Hercules Capital
Annual Report 2013

Plain-text annual report

2 13Annual Report 2013 in Review < The Way Forward We are proud of what we have accomplished over the past 10 years, building one of the strongest Business Development Companies (BDCs) in the venture debt industry. Hundreds of companies have chosen Hercules for their financing needs and to help them grow. At the same time, we have delivered record returns to our shareholders while providing them with unique opportunities to invest in some of the most innovative companies in the United States. New York Stock Exchange symbol: HTGC Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY 2013 Annual Report 1 Milestones Reached in 2013 $1.2 Billion in Total Assets $705 Million in New Originations a record high for the company 95 Pre-IPO Companies in Hercules’ warrant and equity portfolio represent potential upside for shareholders Realized Total Shareholder Return was Approxim ately 59%* includes stock appreciation and dividends *Past performance does not guarantee future results. You should not rely on our past performance as a guarantee of your future investment performance. Over 265 Portfolio Companies have chosen Hercules as their financing partner of choice 17% Return on Average Equity 27 Announced and Completed IPO and M&A Events from a diversified portfolio of venture capital–backed/pre-IPO companies $317.4 Million in Dividends Paid Out over 33 Consecutive Quarters $4 Billion in Commitments since Inception < 84 Active Loan Investments 43% Increase of Total Investment Income compared to 2012 $8.75 Cumulative Dividends Declared since IPO to December 31, 2013 To Our Valued Shareholders, Ten years ago when we opened our doors, we wanted to create since our IPO in June 2005, bringing the total cumulative an opportunity for individual and institutional investors to gain dividends declared to $355.8 million, or $9.37 per share. exposure to high-growth, technology-based companies—an asset class that has largely been accessible only to an exclusive club of limited partners—while also providing entrepreneurs with an alternative source of growth capital that complements existing venture capital financing. Today we believe that there is little doubt about the vibrancy of Hercules Technology Growth Capital’s business model, and we are proud of what we have accomplished for our employees, our shareholders, and the companies we have helped finance and grow. Financial Highlights and Achievements The year 2013 marked Hercules’ tenth anniversary and the company’s strongest annual financial performance to date. During the past year, we delivered the following achievements: A Strong Foundation Throughout our history, maintaining a diversified portfolio, ensuring a strong and liquid balance sheet, and emphasizing deep credit analysis have been the guiding principles of our business. We believe the way we performed during the financial crisis of 2008–2011 is a testament to our adherence to these principles. Make no mistake: that period of time taught us a number of valuable lessons. In 2011 we sought to diversify our sources of funding and find lower cost of capital. This resulted in our first convertible bond issuance of $75 million. We further increased our financial strength and flexibility in 2012 in the following ways: completed an $81.7 million equity offering; issued $170.4 million in baby bonds; reduced interest rates • Record new originations of more than $705 million applicable to approximately $50 million of our Small Business • An impressive total investment income of approximately Investment Company debentures; lowered the borrowing costs of $140 million, representing a 43 percent increase over 2012 our credit facility with Wells Fargo Capital Finance; and completed • Net investment income of $73 million, or 52 percent over our first securitization, which raised $129.3 million. As a result, we 2012, and a 27 percent increase on an earnings-per-share are a stronger, more resilient company. basis to $1.22 per share • Realized total shareholder return was approximately 59 percent, making Hercules one of the top-performing BDCs in the marketplace • A diversified portfolio with 27 announced or completed liquidity events As we worked to diversify our sources of funding and lower our cost of capital, we continued to increase the diversity and size of our portfolio. Since 2010 we doubled our total assets from approximately $591.2 million to $1.2 billion. We maintained characteristic discipline in running our business and ended the year with a strong balance sheet containing more than $370 million We believe that our performance demonstrates that there was, of liquidity, of which approximately $268 million is cash. and continues to be, a need for the type of growth capital we offer to innovative companies. After 10 years, more than 265 companies have elected to work with Hercules, allowing us to complete more than $4 billion in commitments that have resulted in $2.9 billion in cumulative fundings. Methodical, Strategic Expansion for the Long Term In response to the unprecedented demand for venture debt in 2013 we took steps to be closer to and better serve the promising entrepreneurs in key centers around the country. We opened an office in New York City and expanded our Dividends since Hercules’ IPO in June 2005 As a result of these financial and operational achievements, origination teams in McLean and Palo Alto and our credit team in Boston. This is a continuation of the thoughtful and strategic Hercules has declared dividends for 35 consecutive quarters expansion of our operations that we have always employed and 2 Hercules Technology Growth Capital 6976_INS_C4.indd 2 5/24/14 3:32 AM which mirrors our slow and steady strategy of deploying capital warrant portfolio of 113 companies and has, in our view, the over the course of the past several years. potential to realize meaningful gains. In the first quarter of Our focus has always been on high-quality underwriting, not 2014, five of our portfolio companies have already completed IPOs. In short, we expect to see continued monetization of our quarterly profits. We could increase our investment income by increasing our credit risk, but we do not believe that this is portfolio. the way to build a healthy and vibrant portfolio for the future. In 2014, we will continue to focus on expanding our business We believe that it is precisely because of our unwavering focus on high-quality portfolio originations over the course of the past 10 years that our total credit losses, net of realized gains since inception, amount to only about nine basis points on an as we embark on a number of new strategic initiatives such as broadening our product offering to better meet the needs of our portfolio companies, potentially increasing our strategic partnerships, and acquiring certain portfolios. annualized basis, or $32 million on a GAAP basis of $4 billion As we reflect on the possibilities for the future, there are many in cumulative commitments. The attractive and consistent yields reasons to be optimistic given the team we have assembled we have generated by investing in high-growth, venture-backed and the solid foundational components we have woven into the companies are a result of our ability to keenly analyze and company over the past 10 years. evaluate credit. Because of this thoughtful and disciplined approach, Hercules is one of the best-positioned BDCs in the industry and one of the largest, most experienced and trusted non-bank providers of venture debt. On behalf of the entire Board of Directors, I would like to express how grateful we are to have you share this journey with us. Outlook for 2014 I believe that 2014 has the potential to be a tremendous year for Hercules. Sincerely, Manuel A. Henriquez Chairman, President, and Chief Executive Officer The strengths that are embedded in this company—our people, strong relationships with the venture capital and entrepreneurial communities, attractive financing solutions, aptitude for identifying the most promising and innovative companies, and a robust balance sheet —provide us with a foundation that is rock solid. Moreover, these strengths along with our ability to remain selective in our underwriting enable us to continue thriving despite increasing competitive pressures and financial market uncertainty. In addition, assuming that the equity capital markets remain relatively stable through year-end 2014, we believe it is likely that Hercules will continue to benefit from the M&A and IPO events of its portfolio companies, which positively affected our 2013 performance. We are encouraged by our growing pipeline in the coming year, which stems from our existing 6976_INS_C4.indd 3 5/24/14 3:32 AM 2013 Annual Report 3 Financial Highlights Comparison of 5-Year Cumulative Total Return* Hercules Technology Growth Capital NYSE Composite NASDAQ Financial 100 *$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ended December 31. $350 $300 $250 $200 $150 $100 244% 105% 86% Year 09 10 11 12 13 Hercules’ Significant Portfolio Growth ($ in billions) Cumulative Commitments* Cumulative Fundings* *Debt only o m m it m e e C u m u l a ti v C $2.1 $1.5 $1.5 $1.2 $4.0 $2.9 $3.4 $2.4 0 % R 3 G A n t C $2.7 $1.9 Year 09 10 11 12 13 4 Hercules Technology Growth Capital 6976_INS_C4.indd 4 5/24/14 3:32 AM Investment Income Continues to Grow US dollars in millions, except per-share amounts Total Investment Income Net Investment Income Net Investment Income per Share Declared Dividends per Share Investments, Fair Value Cash and Cash Equivalents Total Assets Total Liabilities Total Net Assets 2009 2010 2011 2012 2013 $ 74.3 $ 59.5 $ 79.9 $ 97.5 $ 139.7 43.1 1.25 1.26 374.7 124.8 509.0 142.5 366.5 29.4 0.80 0.80 472.0 107.0 591.2 178.7 412.5 39.6 0.91 0.88 652.9 64.5 747.4 316.4 431.0 48.1 0.96 0.95 906.3 183.0 73.1 1.22 1.11 910.3 268.4 1,123.6 1,221.7 607.7 516.0 571.7 650.0 $317.4 Million in Historical Dividends Declared since 2005 IPO* Dividends Declared per Year Cumulative Dividends Declared *As of December 31, 2013 1 0 5 $ . 6 2 1 $ . 1 8 5 $ . 0 8 0 $ . 5 7 8 $ . 9 6 6 $ . 4 6 7 $ . 8 8 0 $ . 5 9 0 $ . 1 1 1 $ . Year 09 10 11 12 13 6976_INS_C4.indd 5 5/24/14 3:32 AM 2013 Annual Report 5 Outlook for 2014 Hercules Will Continue to Build Upon its Strengths With113 companies 0.009 total credit in Hercules’ warrant portfolio (95 pre-IPO losses net of realized gains since 5Hercules portfolio companies have already completed IPOs and 18 public), there is the potential to 2003 on an annualized basis have in Q1 2014. realize meaningful gains through IPO amounted to only 9 basis points. and M&A exits. $268 million in cash available for future investments $151 million of unfunded commitments as of Over 500 venture capital and private as of December 31, 2013. December 31, 2013, will fuel potential equity firms have invested in future portfolio growth. our portfolio companies. A Well- Diversified Portfolio* Medical Devices 12.5% Energy Technology 18.1% Biotech 33.8% Communications and Hardware 5.5% Internet 14.6% Software and SaaS 15.5% *Chart as percentage of debt investments, fair value. 6 Hercules Technology Growth Capital 6976_INS_C4.indd 6 5/24/14 3:32 AM Form 2 1310-K [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 814-00702 Hercules Technology Growth Capital, Inc. (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 74-3113410 (I.R.S. Employer Identification Number) 400 Hamilton Avenue, Suite 310 Palo Alto, California 94301 (Address of principal executive offices) (650) 289-3060 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, par value $0.001 per share Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES È NO ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ‘ No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $820.7 million based upon a closing price of $13.94 reported for such date on the New York Stock Exchange. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended and shall not be deemed to be an admission that, such persons are affiliates of the Registrant. On February 24, 2014, there were 61,828,166 shares outstanding of the registrant’s common stock, $0.001 par value. DOCUMENTS INCORPORATED BY REFERENCE Documents incorporated by reference: Portions of the registrant’s Proxy Statement for its 2014 Annual Meeting of Shareholders to be filed within 120 days after the close of the registrant’s year end are incorporated by reference into Part III of this Annual Report on Form 10-K. [THIS PAGE INTENTIONALLY LEFT BLANK] HERCULES TECHNOLOGY GROWTH CAPITAL, INC. FORM 10-K ANNUAL REPORT Part I. Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved SEC Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II. Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . Item 9. Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III. Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Page 1 26 57 57 57 57 58 62 63 102 104 178 178 179 180 180 180 180 180 Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures 181 188 Part IV. Hercules Technology Growth Capital, Inc., our logo and other trademarks of Hercules Technology Growth Capital, Inc. are the property of Hercules Technology Growth Capital, Inc. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners. [THIS PAGE INTENTIONALLY LEFT BLANK] In this Annual Report on Form 10-K, or Annual Report, the “Company,” “HTGC,” “we,” “us” and “our” refer to Hercules Technology Growth Capital, Inc. and its wholly owned subsidiaries and its affiliated securitization trusts unless the context otherwise requires. Item 1. Business PART I GENERAL We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related markets, including technology, biotechnology, life science, and energy and renewables technology industries at all stages of development. We source our investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York, NY, Boulder, CO and McLean, VA. Our goal is to be the leading structured debt financing provider of choice for venture capital-backed companies in technology-related markets requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related markets including technology, biotechnology, life science, and energy and renewables technology industries and to offer a full suite of growth capital products. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We invest primarily in private companies but also have investments in public companies. We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related markets with attractive current yields and the potential for equity appreciation and realized gains. Our equity ownership in our portfolio companies may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide directly to venture capital-backed companies in technology-related markets is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We also make investments in qualifying small businesses through our two wholly-owned small business investment company, or SBIC, subsidiaries. Our SBIC subsidiaries, Hercules Technology II, L.P., or HT II, and Hercules Technology III, L.P., or HT III, hold approximately $174.1 million and $285.1 million in assets, respectively, and accounted for approximately 11.1% and 18.2% of our total assets, respectively, prior to consolidation at December 31, 2013. We have issued $225.0 million in SBA-guaranteed debentures in our SBIC subsidiaries, which is the maximum amount allowed for a group of SBICs under common control. See “— Regulation—Small Business Administration Regulations” for additional information regarding our SBIC subsidiaries. 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,” which includes securities of private U.S. companies, cash, cash equivalents and high-quality debt investments that mature in one year or less. 1 Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology-related companies at various stages of their development. Consistent with regulatory requirements, we invest primarily in United States based companies and to a lesser extent in foreign companies. We focus our investments in companies active in the technology industry sub-sectors characterized by products or services that require advanced technologies, including, but not limited to, computer software and hardware, networking systems, semiconductors, semiconductor capital equipment, information technology infrastructure or services, internet consumer and business services, telecommunications, telecommunications equipment, renewable or alternative energy, media and life science. Within the life science sub-sector, we generally focus on medical devices, bio-pharmaceutical, drug discovery, drug delivery, health care services and information systems companies. Within the energy technology sub-sector, we focus on sustainable and renewable energy technologies and energy efficiency and monitoring technologies. 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. CORPORATE HISTORY AND OFFICES We are a Maryland corporation formed in December 2003 that began investment operations in September 2004. We are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or 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. A business development company also must meet a coverage ratio of total net assets to total senior securities, which include all of our borrowings (including accrued interest payable) except for debentures issued by the Small Business Administration, or the SBA, and any preferred stock we may issue in the future, of at least 200% subsequent to each borrowing or issuance of senior securities. See “Item 1. Business—Regulation as a Business Development Company”. As of January 1, 2006, we have qualified as and have elected to be treated for tax purposes as a RIC under the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. Our principal executive offices are located at 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301, and our telephone number is (650) 289-3060. We also have offices in Boston, MA, Boulder, CO, New York, NY and McLean, VA. We maintain a website on the Internet at www.htgc.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider that information to be part of this Annual Report. 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 SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at (202) 551-8090. 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. 2 OUR MARKET OPPORTUNITY We believe that technology-related companies compete in one of the largest and most rapidly growing sectors of the U.S. economy and that continued growth is supported by ongoing innovation and performance improvements in technology products as well as the adoption of technology across virtually all industries in response to competitive pressures. We believe that an attractive market opportunity exists for a specialty finance company focused primarily on investments in structured debt with warrants in technology-related companies for the following reasons: • Technology-related companies have generally been underserved by traditional lending sources; • Unfulfilled demand exists for structured debt financing to technology-related companies as the number of lenders has declined due to the recent financial market turmoil; and • Structured debt with warrants products are less dilutive and complement equity financing from venture capital and private equity funds. Technology-Related Companies are 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 because traditional lenders have continued to consolidate and have adopted a more risk-averse approach to lending. More importantly, we believe traditional lenders are typically unable to underwrite the risk associated with these companies effectively. The unique cash flow characteristics of many technology-related companies include significant research and development expenditures and high projected revenue growth thus often making such companies difficult to evaluate from a credit perspective. In addition, the balance sheets of these companies often include a disproportionately large amount of intellectual property assets, which can be difficult to value. Finally, the speed of innovation in technology and rapid shifts in consumer demand and market share add to the difficulty in evaluating technology-related companies. Due to the difficulties described above, we believe traditional lenders are generally refraining from entering the structured debt financing marketplace, instead preferring the risk-reward profile of asset based lending. 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 outflows and requiring a significant depository relationship to facilitate rapid liquidation. Unfulfilled Demand for Structured Debt Financing to Technology-Related Companies. Private debt capital in the form of structured debt financing from specialty finance companies continues to be an important source of funding for technology-related companies. We believe that the level of demand for structured debt financing is a function of the level of annual venture equity investment activity. We believe that demand for structured debt financing is currently underserved. The venture capital market for the technology-related companies in which we invest has been active and is continuing to show signs of increased investment activity. Therefore, to the extent we have capital available, we believe this is an opportune time to be active in the structured lending market for technology-related companies. Structured Debt with Warrants Products Complement Equity Financing From Venture Capital and Private Equity Funds. We believe that technology-related companies and their financial sponsors will continue to view structured debt securities as an attractive source of capital because it augments the capital provided by venture capital and private equity funds. We believe that our structured debt with warrants product provides access to growth capital that otherwise may only be available through incremental investments by existing equity 3 investors. As such, we provide portfolio companies and their financial sponsors with an opportunity to diversify their capital sources. Generally, we believe technology-related companies at all stages of development target a portion of their capital to be debt in an attempt to achieve a higher valuation through internal growth. In addition, because financial sponsor-backed companies have reached a more mature stage prior to reaching a liquidity event, we believe our investments could provide the debt capital needed to grow or recapitalize during the extended period prior to liquidity events. Our strategy to achieve our investment objective includes the following key elements: OUR BUSINESS STRATEGY Leverage the Experience and Industry Relationships of Our Management Team and Investment Professionals. We have assembled a team of experienced investment professionals with extensive experience as venture capitalists, commercial lenders, and originators of structured debt and equity investments in technology- related companies. 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 debt, debt with warrants and equity investments in over 265 technology-related companies, representing over $4.0 billion in commitments from inception to December 31, 2013, and have developed a network of industry contacts with investors and other participants within the venture capital and private equity communities. In addition, 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 concentrate our investing activities generally in industries in which our investment professionals have investment experience. 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 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 equity-related securities. 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, security interests in the assets of our portfolio companies, and on select investment covenants 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. Historically our structured debt investments to technology-related companies typically include warrants or other equity interests, giving us the potential to realize equity-like returns on a portion of our investment. In addition, in some cases, we receive the right to make additional equity investments in our portfolio companies, including the right to convert some portion of our debt into equity, in connection with future equity financing rounds. We believe these equity interests 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 only invest in companies that 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 debt with warrants. 4 We use our 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 and complimentary source of capital, both by the portfolio company and by the portfolio company’s 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, including select publicly listed companies and select special opportunity lower middle market companies that require additional capital to fund acquisitions, recapitalizations and refinancings and established-stage 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 focus their investments on a particular stage in a company’s 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 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, 2013, our proprietary SQL-based database system included approximately 34,300 technology-related companies and approximately 8,800 venture capital firms, private equity sponsors/investors, as well as various other industry contacts. This proprietary SQL system allows us to maintain, cultivate and grow our industry relationships while providing us with comprehensive details on companies in the technology-related industries and their financial sponsors. OUR INVESTMENTS AND OPERATIONS We principally invest in debt securities and, to a lesser extent, equity securities, with a particular emphasis on structured debt with warrants. 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 anticipate that such entities may, at the time of investment, be generating revenues or will have a business plan that anticipates generation of revenues within 24 to 48 months. Further, we anticipate that on the date of our investment we will generally obtain a lien on available assets, which may or may not include intellectual property, and these companies will have sufficient cash on their balance sheet to operate as well as potentially amortize their debt for at least three to nine 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, for an additional six to 12 months subject to market conditions. We expect that our investments will generally range from $1.0 million to $40.0 million. We typically structure our debt securities to provide for amortization of principal over the life of the loan, but may include a period of interest-only payments. Our loans will be collateralized by a security interest in the borrower’s assets, 5 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 which generally ranged from the prevailing U.S. prime rate, or Prime or the LIBOR rate to approximately 14% as of December 31, 2013. As of December 31, 2013, 99.0% of our loans were at floating rates or floating rates with a floor and 1.0% of the loans were at fixed rates. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual PIK interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such payment-in-kind interest was accrued, 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 for tax purposes certain other amounts prior to receiving the related cash. In addition, the majority of our investments in the structured debt of venture capital-backed companies generally have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for potential capital appreciation. The warrants typically will be immediately exercisable upon issuance and generally will remain exercisable for the lesser of five to ten years or three to five years after completion of 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 or on a very select basis 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 structured debt and equity investments take one of the following forms: • • Structured Debt with Warrants. We seek to invest a majority of our assets in structured debt with warrants of prospective portfolio companies. Traditional structured debt financing 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 investments in structured debt with warrants may be the only debt capital on the balance sheet of our portfolio companies, and in many cases we have a first priority security interest in all of our portfolio company’s assets, or in certain investments we may have a negative pledge on intellectual property. Our structured debt with warrants typically have maturities of between two and seven years, and they may provide for full amortization after an interest only period. Our structured debt with warrants generally carry a contractual interest rate between the prevailing U.S. prime rate, or Prime or the LIBOR rate and approximately 14% and may include an additional end-of-term payment or contractual PIK interest arrangements. In most cases we collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may prohibit a company from pledging or otherwise encumbering their intellectual property. We may structure our structured debt with warrants with restrictive affirmative and negative covenants, default penalties, prepayment penalties, lien protection, equity calls, change-in-control provisions or board observation rights. Senior Debt. We seek to invest a limited portion of our assets in senior debt. Senior debt may be collateralized by accounts receivable and/or inventory financing of prospective portfolio companies. Senior debt has a senior position with respect to a borrower’s 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. We generally collateralize our investments by obtaining security interests in our portfolio companies’ assets, which may include their intellectual property. In other cases we may obtain a negative pledge covering a company’s intellectual property. 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 6 Prime or LIBOR plus a spread with a floor, generally maturing in one to three years, and will be secured by accounts receivable and/or inventory. • Equipment Loans. We intend to invest a limited portion of our assets in equipment-based loans to early-stage prospective portfolio companies. Equipment-based loans are secured by a first priority security interest in only the specific assets financed. These loans are generally for amounts up to $3.0 million but may be up to $15.0 million for certain energy technology venture investments, carry a contractual interest rate between Prime and Prime plus 9.0%, and have an average term between three and four years. Equipment loans may also include end of term payments. • Equity-Related Securities. The equity-related securities we hold consist primarily of warrants or other equity interests generally obtained in connection with our structured debt investments. In addition to the warrants received as a part of a structured debt financing, we typically receive the right to make equity investments in a portfolio company in connection with that company’s next round of equity financing. We may also on certain debt investments have the right to convert a portion of the debt investment into equity. These rights will provide us with the opportunity to further enhance our returns over time through opportunistic equity investments in our portfolio companies. These 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. We may achieve liquidity through a merger or acquisition of a portfolio company, a public offering of a portfolio company’s stock or by exercising our right, if any, to require a portfolio company to buy back the equity-related securities we hold. We may also make stand alone direct equity investments into portfolio companies in which we may not have any debt investment in the company. As of December 31, 2013, we held equity related securities in 125 portfolio companies. A comparison of the typical features of our various investment alternatives is set forth in the chart below. Structured debt with warrants Senior Debt Equipment Loans Equity related Securities Typical Structure Term debt with Investment Horizon Ranking/Security Covenants warrants Long term, ranging from 2 to 7 years, with an average of 3 years Senior secured, either first out or last out, or second lien Less restrictive; Mostly financial Term or revolving debt Term debt with warrants Preferred stock or common stock Usually under 3 years Ranging from 3 to 4 years Ranging from 3 to 7 years Senior/First lien Secured only by underlying equipment None/unsecured Generally borrowing base and financial None None Risk Tolerance Medium/High Low High High Coupon/Dividend Cash pay—fixed and floating rate; PIK in limited cases Cash pay—floating or fixed rate Cash pay-floating or fixed rate and may include PIK Generally none Customization or Flexibility More flexible Little to none Little to none Flexible Equity Dilution Low to medium None to low Low High 7 Investment Criteria We have identified several criteria, among others, that we believe are important in achieving our investment objective with respect to prospective portfolio companies. These criteria, while not inclusive, provide general guidelines for our investment decisions. Portfolio Composition. While we generally focus our investments in venture capital-backed companies in technology-related markets, 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. As of December 31, 2013, approximately 67.0% of the fair value of our portfolio was composed of investments in four industries: 24.1% was composed of investments in the drug discovery and development industry, 18.1% was composed of investments in the energy technology industry, 13.4% was composed of investments in the internet consumer and business services industry and 11.4% was composed of investments in the medical device and equipment industry. 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 with 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 anticipate having commitments for their first institutional round of equity financing for early stage companies. We expect a prospective portfolio company to demonstrate progress in its product development or demonstrate a path towards revenue generation or 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 potential access to capital to support leverage, demonstrate an operating plan capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover its operating expenses and service its debt for a specific period. 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 six to 12 months. Security Interest. In many instances we seek a first priority security interest in all of the portfolio companies’ tangible and intangible assets as collateral for our debt investment, subject in some cases to permitted exceptions. In other cases we may obtain a negative pledge prohibiting a company from pledging or otherwise encumbering their 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 and subject to assumptions that may change over the life of the investment especially when attempting to estimate the value of intellectual property. We generally 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 may include one or more of the following covenants: cross-default, or material adverse change provisions, require the portfolio company to provide periodic financial reports and operating metrics and will typically limit the portfolio company’s ability to incur additional debt, sell assets, dividend 8 recapture, engage in transactions with affiliates and consummate an extraordinary transaction, such as a merger or recapitalization without our consent. In addition, we may require other performance or financial based covenants, as we deem appropriate. Exit Strategy. Prior to making a debt investment that is accompanied by an equity-related security in a prospective portfolio company, we analyze the potential for that company to increase the liquidity of its equity through a future event that would enable us to realize appreciation in the value of our equity interest. Liquidity events may include an initial public offering, a private sale of our equity interest to a third party, a merger or an acquisition of the company or a purchase of our equity position by the company or one of its stockholders. Investment Process We have organized our management team around the four key elements of our investment process: • Origination; • Underwriting; • Documentation; and • Loan and Compliance Administration. Our investment process is summarized in the following chart: Origination Deal Sourcing and Screening and Preliminary Due Diligence. Term Sheet Structuring, Negotiation and Execution. Underwriting Formal Due Diligence to Create Investment Memorandum. Transaction Reviewed By Investment Committee. Approval Rejection Documentation Loan Documents Drafted and Negotiated. Due Diligence Finalized. Loan Documents Executed. Loan and Compliance Administration Loan Funded and Recorded. Ongoing Invoicing and Collection. Tracking, Monitoring, Reviewing, Reporting, Plotting, Analyzing, Valuing, Restructuring, Credit Scoring, etc. 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. As of December 31, 2013, our investment origination team, which consists of approximately 38 investment professionals, is headed by the 9 Senior Managing Directors of our Energy Technology and Life Science groups, and our Chief Executive Officer. The origination team is responsible for sourcing potential investment opportunities and members of the investment origination team use 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. Our investment origination team is divided into special opportunity lower middle market, technology, energy technology, and life science sub-teams to better source potential 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. This proprietary SQL system allows our origination team to maintain, cultivate and grow our industry relationships while providing our origination team with comprehensive details on companies in the technology-related industries and their financial sponsors. If a prospective portfolio company generally meets certain underwriting criteria, we perform preliminary due diligence, which may include high level company and technology assessments, evaluation of its financial sponsors’ support, market analysis, competitive analysis, identify key 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 whom we define as the underwriting team. The underwriting team for a proposed investment consists of the deal sponsor who typically possesses general 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 legal professionals. To ensure consistent underwriting, we generally use our standardized due diligence methodologies, which include due diligence on financial performance and credit risk as well as an analysis of the operations and the legal and applicable 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 company’s 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 interviews select key management of the company and select financial sponsors and assembles information necessary 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 approval of a majority of our investment committee and an affirmative vote by our Chief Executive Officer is required before we proceed with any investment. The members of our investment committee are our Chief Executive Officer, our Chief Financial Officer, our Chief Credit Officer and the Senior Managing Directors of our Energy Technology and Life Science groups. The investment committee generally meets weekly and more frequently on an as-needed basis. The Senior Managing Directors abstain from voting with respect to investments they originate. 