, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as disclosed on Schedule II hereof, neither the Company nor any of its subsidiaries has previously entered into any agreement currently in effect granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of
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the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein and are not otherwise in conflict with the provisions of this Agreement.
(c) No Piggyback on Registrations . Neither the Company nor any of its security holders (other than as disclosed on Schedule II hereto) may include securities of the Company in the Registration Statement, and the Company shall not after the date hereof enter into any agreement providing such right to any of its securityholders, unless the right so granted is subject in all respects to the prior rights in full of the Holders set forth herein and is not otherwise in conflict with the provisions of this Agreement.
(d) Amendments and Waivers . The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of a majority of the then outstanding Registrable Securities.
(e) Notices. Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:
If to the Company: |
Hercules Technology Growth Capital, Inc. 525 University Avenue, Suite 700 Palo Alto, California 94301 Attention: Chief Executive Officer Tel. No.: (650) 289-3060 Fax No.: (650) 473-9194 |
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with copies (which shall not constitute notice) to: |
Ropes & Gray LLP One Embarcadero Center, Suite 2200 San Francisco, California 94111 Attention: Christopher J. Austin, Esq. Tel. No.: (415) 315-6303 Fax No.: (415) 315-6350 |
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If to any Purchaser: | At the address of such Purchaser set forth on Exhibit A to this Agreement, with copies (which shall not constitute notice) to: |
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with copies (which shall not constitute notice) to: |
Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 Attention: Abbe L. Dienstag, Esq. Tel No.: (212) 715-9100 Fax No.: (212) 715-8000 |
Any party hereto may from time to time change its address for notices by giving at least ten (10) days written notice of such changed address to the other party hereto.
(f) Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns and shall inure to the benefit of each Holder and its successors and assigns. The Company may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of each Holder. Each Purchaser may assign its rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. The terms and provisions of Section 5 hereof are for the benefit of the Purchasers and their Affiliates and accordingly may be enforced by any of them.
(g) Assignment of Registration Rights . The rights of each Holder hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by each Holder to any Affiliate of such Holder or any other Holder or Affiliate of any other Holder of all or a portion of the Registrable Securities if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, and (v) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement. In addition, each Holder shall have the right to assign its rights hereunder to any other Person with the prior written consent of the Company, which consent shall not be unreasonably withheld, conditioned or delayed. The rights to assignment shall apply to the Holders (and to subsequent) successors and assigns.
(h) Counterparts . This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
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(i) Governing Law; Jurisdiction . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted. The Company and the Holders agree that venue for any dispute arising under this Agreement will lie exclusively in the state or federal courts located in New York County, New York, and the parties irrevocably waive any right to raise forum non conveniens or any other argument that New York is not the proper venue. The Company and the Holders irrevocably consent to personal jurisdiction in the state and federal courts of the state of New York. The Company and the Holders consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 8(i) shall affect or limit any right to serve process in any other manner permitted by law. The Company and the Holders hereby agree that the prevailing party in any suit, action or proceeding arising out of or relating to the this Agreement or the Purchase Agreement, shall be entitled to reimbursement for reasonable legal fees from the non-prevailing party. The parties hereby waive all rights to a trial by jury.
(j) Cumulative Remedies . The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
(k) Severability . If any term, provision, covenant or restriction of this Agreement is held to be invalid, illegal, void or unenforceable in any respect, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
(l) Headings . The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
(m) Shares Held by the Company and its Affiliates . Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.
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IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized persons as of the date first indicated above.
HERCULES TECHNOLOGY GROWTH CAPITAL, INC. |
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Title: |
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FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P. By: Farallon Partners, L.L.C., its general partner |
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FARALLON CAPITAL INSTITUTIONAL PARTNERS III, L.P. By: Farallon Partners, L.L.C., its general partner |
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Title: |
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TINICUM PARTNERS, L.P. By: Farallon Partners, L.L.C., its general partner |
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By: |
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Title: |
Agreed to with respect to Section 5 only:
FARALLON CAPITAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its general partner |
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By: |
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Name: |
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Title: |
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FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its general partner |
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Exhibit n.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report dated January 30, 2006, except for Note 16, as to which the date is March 6, 2006, in the Post-Effective Amendment No. 3 to the Registration Statement (Form N-2 No. 333-126604) and related Prospectus of Hercules Technology Growth Capital, Inc.
/s/ Ernst & Young LLP
San Francisco, California
March 6, 2006
Exhibit n.3
March 6, 2006
Rizwan R. Hussain
Director, Global Venture Capital Services
VentureOne / FIS / Dow Jones & Co.
201 California Street, 10 th Floor
San Francisco, CA 94111
Dear Rizwan,
Hercules would like the consent of VentureOne/Dow Jones to use the following paragraphs in our upcoming N2. If acceptable, please sign and fax to me at 866.811.3908.
Thank you,
Sally Borg
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/Ernst & Young. According to Dow Jones VentureOne/Ernst & Young, 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.
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/Ernst & Young, as of December 31, 2005, median pre-money valuations for venture capital-backed companies in 2005 was $15.2 million, which was slightly lower than 1998 levels of $15.5 million and 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 level
/s/ Rizwan Hussain, Director, Global Venture Capital Services
Date: March 7, 2006
525 U NIVERSITY A VENUE
S UITE 700
P ALO A LTO , CA 94301
650.289.3060
650.473.9194
www.H ERCULES T ECH . COM