1280784--3/16/2009--HERCULES_TECHNOLOGY_GROWTH_CAPITAL

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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 are currently in a period of capital markets disruption and recession and we do not expect these conditions to improve in the near future. Current market conditions have materially and adversely impacted debt and equity capital markets in the United States, which could result in a negative impact on our business and operations. We have and may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive. 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. 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 operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively. Because we intend to distribute substantially all of our income to our stockholders in order to qualify 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. Because we borrow money, there could be increased risk in investing in our company. 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. Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. Regulations governing our operations as a business development company affect our ability to, and the manner in which, we raise additional capital, which may expose us to risks. When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings. If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a business development company or be precluded from investing according to our current business strategy. We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. There is a risk that you may not receive distributions or that our distributions may not grow over time. 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 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. Fluctuations in interest rates may adversely affect our profitability. Our cost of borrowing is increased by the warrant participation agreement we have with one of our lenders. In addition, our realized gains are reduced by amounts paid pursuant to the warrant participation agreement. 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. Amortization of our Credit Facility may negatively affect our net asset value and ability to pay dividends. In addition to regulatory restrictions that restrict our ability to raise capital, the Wells Facility contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends. If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending and investment activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely. One of our wholly-owned subsidiaries is licensed by the U.S. Small Business Administration, and as a result, we will be subject to SBA regulations. 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. Changes in laws or regulations governing our business could negatively affect the profitability of our operations. Results may fluctuate and may not be indicative of future performance. Risks Related to Our Investments Our investments are concentrated in certain industries and 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. Our investments may be concentrated in portfolio companies which may have limited operating histories and financial resources. Our investment strategy focuses on technology-related 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 in and may continue investing in technology-related 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. Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. 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. Any unrealized losses we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution. A continuing lack of initial public offering opportunities may cause companies to stay in our portfolio longer, leading to lower returns, unrealized depreciation, or realized losses. To the extent venture capital or private equity firms decrease or discontinue funding to their portfolio companies, our portfolio companies may not be able to meet their obligations under the debt securities that we hold. If the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses. The economic recession and future downturns or recessions could impair the value of the collateral for our loans to our portfolio companies and consequently increase the possibility of an adverse effect on our financial condition and results of operations. 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. 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. 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. We may not be able to realize our entire investment on equipment-based loans in the case of default. Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. Some of our portfolio companies may need additional capital, which may not be readily available. We may be unable or decide not to make additional cash investments in our portfolio companies which could result in our losing our initial investment if the portfolio company fails. If our investments do not meet our performance expectations, you may not receive distributions. 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. 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. Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies. Our equity related 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. We do not control any of our portfolio companies and therefore our portfolio companies may make decisions with which we disagree. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity. We may not realize gains from our equity investments. Our financial results could be negatively affected if we are unable to recover our principal investment as a result of a negative pledge on the intellectual property of our portfolio companies. We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies. Risks Related to Our Common Stock Investing in shares of our common stock may involve an above average degree of risk. Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital. 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. If we conduct an offering of our common stock at a price below net asset value, investors are likely to incur immediate dilution upon the closing of the offering. Current levels of market volatility are unprecedented. Our common stock price has been and continues to be volatile and may decrease substantially.

Full 10-K form ▸

1280784--3/16/2009--HERCULES_TECHNOLOGY_GROWTH_CAPITAL_INC