10 Documentation Our documentation group, currently headed by our General Counsel, administers the documentation process for our investments. This group is responsible for documenting the transactions approved by our investment committee with a prospective portfolio company. This group negotiates loan documentation and, subject to appropriate approvals, 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 Chief Financial Officer and Chief Credit Officer, administers loans and tracks covenant compliance, if applicable, of 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 committee’s approval, the loan is recorded in our loan administration software and our SQL-based database system. The loan and compliance administration group is also responsible for ensuring timely interest and principal payments and collateral management as well as advising 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 investment committee and the Valuation Committee of our Board of Directors, accordingly, 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 outstanding loans. 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. From time to time, we will identify investments that require closer monitoring or become workout assets. We develop a workout strategy for workout assets and our investment committee monitors the progress against the strategy. We may incur losses from our investing activities, however, we work with our troubled portfolio companies in order to recover as much of our investments as is practicable, including possibly taking control of the portfolio company. There can be no assurance that principal will be recovered. We use the following investment grading system approved by our Board of Directors: Grade 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. Grade 2. The borrower is performing as expected and the risk profile is neutral to favorable. All new loans are initially graded 2. Grade 3. The borrower may be performing below expectations, and the loan’s risk has increased materially since origination. We increase procedures to monitor a borrower that may have limited amounts of 11 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 or maintain it at a grade 3 as the company continues to pursue its business plan. Grade 4. The borrower is performing materially below expectations, and the loan risk has substantially increased since origination. Loans graded 4 may experience some partial loss or full return of principal but are expected to realize some loss of interest which is not anticipated to be repaid in full, which, to the extent not already reflected, may require the fair value of the loan to be reduced to the amount we anticipate will be recovered. Grade 4 investments are closely monitored. Grade 5. The borrower is in workout, materially performing below expectations and a 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, if any, we anticipate will be recovered. At December 31, 2013, our investments had a weighted average investment grading of 2.20. Managerial Assistance As a business development company, we are required to offer, and provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services. COMPETITION Our primary competitors provide financing to prospective portfolio companies and include non-bank financial institutions, federally or state chartered banks, venture debt funds, 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- backed companies in technology-related markets. We believe that our specialization in financing technology- related companies will enable us to determine a range of potential values 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 “Item 1A. Risk Factors—Risks Related to our Business and Structure—We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively.” BROKERAGE ALLOCATIONS AND OTHER PRACTICES Because 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 where 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 Hercules, 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 firm’s risk and skill in positioning 12 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. EMPLOYEES As of December 31, 2013, we had 62 employees, including approximately 38 investment and portfolio management professionals, all of whom have extensive experience working on financing transactions for technology-related companies. REGULATION The following discussion is a general summary of the material prohibitions and descriptions governing business development companies. It does not purport to be a complete description of all of the laws and regulations affecting business development companies. A business development company primarily focuses on investing in or lending to private companies and making managerial assistance available to them, while providing its stockholders with the ability to retain the liquidity of a publicly-traded stock. 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 company’s 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, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: (a) is organized under the laws of, and has its principal place of business in, the United States; (b) 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 (c) does not have any class of securities listed on a national securities exchange; or if it has securities listed on a national securities exchange such company has a market capitalization of less than 13 $250 million; is controlled by the business development company and has an affiliate of a business development company on its board of directors; or meets such other criteria as may be established by the SEC. (2) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. (3) 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. (4) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities. (5) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment. Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than 25% of the outstanding voting securities of the portfolio company. We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the 1940 Act), invest more than 5% of the value of our total assets in the securities of one such investment company or invest more than 10% of the value of our total assets in the securities of such investment companies in the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. Significant Managerial Assistance In order to count portfolio securities as qualifying assets for the purpose of the 70% test discussed above, a business development company must either control the issuer of the securities or must offer to make available 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 company’s 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 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 14 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 and Options Under the 1940 Act, a business development company is subject to restrictions on the amount of warrants, options, restricted stock 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 company’s total outstanding shares of capital stock. This amount is reduced to 20% of the business development company’s 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 company’s total outstanding shares of capital stock. We have received exemptive relief from the SEC permitting us to issue stock options and restricted stock to our employees and directors subject to the above conditions, among others. For a discussion regarding the conditions of this exemptive relief, see “—Exemptive Relief” below and Note 7 to our consolidated financial statements. 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, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. 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 “Item 1A. Risk Factors—Risks Related to Our Business & Structure—Because we borrow money, there could be increased risk in investing in our company.” Capital Structure We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in the best interests of the Company and our stockholders have approved the practice of making such sales. Code of Ethics We have adopted and will maintain a code of ethics 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 code’s 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. 15 Our code of ethics is posted on our website at www.htgc.com and was filed with the SEC as an exhibit to the registration statement (Registration No. 333-122950) for our initial public offering. You may read and copy the code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, the code of ethics is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov. You may also obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., 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, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent). We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders. Proxy Voting Policies and Procedures We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so. Our proxy voting decisions are made by our investment committee, which is responsible for monitoring each of our investments. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties. Exemptive Relief On June 21, 2005, we filed a request with the SEC for exemptive relief to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to business development companies. Specifically, we requested that the SEC permit us to issue stock options to our non-employee directors as contemplated by Section 61(a)(3)(B)(i)(II) of the 1940 Act. On February 15, 2007, we received approval from the SEC on this exemptive request. In addition, in June 2007, we filed an amendment to the February 2007 order to adjust the number of shares issued to the non-employee directors. On October 10, 2007, we received approval from the SEC on this amended exemptive request. On April 5, 2007, we received approval from the SEC on our request for exemptive relief that permits us to exclude the indebtedness of our wholly-owned subsidiaries that are small business investment companies from the 200% asset coverage requirement applicable to us. 16 On May 2, 2007, we received approval from the SEC on our request for exemptive relief that permits us to issue restricted stock to our employees, officers and directors. On June 21, 2007, our shareholders approved amendments to the 2004 Equity Incentive Plan and 2006 Non-Employee Incentive Plan permitting such restricted grants. On June 22, 2010 we received approval from the SEC on our request for exemptive relief that permits our employees to exercise their stock options and restricted stock and pay any related income taxes using a cashless exercise program. Legislation Recently, legislation was introduced in the U.S. House of Representatives which may revise certain regulations applicable to business development companies. The legislation provides for (i) increasing the amount of funds business development companies may borrow by reducing asset to debt limitations from 2:1 to 3:2, (ii) permitting business development companies to file registration statements with the U.S. Securities and Exchange Commission that incorporate information by reference from already-filed reports, (iii) utilizing other streamlined registration processes afforded to operating companies, and (iv) allowing business development companies to own investment adviser subsidiaries. There are no assurances as to when the legislation will be enacted by Congress, if at all, or, if enacted, what final form the legislation would take. Other We will be periodically examined by the SEC for compliance with the Securities Exchange Act of 1934 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 person’s 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. Penney, our General Counsel, as our Chief Compliance Officer responsible for administering these policies and procedures. Small Business Administration Regulations We make investments in qualifying small businesses through our two wholly-owned SBIC subsidiaries, HT II and HT III. We have issued $225.0 million in SBA-guaranteed debentures in HT II and HT III, which is the maximum amount allowed for a group of SBICs under common control. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. 17 HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2013 as a result of having sufficient capital as defined under the SBA regulations. HT II and HT III hold approximately $174.1 million and $285.1 million in assets, respectively, and accounted for approximately 11.1% and 18.2% of our total assets prior to consolidation at December 31, 2013. The SBA restricts the ability of SBICs to repurchase their capital stock. SBA regulations also include restrictions on a “change of control” or transfer of an SBIC and require that SBICs invest idle funds in accordance with SBA regulations. In addition, HT II and HT III may also be limited in their ability to make distributions to us if they do not have sufficient capital, in accordance with SBA regulations. Our SBIC subsidiaries are subject to regulation and oversight by the SBA, including requirements with respect to maintaining certain minimum financial ratios and other covenants. Receipt of an SBIC license does not assure that our SBIC subsidiaries will receive SBA guaranteed debenture funding, which is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies. The SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under the SBA-guaranteed debentures issued by our SBIC subsidiaries upon an event of default. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of certain material U.S. federal income tax considerations relating to our qualification and taxation as a RIC and the acquisition, ownership and disposition of our preferred stock or common stock, but does not purport to be a complete description of the income tax considerations relating thereto. Election to be Taxed as a RIC Through December 31, 2005, we were subject to Federal income tax as an ordinary corporation under subchapter C of the Code. Effective beginning on January 1, 2006 we met the criteria specified below to qualify as a RIC, and elected to be treated as a RIC under Subchapter M of the Code with the filing of our federal income tax return for 2006. As a RIC, we generally will not have to pay corporate taxes on any income we distribute to our stockholders as dividends, which allows us to reduce or eliminate our corporate level tax. On December 31, 2005, immediately before the effective date of our RIC election, we held assets with “built-in gain,” which are assets whose fair market value as of the effective date of the election exceeded their tax basis as of such date. We elected to recognize all of our net built-in gains at the time of the conversion and paid tax on the built-in gain with the filing of our 2005 federal income tax return. In making this election, we marked our portfolio to market at the time of our RIC election and paid approximately $294,000 in income tax on the resulting gains. Taxation as a Regulated Investment Company For any taxable year in which we: • qualify as a RIC; and 18 • distribute at least 90% of our net ordinary income and realized net short-term gains in excess of realized net long-term capital losses, if any (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 (or are deemed to distribute) to stockholders with respect to that year. As described above, we made the election to recognize built-in gains as of the effective date of our election to be treated as a RIC and therefore will not be subject to built-in gains tax when we sell those assets. However, 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 U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders. 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; 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 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”). Under applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are payable in part in our common stock. 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 19 for each calendar year, (2) 98.2% of our capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax (the “Excise Tax Avoidance Requirements”). 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). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. We may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in 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 PIK interest provisions or, in certain cases, increasing interest rates or debt instruments that were 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 and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount. Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant. We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement (collectively, the “Distribution Requirements”). However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “—Regulation—Senior Securities; Coverage Ratio.” We may be restricted from making distributions under the terms of our debt obligations themselves unless certain conditions are satisfied. 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. If we are prohibited from making distributions or are unable to obtain cash from other sources to make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate- level federal income tax. In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC Distribution Requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject to corporate-level federal income tax. Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar 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 20 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 gross 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 and such net operating losses do not pass through to the RIC’s stockholders. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. A RIC may not use any net capital losses (that is, realized capital losses in excess of realized capital gains) to offset the RIC’s investment company taxable income, but may carry forward such losses, and use them to offset capital gains indefinitely. Due to these limits on the deductibility of expenses and net capital losses, 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. Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within various countries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as paid by its shareholders. If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (“passive foreign investment companies”), we could be subject to federal income tax and additional interest charges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is timely distributed to our shareholders. We would not be able to pass through to our shareholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability. Foreign exchange gains and losses realized by us in connection with certain transactions involving non- dollar debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income. Failure to Qualify as a Regulated Investment Company If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level federal taxes or to dispose of certain assets). 21 If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, 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 would be taxable to our stockholders and if provided certain holding period and other requirements were met, could qualify for treatment as “qualified dividend income” eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributions 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 stockholder’s 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. 22 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 report, we do not have any preferred stock outstanding. At December 31, 2013, 74.5% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Valuation Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate; (4) the Valuation Committee discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 23 The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company uses pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans, which represent less than 4.0% of the Company’s debt investment portfolio, using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when 24 the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investment from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investment. Equity-Related Securities and Warrants In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. Determinations In Connection With Offerings In connection with each offering of shares of our common stock, the Board of Directors or a committee thereof is required to make the determination that we are not selling shares of our common stock at a price below our then current net asset value at the time at which the sale is made. The Board of Directors considers the following factors, among others, in making such determination: • • • the net asset value of our common stock disclosed in the most recent periodic report we filed with the SEC; our management’s assessment of whether any material change in the net asset value has occurred (including through the realization of net gains on the sale of our portfolio investments) from the period beginning on the date of the most recently disclosed net asset value to the period ending two days prior to the date of the sale of our common stock; and the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering. Importantly, this determination does not require that we calculate net asset value in connection with each offering of shares of our common stock, but instead it involves the determination by the Board of Directors or a committee thereof that we are not selling shares of our common stock at a price below the then current net asset value at the time at which the sale is made. 25 Moreover, to the extent that there is even a remote possibility that we may (i) issue shares of our common stock at a price below the then current net asset value of our common stock at the time at which the sale is made or (ii) trigger the undertaking (which we provided to the SEC in the registration statement to which this prospectus is a part) to suspend the offering of shares of our common stock pursuant to this prospectus if the net asset value fluctuates by certain amounts in certain circumstances until the prospectus is amended, the Board of Directors or a committee thereof will elect, in the case of clause (i) above, either to postpone the offering until such time that there is no longer the possibility of the occurrence of such, events or to undertake to determine net asset value within two days prior to any such sale to ensure that such sale will not be below our then current net asset value, and, in the case of clause (ii) above, to comply with such undertaking or to undertake to determine net asset value to ensure that such undertaking has not been triggered. These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records we are required to maintain under the 1940 Act. Item 1A. Risk Factors Investing in our securities may be speculative and involves a high degree of risk. You should consider carefully the risks described below and all other information contained in this Annual Report, including our financial statements and the related notes and the schedules and exhibits to this Annual Report. 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 securities could decline, and you may lose all or part of your investment. Risks Related to our Business Structure We are dependent upon key management personnel for their time availability and 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. Furthermore, we do not have an employment agreement with Mr. Henriquez and our senior management is not restricted from creating new investment vehicles subject to compliance with applicable law. 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, our relationships become strained as a result of enforcing our rights with respect to non-performing portfolio companies in protecting our investments or we fail 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. 26 We operate in a highly competitive market for investment opportunities, and we may not be able to compete effectively. A 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, business development companies, 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. A significant increase in the number and/or the size of our competitors, including traditional commercial lenders and other financing sources, in technology-related industries could force us to accept less attractive investment terms. We may miss opportunities 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 imposes 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, or that we will be able to fully invest our available capital. 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 team’s 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. 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. In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, we intend to distribute to our stockholders substantially all of our net ordinary income and realized net capital gains except for certain realized net capital gains, which we may 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. 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. 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. If we are unable to incur additional debt, we may be required to raise additional equity at a time when it may be disadvantageous to do so. In addition, shares of closed-end investment companies have recently 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 shares of our 27 common stock will trade above, at or below our net asset value. If our common stock trades below its net asset value, we generally will 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. 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. In addition, our results of operations and financial condition could be adversely affected. Because we have substantial indebtedness, there could be increased risk in investing in our company. Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity. If we are not able to service our substantial indebtedness, our business could be harmed materially. Our secured credit facilities with Wells Fargo Capital Finance LLC (the “Wells Facility”) and Union Bank, N.A. (the “Union Bank Facility,” and together with the Wells Facility, our “Credit Facilities”) our Convertible Senior Notes, our 2019 Notes and our Asset-Backed Notes (as each term is defined below) contain financial and operating covenants that could restrict our business activities, including our ability to declare dividends if we default under certain provisions. As of December 31, 2013, we did not have any outstanding borrowings under our Credit Facilities. In addition, as of December 31, 2013, we had approximately $225.0 million of indebtedness outstanding incurred by our SBIC subsidiaries, approximately $75.0 million of Convertible Senior Notes payable, approximately $170.4 million of 2019 Notes and approximately $89.6 million in aggregate principal amount of fixed rate asset-backed notes (the “Asset-Backed Notes”) in connection with our $230.7 million debt Securitization (the “Debt Securitization”). There can be no assurance that we will be successful in obtaining any additional debt capital on terms acceptable to us or at all. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. As a business development company, generally, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. 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. As of December 31, 2013 our asset coverage ratio under our regulatory requirements as a business development company was 295.5%, excluding our SBIC debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio. 28 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 below. Annual Return on Our Portfolio (Net of Expenses) -10% -5% 0% 5% 10% Corresponding return to stockholder(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23.14%) (13.74%) (4.34%) 5.06% 14.45% (1) Assumes $1.2 billion in total assets, $559.9 million in debt outstanding, $650.0 million in stockholders’ equity, and an average cost of funds of 5.04%, which is the approximate average cost of borrowed funds, including our Credit Facilities, our Convertible Senior Notes, 2019 Notes, our SBA debentures and our Asset-Backed Notes for the period ended December 31, 2013. Actual interest payments may be different. It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the future could constrain our ability to grow our business. Under our borrowings and our Credit Facilities, current lenders have, and any future lender or lenders may 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 the collateral pool. Our Credit Facilities and borrowings also subject us to various financial and operating covenants, including, but not limited to, maintaining certain financial ratios and minimum tangible net worth amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we may grant a securities interest in our assets in connection with any such credit facilities and borrowings. Our Credit Facilities generally 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. In addition, our Credit Facilities require or are expected to require the repayment of all outstanding debt on the maturity which may disrupt our business and potentially the business of our portfolio companies that are financed through the facilities. An event of default under these facilities would likely result, among other things, in termination of the availability of further funds under the facilities and accelerated maturity dates for all amounts outstanding under the facilities, which would likely disrupt our business and, potentially, the business of the portfolio companies whose loans we finance through the facilities. This could reduce our revenues and, by delaying any cash payment allowed to us under our facilities until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and our ability to make distributions sufficient to maintain our status as a RIC. The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain sufficient capital in the future, we may be forced to reduce or discontinue our operations, not be able to make new investments, or otherwise respond to changing business conditions or competitive pressures. In addition to regulatory requirements that restrict our ability to raise capital, our Credit Facilities, the Convertible Senior Notes and the 2019 Notes contain various covenants which, if not complied with, could accelerate repayment under the facility or require us to repurchase the Convertible Senior Notes and the 2019 Notes thereby materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends. The credit agreements governing our Credit Facilities, the Convertible Senior Notes and the 2019 Notes require us to comply with certain financial and operational covenants. These covenants require us to, among other things, maintain certain financial ratios, including asset coverage, debt to equity and interest coverage. Our ability to continue to comply with these covenants in the future depends on many factors, some of which are beyond our control. There are no assurances that we will be able to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver from the 29 lenders under our Credit Facilities or the trustee or holders under the Convertible Senior Notes and could accelerate repayment under the facilities or the Convertible Senior Notes or the 2019 Notes and thereby have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay dividends. In addition, holders of the Convertible Senior Notes will have the right to require us to repurchase the Convertible Senior Notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases. See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition—Borrowings.” We may be unable to obtain debt capital on favorable terms or at all, in which case we would not be able to use leverage to increase the return on our investments. If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting from leverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfolio companies. We are subject to certain risks as a result of our interests in connection with the Debt Securitization and our equity interest in the Securitization Issuer. On December 19, 2012, in connection with the Debt Securitization and the offering of the Asset-Backed Notes by Hercules Capital Funding Trust 2012-1 (the “Securitization Issuer”), we sold and/or contributed to Hercules Capital Funding 2012-1 LLC, as Trust Depositor (the “Trust Depositor”), certain senior loans made to certain of our portfolio companies (the “Loans”), which the Trust Depositor in turn sold and/or contributed to the Securitization Issuer in exchange for 100% of the equity interest in the Securitization Issuer, cash proceeds and other consideration. Following these transfers, the Securitization Issuer, and not the Trust Depositor or us, held all of the ownership interest in the Loans. As a result of the Debt Securitization, we hold, indirectly through the Trust Depositor, 100% of the equity interest in the Securitization Issuer. As a result, we consolidate the financial statements of the Trust Depositor and the Securitization Issuer, as well as our other subsidiaries, in our consolidated financial statements. Because each of the Trust Depositor and the Securitization Issuer is disregarded as an entity separate from its owner for U.S. federal income tax purposes, the sale or contribution by us to the Trust Depositor, and by the Trust Depositor to the Securitization Issuer, did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations or cash flows. Further, a failure of the Securitization Issuer to be treated as a disregarded entity for U.S. federal income tax purposes would constitute an event of default pursuant to the indenture under the Debt Securitization, upon which the trustee under the Debt Securitization (the “Trustee”) may and will at the direction of a supermajority of the holders of the Asset-Backed Notes (the “Noteholders”) declare the Asset-Backed Notes to be immediately due and payable and exercise remedies under the indenture, including (i) to institute proceedings for the collection of all amounts then payable on the Asset- Backed Notes or under the indenture, enforce any judgment obtained, and collect from the Securitization Issuer and any other obligor upon the Asset-Backed Notes monies adjudged due; (ii) institute proceedings from time to time for the complete or partial foreclosure of the indenture with respect to the property of the Securitization Issuer; (iii) exercise any remedies as a secured party under the relevant UCC and take other appropriate action under applicable law to protect and enforce the rights and remedies of the Trustee and the Noteholders; or (iv) sell the property of the Securitization Issuer or any portion thereof or rights or interest therein at one or more public or private sales called and conducted in any matter permitted by law. Any such exercise of remedies could have a material adverse effect on our business, financial condition, results of operations or cash flows. 30 An event of default in connection with the Debt Securitization could give rise to a cross-default under our other material indebtedness. The documents governing our other material indebtedness contain customary cross-default provisions that could be triggered if an event of default occurs in connection with the Debt Securitization. An event of default with respect to our other indebtedness could lead to the acceleration of such indebtedness and the exercise of other remedies as provided in the documents governing such other indebtedness. This could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We may not receive cash distributions in respect of our indirect ownership interest in the Securitization Issuer. Apart from fees payable to us in connection with our role as servicer of the Loans and the reimbursement of related amounts under the Debt Securitization documents, we receive cash in connection with the Debt Securitization only to the extent that the Trust Depositor receives payments in respect of its equity interest in the Securitization Issuer. The holder of the equity interest in the Securitization Issuer is the residual claimant on distributions, if any, made by the Securitization Issuer after the Noteholders and other claimants have been paid in full on each payment date or upon maturity of the notes, subject to the priority of payments under the Debt Securitization documents. To the extent that the value of the Securitization Issuer’s portfolio of Loans is reduced as a result of conditions in the credit markets (relevant in the event of a liquidation event), other macroeconomic factors, distressed or defaulted Loans or the failure of individual portfolio companies to otherwise meet their obligations in respect of the Loans, or for any other reason, the ability of the Securitization Issuer to make cash distributions in respect of the Trust Depositor’s equity interest would be negatively affected and consequently, the value of the equity interest in the Securitization Issuer would also be reduced. In the event that we fail to receive cash indirectly from the Securitization Issuer, we could be unable to make distributions, if at all, in amounts sufficient to maintain our status as a RIC. The interests of the Noteholders may not be aligned with our interests. The Asset-Backed Notes are debt obligations ranking senior in right of payment to the rights of the holder of the equity interest in the Securitization Issuer, as residual claimant in respect of distributions, if any, made by the Securitization Issuer. As such, there are circumstances in which the interests of the Noteholders may not be aligned with the interests of holders of the equity interest in the Securitization Issuer. For example, under the terms of the documents governing the Debt Securitization, the Noteholders have the right to receive payments of principal and interest prior to holders of the equity interest. For as long as the Asset-Backed Notes remain outstanding, the Noteholders have the right to act in certain circumstances with respect to the Loans in ways that may benefit their interests but not the interests of holder of the equity interest in the Securitization Issuer, including by exercising remedies under the documents governing the Debt Securitization. If an event of default occurs, the Noteholders will be entitled to determine the remedies to be exercised, subject to the terms of the documents governing the Debt Securitization. For example, upon the occurrence of an event of default with respect to the Asset-Backed Notes, the Trustee may and will at the direction of the holders of a supermajority of the Asset-Backed Notes declare the principal, together with any accrued interest, of the notes to be immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation on the part of the Securitization Issuer. The Asset-Backed Notes then outstanding will be paid in full before any further payment or distribution on the equity interest is made. There can be no assurance that there will be sufficient funds through collections on the Loans or through the proceeds of the sale of the Loans in the event of a bankruptcy or insolvency to repay in full the obligations under the Asset-Backed Notes, or to make any distribution to holder of the equity interest in the Securitization Issuer. 31 Remedies pursued by the Noteholders could be adverse to our interests as the indirect holder of the equity interest in the Securitization Issuer. The Noteholders have no obligation to consider any possible adverse effect on such other interests. Thus, there can be no assurance that any remedies pursued by the Noteholders will be consistent with the best interests of the Trust Depositor or that we will receive, indirectly through the Trust Depositor, any payments or distributions upon an acceleration of the Asset-Backed Notes. Any failure of the Securitization Issuer to make distributions in respect of the equity interest that we indirectly hold, whether as a result of an event of default and the acceleration of payments on the Asset-Backed Notes or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. Certain events related to the performance of Loans could lead to the acceleration of principal payments on the Asset-Backed Notes. The following constitute rapid amortization events (“Rapid Amortization Events”) under the documents governing the Debt Securitization: (i) the aggregate outstanding principal balance of delinquent Loans and restructured Loans that would have been delinquent Loans had such Loans not become restructured Loans exceeds 10% of the current aggregate outstanding principal balance of the Loans, excluding all defaulted Loans and all purchased Loans (the “Pool Balance”) for a period of three consecutive months; (ii) the aggregate outstanding principal balance of defaulted Loans exceeds 5% of the initial Pool Balance determined as of December 19, 2012 for a period of three consecutive months; (iii) the aggregate outstanding principal balance of the Asset-Backed Notes exceeds the borrowing base for a period of three consecutive months; (iv) the Securitization Issuer’s pool of Loans contains Loans to ten or fewer obligors; and (v) the occurrence of an event of default under the documents governing the Debt Securitization. After a Rapid Amortization Event has occurred, subject to the priority of payments under the documents governing the Debt Securitization, principal collections on the Loans will be used to make accelerated payments of principal on the Asset-Backed Notes until the payment of principal balance of the Asset-Backed Loans is reduced to zero. Such an event could delay, reduce or eliminate the ability of the Securitization Issuer to make distributions in respect of the equity interest that we indirectly hold, which could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in our inability to make distributions sufficient to maintain our status as a RIC. We have certain repurchase obligations with respect to the Loans transferred in connection with the Debt Securitization. As part of the Debt Securitization, we entered into a sale and contribution agreement and a sale and servicing agreement under which we would be required to repurchase any Loan (or participation interest therein) which was sold to the Securitization Issuer in breach of certain customary representations and warranty made by us or by the Trust Depositor with respect to such Loan or the legal structure of the Debt Securitization. To the extent that there is a breach of such representations and warranties and we fail to satisfy any such repurchase obligation, the Trustee may, on behalf of the Securitization Issuer, bring an action against us to enforce these repurchase obligations. Because most of our investments typically are not in publicly-traded securities, there is uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value. At December 31, 2013, portfolio investments, which are valued at fair value by the Board of Directors, were approximately 74.5% of our total assets. We expect our investments to continue to consist primarily of securities issued by privately-held companies, the fair value of which is not readily determinable. In addition, we are not permitted to maintain a general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. 32 There is no single standard for determining fair value in good faith. We value these securities at fair value as determined in good faith by our Board of Directors, based on the recommendations of our Valuation Committee. In making a good faith determination of the value of these securities, we generally start with the cost basis of each security, which includes the amortized OID and PIK interest, if any. The Valuation Committee uses its best judgment in arriving at the fair value of these securities. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while applying a valuation process for the types of investments we make, which includes but is not limited to deriving a hypothetical exit price. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each investment. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities. Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment in a timely manner could result in a realized loss on the investment. If we obtain a control investment in a portfolio company our ability to divest ourselves from a debt or equity investment could be restricted due to illiquidity in a private stock, limited trading volume on a public company’s stock, inside information on a company’s performance, insider blackout periods, or other factors that could prohibit us from disposing of the investment as we would if it were not a control investment. Additionally, we may choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could experience a decrease in the value of our portfolio company holdings and potentially incur a realized loss on the investment. Regulations governing our operations as a business development company may 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. Under the 1940 Act, we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. 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. 33 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. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all. 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. We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio 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. As a business development company, we may 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. See “Regulation” in this prospectus. We believe that most of the senior loans we make will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could lose our status as a business development company, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to comply with the 1940 Act. If we need to dispose of such investments quickly, it would be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss. A failure on our part to maintain our qualification as a business development company would significantly reduce our operating flexibility. If we fail to continuously qualify as a business development company, we might be subject to regulation as a registered closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility. In addition, failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us. For additional information on the qualification requirements of a business development company, see “Regulation” in this prospectus. To the extent original issue discount and paid-in-kind interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income. Our investments may include original issue discount, or OID, instruments and contractual payment-in-kind, or PIK, interest arrangements, which represents contractual interest added to a loan balance and due at the end of 34 such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following: • OID instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments; • OID accruals may create uncertainty about the source of our distributions to stockholders; • OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral; and • OID and PIK instruments may represent a higher credit risk than coupon loans. 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 elected to be treated as a RIC for federal income tax purposes with the filing of our federal corporate income tax return for 2006. We will not qualify for the tax treatment allowable to RICs if we are unable to comply with the source of income, asset 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 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. 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), and we cannot pass such net operating losses through to our stockholders. We may have difficulty paying our required distributions under applicable tax rules if we recognize income before or without receiving cash representing such income. In accordance with U.S. federal tax requirements, we include in income for tax purposes certain amounts that we have not yet received in cash, such as contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. In addition to the cash yields received on our loans, in some instances, our loans generally include one or more of the following: end-of-term payments, exit fees, balloon payment fees, commitment fees, success fees or prepayment fees. In some cases our loans also include contractual PIK interest arrangements. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which such payment-in-kind interest was accrued, 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 for tax purposes certain other amounts prior to receiving the related 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 generally will 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 or to pay a portion of our distributions using shares of newly issued common stock, consistent with Internal Revenue Service requirements, to satisfy such distribution requirements. Other features of the debt instruments that we hold may also cause such instruments to generate original issue discount, resulting in a dividend distribution requirement in excess of current cash interest received. Since 35 in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the RIC tax requirement to distribute generally an amount equal to 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. Under such circumstances, 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. If we are unable to obtain cash from other sources and are otherwise unable 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. 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, or our business may not perform in a manner that will allow us to make a specified level of distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make distributions. Also, our Credit Facilities limit our ability to declare dividends if we default under certain provisions. 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. Under applicable Treasury regulations and certain private rulings issued by the Internal Revenue Service, RICs are permitted to treat certain distributions payable in up to 80% in their stock, as taxable dividends that will satisfy their annual distribution obligations for federal income tax and excise tax purposes provided that shareholders have the opportunity to elect to receive the distribution in cash. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, then such sales may put downward pressure on the trading price of our stock. We may in the future determine to distribute taxable dividends that are payable in part in our common stock. We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability or the value of our portfolio General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. 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 and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest-earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will accrue interest at variable rates. 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 current initial investments in debt securities will be at floating rate with a floor. However, in the event that we make investments in debt securities at variable 36 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. Our realized gains are reduced by amounts paid pursuant to the warrant participation agreement. Citigroup, a former credit facility provider to Hercules, has an equity participation right through a warrant participation agreement on the pool of loans and certain warrants formerly collateralized under its then existing credit facility (the “Citigroup Facility”). Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. As a result, Citigroup is entitled to 10% of the realized gains on certain warrants until the realized gains paid to Citigroup pursuant to the agreement equals $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citigroup Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2013, we reduced our realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $57,000 as a result of appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $370,000 as of December 31, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid approximately $1.6 million under the warrant participation agreement thereby reducing our realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and March 2018. Pending legislation may allow us to incur additional leverage. As a business development company, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that business development companies may incur by modifying the percentage from 200% to 150%. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in us may increase. Two of our wholly-owned subsidiaries are licensed by the U.S. Small Business Administration, and as a result, we will be subject to SBA regulations. Our wholly-owned subsidiaries HT II and HT III are licensed to act as SBICs and are regulated by the SBA. HT II and HT III hold approximately $174.1 million and $285.1 million in assets, respectively, and they accounted for approximately 11.1% and 18.2% of our total assets, respectively, prior to consolidation at December 31, 2013. The SBIC licenses allow our SBIC subsidiaries to obtain leverage by issuing SBA- guaranteed debentures, subject to the issuance of a capital commitment by the SBA and other customary 37 procedures. The SBA regulations require, among other things, that a licensed SBIC be examined periodically and audited by an independent auditor to determine the SBIC’s compliance with the relevant SBA regulations. Under current SBA regulations, a licensed SBIC can provide capital to those entities that have a tangible net worth not exceeding $18.0 million and an average annual net income after Federal income taxes not exceeding $6.0 million for the two most recent fiscal years. In addition, a licensed SBIC must devote 25.0% of its investment activity to those entities that have a tangible net worth not exceeding $6.0 million and an average annual net income after Federal income taxes not exceeding $2.0 million for the two most recent fiscal years. The SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on factors such as the number of employees and gross sales. The SBA regulations permit licensed SBICs to make long term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. The SBA also places certain limitations on the financing terms of investments by SBICs in portfolio companies and prohibits SBICs from providing funds for certain purposes or to businesses in a few prohibited industries. Compliance with SBA requirements may cause HT II and HT III to forego attractive investment opportunities that are not permitted under SBA regulations. Further, the SBA regulations require that a licensed SBIC be periodically examined and audited by the SBA to determine its compliance with the relevant SBA regulations. The SBA prohibits, without prior SBA approval, a “change of control” of an SBIC or transfers that would result in any person (or a group of persons acting in concert) owning 10.0% or more of a class of capital stock of a licensed SBIC. If either HT II or HT III fail to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/ or limit HT II or HT III from making new investments. Such actions by the SBA would, in turn, negatively affect us because HT II and HT III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2013 as a result of having sufficient capital as defined under the SBA regulations. See “Regulation—Small Business Administration Regulations” in this prospectus. SBA regulations limit the outstanding dollar amount of SBA guaranteed debentures that may be issued by an SBIC or group of SBICs under common control. The SBA regulations currently limit the dollar amount of SBA-guaranteed debentures that can be issued by any one SBIC to $150.0 million or to a group of SBICs under common control to $225.0 million. A proposed bill in the U.S. Senate, the Expanding Access to Capital for Entrepreneurial Act, or Senate Bill 511, would increase the total SBIC leverage capacity for affiliated SBIC funds from $225 million to $350 million. However, the ultimate form and likely outcome of such legislation or any similar legislation cannot be predicted. An SBIC may not borrow an amount in excess of two times (and in certain cases, up to three times) its regulatory capital. As of December 31, 2013, we have issued $225.0 million in SBA-guaranteed debentures in our SBIC Subsidiaries, which is the maximum allowed for a group of SBICs under common control. During times that we reach the maximum dollar amount of SBA-guaranteed debentures permitted, and if we require additional capital, our cost of capital is likely to increase, and there is no assurance that we will be able to obtain additional financing on acceptable terms. Moreover, the current status of our SBIC subsidiaries as SBICs does not automatically assure that our SBIC subsidiaries will continue to receive SBA-guaranteed debenture funding. Receipt of SBA leverage funding is dependent upon our SBIC subsidiaries continuing to be in compliance with SBA regulations and policies and available SBA funding. The amount of SBA leverage funding available to SBICs is dependent upon annual Congressional authorizations and in the future may be subject to annual Congressional appropriations. There can be no assurance that there will be sufficient debenture funding available at the times desired by our SBIC subsidiaries. 38 The debentures guaranteed by the SBA have a maturity of ten years and require semi-annual payments of interest. Our SBIC subsidiaries will need to generate sufficient cash flow to make required interest payments on the debentures. If our SBIC subsidiaries are unable to meet their financial obligations under the debentures, the SBA, as a creditor, will have a superior claim to our SBIC subsidiaries’ assets over our stockholders in the event we liquidate our SBIC subsidiaries or the SBA exercises its remedies under such debentures as the result of a default by us. Our wholly-owned SBIC subsidiaries may be unable to make distributions to us that will enable us to maintain RIC status, which could result in the imposition of an entity-level tax. In order for us to continue to qualify for RIC tax treatment and to minimize corporate-level taxes, we will be required to distribute substantially all of our net ordinary income and net capital gain income, including income from certain of our subsidiaries, which includes the income from our SBIC subsidiaries. We will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may result in loss of RIC tax treatment and a consequent imposition of an entity-level tax on us. 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, SBICs, 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. Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results. We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the New York Stock Exchange, or NYSE, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act, and the SEC has adopted additional rules and regulations that may impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. 39 Results may fluctuate and may not be indicative of future performance. Our operating results may fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. Factors that could cause operating results to fluctuate include, but are not limited to, variations in the investment origination volume and fee income earned, changes in the accrual status of our debt investments, variations in timing of prepayments, variations in and the timing of the recognition of net realized gains or losses and changes in unrealized appreciation or depreciation, the level of our expenses, the degree to which we encounter competition in our markets, and general economic conditions. Risks Related to Current Economic and Market Conditions Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations. The global capital markets have experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-pricing of credit risk and the failure of certain major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that have materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. While the capital markets improved during 2013, these conditions could deteriorate in the future. During such market disruptions, we may have difficulty raising debt or equity capital, especially as a result of regulatory constraints. Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. In addition, significant changes in the capital markets, including the disruption and volatility, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition and results of operations. Various social and political tensions in the United States and around the world, particularly in the Middle East, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Several European Union (“EU”) countries, including Greece, Ireland, Italy, Spain, and Portugal, continue to face budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is also continued concern about national-level support for the euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. The recent United States and global economic downturn, or a return to the recessionary period in the United States, could adversely impact our investments. We cannot predict the duration of the effects related to these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that it will be successful in doing so. Depending on funding requirements, we may need to raise additional capital to meet our unfunded commitments either through equity offerings or through additional borrowings. As of December 31, 2013, we had unfunded debt commitments of approximately $151.0 million. Approximately $77.4 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. These commitments 40 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 or future earning assets. Closed commitments generally fund 70-80% of the committed amount in aggregate over the life of the commitment. We intend to use cash flow from normal and early principal repayments, SBA debentures, our Credit Facilities and proceeds from the Convertible Senior Notes, 2019 Notes and the Asset-Backed Notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening of current economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all. A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations. As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future (currently February 2014) unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations. A failure by Congress to raise the debt limit would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. If the U.S. Government fails to complete its budget process or to provide for a continuing resolution before the expiration of the current continuing resolution (currently January 2014), another federal government shutdown may result. Such a failure or the perceived risk of such a failure consequently could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies. Consequently, the continued uncertainty in the general economic environment, including the recent government shutdown and potential debt ceiling implications, as well in specific economies of several individual geographic markets in which our portfolio companies operate, could adversely affect our business, financial condition and results of operations. Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating-rate debt securities. Concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing. Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities. 41 Risks Related to Our Investments Our investments are concentrated in certain industries and in a 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 companies. As of December 31, 2013, approximately 67.0% of the fair value of our portfolio was composed of investments in four industries: 24.1% was composed of investments in the drug discovery and development industry, 18.1% was composed of investments in the energy technology industry, 13.4% was composed of investments in the internet consumer and business services industry and 11.4% was composed of investments in the medical device and equipment industry. As a result, a downturn in technology-related industry sectors and particularly those in which we are heavily concentrated could materially adversely affect our financial condition. Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected. Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at December 31, 2013 that represent greater than 5% of our net assets: (in thousands) December 31, 2013 Fair Value Percentage of Net Assets Merrimack Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,855 6.6% Merrimack Pharmaceuticals, Inc. is a biopharmaceutical company discovering, developing and preparing to commercialize innovative medicines paired with companion diagnostics for the treatment of serious diseases, with an initial focus on cancer. Our investments may be in portfolio companies that have limited operating histories and resources. We expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. These companies may be particularly vulnerable to U.S. and foreign 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 larger, more established 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. 42 We cannot assure you that any of our investments in our portfolio companies will be successful. We may lose our entire investment in any or all of our portfolio companies. Investing in publicly traded companies can involve a high degree of risk and can be speculative. We have invested, and expect to continue to invest, a portion of our portfolio in publicly traded companies or companies that are in the process of completing their initial public offering, or IPO. As publicly traded companies, the securities of these companies may not trade at high volumes, and prices can be volatile, which may restrict our ability to sell our positions and may have a material adverse impact on us. Our investment strategy focuses on technology-related companies, which are subject to many risks, including volatility, intense competition, shortened product life cycles, changes in regulatory and governmental programs and periodic downturns, and you could lose all or part of your investment. We have invested and will continue investing primarily in technology-related 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 companies can and often do fluctuate suddenly and dramatically. In addition, technology-related markets are generally characterized by abrupt business cycles and intense competition. Overcapacity in technology-related industries, together with cyclical economic downturns, may result in substantial decreases in the market capitalization of many technology-related companies. While such valuations have recovered to some extent, such decreases in market capitalization may occur again, and any future decreases in technology- related 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 companies have historically decreased over their productive lives. As a result, the average selling prices of products and services offered by technology-related 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. A natural disaster may also impact the operations of our portfolio companies, including our technology- related portfolio companies. The nature and level of natural disasters cannot be predicted and may be exacerbated by global climate change. A portion of our technology-related portfolio companies rely on items assembled or produced in areas susceptible to natural disasters, and may sell finished goods into markets susceptible to natural disasters. A major disaster, such as an earthquake, tsunami, flood or other catastrophic event could result in disruption to the business and operations of our technology-related portfolio companies. We will invest in technology-related companies that are reliant on U.S. and foreign regulatory and governmental programs. Any material changes or discontinuation, due to change in administration or U.S. Congress or otherwise could have a material adverse effect on the operations of a portfolio company in these industries and, in turn, impair our ability to timely collect principal and interest payments owed to us to the extent applicable. 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. 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 43 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. Our investments in the energy technology industry are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns and potential litigation. Our investments in energy technology companies are subject to substantial operational risks, such as underestimated cost projections, unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative energy solutions compared to traditional energy products. In addition, energy technology companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, some energy companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to period, resulting in volatility in production levels and profitability. In addition, our energy technology companies 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 energy technology companies can and often do fluctuate suddenly and dramatically and the markets in which energy technology companies operate are generally characterized by abrupt business cycles and intense competition. Demand for energy technology and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases. A change in prices in these energy products could reduce demand for alternative energy. Our investments in energy technology companies also face potential litigation, including significant warranty and product liability claims, as well as class action and government claims arising from the increased attention to the industry from the failure of Solyndra. Such litigation could adversely affect the business and results of operations of our energy technology portfolio companies. There is also particular uncertainty about whether agreements providing incentives for reductions in greenhouse gas emissions, such as the Kyoto Protocol, will continue and whether countries around the world will enact or maintain legislation that provides incentives for reductions in greenhouse gas emissions, without which such investments in energy technology dependent portfolio companies may not be economical or financing for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the risk that favorable regulatory regimes expire or are adversely modified. This could, in turn, materially adversely affect the value of the energy technology companies in our portfolio. Energy technology companies are subject to extensive government regulation and certain other risks particular to the sectors in which they operate and our business and growth strategy could be adversely affected if government regulations, priorities and resources impacting such sectors change or if our portfolio companies fail to comply with such regulations. As part of our investment strategy, we plan to invest in portfolio companies in energy technology sectors that may be subject to extensive regulation by foreign, U.S. federal, state and/or local agencies. Changes in existing laws, rules or regulations, or judicial or administrative interpretations thereof, or new laws, rules or regulations could have an adverse impact on the business and industries of our portfolio companies. In addition, changes in government priorities or limitations on government resources could also adversely impact our portfolio companies. We are unable to predict whether any such changes in laws, rules or regulations will occur and, if they do occur, the impact of these changes on our portfolio companies and our investment returns. Furthermore, if any of our portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Our portfolio companies may be subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. 44 In addition, there is considerable uncertainty about whether foreign, U.S., state and/or local governmental entities will enact or maintain legislation or regulatory programs that mandate reductions in greenhouse gas emissions or provide incentives for energy technology companies. Without such regulatory policies, investments in Energy Technology companies may not be economical and financing for energy technology companies may become unavailable, which could materially adversely affect the ability of our portfolio companies to repay the debt they owe to us. Any of these factors could materially and adversely affect the operations and financial condition of a portfolio company and, in turn, the ability of the portfolio company to repay the debt they owe to us. Our investments in the life science industry are subject to extensive government regulation, litigation risk and certain other risks particular to that industry. We have invested and plan to continue investing in companies in the life science industry that are subject to extensive regulation by the Food and Drug Administration, or the FDA, and to a lesser extent, other federal, state and other foreign agencies. If any of these portfolio companies fail to comply with applicable regulations, they could be subject to significant penalties and claims that could materially and adversely affect their operations. Portfolio companies that produce medical devices or drugs are subject to the expense, delay and uncertainty of the regulatory approval process for their products and, even if approved, these products may not be accepted in the marketplace. In addition, governmental budgetary constraints effecting the regulatory approval process, new laws, regulations or judicial interpretations of existing laws and regulations might adversely affect a portfolio company in this industry. Portfolio companies in the life science industry may also have a limited number of suppliers of necessary components or a limited number of manufacturers for their products, and therefore face a risk of disruption to their manufacturing process if they are unable to find alternative suppliers when needed. Any of these factors could materially and adversely affect the operations of a portfolio company in this industry and, in turn, impair our ability to timely collect principal and interest payments owed to us. Our investments in the drug discovery industry are subject to numerous risks, including competition, extensive government regulation, product liability and commercial difficulties. Our investments in the drug discovery industry are subject to numerous risks. The successful and timely implementation of the business model of our drug discovery portfolio companies depends on their ability to adapt to changing technologies and introduce new products. As competitors continue to introduce competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patient’s and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio companies. The success of new product offerings will depend on many factors, including the ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate products from those of competitors. Failure by our portfolio companies to introduce planned products or other new products or to introduce products on schedule could have a material adverse effect on our business, financial condition and results of operations. Further, the development of products by drug discovery companies requires significant research and development, clinical trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the US and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and foreign agencies may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents attained by others can preclude or delay the commercialization of a product. There can be no assurance that any products now in development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development process, including after significant funds have been invested. Products may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. 45 Future legislation, and/or regulations and policies adopted by the FDA or other U.S. or foreign regulatory authorities may increase the time and cost required by some of our portfolio companies to conduct and complete clinical trials for the product candidates that they develop, and there is no assurance that these companies will obtain regulatory approval to market and commercialize their products in the U.S. and in foreign countries The FDA has established regulations, guidelines and policies to govern the drug development and approval process, as have foreign regulatory authorities, which affect some of our portfolio companies. Any change in regulatory requirements due to the adoption by the FDA and/or foreign regulatory authorities of new legislation, regulations, or policies may require some of our portfolio companies to amend existing clinical trial protocols or add new clinical trials to comply with these changes. Such amendments to existing protocols and/or clinical trial applications or the need for new ones, may significantly impact the cost, timing and completion of the clinical trials. In addition, increased scrutiny by the U.S. Congress of the FDA’s and other authorities approval processes may significantly delay or prevent regulatory approval, as well as impose more stringent product labeling and post-marketing testing and other requirements. Foreign regulatory authorities may also increase their scrutiny of approval processes resulting in similar delays. Increased scrutiny and approvals processes may limit the ability of our portfolio companies to market and commercialize their products in the U.S. and in foreign countries. Changes in healthcare laws and other regulations applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services. Changes in healthcare or other laws and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio companies. Price declines and illiquidity in the corporate debt markets could adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation. As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair market value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity), the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities to similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer substantial unrealized depreciation in future periods, which could have a material adverse impact on our business, financial condition and results of operations. 46 Economic recessions or slowdowns 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 have a material adverse effect on our results of operations. Many of our portfolio companies may be susceptible to economic slowdowns or recessions in both the U.S. and foreign countries, and may be unable to repay our loans during such periods. Therefore, during such periods, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease. 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. These events could prevent us from increasing investments and harm our operating results. In particular, intellectual property owned or controlled by our portfolio companies may constitute an important portion of the value of the collateral of our loans to our portfolio companies. Adverse economic conditions may decrease the demand for our portfolio companies’ intellectual property and consequently its value in the event of a bankruptcy or required sale through a foreclosure proceeding. As a result, our ability to fully recover the amounts owed to us under the terms of the loans may be impaired by such events. A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s 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. The health and performance of our portfolio companies could be adversely affected by political and economic conditions in the countries in which they conduct business. Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S. Any conflict or uncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, could harm their business, financial condition and results of operations. In addition, if the government of any country in which their products are developed, manufactured or sold sets technical or regulatory standards for products developed or manufactured in or imported into their country that are not widely shared, it may lead some of their customers to suspend imports of their products into that country, require manufacturers or developers in that country to manufacture or develop products with different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in each case, could harm their businesses. 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 and could impair our ability to service our borrowings. As a business development company, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith 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 investment portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods and could materially adversely affect our ability to service our outstanding borrowings. 47 A lack of initial public offering, or IPO, opportunities may cause companies to stay in our portfolio longer, leading to lower returns, unrealized depreciation, or realized losses. A lack of IPO opportunities for venture capital-backed companies could lead to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available funding for early-stage companies in particular as, in general, venture-capital firms are being forced to provide additional financing to late-stage companies that cannot complete an IPO. In the best case, such stagnation would dampen returns, and in the worst case, could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private fundings or are not able to access additional capital at all. A lack of IPO opportunities for venture capital-backed companies can also cause some venture capital firms to change their strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such companies to access capital and to fulfill their potential, which can result in unrealized depreciation and realized losses in such companies by other companies such as ourselves who are co-investors in such companies. The majority of our portfolio companies will need multiple rounds of additional financing to repay their debts to us and continue operations. Our portfolio companies may not be able to raise additional financing, which could harm our investment returns. The majority of 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. 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. This may have a significant impact if the companies are unable to obtain certain federal, state or foreign agency approval for their products or the marketing thereof, of if regulatory review processes extend longer than anticipated, and the companies need continued funding for their operations during these times. 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 the assets securing the loans that we make decrease in value, then we may lack sufficient collateral to cover losses. To attempt to mitigate credit risks, we will typically take a security interest in the available assets of our portfolio companies. There is no assurance that we will obtain or properly perfect our liens. 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. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s 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 company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires, the technology fails to achieve its intended results or a new technology makes the intellectual property functionally obsolete. 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. 48 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. At December 31, 2013, approximately 62.8% of the Company’s portfolio company loans were secured by a first priority security in all of the assets of the portfolio company (including their intellectual property), 37.1% of portfolio company loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property and 0.1% of portfolio company loans had an equipment only lien. We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient. In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to “equitable subordination.” This means that 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. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses. If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance. 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 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 49 investment return. In addition, the intellectual property held by our portfolio companies often represents a substantial portion of the collateral, if any, securing our investments. We cannot assure you that any of our portfolio companies will successfully acquire or develop any new technologies, or that the intellectual property the companies currently hold will remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful. An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economic downturns. We invest primarily in privately-held companies. Generally, very little public information exists about these companies, and we are required to rely on the ability of our management team to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, then we may not make a fully informed investment decision, and we may not receive the expected return on our investment or lose some or all of the money invested in these companies. Also, privately-held companies frequently 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 and our results of operations and financial condition. 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 company’s 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 company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively impact our investment returns and our results of operations and financial condition. If our portfolio companies are unable to protect their intellectual property rights, or are required to devote significant resources to protecting their intellectual property rights, then our investments could be harmed. 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 party’s 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 company’s 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. 50 Portfolio company litigation could result in additional costs, the diversion of management time and resources and have an adverse impact on the fair value of our investment. To the extent that litigation arises with respect to any of our portfolio companies, we may be named as a defendant, which could result in additional costs and the diversion of management time and resources. Furthermore, if we are providing managerial assistance to the portfolio company or have representatives on the portfolio company’s board of directors, our costs and diversion of our management’s time and resources in assessing the portfolio company could be substantial in light of any such litigation regardless of whether we are named as a defendant. In addition, litigation involving a portfolio company may be costly and affect the operations of the portfolio company’s business, which could in turn have an adverse impact on the fair value of our investment in such company. We may not be able to realize our entire investment on equipment-based loans in the case of default. We may from time-to-time provide loans that will be collateralized only by equipment of the portfolio company. If the portfolio company defaults on the loan we would take possession of the underlying equipment to satisfy the outstanding debt. The residual value of the equipment at the time we would take possession may not be sufficient to satisfy the outstanding debt and we could experience a loss on the disposition of the equipment. Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies. Our total investments at value in foreign companies were approximately $46.3 million or 5.1% of total investments at December 31, 2013. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. 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. Also, restrictions and provisions in any future credit facilities may limit our ability to make distributions. 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. We cannot assure you that you will receive distributions at a particular level or at all. We may not have sufficient funds to make follow-on investments. Our decision not to make a follow-on investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment in a successful situation, for example, the exercise of a warrant to purchase common stock. Any decision we make not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment or may result in a missed opportunity for us to increase our participation in a successful operation and may dilute our equity interest or otherwise reduce the expected yield on our investment. Moreover, a follow-on investment may limit the number of companies in which we can make initial 51 investments. In determining whether to make a follow-on investment, our management will exercise its business judgment and apply criteria similar to those used when making the initial investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments and this could adversely affect our success and result in the loss of a substantial portion or all of our investment in a portfolio company. The lack of liquidity in our investments may adversely affect our business and, if we need to sell any of our investments, we may not be able to do so at a favorable price. As a result, we may suffer losses. We generally invest in debt securities with terms of up to seven years and hold such investments until maturity, and we do not expect that our related holdings of equity securities will provide us with liquidity opportunities in the near-term. We invest and expect to continue investing in companies whose securities have no established trading market and whose securities are and will be subject to legal and other restrictions on resale or whose securities are and will be less liquid than are publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our qualification as a business development company and as a RIC, we may have to dispose of investments if we do not satisfy one or more of the applicable criteria under the respective regulatory frameworks. Our portfolio companies may incur debt or issue equity securities that rank 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 incur other debt, or issue other equity securities, that rank equally with, or senior to, our investment. Such instruments may provide that the holders thereof are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities 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 holders, the portfolio company might not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on a pari passu basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected. 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. 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. 52 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. Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity. During 2013, we received debt investment early repayments and pay down of working capital debt investments of approximately $477.5 million. 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 elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock. We may 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. We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. However, from time to time we may elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance or actions to compel and collect payments from the borrower outside the ordinary course of business. Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans or we could be subject to lender liability claims. Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with loans. These investments represent approximately 9.7% of the outstanding balance of our portfolio as of December 31, 2013. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if 53 it were unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and preferred securities had been satisfied. Risks Related to Our Securities Investing in shares of our common stock involves an above average degree of risk. The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance. Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital. If our common stock is trading below its net asset value per share, 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. If our common stock trades below net asset value, the higher cost of equity capital may result in it being unattractive to raise new equity, which may limit our ability to grow. The risk of trading below net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. Provisions of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock. 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. 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. Subject to compliance with the 1940 Act, our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. The existence of these provisions, among others, may have a negative impact on the price of our common stock and may discourage third party bids for ownership of our company. These provisions may prevent any premiums being offered to you for shares of our common stock. We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. If we receive such approval from the stockholders, we may again issue shares of our common stock at a price below the then current net asset value per share of common stock. Any such issuance could materially dilute your interest in our common stock and reduce our net asset value per share. We may again obtain the approval of our stockholders to issue shares of our common stock at prices below the then current net asset value per share of our common stock. Such approval has allowed and may again allow us to access the capital markets in a way that we typically are unable to do as a result of restrictions that, absent stockholder approval, apply to business development companies under the 1940 Act. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock is subject to the determination by our board of directors that such issuance and sale is in our and our stockholders’ best interests. 54 Any sale or other issuance of shares of our common stock at a price below net asset value per share has resulted and will continue to result in an immediate dilution to your interest in our common stock and a reduction of our net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of common stock that may be issued below our net asset value per share and the price and timing of such issuances are not currently known, we cannot predict the actual dilutive effect of any such issuance. We also cannot determine the resulting reduction in our net asset value per share of any such issuance at this time. We caution you that such effects may be material, and we undertake to describe all the material risks and dilutive effects of any offering that we make at a price below our then current net asset value in the future in a prospectus supplement issued in connection with any such offering. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. 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. We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, at a price below the current net asset value of the common stock, or sell warrants, options or rights to acquire such common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders have approved the practice of making such sales. Although we are not currently authorized to issue shares of our common stock at a price below our net asset value per share, we may seek stockholder approval of this proposal again at a special meeting of stockholders or our next annual meeting of shareholders. Our Board of Directors, subject to its fiduciary duties and regulatory requirements, has the discretion to determine the amount of the discount, and as a result, the discount could be up to 100% of net asset value per share. If we were to issue shares at a price below net asset value, such sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we determined to conduct additional offerings in the future there may be even greater discounts if we determine to conduct such offerings at prices below net asset value. As a result, investors will experience further dilution and additional discounts to the price of our common stock. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect of an offering cannot be predicted. We did not sell any of our securities at a price below net asset value during the year ended December 31, 2013. Our shares may trade at discounts from net asset value or at premiums that are unsustainable over the long term. Shares of business development companies may trade at a market price that is less than the net asset value that is attributable to those shares. Our shares have traded above and below our NAV. The possibility that our shares of common stock will trade at a discount from net asset value or at a premium that is unsustainable over the long term is separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether our shares will trade at, above or below net asset value in the future. Our credit ratings may not reflect all risks of an investment in our debt securities. Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities. 55 Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan. All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested in shares of our common stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over time. Our stockholders may experience dilution upon the conversion of the Convertible Notes. The Convertible Senior Notes are convertible into shares of our common stock beginning October 15, 2015, or, under certain circumstances, earlier. Upon conversion of the Convertible Notes, we have the choice to pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. The current conversion price of the Convertible Senior Notes is approximately $11.89 per share of common stock, in each case subject to adjustment in certain circumstances. If we elect to deliver shares of common stock upon a conversion at the time our tangible book value per share exceeds the conversion price in effect at such time, our stockholders will incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of common stock upon our issuance of common stock in connection with the conversion of the Convertible Senior Notes and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance. Our common stock price has been and continues to be volatile and may decrease substantially. As with any company, the price of our common stock will fluctuate with market conditions and other factors, which include, but are not limited to, the following: • • • • • • • • • • • • • • • • price and volume fluctuations in the overall stock market from time to time; significant volatility in the market price and trading volume of securities of RICs, business development companies or other financial services companies; any inability to deploy or invest our capital; fluctuations in interest rates; any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; the financial performance of specific industries in which we invest in on a recurring basis; announcement of strategic developments, acquisitions, and other material events by us or our competitors, or operating performance of companies comparable to us; changes in regulatory policies or tax guidelines with respect to RICs, SBICs or business development companies; losing RIC status; actual or anticipated changes in our earnings or fluctuations in our operating results, or changes in the expectations of securities analysts; changes in the value of our portfolio of investments; realized losses in investments in our portfolio companies; general economic conditions and trends; inability to access the capital markets; loss of a major funded source; or departures of key personnel. 56 In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and could divert management’s attention and resources from our business. Item 1B. Unresolved Staff Comments None. Item 2. Properties Neither we nor any of our subsidiaries own any real estate or other physical properties materially important to our operation or any of our subsidiaries. Currently, we lease approximately 14,500 square feet of office space in Palo Alto, CA for our corporate headquarters. We also lease office space in Boston, MA, New York, NY, Boulder, CO and McLean, VA. Item 3. Legal Proceedings We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period. Item 4. Mine Safety Disclosures Not applicable. 57 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities PRICE RANGE OF COMMON STOCK Our common stock is traded on the NYSE under the symbol “HTGC.” The following table sets forth the range of high and low sales prices of our common stock for each fiscal quarter during the two most recently completed fiscal years as reported on the Nasdaq Global Select Market for those periods prior to April 30, 2012 and the NYSE thereafter. Quarter Ended March 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price Range High $10.53 10.84 11.26 11.18 11.88 13.61 15.18 17.09 Low $ 8.72 9.76 10.50 9.84 11.58 11.05 13.20 14.62 The last reported price for our common stock on February 24, 2014 was $16.56 per share. As of February 11, 2014, we had approximately 43,400 stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders. We believe that there are currently approximately 55 additional beneficial holders of our common stock. 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 possibilities 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 or at a significant discount to the net assets attributable to those shares. SALES OF UNREGISTERED SECURITIES During 2013, 2012 and 2011, the Board of Directors elected to receive approximately $106,000, $150,000 and $105,000 respectively, of their compensation in the form of common stock and the Company issued 10,335, 13,584, and 9,942 shares, respectively, to the directors based on the closing prices of the common stock on the specified election dates. During 2013, 2012 and 2011, we issued approximately 159,000, 219,000 and 167,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value of the shares of our common stock issued under our dividend reinvestment plan during the years ended December 31, 2013, 2012 and 2011 were approximately $2.2 million, $2.3 million and $1.6 million, respectively. ISSUER PURCHASES OF EQUITY SECURITIES In February 2010, the Board of Directors approved a $35.0 million open market share repurchase program and on July 25, 2012, the Board of Directors approved the extension of the share repurchase program. The share repurchase program expired on February 26, 2013. The Company did not repurchase any common stock during the years ended December 31, 2013 and December 31, 2012. 58 EQUITY COMPENSATION PLAN INFORMATION Information relating to compensation plans under which our equity securities are authorized for issuance is set forth under the heading “Executive Compensation—Equity Compensation Plan Information” in our definitive proxy statement for our 2014 Annual Meeting of Stockholders. DIVIDEND POLICY As a RIC, we intend to distribute quarterly dividends to our stockholders. To the extent we do not 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) 98.2% 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 years we are required to pay a 4% excise tax on our undistributed income. To the extent that we earn annual taxable income in excess of dividends paid from such taxable income for the year, we may carry over the excess taxable income into the next year and such excess income will be available for distribution in the next year as permitted by the Code. 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. Please refer to “Item 1. Business—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 distributions and, if we issue senior securities, we may 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 “Item 1. Business— Regulation.” For the years ended December 31, 2013 and 2012, we did not record a provision for excise tax since we have paid out greater than 98% of our taxable earnings for each fiscal year. 59 The following table summarizes dividends declared and paid or to be paid on all shares, including restricted stock, to date: Date Declared Record Date Payment Date Amount Per Share January 6, 2006 February 15, 2008 October 27, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1, 2005 December 9, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 3, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 10, 2006 July 19, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 31, 2006 October 16, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 6, 2006 February 19, 2007 February 7, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 3, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 16, 2007 August 2, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 16, 2007 November 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 16, 2007 February 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 16, 2008 August 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 15, 2008 November 6, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 14, 2008 February 12, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 7, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2009 August 6, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 14, 2009 October 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 20, 2009 December 16, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 24, 2009 February 11, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 19, 2010 May 3, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 12, 2010 August 2, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 12, 2010 November 4, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 10, 2010 March 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 10, 2011 May 5, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 11, 2011 August 4, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 15, 2011 November 3, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 14, 2011 February 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 12, 2012 April 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 18, 2012 July 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 17, 2012 October 26, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 14, 2012 February 26, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 11, 2013 April 29, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 14, 2013 July 29, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 13, 2013 November 4, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 18, 2013 February 24, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 10, 2014 February 23, 2009 November 17, 2005 January 27, 2006 May 5, 2006 August 28, 2006 December 1, 2006 March 19, 2007 June 18, 2007 September 17, 2007 December 17, 2007 March 17, 2008 June 16, 2008 September 19, 2008 December 15, 2008 March 30, 2009 June 15, 2009 September 14, 2009 November 23, 2009 December 30, 2009 March 19, 2010 June 18, 2010 September 17, 2010 December 17, 2010 March 24, 2011 June 23, 2011 September 15, 2011 November 29, 2011 March 15, 2012 May 25, 2012 August 24, 2012 November 21, 2012 March 19, 2013 May 21, 2013 August 20, 2013 November 25, 2013 March 17, 2014 $0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.32* 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 $9.06 * Dividend paid in cash and stock. On February 24, 2014 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 17, 2014 to shareholders of record as of March 10, 2014. This dividend would represent our thirty-fourth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $9.06 per share. Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90—100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income. Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2013, 2012, and 2011, 100% were distributions of ordinary income. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2014 distributions to stockholders will actually be. 60 We maintain an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. During 2013, 2012, and 2011, the Company issued approximately 159,000, 219,000, and 167,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. PERFORMANCE GRAPH The following stock performance graph compares the cumulative stockholder return assuming that, on December 31, 2008, a person invested $100 in each of our common stock, the NYSE Composite Index and the NASDAQ Financial 100 Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hercules Technology Growth Capital, the NYSE Composite Index, and the NASDAQ Financial 100 Index $400 $350 $300 $250 $200 $150 $100 $50 $0 12/31/08 6/30/09 12/31/09 6/30/10 12/31/10 6/30/11 12/31/11 6/30/12 12/31/12 6/30/13 12/31/13 Hercules Technology Growth Capital NYSE Composite NASDAQ Financial 100 *$100 invested on 12/31/08 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. This graph and other information furnished under Part II. Item 5 of the Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934. The stock price performance included in the above graph is not necessarily indicative of future stock price performance. 61 Item 6. Selected Consolidated Financial Data Selected Consolidated Financial Data The following consolidated financial data is derived from our audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere herein. Historical data is not necessarily indicative of results to be expected for any future period. For the Years Ended December 31, (in thousands, except per share amounts) 2013 2012 2011 2010 2009 Balance sheet data: Investments, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Data: Total debt investments, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total warrant investments, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity investments, at value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfunded Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net asset value per share(1) $ 910,295 268,368 1,221,715 571,708 650,007 $ 906,300 182,994 1,123,643 607,675 515,968 821,988 35,637 52,670 150,986 10.51 $ 827,540 29,550 49,210 61,851 9.75 $ $652,870 64,474 747,394 316,353 431,041 585,767 30,045 37,058 168,196 9.83 $ $472,032 107,014 591,247 178,716 412,531 401,618 23,690 46,724 117,200 9.50 $ $374,669 124,828 508,967 142,452 366,515 325,134 14,450 35,085 11,700 10.29 $ (1) Based on common shares outstanding at period end (in thousands, except per share amounts) Investment income: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee Compensation: Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income before and investment gains and losses . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in unrealized appreciation (depreciation) on investments . . Net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the Years Ended December 31, 2013 2012 2011 2010 2009 $123,671 16,042 $87,603 9,917 $70,346 9,509 $ 54,700 4,774 $ 62,200 12,077 139,713 97,520 79,855 59,474 74,277 30,334 4,807 9,354 16,179 5,974 22,153 66,648 73,065 73,065 14,836 11,545 26,381 19,835 3,917 8,108 13,326 4,227 17,553 49,413 48,107 48,107 3,168 (4,516) 13,252 2,635 7,992 13,260 3,128 16,388 40,267 39,588 39,588 2,741 4,607 8,572 1,259 7,086 10,474 2,709 13,183 30,100 29,374 9,387 1,880 7,281 10,737 1,888 12,625 31,173 43,104 29,374 (26,382) 1,990 43,104 (30,801) 1,269 (1,348) 7,348 (24,392) (29,532) Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,446 $46,759 $46,936 $ 4,982 $ 13,572 Change in net assets per common share (basic): . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1.67 1.11 $ $ 0.93 0.95 $ $ 1.08 0.88 $ $ 0.12 0.80 $ $ 0.38 1.26(1) (1) February 12, 2009 dividend paid in cash and stock. 62 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The matters discussed in this report, as well as in future oral and written statements by management of Hercules Technology Growth Capital, Inc., 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 expressions. 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 report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this report include statements as to: • • • • • • • • • • • • • • • • • 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 including in the venture capital industry; the expected market for venture capital investments and our addressable market; the dependence of our future success on the general economy and its impact on the industries in which we invest; our ability to access debt markets and equity markets; 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 BDC, a SBIC and a RIC; the adequacy of our cash resources and working capital; the timing of cash flows, if any, from the operations of our portfolio companies; the timing, form and amount of any dividend distributions; the impact of fluctuations in interest rates on our business; the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and our ability to recover unrealized losses. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this report, please see the discussion under “Item 1A. Risk Factors.” You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward- looking statement to reflect events or circumstances occurring after the date of this report. The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical 63 information, the following discussion and other parts of this report contain forward-looking information that involve risks and uncertainties Our actual results could differ materially from those anticipated by such forward- looking information due to the factors discussed under “Item 1A—Risk Factors” and “Forward-Looking Statements” of this Item 7. Overview We are a specialty finance company focused on providing senior secured loans to venture capital-backed companies in technology-related markets, including technology, biotechnology, life science, and energy and renewables technology industries at all stages of development. We source our investments through our principal office located in Palo Alto, CA, as well as through our additional offices in Boston, MA, New York, NY, Boulder, CO and McLean, VA. Our goal is to be the leading structured debt financing provider of choice for venture capital-backed companies in technology-related markets requiring sophisticated and customized financing solutions. Our strategy is to evaluate and invest in a broad range of technology-related markets including technology, biotechnology, life science, and energy and renewables technology industries and to offer a full suite of growth capital products. We invest primarily in structured debt with warrants and, to a lesser extent, in senior debt and equity investments. We invest primarily in private companies but also have investments in public companies. We use the term “structured debt with warrants” to refer to any debt investment, such as a senior or subordinated secured loan, that is coupled with an equity component, including warrants, options or rights to purchase common or preferred stock. Our structured debt with warrants investments typically are secured by some or all of the assets of the portfolio company. Our investment objective is to maximize our portfolio total return by generating current income from our debt investments and capital appreciation from our equity-related investments. Our primary business objectives are to increase our net income, net operating income and net asset value by investing in structured debt with warrants and equity of venture capital-backed companies in technology-related markets with attractive current yields and the potential for equity appreciation and realized gains. Our equity ownership in our portfolio companies may represent a controlling interest. In some cases, we receive the right to make additional equity investments in our portfolio companies in connection with future equity financing rounds. Capital that we provide directly to venture capital-backed companies in technology-related markets is generally used for growth and general working capital purposes as well as in select cases for acquisitions or recapitalizations. We also make investments in qualifying small businesses through our two wholly-owned SBICs. Our SBIC subsidiaries, HT II and HT III, hold approximately $174.1 million and $285.1 million in assets, respectively, and accounted for approximately 11.1% and 18.2% of our total assets, respectively, prior to consolidation at December 31, 2013. We have issued $225.0 million in SBA-guaranteed debentures in our SBIC subsidiaries, which is the maximum amount allowed for a group of SBICs under common control 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,” which includes securities of private U.S. companies, cash, cash equivalents and high-quality debt investments that mature in one year or less. We have qualified as and have elected to be treated for tax purposes as a RIC under the Code. Pursuant to this election, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders. However, our qualification and election to be treated as a RIC requires that we comply with provisions contained in the Code. For example, as a RIC we must receive 90% or more of our income from qualified earnings, typically referred to as “good income,” as well as satisfy asset diversification and income distribution requirements. 64 Our portfolio is comprised of, and we anticipate that our portfolio will continue to be comprised of, investments primarily in technology-related companies at various stages of their development. Consistent with requirements under the 1940 Act, we invest primarily in United-States based companies and to a lesser extent in foreign companies. We regularly engage in discussions with third parties with respect to various potential transactions. We may acquire an investment or a portfolio of investments or an entire company or sell a portion of our portfolio on an opportunistic basis. We, our subsidiaries or our affiliates may also agree to manage certain other funds that invest in debt, equity or provide other financing or services to companies in a variety of industries for which we may earn management or other fees for our services. We may also invest in the equity of these funds, along with other third parties, from which we would seek to earn a return and/or future incentive allocations. Some of these transactions could be material to our business. Consummation of any such transaction will be subject to completion of due diligence, finalization of key business and financial terms (including price) and negotiation of final definitive documentation as well as a number of other factors and conditions including, without limitation, the approval of our board of directors and required regulatory or third party consents and, in certain cases, the approval of our stockholders. Accordingly, there can be no assurance that any such transaction would be consummated. Any of these transactions or funds may require significant management resources either during the transaction phase or on an ongoing basis depending on the terms of the transaction. Portfolio and Investment Activity The total fair value of our investment portfolio was $910.3 million at December 31, 2013 as compared to $906.3 million at December 31, 2012. The fair value of the debt investment portfolio at December 31, 2013 was approximately $822.0 million, compared to a fair value of approximately $827.5 million at December 31, 2012. The fair value of the equity portfolio at December 31, 2013 was approximately $52.7 million, compared to a fair value of approximately $49.2 million at December 31, 2012. The fair value of the warrant portfolio at December 31, 2013 was approximately $35.6 million, compared to a fair value of approximately $29.5 million at December 31, 2012. Portfolio Activity Our investments in portfolio companies take a variety of forms, including unfunded contractual commitments and funded investments. From time to time, unfunded contractual commitments depend upon a portfolio company reaching certain milestones before the debt commitment is available to the portfolio company, which is expected to affect our funding levels. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as the on-balance sheet financial instruments that we hold. Debt commitments generally fund over the two succeeding quarters from close. Not all debt commitments represent our future cash requirements. Similarly, unfunded contractual commitments may expire without being drawn and do not represent our future cash requirements. Prior to entering into a contractual commitment, we generally issue a non-binding term sheet to a prospective portfolio company. Non-binding term sheets are subject to completion of our due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies and generally convert to contractual commitments within approximately 90 days of signing. Not all non-binding term sheets are expected to close and do not necessarily represent our future cash requirements. 65 Our portfolio activity for the years ended December 31, 2013 and 2012 was comprised of the following: (in millions) Debt Commitments(1) Year Ended December 31, 2013 2012 New portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Existing portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $535.0 165.1 $362.3 274 Total Funded Debt Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700.1 $636.6 New portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Existing portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $373.1 118.0 $267.9 191.4 Total Funded Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $491.1 $459.3 New portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Existing portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 3.9 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.9 $ 6.0 3.7 9.7 Unfunded Contractual Commitments(2) Total Non-Binding Term Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $151.0 $ 61.9 New portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Existing portfolio company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.0 10.0 $ 70.0 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38.0 $ 70.0 Includes restructured loans. (1) (2) As of December 31, 2013, includes unfunded contractual commitments in 24 new and existing portfolio companies. Approximately $77.4 million of these unfunded origination activity commitments are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. We receive payments in our debt investment portfolio based on scheduled amortization of the outstanding balances. In addition, we receive principal repayments for some of our loans prior to their scheduled maturity date. The frequency or volume of these early principal repayments may fluctuate significantly from period to period. During the year ended December 31, 2013, we received approximately $477.5 million in aggregate debt investment early repayments and pay down of working capital debt investments. Of the approximately $477.5 million of aggregate repayments, approximately $234.1 million were early repayments related to 37 portfolio companies, approximately $67.2 million were early repayments due to merger and acquisition or initial public offering transactions related to nine portfolio companies and approximately $176.2 million were scheduled principal payments. Total portfolio investment activity (inclusive of unearned income) as of and for each of the years ended December 31, 2013 and 2012 was as follows: (in millions) December 31, 2013 December 31, 2012 Beginning Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New fundings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructure fundings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants not related to current period fudings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments received on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Early payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructure payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of loan discounts and paid-in-kind principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion of “Other Assets” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt converted to equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants converted to equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized (loss) gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 906.3 473.6 23.6 3.5 (176.2) (301.3) (9.8) 31.9 (14.3) — — 0.2 (22.5) (16.7) 12.0 $ 910.3 $ 652.9 469.9 85.0 (0.2) (120.7) (125.1) (48.5) 21.3 (12.8) 9.6 0.6 — (7.2) (14.1) (4.4) $ 906.3 66 The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2013 and December 31, 2012. (in thousands) Senior secured debt with warrants . . . . . . . . . . Senior secured debt . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $634,820 222,805 35,554 17,116 $910,295 69.7% 24.5% 3.9% 1.9% 100.0% $652,041 205,049 33,885 15,325 $906,300 72.0% 22.6% 3.7% 1.7% 100.0% A summary of our investment portfolio at value by geographic location is as follows: (in thousands) United States . . . . . . . . . . . . . . . . . . . . . . . . . . Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $864,003 25,798 10,131 9,863 500 $910,295 94.9% 2.8% 1.1% 1.1% 0.1% 100.0% $901,041 — — — 5,259 $906,300 99.4% — — — 0.6% 100.0% As of December 31, 2013, we held warrants or equity positions in five companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Everyday Health, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2013 the following portfolio companies in which we held investments as of December 31, 2013 completed initial public offerings or were acquired: 1. 2. 3. 4. In January 2014, Dicerna Pharmaceuticals, Inc. (NASDAQ: DRNA) completed its initial public offering of 6,900,000 shares of its common stock at $15.00 per share. In February 2014, Revance Therapeutics, Inc. (NASDAQ:RVNC) completed its initial public offering of 6,900,000 shares of its common stock at $16.00 per share. The company had initially filed confidentially in April 2013. In February 2014, Concert Pharmaceuticals, Inc. (NASDAQ:CNCE) completed its initial public offering of 6,000,000 shares of its common stock at $14.00 per share. The company had initially filed confidentially in December 2013. In February 2014, Uniqure B.V. (NASDAQ:QURE) completed its initial public offering of 5,400,000 shares of its common stock at $17.00 per share. The company had initially filed confidentially in November 2013. Changes in Portfolio 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 $40.0 million. As of December 31, 2013, our debt investments have a term of between two and seven years and typically bear interest at a rate ranging from the prevailing U.S. prime rate, or Prime, or the London Interbank Offered Rate, or LIBOR, to approximately 14%. In addition to the 67 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, commitment fees, success fees, PIK provisions or prepayment fees which may be required to be included in income prior to receipt. Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. We had approximately $4.0 million and $2.0 million of unamortized fees at December 31, 2013 and December 31, 2012, respectively, and approximately $14.4 million and $6.8 million in exit fees receivable at December 31, 2013 and December 31, 2012, respectively. We have loans in our portfolio that contain a PIK provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though we have not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. We recorded approximately $3.5 million and $1.5 million in PIK income in the years ended December 31, 2013 and December 31, 2012. In the majority of cases, we collateralize our investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, we obtain a negative pledge covering a company’s intellectual property. At December 31, 2013, approximately 62.8% of our portfolio company loans were secured by a first priority security in all of the assets of the portfolio company, 37.1% of the loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property pursuant to negative pledges and 0.1% of portfolio company loans had an equipment-only lien. Interest on debt securities is generally payable monthly, with amortization of principal typically occurring over the term of the security. In addition, certain of our loans may include an interest-only period. 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. The effective yield on our debt investments during the years ended December 31, 2013 and 2012 was 15.9% and 14.4%, respectively. Excluding the effect of fee accelerations that occurred from early payoffs and one-time events, the adjusted effective yield for the years ended December 31, 2013 and 2012 was 14.4% and 13.4%, respectively. The effective yield is derived by dividing total investment income by the weighted average earning investment portfolio assets outstanding during the year which exclude non-interest earning assets such as warrants and equity investments. The overall weighted average yield to maturity of our loan investments was approximately 13.3% at December 31, 2013, compared to 12.9% at December 31, 2012. The weighted average yield to maturity is computed using the interest rates in effect at the inception of each of the loans, and includes amortization of the loan facility fees, commitment fees and market premiums or discounts over the expected life of the debt investments, weighted by their respective costs when averaged and based on the assumption that all contractual loan commitments have been fully funded and held to maturity. Portfolio Composition Our portfolio companies are primarily privately held companies and public companies which are active in the drug discovery and development, energy technology, internet consumer and business services, medical devices and equipment, software, drug delivery, information services, communications and networking, healthcare services, specialty pharmaceuticals, surgical devices, electronics and computer hardware, media/ content/info, biotechnology tools, semiconductors, consumer and business products and diagnostic industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. 68 As of December 31, 2013, approximately 67.0% of the fair value of our portfolio was composed of investments in four industries: 24.1% was composed of investments in the drug discovery and development industry, 18.1% was composed of investments in the energy technology industry, 13.4% was composed of investments in the internet consumer and business services industry and 11.4% was composed of investments in the medical device and equipment industry. The following table shows the fair value of our portfolio by industry sector at December 31, 2013 and December 31, 2012: (in thousands) Drug Discovery & Development . . . . . . . . . . . . . . . Energy Technology(1) . . . . . . . . . . . . . . . . . . . . . . . . Internet Consumer & Business Services . . . . . . . . . Medical Devices & Equipment . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drug Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Services . . . . . . . . . . . . . . . . . . . . . . . . Communications & Networking . . . . . . . . . . . . . . . Healthcare Services, Other . . . . . . . . . . . . . . . . . . . Specialty Pharmaceuticals . . . . . . . . . . . . . . . . . . . . Surgical Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . Electronics & Computer Hardware . . . . . . . . . . . . . Media/Content/Info . . . . . . . . . . . . . . . . . . . . . . . . . Biotechnology Tools . . . . . . . . . . . . . . . . . . . . . . . . Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer & Business Products . . . . . . . . . . . . . . . . Diagnostic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $219,169 164,466 122,073 103,614 65,218 62,022 46,565 35,979 29,080 20,055 10,307 9,211 8,679 5,275 4,685 2,995 902 $910,295 24.1% 18.1% 13.4% 11.4% 7.2% 6.8% 5.1% 4.0% 3.2% 2.2% 1.0% 1.0% 1.0% 0.6% 0.5% 0.3% 0.1% 100.0% $188,479 126,600 136,149 54,575 70,838 74,218 53,523 37,560 36,481 12,473 11,358 12,715 51,534 6,845 2,922 13,723 16,307 $906,300 20.8% 14.0% 15.0% 6.0% 7.8% 8.2% 5.9% 4.1% 4.0% 1.4% 1.3% 1.4% 5.7% 0.8% 0.3% 1.5% 1.8% 100.0% (1) In our quarterly and annual reports filed with the Commission prior to this Annual Report on Form 10-K, we referred to this industry sector as “Clean Tech.” Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. For the years ended December 31, 2013 and 2012, our ten largest portfolio companies represented approximately 29.3% and 35.2% of the total fair value of our investments in portfolio companies, respectively. At December 31, 2013 and December 31, 2012, we had one and eight investments, respectively that represented 5% or more of our net assets. At both December 31, 2013 and December 31, 2012, we had six equity investments representing approximately 75.7% and 70.9%, respectively, of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. As of December 31, 2013, over 99.9% of our debt investments were in a senior secured first lien position, and more than 99.0% of the debt investment portfolio was priced at floating interest rates or floating interest rates with a Prime or LIBOR based interest rate floor. As a result, we believe we are well positioned to benefit should market rates increase. Our investments in senior secured debt with warrants have equity enhancement features, typically in the form of warrants or other equity-related securities designed to provide us with an opportunity for capital appreciation. Our warrant coverage generally ranges from 3% to 20% of the principal amount invested in a portfolio company, with a strike price generally equal to the most recent equity financing round. As of December 31, 2013, we held warrants in 113 portfolio companies, with a fair value of approximately $35.6 million. The fair value of our warrant portfolio increased by approximately 20.6%, as compared to a fair value of $29.5 million at December 31, 2012. 69 Our existing warrant holdings currently would require us to invest approximately $72.5 million to exercise such warrants as of December 31, 2013. Warrants may appreciate or depreciate in value depending largely upon the underlying portfolio company’s performance and overall market conditions. Of the warrants which we have monetized since inception, we have realized warrant gain multiples in the range of approximately 1.01x to 14.91x based on the historical rate of return on our investments. However, our warrants may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our warrant portfolio. As required by the 1940 Act, we classify our investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that we are deemed to “control”, which, in general, includes a company in which we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of ours, as defined in the 1940 Act, which are not control investments. We are deemed to be an “affiliate” of a company in which we have invested if we own 5% or more, but less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the years ended December 31, 2013, 2012, and 2011. At December 31, 2013 and December 31, 2012, we did not hold any control investments. (in thousands) Portfolio Company Type Fair Value at December 31, 2013 Investment Income Year ended December 31, 2013 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate Gelesis, Inc. Optiscan BioMedical, Corp. . . . . . . . . . . . . . . . . Affiliate Stion Corporation . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 473 4,784 5,724 $10,981 $ — 1,933 462 $2,395 $(1,193) (225) 593 $ (825) $— — — $— $— — — $— (in thousands) Portfolio Company Type Fair Value at December 31, 2012 Investment Income Year ended December 31, 2012 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) E-Band Communiations, Corp. Gelesis, Inc. Optiscan BioMedical, Corp. . . . . . . . . . . . . . . Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate . . . . . . . . . . . . . . . . Affiliate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 1,665 10,207 $11,872 $ 4 712 1,649 $2,365 $ (18) 672 (2,722) $(2,068) $— — — $— $— — — $— (in thousands) Portfolio Company Type Fair Value at December 31, 2011 Investment Income Year ended December 31, 2011 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) MaxVision Holdings, LLC. . . . . . . . . . . . . . . . . . Control . . . . . . . . . . . . . . Affiliate E-Band Communiations, Corp. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,027 — $1,027 $889 14 $903 $5,158 3,425 $8,583 $— — $— $— — $— During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. Our investment in E-Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. 70 During the year ended December 31, 2012, Optiscan BioMedical, Corp. became classified as an affiliate. Our investment in MaxVision Holding, L.L.C., a company that was a control investment as of December 31, 2011, was liquidated during the year ended December 31, 2012. On July 31, 2012, we received payment of $2.0 million for our total debt investments in MaxVision Holding, L.L.C. Approximately $8.7 million of realized losses and a reversal of $10.5 million of previously recorded unrealized depreciation was recognized on this control debt and equity investment during the year ended December 31, 2012. Portfolio Grading We use an investment grading system, which grades each debt investment on a scale of 1 to 5, to characterize and monitor our expected level of risk on the debt investments in our portfolio with 1 being the highest quality. See “Item 1. Business—Investment Process—Loan and Compliance Administration.” The following table shows the distribution of our outstanding debt investments on the 1 to 5 investment grading scale at fair value as of December 31, 2013 and 2012, respectively: (in thousands) Investment Grading 1 2 3 4 5 December 31, 2013 December 31, 2012 Debt Investments at Fair Value Percentage of Total Portfolio Debt Investments at Fair Value Percentage of Total Portfolio $162,586 429,804 184,692 30,687 14,219 $821,988 19.8% 52.3% 22.5% 3.7% 1.7% 100.0% $134,166 542,885 127,560 22,929 — $827,540 16.2% 65.6% 15.4% 2.8% — 100.0% As of December 31, 2013, our debt investments had a weighted average investment grading of 2.20, as compared to 2.06 at December 31, 2012. Our policy is to lower the grading on our portfolio companies as they approach the point in time when they will require additional equity capital. Additionally, we may downgrade our portfolio companies if they are not meeting our financing criteria or are underperforming relative to their respective business plans. Various companies in our portfolio will require additional funding in the near term or have not met their business plans and therefore our debt investments in these portfolio companies have been downgraded until their funding is complete or their operations improve. At December 31, 2013, we had two loans on non-accrual with cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively. Comparatively, at December 31, 2012, we had one loan on non-accrual with an approximate investment cost of $347,000 and no fair market value. During the year ended December 31, 2013, we recognized a realized loss of approximately $350,000 of principal on our debt investments in this company. Results of Operations Comparison of periods ended December 31, 2013 and 2012 Investment Income Interest Income Total investment income for the year ended December 31, 2013 was approximately $139.7 million as compared to approximately $97.5 million for the year ended December 31, 2012. Interest income for the year ended December 31, 2013 totaled approximately $123.7 million as compared to approximately $87.6 million for the year ended December 31, 2012. The increase in interest income is primarily attributable to an increase of loan interest income of approximately $25.0 million for the year ended December 31, 2013, related to both new loans originated during 2013 and an overall increase in amortization during 2013 on loans 71 originated during 2012. This increase in interest income was partially offset by pay-offs during the year ended December 31, 2013. The following table shows the lending activity involving contractual payment-in-kind, or PIK, interest arrangements for the years ended December 31, 2013 and 2012, at cost: (in thousands) Years ended December 31, 2013 2012 Beginning PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PIK interest capitalized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments received from PIK loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,309 3,103 (1,123) (307) $2,041 1,400 (132) — Ending PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,982 $3,309 The increase in payments received from PIK loans and PIK interest capitalized during the year ended December 31, 2013 is due to the addition of nine PIK loans which have incurred PIK capitalizations during the period offset by the payoff of four PIK loans during the period ended December 31, 2013. Fee Income Income from commitment, facility and loan related fees for the year ended December 31, 2013 totaled approximately $16.0 million as compared to approximately $9.9 million for the year ended December 31, 2012. The increase in fee income is primarily attributable to additional fee accelerations and one time fees due to early pay-offs during the year ended December 31, 2013 as compared to the same period in 2012. In certain investment transactions, we may earn income from advisory services; however, we had no income from advisory services in the years ended December 31, 2013 and 2012, respectively. Operating Expenses Our operating expenses are comprised of interest and fees on our borrowings, general and administrative expenses and employee compensation and benefits. Operating expenses totaled approximately $66.6 million and $49.4 million during the years ended December 31, 2013 and 2012, respectively. Interest and Fees on our Borrowings Interest and fees on borrowings totaled approximately $35.1 million for the year ended December 31, 2013 as compared to approximately $23.8 million for the year ended December 31, 2012. This increase was primarily attributable to interest and fee expenses of approximately $12.9 million for the year ended December 31, 2013 related to the 2019 Notes issued in April and September 2012, which is $7.3 million greater than $5.6 million of interest and fees incurred during the year ended December 31, 2012, and approximately $5.1 million of interest and fee expense incurred due to the Asset-Backed Notes issued in December 2012. These expenses were partially offset by a decrease in interest and fees of approximately $749,000 for the year ended December 31, 2013 associated with our SBA debentures due to the pay down in August 2012 of debentures that had a weighted average cost of debt of 6.40% and borrowings of $24.75 million of debentures in November 2012 that had a weighted average cost of debt of 3.05%. Additionally, we incurred approximately $1.1 million of non cash interest expense during the period ended December 31, 2013 attributed to the accretion of the fair value of the conversion feature on the Convertible Senior Notes. We had a weighted average cost of debt, comprised of interest and fees, of approximately 6.1% for the year ended December 31, 2013, as compared to 6.6% during the year ended December 31, 2012. The decrease was primarily driven by the Asset-Backed Notes issued in December 2012, which account for 72 approximately 18.9% of our outstanding debt and accrue interest at 3.3%. As of December 31, 2013 the weighted average debt outstanding was approximately $580.1 million. General and Administrative Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, expenses associated with the workout of underperforming investments and various other expenses. Our general and administrative expenses increased to $9.3 million from $8.1 million for the years ended December 31, 2013 and 2012, respectively. These increases were primarily due to increases of approximately $689,000 and $442,000 related to corporate legal expenses and outside consulting services, partially offset by a reduction of approximately $249,000 for accounting fees. Employee Compensation Employee compensation and benefits totaled approximately $16.2 million for the year ended December 31, 2013 as compared to approximately $13.3 million for the year ended December 31, 2012. This increase was due to increasing our staff to 62 active employees at December 31, 2013 from 52 active employees at December 31, 2012 and increasing our variable compensation (bonus) accrual based on performance improvements. Stock-based compensation totaled approximately $6.0 million for the year ended December 31, 2013 as compared to approximately $4.2 million for the year ended December 31, 2012. These increases were due primarily to the expense on restricted stock grants for 607,001 shares granted during the year ended December 31, 2013. Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of an investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments written off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. A summary of realized gains and losses for the years ended December 31, 2013 and 2012 is as follows: (in thousands) Years Ended December 31, 2013 2012 Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,577 (17,741) $ 17,481 (14,313) Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,836 $ 3,168 During the year ended December 31, 2013, we recognized net realized gains of approximately $14.8 million. These net realized gains include gross realized gains of approximately $32.6 million primarily from the sale of equity and warrant investments in nine portfolio companies, including Virident Systems, Inc. ($7.5 million), Anacor Pharmaceuticals, Inc. ($5.0 million), iWatt, Inc. ($4.7 million), Althea Technologies, Inc. ($4.3 million), WageWorks, Inc. ($2.0 million), Lanx, Inc. ($1.9 million), InsMed, Inc. ($1.4 million), Pacira Pharmaceuticals, Inc. ($1.3 million) and AcelRx, Inc. ($1.1 million). These gains were partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of our debt and equity investments in five portfolio companies, including Bridgewave Communications ($4.4 million), E-Band Communications Corp ($3.3 million), Tethys Bioscience, Inc. ($2.5 million), Just.Me, Inc. ($1.3 million), and PointOne, Inc. ($1.1 million). During the year ended December 31, 2012, we recognized net realized gains of $3.2 million. These net realized gains include gross realized gains of approximately $17.5 million primarily from the sale of equity and warrant investments in NEXX Systems, Inc., ($5.1 million), BARRX Medical ($3.1 million), DeCode Genetics 73 ($2.6 million), Aegerion Pharmaceuticals ($2.4 million) and Annie’s ($2.4 million). These gains were partially offset by gross realized losses of approximately $14.3 million from the liquidation of our equity and warrant investments in MaxVision Holding, L.L.C ($8.7 million), Razorgator Interactive Group ($2.2 million), Zeta Interactive Corporation ($672,000) and Magi.com ($463,000) pka Hi5 Networks, Inc. The net unrealized appreciation and depreciation of our investments is based on fair value of each investment determined in good faith by our Board of Directors. The following table itemizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2013 and 2012: (in thousands) Gross unrealized appreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross unrealized depreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversal of prior period net unrealized appreciation upon a realization event Reversal of prior period net unrealized depreciation upon a realization event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized appreciation (depreciation) attributable to taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized appreciation (depreciation) on escrow receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Citigroup Warrant Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2013 2012 Amount Amount $ 80,616 (63,855) (26,489) 21,763 (898) 465 (57) $ 65,871 (73,158) (12,575) 14,944 — — 402 Net unrealized appreciation (depreciation) on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,545 $ (4,516) During the year ended December 31, 2013, we recorded approximately $12.0 million of net unrealized appreciation from our debt, equity and warrant investments. Approximately $15.7 million is attributed to net unrealized appreciation on equity, including approximately $5.6 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. Approximately $4.5 million is attributed to net unrealized appreciation on our warrant investments, including approximately $9.4 million of net unrealized depreciation due to the reversal of prior period net unrealized appreciation upon being realized as a gain. This unrealized appreciation was partially offset by approximately $8.2 million of net unrealized depreciation on our debt investments, which primarily related to $21.2 million of unrealized depreciation for collateral based impairments, offset by the reversal of approximately $13.0 million of prior period net unrealized depreciation upon being realized as a loss due to the write-off or early payoff of debt investments. Net unrealized appreciation decreased by approximately $898,000 as a result of estimated taxes payable for the year ended December 31, 2013. Net unrealized appreciation further increased by approximately $465,000 as a result of escrow receivables related to merger and acquisition transactions closed during the year ended December 31, 2013. For the year ended December 31, 2013, net unrealized appreciation decreased by approximately $57,000 as a result of net appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. During the year ended December 31, 2012, we recorded approximately $4.5 million of net unrealized depreciation from our debt, equity and warrant investments. Approximately $3.4 million and $2.3 million is attributed to net unrealized depreciation on warrant investments and debt investments, respectively, of which approximately $6.6 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $9.2 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The remainder is related to fluctuations in current market interest rates during the year ended December 31, 2012. This unrealized depreciation was partially offset by approximately $1.3 million of net unrealized appreciation on our equity investments, of which approximately $6.0 million is due to the reversal of prior period 74 net unrealized appreciation upon being realized as a gain and $5.7 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. The following table itemizes the change in net unrealized appreciation/(depreciation) in the investment portfolio by category for the years ended December 31, 2013 and December 31, 2012. (in millions) Collateral based impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversals due to Debt Investment Payoffs & Warrant/Equity sales . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Market/Yield Adjustments* Level 1 & 2 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Level 3 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fair Value Market/Yield Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 Debt Equity Warrants Total $(21.2) 13.0 $ — (5.8) $ (0.1) (10.6) $(21.3) (3.4) — — — 7.6 13.9 21.5 3.5 11.7 15.2 11.1 25.6 36.7 Total Unrealized Appreciation/(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8.2) $15.7 $ 4.5 $ 12.0 (in millions) Collateral based impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversals of Prior Period Collateral based impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversals due to Debt Investment Payoffs & Warrant/Equity sales . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Market/Yield Adjustments* Level 1 & 2 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Level 3 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fair Value Market/Yield Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2012 Debt Equity Warrants Total $(11.4) 10.0 7.0 $(2.1) 0.5 (0.3) — (7.9) (7.9) (6.5) 9.7 3.2 $(1.2) 0.7 (5.0) 1.9 0.2 2.1 (14.7) 11.2 1.7 (4.6) 2.0 (2.6) Total Unrealized Appreciation/(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.3) $ 1.3 $(3.4) $ (4.4) * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, 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 distribute approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. Net Increase in Net Assets Resulting from Operations and Earnings Per Share For the years ended December 31, 2013 and December 31, 2012, the net increase in net assets resulting from operations totaled approximately $99.4 million and $46.8 million, respectively. These changes are made up of the items previously described. The basic and fully diluted net change in net assets per common share for the year ended December 31, 2013 were $1.67 and $1.63, respectively, whereas both the basic and fully diluted net change in net assets per common share for the year ended December 31, 2012 were $0.93. For the purpose of calculating diluted earnings per share for the year ended December 31, 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because our share price was greater than the conversion price in effect ($11.63) for the Convertible Senior Notes for such period. For the year ended December 31, 2012, the dilutive effect of the Convertible Senior Notes under the treasury stock method is anti-dilutive because our share price was less than the conversion price in effect ($11.81) for the Convertible Senior Notes for such period, and not included in this calculation. 75 Comparison of periods ended December 31, 2012 and 2011 Investment Income Interest Income Interest income totaled approximately $87.6 million and $70.3 million for 2012 and 2011, respectively. Income from commitment, facility and loan related fees totaled approximately $9.9 million 2012, compared with $9.5 million for 2011. The increase in interest income was directly related to an increase in the average investment portfolio outstanding in 2012 than in 2011. In 2012 and 2011, interest income included approximately $8.4 million and $7.4 million of income from exit fees, respectively. The year over year increase is attributed to an increase in early payoffs for the year ended December 31, 2012 and an increase in the average investment portfolio outstanding in 2012 than in 2011. At December 31, 2012 and 2011, we had approximately $11.4 million and $10.3 million of deferred income related to commitment, facility and loan related fees, respectively. The increase in deferred income was attributed to increased investment originations in 2012. The following table shows lending activity involving contractual PIK interest arrangements for the years ended December 31, 2012 and 2011, at cost: (in thousands) Years ended December 31, 2012 2011 Beginning PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PIK interest capitalized during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments received from PIK loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PIK converted to other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,041 1,400 (132) — $ 3,955 2,093 (3,567) (440) Ending PIK loan balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,309 $ 2,041 The decrease in payments received from PIK loans and PIK interest capitalized during the year ended December 31, 2012 is due to approximately $1.4 million, $1.0 million, $493,000, $302,000, and $268,000 of PIK collected in conjunction with the sale of our investment in Infologix, Inc. and the early payoffs of IPA Holdings, LLC., Unify Corporation, HighJump Acquisition, LLC., and Velocity Technology Solutions, Inc., respectively, in the year ended December 31, 2011. The decrease in PIK converted to other securities during the year December 31, 2012 is due to approximately $440,000 related to the conversion of MaxVision Holding, LLC. debt to equity during the year ended December 31, 2011. In certain investment transactions, we 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. We had no income from advisory services during the year ended December 31, 2012. Operating Expenses Operating expenses, which are comprised of interest and fees on borrowings, general and administrative and employee compensation, totaled approximately $49.4 million and $40.3 million during the periods ended December 31, 2012 and 2011, respectively. Interest and Fees on our Borrowings Interest and fees on borrowings totaled approximately $23.8 million and $15.9 million during the periods ended December 31, 2012 and 2011, respectively. This $7.9 million year over year increase is largely attributed 76 to $1.6 million of incremental interest and fee expense due to the Convertible Senior Notes issued on April 15, 2011 and $5.6 million related to the 2019 Notes issued in April and September 2012. Additionally, we incurred approximately $577,000 of non cash interest expense during the period ended December 31, 2012 attributed to the accretion of the fair value of the conversion feature on the Convertible Senior Notes. We had a weighted average cost of debt comprised of interest and fees of approximately 6.58% at December 31, 2012, as compared to 6.23% as of December 31, 2011. General and Administrative Expenses General and administrative expenses include legal fees, consulting fees, accounting fees, printer fees, insurance premiums, rent, workout and various other expenses. Expenses increased to $8.1 million from $8.0 million for the periods ended December 31, 2012 and 2011, respectively. Employee Compensation Employee compensation and benefits totaled approximately $13.3 million during both the periods ended December 31, 2012 and 2011. Stock-based compensation totaled approximately $4.2 million and $3.1 million during the periods ended December 31, 2012 and 2011, respectively. This increase was due primarily to the expense on restricted stock grants of approximately 672,000 shares issued in the first quarter of 2012. Net Investment Income Before Income Tax Expense and Investment Gains and Losses Net investment income before income tax expense for the year ended December 31, 2012 totaled $48.1 million as compared with a net investment income before income tax expense in 2011 of approximately $39.6 million. The changes are made up of the items described above under “Investment Income” and “Operating Expenses.” Net Investment Realized Gains and Losses and Unrealized Appreciation and Depreciation Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. A summary of realized gains and losses for the years ended December 31, 2012 and 2011 is as follows: (in thousands) Years Ended December 31, 2012 2011 Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,481 (14,313) $11,092 (8,351) Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,168 $ 2,741 During the year ended December 31, 2012, we recognized gross realized gains of approximately $17.5 million and gross realized losses of approximately $14.3 million, respectively, on the portfolio. During the year ended December 31, 2012, we recorded realized gains of approximately $5.1 million, $3.1 million, $2.6 million, $2.4 million and $2.4 million from the sale of our investments in NEXX Systems, BARRX Medical, Inc., DeCode Genetics, Aegerion Pharmaceuticals, and Annie’s, respectively. These gains were partially offset by the liquidation of our investments in MaxVision Holding, L.L.C, Razorgator Interactive Group, Zeta Interactive Corporation and Magi.com (pka Hi5 Networks, Inc.), of approximately $8.7 million, $2.2 million, $672,000 and $463,000, respectively. 77 During the year ended December 31, 2011 we recognized total gross realized gains of approximately $11.1 million primarily due to the sale of warrants and equity investments in three portfolio companies. We recognized gross realized losses in 2011 of approximately $8.4 million on the disposition of investments in 13 portfolio companies. The net unrealized appreciation and depreciation of our investments is based on fair value of each investment determined in good faith by our Board of Directors. The following table itemizes the change in net unrealized appreciation/depreciation of investments for the years ended December 31, 2012 and 2011: (in thousands) Years Ended December 31, 2012 2011 Gross unrealized appreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross unrealized depreciation on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversal of prior period net unrealized appreciation upon a realization event Reversal of prior period net unrealized depreciation upon a realization event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Citigroup Warrant Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,871 (73,158) (12,575) 14,944 402 $ 58,980 (49,327) (13,224) 8,395 (217) Net unrealized appreciation (depreciation) on portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,516) $ 4,607 During the year ended December 31, 2012, we recorded approximately $4.5 million of net unrealized depreciation from our debt, equity and warrant investments. Approximately $1.3 million is attributed to net unrealized appreciation on equity, of which approximately $6.0 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $5.7 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. We recorded approximately $3.4 million and $2.3 million of net unrealized depreciation on our warrant and debt investments, respectively, of which approximately $6.6 million is due to the reversal of prior period net unrealized appreciation upon being realized as a gain and $9.2 million is due to the reversal of prior period net unrealized depreciation upon being realized as a loss. During the year ended December 31, 2012, net unrealized investment appreciation recognized by the Company was reduced by approximately $402,000 due to the warrant participation agreement with Citigroup. During the year ended December 31, 2011 net change in unrealized appreciation totaled approximately $4.6 million from debt, warrant and equity investments. Approximately $9.0 million was due to net unrealized appreciation on debt investments attributable to reversal of unrealized depreciation to realized loss of approximately $5.0 million on one technology debt investment and due to the reversal of unrealized depreciation of approximately $3.1 million on one life science debt investment as a result of improvements at the portfolio company. Approximately $5.8 million of net unrealized depreciation on equity investments during the year ended December 31, 2011, was primarily attributable to the sale of InfoLogix, Inc. resulting in the reversal of $7.7 million of unrealized appreciation on equity investments to realized gains offset by approximately $1.9 million of net appreciation due to net increases in private and public portfolio company valuations. The following table itemizes the change in net unrealized appreciation/ (depreciation) in the investment portfolio by category for the year ended December 31, 2012. (in millions) Collateral based impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversals of Prior Period Collateral based impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reversals due to Debt Investment Payoffs & Warrant/Equity sales . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Market/Yield Adjustments* Level 1 & 2 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Level 3 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fair Value Market/Yield Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2012 Loans Equity Warrants Total $(11.4) 10.0 7.0 $(2.1) 0.5 (0.3) $(1.2) 0.7 (5.0) $(14.7) 11.2 1.7 — (7.9) (7.9) (6.5) 9.7 3.2 1.9 0.2 2.1 (4.6) 2.0 (2.6) Total Unrealized Appreciation/(Depreciation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.3) $ 1.3 $(3.4) $ (4.4) 78 * Level 1 assets are generally equities listed in active markets and level 2 assets are generally warrants held in a public company. Observable market prices are typically the primary input in valuing level 1 and 2 assets. Level 3 asset valuations require inputs that are both significant and unobservable. Generally, level 3 assets are debt investments and warrants and equities held in a private company. See Note 2 to the financial statements discussing ASC 820. During the year ended December 31, 2012, we recorded approximately $7.9 million net unrealized depreciation on our debt investments related to fluctuations in current market interest rates. Income and Excise Taxes We account for income taxes in accordance with the provisions of ASC 740, 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 distributed approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013. Net Increase in Net Assets Resulting from Operations and Earnings Per Share For the year ended December 31, 2012 net increase in net assets resulting from operations totaled approximately $46.8 million compared to net income of approximately $46.9 million for the period ended December 31, 2011. These changes are made up of the items previously described. Basic and fully diluted net change in net assets per common share were $0.93 and $0.93, respectively, for the year ended December 31, 2012, compared to a basic and fully diluted net income per share of $1.08 and $1.07, respectively, for the year ended December 31, 2011. Financial Condition, Liquidity and Capital Resources Our liquidity and capital resources are derived from our Wells Facility, Union Bank Facility (together the “Credit Facilities”), SBA debentures, Convertible Senior Notes, 2019 Notes, Asset-Backed Notes and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our borrowings and the proceeds from the rotation of our portfolio and from public and private offerings of securities to finance our investment objectives. We may raise additional equity or debt capital through both registered offerings off a shelf registration, “At-The-Market”, or ATM, and private offerings of securities, by securitizing a portion of our investments or borrowing, including from the SBA through our SBIC subsidiaries. On August 16, 2013, we entered into an ATM equity distribution agreement with JMP Securities LLC, or JMP. The equity distribution agreement provides that we may offer and sell up to 8,000,000 shares of our common stock from time to time through JMP, as our sales agent. Sales of our common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. There were no sales under the ATM Program for the year ended December 31, 2013. At December 31, 2013, we had $75.0 million of Convertible Senior Notes payable, $170.4 million of 2019 Notes, $89.6 million of Asset-Backed Notes and $225.0 million of SBA debentures payable. We had no borrowings outstanding under either the Wells Facility or the Union Bank Facility. At December 31, 2013, we had $373.4 million in available liquidity, including $268.4 million in cash and cash equivalents. We had available borrowing capacity of approximately $75.0 million under the Wells Facility 79 and $30.0 million under the Union Bank Facility, subject to existing terms and advance rates and regulatory requirements. We primarily invest cash on hand in interest bearing deposit accounts. At December 31, 2013, we had approximately $6.3 million of restricted cash. Our restricted cash consists of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized Asset-Backed Notes, based on current characteristics of the securitized debt investment portfolios, the restricted funds may be used to pay monthly interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the year ended December 31, 2013, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of loan investments and the sale of loan and equity investments. During the year ended December 31, 2013, our operating activities provided $103.6 million of cash and cash equivalents, compared to $193.9 million used during the year ended December 31, 2012. The $297.5 million increase in cash provided by operating activities resulted primarily from an increase in net assets resulting from operations of $52.7 million, an increase in principal payments received on investments of approximately $231.8 million, and a decrease in purchase of investments of approximately $19.4 million. During the year ended December 31, 2013, our investing activities used $6.6 million of cash, compared to $87,000 during year ended December 31, 2012. This $6.5 million increase in cash used by investing activities was primarily due to an increase of approximately $6.3 million in cash collections of interest and principal payments, classified as restricted cash, on assets that are securitized. During the year ended December 31, 2013, our financing activities used $11.6 million of cash, compared to providing $312.5 million during the year ended December 31, 2012. This $324.2 million decrease in cash provided by financing activities was primarily due to the Issuance of our 2019 Notes of $299.7 million in 2012 partially offset by a decrease in repayments of credit facilities of approximately $34.5 million during the year ended December 31, 2013. As of December 31, 2013, net assets totaled $650.0 million, with a net asset value per share of $10.51. We intend to generate additional cash primarily from cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in other high-quality debt investments that mature in one year or less as well as from future borrowings as required to meet our lending activities. Our primary use of funds will be investments in portfolio companies and cash distributions to holders of our common stock. On July 25, 2012, our Board of Directors approved an extension of the stock repurchase plan under the same terms and conditions that allowed us to repurchase up to $35.0 million of our common stock. The stock repurchase plan expired on February 26, 2013 and no shares were repurchased for the years ended December 31, 2013 and December 31, 2012. As required by the 1940 Act, our asset coverage must be at least 200% after each issuance of senior securities. As of December 31, 2013 our asset coverage ratio under our regulatory requirements as a business development company was 295.5%, excluding our SBA debentures as a result of our exemptive order from the SEC which allows us to exclude all SBA leverage from our asset coverage ratio. As a result of the SEC exemptive order, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 200%, which while providing increased investment flexibility, also may increase our exposure to risks associated with leverage. Total leverage, when including our SBA debentures, was 216.6% at December 31, 2013. 80 Outstanding Borrowings At December 31, 2013 and December 31, 2012, we had the following borrowing capacity and outstanding amounts: (in thousands) December 31, 2013 December 31, 2012 Total Available Carrying Value(1) Total Available Carrying Value(1) SBA Debentures(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible Senior Notes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000 170,364 89,557 75,000 75,000 30,000 $664,921 $225,000 170,364 89,557 72,519 — — $225,000 170,364 129,300 75,000 75,000 30,000 $225,000 170,364 129,300 71,436 — — $557,440 $704,664 $596,100 (1) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. (2) At December 31, 2013 and at December 31, 2012, the total available borrowings under the SBA debentures was $225.0 million, of which $76.0 million was available in HT II and $149.0 million was available in HT III. (3) Represents the aggregate principal amount outstanding of the Convertible Senior Notes less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.5 million at December 31, 2013 and $3.6 million at December 31, 2012. Our net asset value may decline as a result of economic conditions in the United States. Our continued compliance with the covenants under our Credit Facilities, Convertible Senior Notes, 2019 Notes Payable, Asset- Backed Notes and SBA debentures depend on many factors, some of which are beyond our control. Material net asset devaluation could have a material adverse effect on our operations and could require us to reduce our borrowings in order to comply with certain covenants, including the ratio of total assets to total indebtedness. We believe that our current cash and cash equivalents, cash generated from operations, and funds available from our Credit Facilities will be sufficient to meet our working capital and capital expenditure commitments for at least the next 12 months. Debt financing costs are fees and other direct incremental costs we incur in obtaining debt financing and are recognized as prepaid expenses and amortized into the consolidated statement of operations as loan fees over the term of the related debt instrument. Prepaid financing costs, net of accumulated amortization, as of December 31, 2013 and December 31, 2012 were as follows: (in thousands) Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SBA Debenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2013 2012 $ — $ — 867 1,900 4,074 6,287 5,877 398 1,323 2,686 5,319 5,074 $14,800 $19,005 Commitments 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 contractual commitments to provide funds to portfolio companies are not reflected on our balance sheet. Our unfunded contractual commitments may be significant from time to time. As of December 31, 2013, we had unfunded contractual commitments of approximately $151.0 million. Approximately $77.4 million of these unfunded contractual commitments are dependent upon the portfolio company reaching certain milestones before the contractual commitment becomes available. These commitments will be subject to the same 81 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 our future cash requirements. We intend to use cash flow from normal and early principal repayments, and proceeds from borrowings and notes to fund these commitments. However, there can be no assurance that we will have sufficient capital available to fund these commitments as they come due. In addition, as of December 31, 2013, we had approximately $38.0 million of non-binding term sheets outstanding to four new companies, which generally convert to contractual commitments within approximately 90 days of signing. Non-binding outstanding term sheets are subject to completion of our due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent future cash requirements. Contractual Obligations The following table shows our contractual obligations as of December 31, 2013: Contractual Obligations(1)(2) Payments due by period (in thousands) Total Less than 1 year 1 - 3 years 3 - 5 years After 5 years Borrowings(3)(4) Operating Lease Obligations(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $557,440 7,640 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $565,080 $ — 1,484 $1,484 $89,557 2,965 $72,519 1,774 $395,364 1,417 $92,522 $74,293 $396,781 (1) Excludes commitments to extend credit to our portfolio companies. (2) We also have a warrant participation agreement with Citigroup. See Note 4 to our consolidated financial statements. (3) Includes $225.0 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $89.6 million in aggregate principal amount of the Asset-Backed Notes and $72.5 million of the Convertible Senior Notes. (4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $75.0 million less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.5 million at December 31, 2013. (5) Long-term facility leases. Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $1.1 million, $1.2 million, and $1.1 million during the years ended December 31, 2013, 2012, and 2011, respectively. We and our executives and directors are covered by Directors and Officers Insurance, with the directors and officers being indemnified by us to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act. Borrowings Long-term SBA Debentures On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With our net investment of $38.0 million in HT II as of December 31, 2013, HT II has the capacity to issue a total of $76.0 million of SBA guaranteed debentures, subject to SBA approval, of which $76.0 million was outstanding as of December 31, 2013. As of December 31, 2013, HT II has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2013, we held investments in HT II in 42 companies with a fair value of approximately $102.5 million, accounting for approximately 11.3% of our total portfolio. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With 82 our net investment of $74.5 million in HT III as of December 31, 2013, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of December 31, 2013. As of December 31, 2013, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2013, we held investments in HT III in 29 companies with a fair value of approximately $171.6 million, accounting for approximately 18.9% of our total portfolio. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, we plan to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are our wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2013 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.25% to 5.73%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013, were 0.804%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the year ended December 31, 2013 for HT II was approximately $76.0 million with an average interest rate of approximately 5.34%. The average amount of debentures outstanding for the year ended December 31, 2013 for HT III was approximately $149.0 million with an average interest rate of approximately 3.41%. HT II and HT III hold approximately $174.1 million and $285.1 million in assets, respectively, and accounted for approximately 11.1% and 18.2% of our total assets prior to consolidation at December 31, 2013. As of December 31, 2013, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA, and a maximum amount of $225.0 million for funds under common control, subject to periodic adjustments by the SBA. In the aggregate, at December 31, 2013 there was $225.0 million principal amount of indebtedness outstanding incurred by our SBIC subsidiaries, the maximum statutory limit on the dollar amount of SBA guaranteed debentures under the SBIC program. 83 We reported the following SBA debentures outstanding on our Consolidated Statement of Assets and Liabilities as of December 31, 2013 and December 31, 2012: (in thousands) Issuance/Pooling Date Maturity Date Interest Rate(1) 2013 2012 December 31, SBA Debentures: March 26, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2018 March 25, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2019 September 23, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2021 September 21, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 21, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022 March 21, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022 September 19, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2023 September 1, 2019 September 1, 2020 September 1, 2020 September 1, 2021 September 1, 2022 Total SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Interest rate includes annual charge 2019 Notes 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 11,250 25,000 24,250 24,750 $225,000 $225,000 On March 6, 2012, we and U.S. Bank National Association (the “Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, we and the Trustee entered into the First Supplemental Indenture to the Base Indenture, dated April 17, 2012, relating to our issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. On September 24, 2012, we and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture, dated as of September 24, 2012, relating to our issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. 2019 Notes payable is compromised of: (in thousands) April 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying Value of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 $ 84,490 85,874 $170,364 $ 84,490 85,874 $170,364 April 2019 Notes The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGZ.” The April 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all our existing and future 84 secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under our revolving senior secured credit facility with Wells Fargo Capital Finance. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the First Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among us and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. In July 2012, we re-opened our April 2019 Notes and issued an additional amount of approximately $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at our option at any time or from time to time on or after September 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGY.” The September 2019 Notes are our direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of our future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under our credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under our revolving senior secured credit facility with Wells Fargo Capital Finance. The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring us to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by 85 Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among us and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. For the years ended December 31, 2013 and 2012, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 and September 2019 Notes are as follows: (in thousands) Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance cost 2013 $11,926 967 Total interest expense and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,893 2012 $5,139 423 $5,562 Cash paid for interest expense and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,926 $4,790 Year Ended December 31, As of December 31, 2013, we are in compliance with the terms of the indenture, and respective supplemental indenture, governing the April 2019 Notes and September 2019 Notes. See Note 4 to our consolidated financial statements for more detail on the 2019 Notes. Asset-Backed Notes On December 19, 2012, we completed a $230.7 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset- backed notes (the “Asset-Backed Notes”), which Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes were issued by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among us, Hercules Capital Funding 2012-1 LLC, as Trust Depositor (the “Trust Depositor”), Hercules Capital Funding Trust 2012- 1, as Issuer (the “Issuer”), and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by us. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The Asset-Backed Notes have a stated maturity of December 16, 2017. As part of this transaction, we entered into a sale and contribution agreement with the Trust Depositor under which we have agreed to sell or have contributed to the Trust Depositor certain senior loans made to certain of our portfolio companies (the “Loans”). We have made customary representations, warranties and covenants in the sale and contribution agreement with respect to the Loans as of the date of their transfer to the Trust Depositor. In connection with the issuance and sale of the Asset-Backed Notes, we have made customary representations, warranties and covenants in the note purchase agreement. The Asset-Backed Notes are secured obligations of the Issuer and are non-recourse to us. The Issuer also entered into an indenture governing the Asset-Backed Notes, which indenture includes customary representations, warranties and covenants. The Asset- Backed Notes were sold without being registered under the Securities Act of 1933, as amended (the “Securities Act”), to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 86 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act. In addition, the Trust Depositor entered into an amended and restated trust agreement, which includes customary representation, warranties and covenants. The Loans are serviced by us pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. We perform certain servicing and administrative functions with respect to the Loans. We are entitled to receive a monthly fee from the Issuer for servicing the Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the Loans, excluding all defaulted Loans and all purchased Loans, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). We also serve as administrator to the Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2013 and December 31, 2012, the Asset Backed Notes had an outstanding principal balance of $89.6 million and $129.3 million, respectively. Under the terms of the Asset Backed Notes, we are required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as Restricted Cash. There was approximately $6.3 million of Restricted Cash as of December 31, 2013 funded through interest collections. There was no cash segregated at December 31, 2012 due to immaterial monthly interest collections for the period ended December 31, 2012. See Note 4 to our consolidated financial statements for more detail on the Asset-Backed Notes. Convertible Senior Notes In April 2011, we issued $75.0 million in aggregate principal amount of its 6.00% convertible senior notes (the “Convertible Senior Notes”) due in 2016. As of December 31, 2013, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $72.5 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the our subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, we will pay or deliver, as the case may be, at our election, cash, shares of our common stock or a combination of cash and shares of our 87 common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. We may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require us to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, we estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the accompanying consolidated statement of assets and liabilities. As a result, we record interest expense comprised of both stated interest expense as well as accretion of the original issue discount resulting in an estimated effective interest rate of approximately 8.1%. As of December 31, 2013 and December 31, 2012, the components of the carrying value of the Convertible Senior Notes were as follows: (in thousands) Principal amount of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Original issue discount, net of accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying value of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 $75,000 (2,481) $72,519 $75,000 (3,564) $71,436 For the years ended December 31, 2013 and 2012, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows: (in thousands) Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance cost Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 $4,500 1,083 577 $6,160 2012 $4,500 1,083 577 $6,160 Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,500 $4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2013 and December 31, 2012. As of December 31, 2013, we are in compliance with the terms of the indentures governing the Convertible Senior Notes. See Note 4 to our consolidated financial statements for more detail on the Convertible Senior Notes. Wells Facility In August 2008, we entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, we renewed the Wells Facility. Under this three- year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility 88 contains an accordion feature, in which we can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, we entered into an amendment to the Wells Facility. The amendment reduces the interest rate floor by 75 basis points to 4.25% and extends the maturity date by one year to August 2015. Additionally, an amortization period of 12 months was added to pay down the principal balance as of the maturity date, and the unused line fee was reduced. Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.25% and an advance rate of 50% against eligible loans. The Wells Facility is secured by loans in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the year ended December 31, 2013, this non-use fee was approximately $380,000. On June 20, 2011 the Company paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through the end of the term. The Wells Facility includes various financial and operating covenants applicable to us and our subsidiaries, in addition to those applicable to Hercules Funding II, LLC. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $362.0 million plus 90% of the cumulative amount of equity raised after June 30, 2012. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital that we subsequently raise. As of December 31, 2013, the minimum tangible net worth covenant has increased to $478.5 million as a result of our follow-on public offerings. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2013. See Note 4 to our consolidated financial statements for more detail on the Wells Facility. Union Bank Facility On February 10, 2010, we entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). On November 2, 2011, we renewed and amended the Union Bank Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets (“RBC”) have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an accordion feature, in which we can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions. We expect to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Union Bank Facility. On March 30, 2012, we entered into an amendment to the Union Bank Facility which permitted us to issue additional senior notes relating to the offer and sale of our 2019 Notes. On September 17, 2012, we entered into an amendment to the Union Bank Facility. Pursuant to the terms of the amendment, we are permitted to increase our unsecured indebtedness by an aggregate original principal amount not to exceed $200.0 million incurred after March 30, 2012 in one or more issuances, provided certain conditions are satisfied for each issuance. On December 17, 2012, we further amended the Union Bank Facility to remove RBC from the Union Bank Facility. Following the removal of RBC, the Union Bank Facility consists solely of Union Bank’s commitment of $30.0 million. In connection with the amendment, the maximum availability under the Union Bank Facility, subject to a borrowing base, was reduced from $55.0 million to $30.0 million. The Union Bank Facility contains an accordion feature, in which we could increase the credit line by up to $95.0 million in the aggregate, funded by commitments from additional lenders and with the agreement of Union Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility. 89 Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the year ended December 31, 2013, this nonuse fee was approximately $152,000. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. The Union Bank Facility requires various financial and operating covenants. These covenants require us to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. As of December 31, 2013, the minimum tangible net worth covenant has increased to $472.8 million as a result of our follow-on public offerings. As amended, the Union Bank Facility will mature on May 1, 2015, with a borrowing termination date as of May 2, 2014 and a term out provision for the remaining 12 months. Union Bank Facility also provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. We were in compliance with all covenants at December 31, 2013. See Note 4 to our consolidated financial statements for more detail on the Union Bank Facility. Citibank Credit Facility We, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. which expired under normal terms. During the first quarter of 2009, we paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, we granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2013, we reduced our realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. We recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $57,000 as a result of appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $370,000 as of December 31, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, we have paid Citigroup approximately $1.6 million under the warrant participation agreement thereby reducing realized gains by this amount. We will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and March 2018. 90 Dividends The following table summarizes our dividends declared and paid or to be paid on all shares, including restricted stock, to date: Date Declared Record Date Payment Date Amount Per Share October 27, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 9, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 3, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 19, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 16, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 7, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 3, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 2, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 8, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 7, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 6, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 12, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 7, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 6, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 16, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 11, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 3, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 2, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 4, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 5, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 4, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 3, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October 26, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 26, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April 29, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 29, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 4, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 24, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1, 2005 January 6, 2006 April 10, 2006 July 31, 2006 November 6, 2006 February 19, 2007 May 16, 2007 August 16, 2007 November 16, 2007 February 15, 2008 May 16, 2008 August 15, 2008 November 14, 2008 February 23, 2009 May 15, 2009 August 14, 2009 October 20, 2009 December 24, 2009 February 19, 2010 May 12, 2010 August 12, 2010 November 10, 2010 March 10, 2011 May 11, 2011 August 15, 2011 November 14, 2011 March 12, 2012 May 18, 2012 August 17, 2012 November 14, 2012 March 11, 2013 May 14, 2013 August 13, 2013 November 18, 2013 March 10, 2014 November 17, 2005 January 27, 2006 May 5, 2006 August 28, 2006 December 1, 2006 March 19, 2007 June 18, 2007 September 17, 2007 December 17, 2007 March 17, 2008 June 16, 2008 September 19, 2008 December 15, 2008 March 30, 2009 June 15, 2009 September 14, 2009 November 23, 2009 December 30, 2009 March 19, 2010 June 18, 2010 September 17,2010 December 17, 2010 March 24, 2011 June 23, 2011 September 15, 2011 November 29, 2011 March 15, 2012 May 25, 2012 August 24, 2012 November 21, 2012 March 19, 2013 May 21, 2013 August 20, 2013 November 25, 2013 March 17, 2014 $0.03 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.34 0.34 0.34 0.32* 0.30 0.30 0.30 0.04 0.20 0.20 0.20 0.20 0.22 0.22 0.22 0.22 0.23 0.24 0.24 0.24 0.25 0.27 0.28 0.31 0.31 $9.06 * Dividend paid in cash and stock. On February 24, 2014 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 17, 2014 to shareholders of record as of March 10, 2014. This dividend will represent our thirty-fourth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $9.06 per share. Our Board of Directors maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount that approximates 90—100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income. Distributions in excess of our current and accumulated earnings and profits would generally be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Of the dividends declared during the years ended December 31, 2013, 2012, and 2011, 100% were distributions of 91 ordinary income. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2014 distributions to stockholders will actually be. Each year a statement on Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. 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) 98.2% 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 Requirements”). 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). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. 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. Our ability to make distributions will be limited by the asset coverage requirements under the 1940 Act. We intend to distribute approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. 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. 92 Critical Accounting Policies The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition. Valuation of Portfolio Investments The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. At December 31, 2013, approximately 74.5% of our total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). Our debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, our investments in these portfolio companies are generally considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, we value substantially all of our investments at fair value as determined in good faith pursuant to a consistent valuation policy and our Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. We may from time to time engage an independent valuation firm to provide us with valuation assistance with respect to certain of our portfolio investments on a quarterly basis. We intend to continue to engage an independent valuation firm to provide us with assistance regarding our determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of the services rendered by an independent valuation firm is at the discretion of the Board of Directors. Our Board of Directors is ultimately and solely responsible for determining the fair value of our investments in good faith. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) our quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with our investment committee; (3) the Valuation Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee, which incorporates the results of the independent valuation firm as appropriate. 93 (4) the Valuation Committee discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. In accordance with ASU 2011-04, the following table provides quantitative information about our Level 3 fair value measurements of our investments as of December 31, 2013. In addition to the techniques and inputs noted in the table below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to our fair value measurements. 94 Investment Type - Level Three Debt Investments Fair Value at December 31, 2013 Valuation Techniques/ Methodologies Unobservable Input(a) Range Weighted Average(c) (in thousands) Pharmaceuticals -Debt 25,811 250,607 Originated Within 6 Months Market Comparable Companies Hypothetical Market Yield Origination Yield Premium/(Discount) Medical Devices - Debt 46,900 34,723 Originated Within 6 Months Market Comparable Companies Hypothetical Market Yield Origination Yield Premium/(Discount) Technology - Debt 18,796 98,290 Originated Within 6 Months Market Comparable Companies Hypothetical Market Yield Origination Yield 1,643 Liquidation Premium/(Discount) Probability weighting of alternative outcomes Energy Technology - Debt 32,597 108,238 Originated Within 6 Months Market Comparable Companies Hypothetical Market Yield Origination Yield Premium/(Discount) Lower Middle Market - Debt 121,347 Market Comparable Companies Hypothetical Market Yield 31,818 Broker Quote(b) 12,576 Liquidation Premium/(Discount) Price Quotes Par Value Probability weighting of alternative outcomes 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% 99.50% - 100.25% of par $2.0 - $22.5 million 20.00% - 80.00% 15,906 22,236 500 Debt Investments Where Fair Value Approximates Amortized Cost Imminent Payoffs Debt Investments Maturing in Less than One Year Convertible Debt at Par $821,988 Total Level Three Debt Investments (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Schedule of Investments. In our quarterly and annual reports filed with the Commission prior to this Annual Report on Form 10-K, we referred to the Energy Technology industry as “Clean Tech” and we referred to these investments as “Clean Tech” in the Schedule of Investments included in such reports. 95 (b) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (c) The weighted averages are calculated based on the fair market value of each investment. Investment Type - Level Three Debt Investments Fair Value at December 31, 2012 Valuation Techniques/ Methodologies Unobservable Input(a) Range Pharmaceuticals—Debt (in thousands) $266,978 Market Comparable Companies Option Pricing Model(b) Hypothetical Market Yield Premium/(Discount) Average Industry Volatility(c) Risk Free Interest Rate Estimated Time to Exit (in months) Medical Devices—Debt 46,022 Market Comparable Companies Hypothetical Market Yield Technology—Debt 159,341 Market Comparable Companies Liquidation Premium Hypothetical Market Yield Premium/(Discount) Investment Collateral Energy Technology—Debt 91,305 Market Comparable Companies Hypothetical Market Yield Lower Middle Market—Debt 263,894 Market Comparable Companies Broker Quote(d) Premium Hypothetical Market Yield Premium Price Quotes Market Comparable Index Yield Spreads Par Value Total Level Three Debt Investments $827,540 12.83% - 16.11% (2.0%) - 1.0% 57.67% 0.190% 15.2 16.19% 0.0% - 1.0% 12.36% - 20.49% (1.5%) - 1.0% $0 - $7.4 million 12.69% 0.0% - 1.0% 10.75% -16.25% 0.0% -1.0% 78.0% -100% of par 4.33% - 5.93% $30.0 million (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Schedule of Investments. (b) An option pricing model valuation technique was used to derive the conversion feature of convertible notes. (c) Represents the range of industry volatility used by market participants when pricing the investment. (d) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. 96 Investment Type- Fair Value at December 31, 2013 Valuation Techniques/ Methodologies Unobservable Input (a) Range Level Three Equity Investments (in thousands) $10,244 Market Comparable Companies EBITDA Multiple(b) Revenue Multiple(b) Discount for Lack of Marketability(c) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 8.6x - 17.7x 0.7x - 13.8x 9.1%-23.6% 43.4%- 110.7% 0.1% - 0.4% 6 - 30 9,289 Market Adjusted OPM Backsolve 18,127 Other Level Three Warrant Investments $10,200 Market Comparable Companies 8,913 Market Adjusted OPM Backsolve 9,595 Other Average Industry Volatility(d) 45.6% - 109.7% Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 0.1% - 0.9% 6-42 44.0% 0.1% 12 EBITDA Multiple(b) 5.0x - 51.4x Revenue Multiple(b) Discount for Lack of Marketability(c) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 0.5x - 13.8x 6.4% -36.0% 21.3% - 110.7% 0.1% -1.0% 6 - 48 Average Industry Volatility(d) 35.7% -109.9% Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 0.1% -2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Total Level Three Warrant and Equity Investments $66,368 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. (c) Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. (d) Represents the range of average industry volatility used by market participants when pricing the investment. 97 Investment Type- Fair Value at December 31, 2012 Valuation Techniques/ Methodologies Unobservable Input(a) Range Level Three Warrant and Equity Investments (in thousands) $57,685 Market Comparable Companies EBITDA Multiple(b) Revenue Multiple(b) Discount for Lack of Marketability(c) 1.43x -20.68x 0.42x - 16.98x 10.4% - 25.2% Warrant positions additionally subject to: Option Pricing Model Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 46.49% - 141.2% 0.17% - 0.46% 12 - 48 Total Level Three Warrant and Equity Investments $57,685 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. (c) Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. (d) Represents the range of industry volatility used by market participants when pricing the investment. Debt Investments We follow the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. Our debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries at all stages of development. Given the nature of lending to these types of businesses, our investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, we generally start with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. We then apply the valuation methods as set forth below. We apply a procedure for debt investments that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, we also evaluate the collateral for recoverability of the debt investments as well as apply all of its historical fair value analysis. We use pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. We consider each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. Our process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. We value our syndicated loans, which represent less than 4.0% of our debt investment portfolio, using broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, we 98 may consider other factors than those a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis. We record unrealized depreciation on investments when we believe that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security were to be less than amortized cost of the investment. Conversely, where appropriate, we 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 or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost. When originating a debt instrument, we generally receive warrants or other equity-related securities from the borrower. We determine the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investments. Equity-Related Securities and Warrants 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. We have a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. We estimate the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. 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 our valuation of the warrant and equity related securities. We periodically review the valuation of our portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Income Recognition We record interest income on the accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. OID initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non-accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, we may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2013, we had two loans on non-accrual with a cumulative cost and fair value of approximately $23.3 million and $12.6 million, respectively, compared to one loan on non-accrual at December 31, 2012 with an approximate cost of $347,000 and no fair market value. During the year ended December 31, 2013 we recognized a realized loss of approximately $350,000 on our debt investments in this company. Paid-In-Kind and End of Term Income Contractual PIK interest arrangements, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent 99 such amounts are expected to be collected. We will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. In addition, we may also be entitled to an end-of-term payment that is amortized into income over the life of the loan. To maintain our status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though the cash has not yet been collected. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. Fee Income. Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. We recognize nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. Equity Offering Expenses Our offering costs are charged against the proceeds from equity offerings when received. Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by us in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the straight line method, which closely approximates the effective yield method. Stock Based Compensation We have issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. We follow ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock options granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized 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. Income Taxes We operate to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. 100 Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest arrangements, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest arrangements or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the 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) 98.2% 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 Requirements”). 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). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. At December 31, 2013, 2012, and 2011, no excise tax was recorded. We intend to distribute approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. We distributed approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we anticipate no impacts from adopting this standard on our statement of assets and liabilities or results of operations. We are currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Subsequent Events Dividend Declaration On February 24, 2014 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 17, 2014 to shareholders of record as of March 10, 2014. This dividend would represent our thirty-fourth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $9.06 per share 101 Closed and Pending Commitments As of February 24, 2014, we have: a. Closed commitments of approximately $46.4 million to new and existing portfolio companies, and funded approximately $37.1 million since the close of the fourth quarter of 2013. b. Pending commitments (signed non-binding term sheets) of approximately $112.3 million. The table below summarizes our year-to-date closed and pending commitments as follows: Closed and Pending Commitments (in millions) Q1-14 Closed Commitments (as of February 24, 2014) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pending Commitments (as of February 24, 2014) (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year-to-date 2014 Closed and Pending Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46.4 $112.3 $158.7 Notes: a. Closed Commitments may include renewals of existing credit facilities. Not all Closed Commitments result in future cash requirements. Commitments generally fund over the two succeeding quarters from close. b. Not all pending commitments (signed non-binding term sheets) are expected to close and do not necessarily represent any future cash requirements. Portfolio Company Developments As of December 31, 2013, we held warrants or equity positions in five companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Everyday Health, Inc. and four companies which filed confidentially under the JOBS Act. There can be no assurance that these companies will complete their initial public offerings in a timely manner or at all. In addition, subsequent to December 31, 2013 the following portfolio companies in which we held investments as of December 31, 2013 completed initial public offerings or were acquired: 1. 2. 3. 4. 5. 6. In January 2014, Toshiba Corporation completed its acquisition of Hercules portfolio company OCZ Technology. The acquisition resulted in full repayment of the Hercules debt investment in OCZ Technology. In January 2014, Dicerna Pharmaceuticals, Inc. (NASDAQ: DRNA) completed its initial public offering of 6,900,000 shares of its common stock at $15.00 per share. In February 2014, Revance Therapeutics, Inc. (NASDAQ:RVNC) completed its initial public offering of 6,900,000 shares of its common stock at $16.00 per share. The company had initially filed confidentially in April 2013. In February 2014, Concert Pharmaceuticals, Inc. (NASDAQ:CNCE) completed its initial public offering of 6,000,000 shares of its common stock at $14.00 per share. The company had initially filed confidentially in December 2013. In February 2014, Uniqure B.V. (NASDAQ:QURE) completed its initial public offering of 5,400,000 shares of its common stock at $17.00 per share. The company had initially filed confidentially in November 2013. In February 2014, Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) completed its acquisition of Hercules portfolio company NuPathe Inc. (NASDAQ:PATH) at a price of $3.65 per share in cash and the right to receive contingent cash consideration payments of up to $3.15 per share, net to the seller in cash without interest. Item 7A. Quantitative and Qualitative Disclosure About Market Risk We are subject to financial market risks, including changes in interest rates. Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the 102 difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our investment income will be affected by changes in various interest rates, including LIBOR and Prime rates, to the extent our debt investments include variable interest rates. As of December 31, 2013, approximately 99.0% of the loans in our portfolio had variable rates based on floating Prime or LIBOR rates, or variable rates with a floor. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Based on our Consolidated Statement of Assets and Liabilities as of December 31, 2013, the following table shows the approximate annualized increase (decrease) in components of net assets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings. (dollars in thousands) Basis Point Change Interest Income Interest Expense 100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,423 $14,650 $26,052 $36,598 $47,168 $— $— $— $— $— (1) A decline in interest rates would not have a material impact on our Consolidated Financial Statements. Net Income $ 7,423 $14,650 $26,052 $36,598 $47,168 We do not currently engage in any hedging activities. However, we may, in the future, hedge against interest rate fluctuations by using standard hedging instruments such as futures, options, and forward contracts. While hedging activities may insulate us against changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our borrowed funds and higher interest rates with respect to our portfolio of investments. During the year ended December 31, 2013, we did not engage in interest rate hedging activities. Although we believe that the foregoing analysis is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets in our portfolio. It also does not adjust for other business developments, including borrowings under our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes and Asset-Based Notes, that could affect the net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the statement above. Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by variable rate assets in our investment portfolio. For additional information regarding the interest rate associated with each of our Credit Facilities, SBA debentures, Convertible Senior Notes, 2019 Notes and Asset-Based Notes, please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources—Outstanding Borrowings” in this report on Form 10-K. 103 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Assets and Liabilities as of December 31, 2013 and 2012 . . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the three years ended December 31, 2013 . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2013 . . . . . . . . . Consolidated Statements of Cash Flows for the three years ended December 31, 2013 . . . . . . . . . . . . . . . . . Consolidated Schedule of Investments as of December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Schedule of Investments as of December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule of Investments in and Advances to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 106 108 109 110 111 126 145 182 104 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Board of Directors and Shareholders of Hercules Technology Growth Capital, Inc. In our opinion, the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, and the related consolidated statements of operations, of changes in net assets, and of cash flows present fairly, in all material respects, the financial position of Hercules Technology Growth Capital, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework 1992 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 1992). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. Our procedures included confirmation of securities at December 31, 2013 by correspondence with the custodian, borrowers and brokers, and where replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Francisco, CA February 27, 2014 105 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES (in thousands, except per share data) December 31, 2013 2012 Assets Investments: Non-control/Non-affiliate investments (cost of $891,059 and $896,031, respectively) . . . . . . . . . . . . . . . . . . . Affiliate investments (cost of $15,238 and $18,307, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 899,314 10,981 $ 894,428 11,872 Total investments, at value (cost of $906,297 and $914,338, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910,295 268,368 6,271 8,962 27,819 906,300 182,994 — 9,635 24,714 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,221,715 $1,123,643 Liabilities Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term Liabilities (Convertible Senior Notes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and Contingencies (Note 10) $ 14,268 72,519 89,557 170,364 225,000 $ 11,575 71,436 129,300 170,364 225,000 $ 571,708 $ 607,675 Net assets consist of: Common stock, par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized appreciation/(depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated realized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Undistributed net investment income/(Distributions in excess of investment income) . . . . . . . . . . . . . . . . . . . 62 656,594 3,598 (15,240) 4,993 53 564,508 (7,947) (36,916) (3,730) Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650,007 $ 515,968 Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,221,715 $1,123,643 Shares of common stock outstanding ($0.001 par value, 100,000,000 authorized) . . . . . . . . . . . . . . . . . . . . . . . Net asset value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,837 10.51 52,925 9.75 $ $ See notes to consolidated financial statements. 106 The following table presents the assets and liabilities of our consolidated securitization trust for the asset- backed notes (see Note 4), which is a variable interest entity (“VIE”). The assets of our securitization VIE can only be used to settle obligations of our consolidated securitization VIE, these liabilities are only the obligations of our consolidated securitization VIE, and the creditors (or beneficial interest holders) do not have recourse to our general credit. These assets and liabilities are included in the Consolidated Statements of Assets and Liabilities above. (Dollars in thousands) December 31, 2013 2012 ASSETS Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investments, at value (cost of $166,513 and $0, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,271 165,445 $ — 226,997 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,716 $226,997 LIABILITIES Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,557 $129,300 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,557 $129,300 107 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) For the Years Ended December 31, 2013 2012 2011 Investment income: Interest Income Non-Control/Non-Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,302 2,369 — $85,258 2,345 — $69,552 — 794 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,671 87,603 70,346 Fees Non-Control/Non-Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee Compensation: Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized gain on investments Non-Control/Non-Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in unrealized appreciation on investments Non-Control/Non-Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Control investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net realized and unrealized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,016 26 — 16,042 9,897 20 — 9,917 9,400 14 95 9,509 139,713 97,520 79,855 30,334 4,807 9,354 16,179 5,974 22,153 66,648 73,065 14,836 14,836 19,835 3,917 8,108 13,326 4,227 17,553 49,413 48,107 3,168 3,168 13,252 2,635 7,992 13,260 3,128 16,388 40,267 39,588 2,741 2,741 12,370 (825) — 11,545 26,381 (2,448) (2,068) — (4,516) (1,348) (3,976) 3,425 5,158 4,607 7,348 Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,446 $46,759 $46,936 Net investment income before investment gains and losses per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in net assets per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 1.22 1.67 1.63 $ $ $ 0.96 0.93 0.93 $ $ $ 0.91 1.08 1.07 Weighted average shares outstanding Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,838 49,068 42,988 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,292 49,156 43,299 See notes to consolidated financial statements. 108 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (dollars and shares in thousands) Common Stock Shares Par Value Capital in excess of par value Unrealized Appreciation on Investments Accumulated Realized Gains (Losses) on Investments Undistributed net investment income/ (Distributions in excess of investment income) Provision for Income Taxes on Investment Gains Net Assets Balance at December 31, 2010 . . . . . . . . . 43,444 $ 43 $477,549 $ (8,038) $(51,033) $ (5,648) $(342) $412,531 Net increase in net assets resulting from operations . . . . . . . . . . . . . . . — 188 Issuance of common stock . . . . . . . . . Issuance of common stock under — 1 restricted stock plan . . . . . . . . . . . . 140 — Issuance of common stock as stock dividend . . . . . . . . . . . . . . . . . . . . . Retired shares from net issuance . . . . Issuance of the Convertible Senior 167 — (86) — Notes (see Note 4) . . . . . . . . . . . . . — Dividends declared . . . . . . . . . . . . . . . — Stock-based compensation . . . . . . . . . — Tax Reclassification of stockholders’ equity in accordance with generally accepted accounting principles . . . — — — — — — 981 — 1,649 (952) 5,190 — 3,195 (3,368) 4,607 — 2,741 — 39,588 — — — — — — — — — — — — — — — — — — (38,490) — 5,250 (1,882) — — — — — — — — — 46,936 982 — 1,649 (952) 5,190 (38,490) 3,195 — Balance at December 31, 2011 . . . . . . . . . 43,853 $ 44 $484,244 $ (3,431) $(43,042) $ (6,432) $(342) $431,041 Net increase in net assets resulting from operations . . . . . . . . . . . . . . . — $— $ — Issuance of common stock . . . . . . . . . Issuance of common stock under 578 1 3,287 restricted stock plan . . . . . . . . . . . . 505 — — Issuance of common stock as stock dividend. . . . . . . . . . . . . . . . . . . . . . Retired shares from net issuance . . . . Public Offering . . . . . . . . . . . . . . . . . . 8,100 Dividends declared . . . . . . . . . . . . . . . — Stock-based compensation . . . . . . . . . — Tax Reclassification of stockholders’ equity in accordance with generally accepted accounting principles . . . — 219 — (330) — 8 — — 2,305 (4,625) 80,872 — 4,303 — (5,878) $ (4,516) — $ 3,168 — $ 48,107 — $ — — $ 46,759 3,288 — — — — — — — — — — — — — — — — — (47,983) — 2,958 2,920 — — — — — — — — 2,305 (4,625) 80,880 (47,983) 4,303 — Balance at December 31, 2012 . . . . . . . . . 52,925 $ 53 $564,508 $ (7,947) $(36,916) $ (3,388) $(342) $515,968 $ — 25,245 $11,545 — $ 14,836 — Net increase in net assets resulting from operations . . . . . . . . . . . . . . . — Issuance of common stock . . . . . . . . . 2,019 Issuance of common stock under restricted stock plan . . . . . . . . . . . . 423 Issuance of common stock as stock dividend . . . . . . . . . . . . . . . . . . . . . 159 Retired shares from net issuance . . . . (1,739) Public Offering . . . . . . . . . . . . . . . . . . 8,050 Dividends declared . . . . . . . . . . . . . . . — Stock-based compensation . . . . . . . . . — Tax Reclassification of stockholders’ equity in accordance with generally accepted accounting principles . . . — $— 2 1 — (2) 8 — — (1) 2,201 (27,990) 95,529 — 6,054 — — — — — — — $ 73,065 — — — — — (66,454) — — — — — — — $ — — $ 99,446 25,247 — — — — — — — — 2,201 (27,992) 95,537 (66,454) 6,054 — — (8,952) 6,840 2,112 Balance at December 31, 2013 . . . . . . . . . 61,837 $ 62 $656,594 $ 3,598 $(15,240) $ 5,335 $(342) $650,007 See notes to consolidated financial statements. 109 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) December 31, 2013 2012 2011 Cash flows from operating activities: Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net increase in net assets resulting from operations to net cash provided $ 99,446 $ 46,759 $ 46,936 by (used in) operating activities: Purchase of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal payments received on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (increase) decrease in unrealized (appreciation) / depreciation on investments . . . . . . . . . . . . Net realized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of paid-in-kind principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of loan discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of loan discount on Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of loan exit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in deferred loan origination revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned fees related to unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt fees and issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation and amortization of restricted stock grants . . . . . . . . . . . . . . . . . . . . . . Change in operating assets and liabilities: Interest and fees receivable (payable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (487,558) 477,535 44,832 (11,545) (14,836) (3,103) (6,652) 1,083 (9,251) 1,409 (3,087) 4,044 252 6,054 672 2,488 54 1,757 (507,098) 245,777 25,948 4,516 (3,048) (1,400) (5,441) 1,083 (3,986) 2,301 (1,900) 1,560 289 4,303 (3,815) (988) 279 926 (445,066) 247,325 17,733 (4,607) (2,741) (1,943) (6,999) 767 (94) 2,420 615 1,688 348 3,195 (1,300) 318 (563) 2,443 Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,594 (193,935) (139,525) Cash flows from investing activities: Purchases of capital equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Proceeds from issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 2019 Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowings of credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments of credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees paid for credit facilities and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (311) (6,271) — (6,582) 92,376 (64,252) — — — (39,743) — — — (19) (87) — — (87) 79,647 (45,678) — 170,365 129,300 — 64,000 (74,228) (10,864) — (189) — (25) (214) 30 (36,843) 75,000 — — — 92,500 (27,313) (3,110) (3,065) Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,638) 312,542 97,199 Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,374 182,994 118,520 64,474 (42,540) 107,014 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 268,368 $ 182,994 $ 64,474 Supplemental disclosures: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,245 85 $ 2,201 $ $ 18,928 44 $ 2,305 $ $ 11,270 66 $ 1,649 $ See notes to consolidated financial statements. 110 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Debt Biotechnology Tools 1-5 Years Maturity Labcyte, Inc.(11) Biotechnology Tools Senior Secured June 2016 Interest rate PRIME + 6.70% or Floor rate of 9.95% $ 4,270 $ 4,323 $ 4,289 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Biotechnology Tools (0.66%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,323 4,323 4,289 4,289 Energy Technology Under 1 Year Maturity American Superconductor Corporation(3)(11) Brightsource Energy, Inc. Enphase Energy, Inc.(11) Energy Technology Energy Technology Energy Technology Senior Secured December Senior Secured Senior Secured 2014 January 2014 June 2014 Interest rate PRIME + 7.25% or Floor rate of 11.00% Interest rate Prime + 8.25% or Floor rate of 11.50% Interest rate PRIME + 5.75% or Floor rate of 9.00% $ 4,615 4,991 4,991 $15,000 15,886 15,886 $ 1,315 1,358 1,358 Subtotal: Under 1 Year Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,236 22,236 1-5 Years Maturity Agrivida, Inc. American Superconductor Corporation(3)(11) APTwater, Inc BioAmber, Inc.(5)(10) Enphase Energy, Inc.(11) Fluidic, Inc. Fulcrum Bioenergy, Inc.(11) Glori Energy, Inc.(11) Polyera Corporation SCIEnergy, Inc.(4) Scifiniti (pka Integrated Photovoltaics, Inc.) Stion Corporation.(4)(6) TAS Energy, Inc. Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Senior Secured December 2016 Senior Secured November 2016 Senior Secured April 2017 Senior Secured June 2016 Senior Secured August 2016 Senior Secured March 2016 Senior Secured November Senior Secured 2016 June 2015 Senior Secured June 2016 Senior Secured Senior Secured Senior Secured Senior Secured Senior Secured September 2015 February 2015 February 2015 February 2015 February 2015 Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 7.25% or Floor rate of 11.00% Interest rate PRIME + 6.75% or Floor rate of 10.00%, PIK Interest 2.75% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 8.00% or Floor rate of 11.25% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 8.75% or Floor rate of 12.00% Interest rate PRIME + 7.38% or Floor rate of 10.63% Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 6.25% or Floor rate of 9.50% $ 6,000 5,887 5,770 $10,000 9,801 9,801 $18,085 17,874 17,874 $25,000 25,298 25,798 $ 7,400 7,422 7,314 $ 5,000 4,922 4,922 $10,000 9,944 9,694 $ 5,333 5,457 5,414 $ 5,809 5,797 5,686 $ 4,448 4,596 4,685 $ 1,463 1,443 1,429 $ 4,571 4,005 4,096 $15,000 15,277 15,421 $ 4,503 4,374 4,338 Total TAS Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TPI Composites, Inc. Senior Secured June 2016 19,651 19,760 Interest rate PRIME + 8.00% or Floor rate of 11.25% $15,000 14,888 14,889 Energy Technology Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,985 137,131 Subtotal: Energy Technology (24.52%)*(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,221 159,367 See notes to consolidated financial statements. 111 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Communications & Networking 1-5 Years Maturity OpenPeak, Inc.(11) Spring Mobile Solutions, Inc. Communications & Networking Communications & Networking Senior Secured July 2015 Senior Secured November 2016 Interest rate PRIME + 8.75% or Floor rate of 12.00% Interest rate PRIME + 8.00% or Floor rate of 11.25% $10,029 $ 10,714 $ 10,814 $20,000 19,682 19,875 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,396 30,690 Subtotal: Communications & Networking (4.72%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,396 30,690 Drug Delivery 1-5 Years Maturity AcelRx Pharmaceuticals, Inc.(3)(10) Drug Delivery Senior Secured October BIND Therapeutics, Inc.(3) Drug Delivery Senior Secured Celsion Corporation(3) Drug Delivery Senior Secured 2017 September 2016 June 2017 Dance Biopharm, Inc. Drug Delivery Senior Secured August Intelliject, Inc.(11) Drug Delivery Senior Secured 2017 June 2016 NuPathe, Inc.(3) Drug Delivery Senior Secured May 2016 Revance Therapeutics, Inc. Drug Delivery Senior Secured March Drug Delivery Senior Secured March 2015 Interest rate PRIME + 3.85% or Floor rate of 9.10% Interest rate Prime + 7.00% or Floor rate of 10.25% Interest rate Prime + 8.00% or Floor rate of 11.25% Interest rate PRIME + 7.4% or Floor rate of 10.65% Interest rate PRIME + 5.75% or Floor rate of 11.00% Interest rate Prime - 3.25% or Floor rate of 9.85% Interest rate PRIME + 6.60% or Floor rate of 9.85% Interest rate PRIME + 6.60% or Floor rate of 9.85% $15,000 14,556 15,006 $ 4,500 4,407 4,458 $ 5,000 4,897 4,897 $ 1,000 974 974 $15,000 15,150 15,450 $ 5,749 5,629 5,744 $ 9,798 10,032 9,943 980 Total Revance Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 $ 1,011 11,043 994 10,937 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,655 57,466 Subtotal: Drug Delivery (8.84%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,655 57,466 Senior Secured April 2016 Interest rate Prime + 2.75% Aveo Pharmaceuticals, Inc.(3)(10)(11) Drug Discovery & Senior Secured Drug Discovery & Development 1-5 Years Maturity ADMA Biologics, Inc.(3) Anacor Pharmaceuticals, Inc. Drug Discovery & Development Drug Discovery & Development Cell Therapeutics, Inc.(3)(11) Cempra, Inc.(3)(11) Cleveland BioLabs, Inc.(3) Concert Pharmaceuticals, Inc.(4) Coronado Biosciences, Inc.(3)(11) Dicerna Pharmaceuticals, Inc. Insmed, Incorporated(11) Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Senior Secured July 2017 September 2015 Senior Secured October Senior Secured Senior Secured 2016 June 2017 January 2017 Senior Secured October Senior Secured March 2015 Senior Secured Senior Secured 2016 January 2015 January 2016 Merrimack Pharmaceuticals, Inc.(3) Drug Discovery & Senior Secured November Neuralstem, Inc.(3) Development Drug Discovery & Development Senior Secured 2016 June 2016 or Floor rate of 8.50% Interst rate PRIME + 6.40% or Floor rate of 11.65% Interest rate PRIME + 7.15% or Floor rate of 11.90% Interest rate Prime + 9.00% or Floor rate of 12.25% Interest rate PRIME + 6.30% or Floor rate of 9.55% Interest rate PRIME + 6.20% or Floor rate of 10.45% Interest rate PRIME + 3.25% or Floor rate of 8.50% Interest rate PRIME + 6.00% or Floor rate of 9.25% Interest rate PRIME + 4.40% or Floor rate of 10.15% Interest rate PRIME + 4.75% or Floor rate of 9.25% Interest rate PRIME + 5.30% or Floor rate of 10.55% Interest rate PRIME + 7.75% or Floor rate of 11.00% $ 5,000 4,956 4,892 $30,000 29,083 29,810 $19,396 19,396 19,590 $15,000 14,750 15,200 $15,000 14,795 14,550 $ 6,000 5,909 5,909 $15,091 14,933 14,649 $13,654 13,720 13,449 $ 5,026 4,991 4,981 $20,000 19,708 19,535 $40,000 40,314 39,455 $ 8,000 7,874 8,035 See notes to consolidated financial statements. 112 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Paratek Pharmaceuticals, Inc. Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Senior Secured N/A Interest rate Fixed 10.00% Senior Secured N/A Interest rate Fixed 10.00% Senior Secured N/A N/A $ $ $ 36 $ 36 $ 45 28 109 45 28 109 — — — — Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ uniQure B.V.(5)(10)(11) Senior Secured October Drug Discovery & Development 2016 Interest rate PRIME + 8.60% or Floor rate of 11.85% $10,000 9,695 9,818 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,232 199,872 Subtotal: Drug Discovery & Development (30.75%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,232 199,872 Electronics & Computer Hardware 1-5 Years Maturity Clustrix, Inc. Identive Group, Inc.(3)(11) OCZ Technology Group, Inc. Plures Technologies, Inc.(3) Electronics & Computer Hardware Electronics & Computer Hardware Electronics & Computer Hardware Electronics & Computer Hardware Senior Secured December 2015 Interest rate PRIME + 6.50% or Floor rate of 9.75% Senior Secured November 2015 Interest rate PRIME + 7.75% or Floor rate of 11.00% Senior Secured April 2016 Senior Secured October 2016 Interest rate Prime + 8.75% or Floor rate of 12.50%, PIK Interest 3.00% Interest rate Prime + 12.75% or Floor rate of 16.00%, PIK Interest 4.00% $ 524 526 526 $ 5,938 5,696 5,755 $ 1,221 1,221 1,221 $ 2,046 1,958 9,400 9,400 1,458 8,959 8,959 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Electronics & Computer Hardware (1.38%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare Services, Other 1-5 Years Maturity InstaMed Communications, LLC MDEverywhere, Inc. Orion Healthcorp, Inc. Healthcare Services, Other Healthcare Services, Other Healthcare Services, Other Healthcare Services, Other Healthcare Services, Other Senior Secured December Senior Secured 2016 June 2016 Senior Secured June 2017 Senior Secured June 2017 Senior Secured June 2016 Interest rate PRIME + 7.25% or Floor rate of 10.50% Interest rate LIBOR + 9.50% or Floor rate of 10.75% Interest rate LIBOR + 10.50% or Floor rate of 12.00%, PIK Interest 3.00% Interest rate LIBOR + 9.50% or Floor rate of 11.00% Interest rate LIBOR + 8.25% or Floor rate of 9.50% $ 3,000 2,979 2,979 $ 2,000 1,875 1,907 $ 6,591 6,467 6,413 $ 9,000 8,838 8,445 $ 500 465 461 Total Orion Healthcorp, Inc. Pacific Child & Family Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,091 January 2015 January 2015 Healthcare Services, Other Healthcare Services, Other Interest rate LIBOR + 9.00% or Floor rate of 11.50% Interest rate LIBOR + 11.00% or Floor rate of 14.00%, PIK interest 3.75% Senior Secured Senior Secured $ 1,946 $ 6,836 Total Pacific Child & Family Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,782 15,769 15,318 2,017 1,988 6,867 8,884 6,833 8,822 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,508 29,025 Subtotal: Healthcare Services, Other (4.47%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,508 29,025 See notes to consolidated financial statements. 113 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Information Services 1-5 Years Maturity Eccentex Corporation(11) InXpo, Inc. Jab Wireless, Inc. Total Jab Wireless, Inc. Womensforum.com(11) Information Services Information Services Information Services Information Services Senior Secured May 2015 Senior Secured April 2016 Senior Secured November 2017 Senior Secured November 2017 Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate Libor + 6.75% or Floor rate of 8.00% Interest rate Prime + 6.75% or Floor rate of 8.00% $ 657 $ 658 $ 185 $ 2,550 2,489 2,384 $30,000 29,822 29,822 $ 2,000 1,996 1,996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000 31,818 31,818 Information Services Information Services Information Services Senior Secured October 2016 Senior Secured October 2016 Senior Secured April 2015 Interest rate LIBOR + 7.50% or Floor rate of 10.25%, PIK Interest 2.00% Interest rate LIBOR + 6.50% or Floor rate of 9.25% Interest rate LIBOR + 6.50% or Floor rate of 9.00% $ 4,607 4,536 4,127 $ 6,900 6,793 6,470 $ 1,250 1,227 1,156 Total Womensforum.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,757 12,556 11,754 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,521 46,140 Subtotal: Information Services (7.10%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,521 46,140 Internet Consumer & Business Services Under 1 Year Maturity Gazelle, Inc. Tectura Corporation(8) Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Senior Secured October 2014 Senior Secured May 2014 Senior Secured May 2014 Senior Secured May 2014 Senior Secured May 2014 Interest rate PRIME + 6.50% or Floor rate of 9.75% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 8.00% or Floor rate of 11.00%, PIK Interest 1.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% Interest rate LIBOR + 10.00% or Floor rate of 13.00% $ 2,137 2,115 2,115 $ 6,468 6,467 3,566 $10,777 10,777 5,943 $ 563 563 310 $ 5,000 5,000 2,757 Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,807 22,806 12,576 Subtotal: Under 1 Year Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,921 14,691 1-5 Years Maturity Blurb, Inc. CashStar, Inc. Internet Consumer & Business Services Internet Consumer & Business Services Senior Secured December Senior Secured 2015 June 2016 Education Dynamics, LLC Internet Consumer & Business Services Senior Secured March 2016 Interest rate PRIME + 5.25% or Floor rate of 8.50% Interest rate Prime + 6.25% or Floor rate 10.50%, PIK Interest 1.00% Interest rate Libor + 12.5% or Floor rate 12.50%, PIK Interest 1.5% $ 6,351 6,216 6,054 $ 4,018 3,944 3,916 $24,685 24,284 23,582 Gazelle, Inc. Just Fabulous, Inc. Internet Consumer & Business Services Senior Secured April 2016 Interest rate Prime + 7.00% Internet Consumer & Business Services Senior Secured February 2017 or Floor rate of 10.25%, PIK Interest 2.50% Interest rate PRIME + 8.25% or Floor rate of 11.50% $12,365 12,283 12,128 $ 5,000 4,842 4,842 See notes to consolidated financial statements. 114 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) NetPlenish(8) Internet Consumer & Business Services Internet Consumer & Business Services Senior Secured September 2015 Senior Secured April 2015 Interest rate FIXED 10.00% $ 383 $ 375 $ Interest rate FIXED 10.00% $ 97 Total NetPlenish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Reply! Inc.(11) Senior Secured 480 Internet Consumer & Business Services February 2016 — — — 97 472 Internet Consumer & Business Services Senior Secured Internet Consumer & Business Services Senior Secured September 2015 September 2015 Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Senior Secured Senior Secured September 2015 September 2016 Interest rate PRIME + 7.25% or Floor rate of 10.50%, PIK Interest 2.00% Interest rate Prime + 6.88% or Floor rate of 10.13%, PIK Interest 2.00% Interest rate Prime + 7.25% or Floor rate of 11.00%, PIK Interest 2.00% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate LIBOR + 7.00% or Floor rate of 8.50% Interest rate LIBOR + 8.50% or Floor rate of 10.00%, PIK interest 2.50% $ 3,031 3,051 3,034 $ 9,169 9,086 9,169 $ 2,020 2,044 2,070 $ 7,897 7,927 7,525 $ 7,949 7,898 7,397 Total Reply! Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,220 $14,578 ShareThis, Inc. Senior Secured June 2016 14,181 14,160 14,273 14,160 VaultLogix, LLC Total VaultLogix, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,847 WaveMarket, Inc.(11) Senior Secured 15,826 14,923 Internet Consumer & Business Services September 2015 Interest rate Prime + 5.75% or Floor rate of 9.50% $10,000 9,940 9,665 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,148 103,545 Subtotal: Internet Consumer & Business Services (18.19%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,069 118,236 Media/Content/Info Under 1 Year Maturity Zoom Media Group, Inc. Media/Content/Info Senior Secured December 2014 Interest rate PRIME + 5.25% or Floor rate of 8.50% $ 4,000 Subtotal: Under 1 Year Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5 Years Maturity Zoom Media Group, Inc. Media/Content/Info Senior Secured December 2015 Interest rate PRIME + 7.25% and PIK + 3.75% or Floor rate of 10.50% $ 4,288 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Media/Content/Info (1.22%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical Devices & Equipment Under 1 Year Maturity Oraya Therapeutics, Inc.(9)(11) Medical Devices & Equipment Senior Secured December Interest rate Fixed 7.00% 2014 $ 500 Subtotal: Under 1 Year Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,858 3,858 3,858 3,858 4,122 4,122 7,981 4,071 4,071 7,929 500 500 500 500 1-5 Years Maturity Baxano Surgical, Inc.(3) Home Dialysis Plus, Inc. InspireMD, Inc.(3)(5)(10) Medrobotics Corporation Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Senior Secured March 2017 Senior Secured April 2017 February 2017 Senior Secured Senior Secured March 2016 Interest rate PRIME + 7.75% or Floor rate of 12.5% Interest rate PRIME + 6.35% or Floor rate of 9.60% Interest rate PRIME + 5.00% or Floor rate of 10.50% Interest rate PRIME + 7.85% or Floor rate of 11.10% $ 7,500 7,222 7,222 $10,000 9,732 9,732 $10,000 9,696 9,696 $ 4,561 4,489 4,454 See notes to consolidated financial statements. 115 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company NetBio, Inc. NinePoint Medical, Inc. Oraya Therapeutics, Inc.(9)(11) SonaCare Medical, LLC (pka US HIFU, LLC)(11) United Orthopedic Group, Inc. ViewRay, Inc. Sub-Industry Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Type of Investment(1) Maturity Date Senior Secured August Senior Secured Senior Secured 2017 January 2016 September 2015 Senior Secured April 2016 July 2016 Senior Secured Senior Secured June 2017 Interest Rate and Floor Interest rate PRIME + 5.00% or Floor rate of 11.00% Interest rate PRIME + 5.85% or Floor rate of 9.10% Interest rate PRIME + 5.50% or Floor rate of 10.25% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate PRIME + 8.60% or Floor rate of 11.85% Interest rate PRIME + 7.00% or Floor rate of 10.25%, PIK Interest 1.50% Principal Amount Cost(2) Value(3) $ 5,000 $ 4,788 $ 4,788 $ 5,946 5,911 5,794 $ 7,064 6,980 7,162 $ 5,667 5,754 5,818 $25,000 24,647 25,166 $15,000 14,489 14,489 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,707 94,320 Subtotal: Medical Devices & Equipment (14.59%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,206 94,819 Semiconductors 1-5 Years Maturity Achronix Semiconductor Corporation Semiconductors Senior Secured SiTime Corporation Semiconductors Senior Secured January 2015 September 2016 Interest rate PRIME + 10.60% or Floor rate of 13.85% Interest rate PRIME + 6.50% or Floor rate of 9.75% Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Semiconductors (0.69%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software Under 1 Year Maturity Clickfox, Inc. StartApp, Inc. Touchcommerce, Inc. Software Software Software Senior Secured September 2014 Senior Secured December 2014 Senior Secured December 2014 Interest rate PRIME + 6.75% or Floor rate of 10.00% Interest rate PRIME + 2.75% or Floor rate of 6.00% Interest rate Prime + 2.25% or Floor rate of 6.50% Subtotal: Under 1 Year Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,032 1,023 1,006 $ 3,500 3,473 4,495 4,495 3,473 4,479 4,479 $ 2,000 1,979 1,979 $ 200 191 191 $ 3,111 3,071 5,241 2,970 5,140 1-5 Years Maturity Clickfox, Inc. Hillcrest Laboratories, Inc. Mobile Posse, Inc. Neos Geosolutions, Inc. Sonian, Inc. StartApp, Inc. Touchcommerce, Inc. Software Software Software Software Software Software Software Senior Secured November Senior Secured 2015 July 2015 Senior Secured December 2016 Senior Secured May 2016 Senior Secured July 2017 Senior Secured March Senior Secured 2017 June 2017 Interest rate PRIME + 8.25% or Floor rate of 11.50% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate PRIME + 7.50% or Floor rate of 10.75% Interest rate Prime + 5.75% or Floor rate of 10.50% Interest rate PRIME + 7.00% or Floor rate of 10.25% Interest rate PRIME + 7.75% or Floor rate of 11.00% Interest rate Prime + 6.00% or Floor rate of 10.25% $ 5,842 5,530 5,530 $ 2,660 2,630 2,604 $ 4,000 3,876 3,879 $ 3,771 3,808 3,705 $ 5,500 5,332 5,332 $ 2,500 2,507 2,498 $ 5,000 4,688 4,767 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,372 28,315 Subtotal: Software (5.15%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,613 33,455 See notes to consolidated financial statements. 116 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Maturity Date Interest Rate and Floor Principal Amount Cost(2) Value(3) Specialty Pharmaceuticals 1-5 Years Maturity Rockwell Medical, Inc. Specialty Pharmaceuticals Senior Secured March 2017 Interest rate PRIME + 9.25% or Floor rate of 12.50% $20,000 $ 20,055 $ 20,055 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,055 20,055 Subtotal: Specialty Pharmaceuticals (3.09%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,055 20,055 Surgical Devices 1-5 Years Maturity Transmedics, Inc.(11) Surgical Devices Senior Secured November Interest rate FIXED 12.95% $ 7,250 7,207 7,207 2015 Subtotal: 1-5 Years Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Surgical Devices (1.11%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,207 7,207 7,207 7,207 Total Debt (126.46%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 835,882 821,988 See notes to consolidated financial statements. 117 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Equity Biotechnology Tools NuGEN Technologies, Inc. Biotechnology Tools Equity Preferred Series C 189,394 $ Subtotal: Biotechnology Tools (0.11%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500 500 687 687 Communications & Networking GlowPoint, Inc.(3) Peerless Network, Inc. Stoke, Inc. Communications & Networking Communications & Networking Communications & Networking Equity Equity Equity Common Stock 114,192 102 157 Preferred Series A 1,000,000 1,000 3,621 Preferred Series E 152,905 500 1,602 224 4,002 Subtotal: Communications & Networking (0.62%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer & Business Products Caivis Acquisition Corporation IPA Holdings, LLC Market Force Information, Inc. Consumer & Business Products Consumer & Business Products Consumer & Business Products Equity Equity Equity Common Stock LLC Interest 295,861 500,000 Preferred Series B 187,970 819 500 500 598 676 285 Subtotal: Consumer & Business Products (0.24%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,819 1,559 Diagnostic Singulex, Inc. Diagnostic Equity Common Stock 937,998 Subtotal: Diagnostic (0.12%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Drug Delivery Merrion Pharmaceuticals, Plc(3)(5)(10) NuPathe, Inc.(3) Transcept Pharmaceuticals, Inc.(3) Drug Delivery Drug Delivery Drug Delivery Equity Equity Equity Equity Common Stock Common Stock Common Stock Common Stock 89,243 20,000 50,000 41,570 Subtotal: Drug Delivery (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750 750 178 9 146 500 833 750 750 1,009 — 164 140 1,313 Drug Discovery & Development Acceleron Pharma, Inc.(3) Aveo Pharmaceuticals, Inc.(3)(10) Dicerna Pharmaceuticals, Inc.(12) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Equity Equity Equity Equity Drug Discovery & Development Corporation Merrimack Pharmaceuticals, Inc.(3) Drug Discovery & Paratek Pharmaceuticals, Inc. Development Drug Discovery & Development Drug Discovery & Development Equity Equity Equity Equity Total Dicerna Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inotek Pharmaceuticals Common Stock 256,410 1,505 9,286 Common Stock 167,864 Preferred Series B 20,107 Preferred Series C 142,858 162,965 842 503 1,000 1,503 307 228 1,055 1,283 Common Stock 15,334 1,500 — Common Stock 546,448 2,000 2,912 Common Stock 85,450 5 Preferred Series H 244,158 329,608 1,000 1,005 8,355 — — — 13,788 Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal: Drug Discovery & Development (2.12%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See notes to consolidated financial statements. 118 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Information Services Equity Preferred Series C 263,158 $ 250 $ — Subtotal: Information Services (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Services Equity Common Stock 500,000 Information Services Buzznet, Inc. Good Technologies, Inc. (pka Visto Corporation) Internet Consumer & Business Services Blurb, Inc. Philotic, Inc. Progress Financial Trulia, Inc.(3) Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Equity Equity Equity Equity Preferred Series B 220,653 Common Stock Preferred Series G Common Stock 8,121 218,351 29,340 Subtotal: Internet Consumer & Business Services (0.27%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Media/Content/Info Everyday Health, Inc. (pka Waterfront Media, Inc.) Media/Content/Info Equity Preferred Series D 145,590 Subtotal: Media/Content/Info (0.07%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical Devices & Equipment Gelesis, Inc.(6) Medrobotics Corporation Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Equity Equity Equity Equity Equity Equity LLC Interest 2,024,092 Preferred Series E 136,798 Preferred Series D-1 4,118,444 1,000 Preferred Series B 6,185,567 3,000 Preferred Series C 1,927,309 655 Preferred Series D 41,352,489 Total Optiscan Biomedical, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,465,365 Subtotal: Medical Devices & Equipment (0.81%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software Atrenta, Inc. Software Software Equity Equity Preferred Series C Preferred Series D Total Atrenta, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box, Inc. Software Software Software Software Software Equity Equity Equity Equity Equity Preferred Series C Preferred Series D Preferred Series D-1 Preferred Series D-2 Preferred Series E Total Box, Inc. CapLinked, Inc. ForeScout Technologies, Inc. HighRoads, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Series A-3 Preferred Series D Preferred Series B Software Software Software Equity Equity Equity 1,196,845 635,513 1,832,358 390,625 158,133 124,511 220,751 38,183 932,203 53,614 319,099 190,170 Subtotal: Software (3.19%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See notes to consolidated financial statements. 119 603 853 175 92 250 141 658 1,000 1,000 925 250 3,945 7,600 9,775 986 508 1,494 500 500 1,000 2,001 500 4,501 51 398 307 6,751 — — 444 280 1,035 1,759 425 425 466 269 — 411 135 4,006 4,552 5,287 1,607 1,088 2,695 7,031 2,846 2,241 3,974 687 16,779 94 849 337 20,754 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Equity Equity Equity Preferred Series E 241,829 $ 750 $ — Preferred Series E-1 26,955 Preferred Series G 4,667,636 Total QuatRx Pharmaceuticals Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,936,420 Subtotal: Specialty Pharmaceuticals (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surgical Devices Gynesonics, Inc. Total Gynesonics, Inc. Transmedics, Inc. Surgical Devices Surgical Devices Surgical Devices Equity Equity Equity Preferred Series B Preferred Series C Preferred Series D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Equity Equity Preferred Series B Preferred Series C Preferred Series D Surgical Devices Surgical Devices Surgical Devices 219,298 656,538 1,621,553 2,497,389 88,961 119,999 260,000 Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468,960 Subtotal: Surgical Devices (0.36%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 750 750 250 282 580 1,112 1,100 300 650 2,050 3,162 — — — — 73 123 749 945 303 212 886 1,401 2,346 Total Equity (8.10%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,808 52,670 Warrant Biotechnology Tools Labcyte, Inc. NuGEN Technologies, Inc. Biotechnology Tools Warrant Biotechnology Tools Warrant Preferred Series C Preferred Series B 1,127,624 234,659 Subtotal: Biotechnology Tools (0.05%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Technology Agrivida, Inc. Alphabet Energy, Inc. American Superconductor Corporation(3) Brightsource Energy, Inc. Calera, Inc. EcoMotors, Inc. Fluidic, Inc. Fulcrum Bioenergy, Inc. Glori Energy, Inc. GreatPoint Energy, Inc. Polyera Corporation Propel Fuels SCIEnergy, Inc. Scifiniti (pka Integrated Photovoltaics, Inc.) Solexel, Inc. Stion Corporation(6) TAS Energy, Inc. TPI Composites, Inc. Trilliant, Inc. Energy Technology Warrant Energy Technology Warrant Preferred Series C Preferred Series A 77,447 86,329 Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Energy Technology Warrant Common Stock Preferred Series 1 Preferred Series C Preferred Series B Preferred Series C Preferred Series C-1 Preferred Series C Preferred Series D-1 Preferred Series C Preferred Series C Preferred Series D Preferred Series B Preferred Series C Preferred Series Seed Preferred Series F Preferred Series B Preferred Series A 512,820 175,000 44,529 437,500 59,665 280,897 145,932 393,212 161,575 3,200,000 1,061,623 390,000 1,171,625 2,154 428,571 120 320,000 Subtotal: Energy Technology (0.78%)*(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 78 401 120 82 391 780 513 308 102 275 165 548 69 211 360 82 1,162 1,378 299 172 162 7,179 65 234 299 243 176 175 214 — 475 138 210 50 — 44 233 2 68 278 1,627 756 376 34 5,099 See notes to consolidated financial statements. 120 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Communications & Networking Intelepeer, Inc. OpenPeak, Inc. PeerApp, Inc. Peerless Network, Inc. Ping Identity Corporation Spring Mobile Solutions, Inc. Stoke, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series C 117,958 $ 102 $ 112 Preferred Series 2 108,982 149 Preferred Series B 298,779 Preferred Series A 135,000 Preferred Series B 1,136,277 Preferred Series D 2,834,375 Preferred Series C 158,536 Preferred Series D 72,727 Total Stoke, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,263 Subtotal: Communications & Networking (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer & Business Products Intelligent Beauty, Inc. IPA Holdings, LLC Market Force Information, Inc. Consumer & Business Products Consumer & Business Products Consumer & Business Products Warrant Warrant Warrant Preferred Series B 190,234 Common Stock 650,000 Preferred Series A 99,286 Subtotal: Consumer & Business Products (0.22%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diagnostic Navidea Biopharmaceuticals, Inc. (pka Neoprode)(3) Diagnostic Warrant Common Stock 333,333 Subtotal: Diagnostic (0.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drug Delivery AcelRx Pharmaceuticals, Inc.(3)(10) Drug Delivery Drug Delivery Alexza Pharmaceuticals, Inc.(3) BIND Therapeutics, Inc.(3) Drug Delivery Drug Delivery Celsion Corporation(3) Drug Delivery Dance Biopharm, Inc. Drug Delivery Intelliject, Inc. NuPathe, Inc.(3) Drug Delivery Drug Delivery Revance Therapeutics, Inc.(12) Transcept Pharmaceuticals, Inc.(3) Drug Delivery Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Preferred Series E-5 Common Stock 176,730 37,639 71,359 97,493 97,701 82,500 106,631 802,675 61,452 Subtotal: Drug Delivery (0.50%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,476 Drug Discovery & Development Acceleron Pharma, Inc.(3) ADMA Biologics, Inc.(3) Anthera Pharmaceuticals, Inc.(3) Cell Therapeutics, Inc.(3) Cempra, Inc.(3) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Warrant Warrant Warrant Warrant Warrant Common Stock Common Stock Common Stock Common Stock Common Stock 11,611 31,750 40,178 679,040 138,797 39 129 984 405 458 See notes to consolidated financial statements. 121 61 95 52 417 53 65 118 994 230 275 24 529 244 244 786 645 367 227 74 594 139 557 87 — 41 368 98 661 5 2 7 1,287 1,027 408 1 1,436 152 152 961 1 294 249 154 1,115 136 330 3 3,243 294 73 9 601 728 Subtotal: Drug Discovery & Development (0.85%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,746 5,509 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Preferred Series D 325,261 $ 490 $ 500 Chroma Therapeutics, Ltd.(5)(10) Cleveland BioLabs, Inc(3) Concert Pharmaceuticals, Inc.(12) Coronado Biosciences, Inc.(3) Dicerna Pharmaceuticals, Inc.(12) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Warrant Warrant Warrant Warrant Warrant Warrant Warrant Merrimack Pharmaceuticals, Inc.(3) Drug Discovery & Neuralstem, Inc.(3) Portola Pharmaceuticals, Inc.(3) uniQure B.V.(5)(10)(12) Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Warrant Warrant Warrant Warrant Warrant Common Stock 156,250 Preferred Series C 400,000 Common Stock Common Stock Preferred Series A Preferred Series B Common Stock Common Stock Common Stock Common Stock 73,009 200 21,000 26,400 47,600 22,408 302,143 648,798 68,702 Preferred Series A 185,873 Total Dicerna Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Horizon Pharma, Inc.(3) Drug Discovery & Development Electronics & Computer Hardware Clustrix, Inc. Identive Group, Inc.(3) Plures Technologies, Inc.(3) Electronics & Computer Hardware Warrant Electronics & Computer Hardware Warrant Electronics & Computer Hardware Warrant Common Stock Common Stock 50,000 992,084 Preferred Series A 552,467 Subtotal: Electronics & Computer Hardware (0.04%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare Services, Other MDEverywhere, Inc. Healthcare Services, Other Warrant Common Stock 129 Subtotal: Healthcare Services, Other (0.01%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Services Buzznet, Inc. Cha Cha Search, Inc. InXpo, Inc. Information Services Warrant Information Services Warrant Information Services Warrant Information Services Warrant Preferred Series B Preferred Series G Preferred Series C Preferred Series C-1 19,962 48,232 648,400 582,015 Total InXpo, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Services Warrant Jab Wireless, Inc. Information Services Warrant RichRelevance, Inc. Preferred Series A Preferred Series E 1,230,415 266,567 112,612 Subtotal: Information Services (0.07%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internet Consumer & Business Services Blurb, Inc. Internet Consumer & Business Services Internet Consumer & Business Services Warrant Warrant Total Blurb, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See notes to consolidated financial statements. 122 Preferred Series B 218,684 Preferred Series C 234,280 452,964 105 367 142 28 237 310 575 231 155 295 153 218 66 577 41 — 38 48 86 5 488 1,045 683 313 12 247 124 383 94 94 9 57 98 49 147 265 98 576 299 636 935 16 136 100 252 55 55 — 10 45 40 85 330 — 425 169 248 417 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Preferred Series C-2 454,545 $ 102 $ CashStar, Inc. Gazelle, Inc. Invoke Solutions, Inc. Just Fabulous, Inc. Prism Education Group, Inc. Progress Financial Reply! Inc. ShareThis, Inc. Tectura Corporation WaveMarket, Inc. Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Preferred Series D 151,827 Common Stock 53,084 Preferred Series B 137,456 Preferred Series B 200,000 Preferred Series G 174,562 Preferred Series B 137,225 Preferred Series C 493,502 Preferred Series B-1 253,378 Preferred Series B-1 1,083,779 Subtotal: Internet Consumer & Business Services (0.32%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Media/Content/Info Everyday Health, Inc. (pka Waterfront Media, Inc.) Glam Media, Inc. Zoom Media Group, Inc. Media/Content/Info Warrant Media/Content/Info Warrant Media/Content/Info Warrant Preferred Series C Preferred Series D Preferred Series A 110,018 407,457 1,204 Subtotal: Media/Content/Info (0.05%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical Devices & Equipment Baxano Surgical, Inc.(3) Gelesis, Inc.(6) Home Dialysis Plus, Inc. InspireMD, Inc.(3)(5)(10) Medrobotics Corporation Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Warrant Warrant Warrant NetBio, Inc. NinePoint Medical, Inc. Novasys Medical, Inc. Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Warrant Warrant Warrant Common Stock LLC Interest 882,353 263,688 Preferred Series A 300,000 Common Stock 168,351 Preferred Series D 424,008 Preferred Series E 34,199 458,207 693,202 2,568 Common Stock Common Stock Preferred Series A-1 587,840 Common Stock 109,449 Preferred Series D 526,840 Preferred Series D-1 53,607 Total Medrobotics Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MELA Sciences, Inc.(3) Total Novasys Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689,896 See notes to consolidated financial statements. 123 47 62 — 1,057 76 93 241 — 85 2,078 50 — 275 325 344 7 297 167 184 23 207 94 398 288 — — — — 165 39 589 43 78 320 546 51 105 2,973 60 482 348 890 439 78 245 242 343 27 370 401 408 170 2 125 6 133 Subtotal: Medical Devices & Equipment (0.54%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,610 3,508 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Optiscan Biomedical, Corp.(6) Oraya Therapeutics, Inc. Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Preferred Series D 10,535,275 $ 1,252 $ 232 Common Stock Preferred Series C 95,498 716,948 812,446 Total Oraya Therapeutics, Inc. SonaCare Medical, LLC (pka US HIFU, LLC) United Orthopedic Group, Inc. ViewRay, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical Devices & Equipment Medical Devices & Equipment Medical Devices & Equipment Warrant Warrant Warrant Preferred Series A 409,704 Preferred Series A 423,076 Preferred Series C 312,500 Semiconductors Achronix Semiconductor Corporation SiTime Corporation Semiconductors Semiconductors Warrant Warrant Preferred Series C Preferred Series G 360,000 195,683 Subtotal: Semiconductors (0.03%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software Atrenta, Inc. Box, Inc. Software Software Software Software Warrant Warrant Warrant Warrant Preferred Series D Preferred Series B Preferred Series C Preferred Series D-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Box, Inc. Braxton Technologies, LLC Central Desktop, Inc. Clickfox, Inc. Software Software Software Software Warrant Warrant Warrant Warrant Preferred Series A Preferred Series B Preferred Series B Preferred Series C Total Clickfox, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Daegis Inc. (pka Unify Corporation)(3) ForeScout Technologies, Inc. Hillcrest Laboratories, Inc. Mobile Posse, Inc. Neos Geosolutions, Inc. Sonian, Inc. SugarSync, Inc. Software Software Software Software Software Software Software Software Warrant Warrant Warrant Warrant Warrant Warrant Warrant Warrant Common Stock Preferred Series E Preferred Series E Preferred Series C Preferred Series 3 Preferred Series C Preferred Series CC Preferred Series DD Total Sugarsync, Inc. Touchcommerce, Inc. White Sky, Inc. WildTangent, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software Software Software Warrant Warrant Warrant Preferred Series E Preferred Series B-2 Preferred Series 3 392,670 271,070 199,219 62,255 532,544 168,750 522,769 1,038,563 592,019 1,630,582 718,860 80,587 1,865,650 396,430 221,150 185,949 332,726 107,526 440,252 992,595 124,295 100,000 66 677 743 188 608 333 23 134 157 201 785 331 160 24 184 121 72 117 194 383 187 108 330 730 1,060 1,433 41 55 130 22 106 78 34 112 251 54 238 194 12 206 330 4,701 3,331 625 8,657 — 187 495 363 858 83 82 139 129 — 105 48 16 64 248 4 123 Subtotal: Software (1.69%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,301 11,009 Specialty Pharmaceuticals QuatRx Pharmaceuticals Company Specialty Subtotal: Specialty Pharmaceuticals (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pharmaceuticals Warrant Preferred Series E 155,324 307 307 — — See notes to consolidated financial statements. 124 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2013 (dollars in thousands) Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) $ 74 320 394 225 100 325 719 27 383 410 9 335 344 754 Portfolio Company Surgical Devices Gynesonics, Inc. Total Gynesonics, Inc. Transmedics, Inc. Surgical Devices Surgical Devices Warrant Warrant Preferred Series C Preferred Series D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrant Warrant Preferred Series B Preferred Series D Surgical Devices Surgical Devices $ 180,480 1,575,965 1,756,445 40,436 175,000 Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,436 Subtotal: Surgical Devices (0.12%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Warrants (5.48%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,606 35,637 Total Investments (140.04%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $906,297 $910,295 Value as a percent of net assets * (1) Preferred and common stock, warrants, and equity interests are generally non-income producing. (2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $48.8 million, $44.5 million and $4.3 million respectively. The tax cost of investments is $906.2 million (3) Except for warrants in twenty-five publicly traded companies and common stock in nine publicly traded companies, all investments are restricted at December 31, 2013 and were valued at fair value as determined in good faith by the Board of Directors. No unrestricted securities of the same issuer are outstanding. The Company uses the Standard Industrial Code for classifying the industry grouping of its portfolio companies. (4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility. (5) Non-U.S. company or the company’s principal place of business is outside the United States. (6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. (7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners at least 25% but not more than 50% of the voting securities of the company (8) Debt is on non-accrual status at December 31, 2013, and is therefore considered non-income producing. (9) Convertible Senior Debt (10) Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non- qualifying assets. (11) Denotes that all or a portion of the loan secures the notes offered in the Debt Securitization (as defined in Note 4). (12) Subsequent to December 31, 2013, this company completed an initial public offering. Note that the December 31, 2013 fair value does not reflect any potential impact of the conversion of our preferred shares to common shares which may include reverse split associated with the offering. (13) In our quarterly and annual reports filed with the commission prior to this Annual Report on Form 10-K, we referred to this industry sector as “Clean Tech.” See notes to consolidated financial statements. 125 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Principal Amount Cost(2) Value(3) Debt Anthera Pharmaceuticals Inc.(3) Aveo Pharmaceuticals, Inc.(3) Cempra, Inc.(3) Chroma Therapeutics, Ltd.(5)(10) Concert Pharmaceuticals, Inc.(4) Coronado BioSciences, Inc.(3) Dicerna Pharmaceuticals, Inc. Insmed, Inc. Merrimack Pharmaceuticals, Inc. NeurogesX, Inc.(3) Paratek Pharmaceuticals, Inc. Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Senior Debt(11) Matures December 2014 Interest rate Prime + 7.30% or Floor rate of 10.55% Senior Debt(11) Matures September 2015 Interest rate Prime + 7.15% or Floor rate of 11.90% Senior Debt(11) Matures December 2015 Interest rate Prime + 6.30% or Floor rate of 9.55% Senior Debt Matures November 2013 Interest rate Prime + 7.75% or Floor rate of 12.00% Senior Debt Matures October 2015 Interest rate Prime + 3.25% or Floor rate of 8.50% Senior Debt(11) Matures March 2016 Interest rate Prime + 6.00% or Floor rate of 9.25% Senior Debt Matures January 2015 Interest rate Prime + 4.40% or Floor rate of 10.15% Senior Debt(11) Matures January 2016 Interest rate Prime + 4.75% or Floor rate of 9.25% Senior Debt Matures May 2016 Interest rate Prime + 5.30% or Floor rate of 10.55% Senior Debt Matures February 2015 Interest rate Prime + 7.50% or Floor rate of 10.75% Senior Debt(9) Matures upon liqudation Interest rate Fixed 10.00% Senior Debt(9) Matures upon liqudation Interest rate Fixed 10.00% $20,532 $ 20,745 $ 21,007 $26,500 26,500 27,030 $10,000 9,862 9,902 $ 4,111 4,718 4,759 $20,000 19,633 18,983 $15,000 14,761 14,761 $ 9,166 8,996 8,929 $20,000 19,305 19,674 $40,000 39,670 39,670 $13,662 13,645 13,884 $ $ 45 36 45 31 76 45 31 76 Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Debt Drug Discovery & Development (34.63%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,911 178,675 See notes to consolidated financial statements. 126 Portfolio Company Bridgewave Communications OpenPeak, Inc. PeerApp, Inc.(4) PointOne, Inc. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Sub-Industry Communications & Networking Communications & Networking Communications & Networking Communications & Networking Type of Investment(1) Senior Debt Matures March 2016 Interest rate Prime + 8.75% or Floor rate of 12.00% Senior Debt (11) Matures July 2015 Interest rate Prime + 8.75% or Floor rate of 12.00% Senior Debt Matures April 2013 Interest rate Prime + 7.50% or Floor rate of 11.50% Senior Debt Matures April 2015 Interest rate Libor + 11.00% or Floor rate of 13.50% Senior Debt Matures September 2015 Interest rate Libor + 11.00% or Floor rate of 13.50% Senior Debt Matures December 2016 Interest rate Libor + 11.00% or Floor rate of 13.50% Principal Amount Cost(2) Value(3) $ 7,500 $ 7,003 $ 4,896 $15,000 15,008 15,158 $ 501 588 588 $ 7,000 6,880 6,772 $ 347 343 333 $ 3,594 3,594 3,400 Total PointOne, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,817 10,505 Total Debt Communications & Networking (6.04%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,416 31,147 Clustrix, Inc. Identive Group, Inc. Electronics & Computer Hardware Electronics & Computer Hardware Senior Debt Matures December 2015 Interest rate Prime + 6.50% or Floor rate of 9.75% Senior Debt Matures November 2015 Interest rate Prime + 7.75% or Floor rate 11.00% $ 235 227 227 $ 7,500 7,447 7,674 7,447 7,674 Total Debt Electronics & Computer Hardware (1.49%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Box, Inc.(4) Software Senior Debt Matures March 2016 Interest rate Prime + 3.75% or Floor rate of 7.50% Senior Debt Matures July 2014 Interest rate Prime + 5.25% or Floor rate of 8.50% Senior Debt(11) Matures July 2016 Interest rate Prime + 5.13% or Floor rate of 8.88% $10,000 9,910 9,353 $ 1,018 1,075 1,060 $20,000 20,138 19,274 Total Box, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,123 29,687 See notes to consolidated financial statements. 127 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Clickfox, Inc. Sub-Industry Type of Investment(1) Software Senior Debt Principal Amount Cost(2) Value(3) Matures November 2015 Interest rate Prime + 8.25% or Floor rate of 11.50% $ 8,000 $ 7,318 $ 7,558 EndPlay,Inc. Software Senior Debt Matures August 2015 Interest rate Prime + 7.35% or Floor rate 10.6% $ 2,000 1,930 1,930 Hillcrest Laboratories, Inc Software Senior Debt Matures July 2015 Interest rate Prime + 7.50% or Floor rate of 10.75% $ 4,000 3,923 3,860 JackBe Corporation Software Senior Debt Matures January 2016 Interest rate Prime + 7.25% or Floor rate of 10.50% $ 3,000 2,900 2,900 Kxen, Inc.(4) Software Senior Debt Matures January 2015 Interest rate Prime + 5.08% or Floor rate of 8.33% $ 2,337 2,371 2,192 Tada Innovations, Inc. Software Senior Debt(9) Matures November 2012 Interest rate Fixed 8.00% $ 100 100 — Total Debt Software (9.33%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,665 48,127 Althea Technologies, Inc. Quatrx Pharmaceuticals Company Specialty Pharmaceuticals Senior Debt Matures October 2013 Interest rate Prime + 7.70% or Floor rate of 10.95% Specialty Pharmaceuticals Senior Debt(9) Matures March 2014 Interest rate Fixed 8.00% $ 7,659 7,927 7,927 $ 1,888 1,888 9,815 2,394 10,321 1,803 1,803 1,783 1,783 Total Debt Specialty Pharmaceuticals (2.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Achronix Semiconductor Corporation Semiconductors Senior Debt Matures January 2015 Interest rate Prime + 10.60% or Floor rate of 13.85% $ 1,847 Total Debt Semiconductors (0.34%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AcelRX Pharmaceuticals, Inc.(3) Drug Delivery Senior Debt(11) Matures December 2014 Interest rate Prime + 3.25% or Floor rate of 8.50% $16,345 16,222 15,983 ADMA Biologics, Inc. Drug Delivery Senior Debt Alexza Pharmaceuticals, Inc.(3) Drug Delivery Senior Debt(11) Matures October 2013 Interest rate Prime + 6.50% or Floor rate of 10.75% $ 5,052 5,410 5,410 Matures Febuary 2016 Interest rate Prime + 2.75% or Floor rate of 8.50% $ 4,000 3,857 3,857 See notes to consolidated financial statements. 128 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company BIND Biosciences, Inc. Sub-Industry Type of Investment(1) Drug Delivery Senior Debt Principal Amount Cost(2) Value(3) Matures July 2014 Interest rate Prime + 7.45% or Floor rate of 10.70% $ 3,326 $ 3,320 $ 3,387 Intelliject, Inc. Drug Delivery Senior Debt(11) Matures June 2016 Interest rate Prime + 5.75% or Floor rate of 11.00% $15,000 14,615 15,065 Nupathe, Inc.(3) Drug Delivery Senior Debt Matures May 2016 Interest rate Prime - 3.25% or Floor rate of 9.85% $ 8,500 8,166 8,166 Revance Therapeutics, Inc. Drug Delivery Senior Debt Total Debt Drug Delivery (13.59%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matures March 2015 Interest rate Prime + 6.60% or Floor rate of 9.85% $18,446 18,330 69,920 18,263 70,131 Ahhha, Inc.(8) Blurb, Inc. Education Dynamics, LLC Just.Me, Inc. Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Senior Debt Matures January 2015 Interest rate Fixed 12.00% Senior Debt Matures December 2015 Interest rate Prime + 5.25% or Floor rate 8.50% Senior Debt Matures March 2016 Interest rate Fixed 12.50%, PIK Interest 1.50% Senior Debt Matures June 2015 Interest rate Prime + 2.50% or Floor rate 5.75% Senior Debt Matures June 2015 Interest rate Prime + 5.00% or Floor rate 8.25% $ 350 347 — $ 8,000 7,708 7,429 $27,500 26,976 26,976 $ 750 732 680 $ 750 727 1,459 704 1,384 Total Just.Me, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loku, Inc. Senior Debt(9) Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Matures June 2013 Interest rate Fixed 6.00% Senior Debt Matures April 2015 Interest rate Fixed 10.00% Senior Debt(11) Matures September 2015 Interest rate Prime + 6.875% or Floor rate of 10.125% Senior Debt(11) Matures September 2015 Interest rate Prime + 7.25% or Floor rate of 11.00% $ 100 100 100 $ 500 490 452 $11,749 11,624 11,337 $ 2,000 1,946 1,971 NetPlenish, Inc. Reply! Inc. Total Reply! Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,570 13,308 See notes to consolidated financial statements. 129 Portfolio Company Second Rotation, Inc. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Sub-Industry Type of Investment(1) Principal Amount Cost(2) Value(3) Internet Consumer & Business Services Senior Debt Matures August 2015 Interest rate Prime + 6.50% or Floor rate of 10.25%, PIK Interest 2.50% Senior Debt Matures August 2015 Interest rate Prime + 6.50% or Floor rate of 10.25%, PIK Interest 1.50% Revolving Line of Credit Matures January 2013 Interest rate Fixed 10.50%, PIK Interest 0.25% $ 5,843 $ 5,860 $ 5,880 $ 1,947 1,888 1,909 $ 327 313 313 Total Second Rotation, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,061 8,102 ShareThis, Inc. Tectura Corporation Internet Consumer & Business Services Internet Consumer & Business Services Senior Debt Matures June 2016 Interest rate Prime + 7.50% or Floor rate of 10.75% Revolving Line of Credit Matures July 2013 Interest rate Libor + 8.00% or Floor rate of 11.00% Senior Debt Matures December 2014 Interest rate Libor + 10.00% or Floor rate of 13.00% Senior Debt Matures April 2013 Interest rate Libor + 10.00% or Floor rate of 13.00% $15,000 14,268 14,268 $16,340 17,850 17,797 $ 6,978 6,908 6,827 $ 1,390 1,325 1,325 Total Tectura Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,083 25,949 Trulia, Inc.(3) Internet Consumer & Business Services Senior Debt(11) Matures September 2015 Interest rate Prime + 2.75% or Floor rate of 6.00% Senior Debt(11) Matures September 2015 Interest rate Prime + 5.50% or Floor rate of 8.75% $ 5,000 4,921 4,729 $ 5,000 4,920 9,841 4,547 9,276 Total Trulia, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vaultlogix, Inc. Internet Consumer & Business Services Senior Debt Matures September 2016 Interest rate LIBOR + 8.50% or Floor rate of 10.00%, PIK interest 2.50% Senior Debt Matures September 2015 Interest rate LIBOR + 7.00% or Floor rate of 8.50% $ 7,500 7,681 7,721 $10,253 10,190 9,854 Total Vaultlogix, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,871 17,575 See notes to consolidated financial statements. 130 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Votizen, Inc. Wavemarket, Inc. Sub-Industry Type of Investment(1) Internet Consumer & Business Services Internet Consumer & Business Services Senior Debt(9) Matures February 2013 Interest rate Fixed 5.00% Senior Debt(11) Matures September 2015 Interest rate Prime + 5.75% or Floor rate of 9.50% Principal Amount Cost(2) Value(3) $ 100 $ 100 $ 6 $10,000 9,840 9,444 Total Debt Internet Consumer & Business Services (26.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,714 134,269 Cha Cha Search, Inc. Eccentex Corporation InXpo, Inc. Jab Wireless, Inc. RichRelevance, Inc. Womensforum.com, Inc. Information Services Information Services Information Services Information Services Information Services Information Services Senior Debt Matures February 2015 Interest rate Prime + 6.25% or Floor rate of 9.50% Senior Debt(11) Matures May 2015 Interest rate Prime + 7.00% or Floor rate of 10.25% Senior Debt Matures March 2014 Interest rate Prime + 7.50% or Floor rate of 10.75% Senior Debt Matures November 2017 Interest rate Prime + 6.75% or Floor rate of 8.00% Senior Debt Matures January 2015 Interest rate Prime + 3.25% or Floor rate of 7.50% Senior Debt(11) Matures October 2016 Interest rate LIBOR + 6.50% or Floor rate of 9.25% Senior Debt(11) Matures October 2016 Interest rate LIBOR + 7.50% or Floor rate of 10.25% $ 2,641 2,604 2,522 $ 1,000 977 965 $ 2,550 2,466 2,434 $30,000 29,852 29,850 $ 4,245 4,210 4,068 $ 8,000 7,838 7,838 $ 4,500 4,422 4,422 Total Womensforum.com, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,260 12,260 Total Debt Information Services (10.10%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,369 52,099 Gynesonics, Inc. Medical Device & Equipment Senior Debt Matures October 2013 Interest rate Prime + 8.25% or Floor rate of 11.50% Senior Debt Matures February 2013 Interest rate Fixed 8.00% Senior Debt Matures September 2013 Interest rate Fixed 8.00% $ 3,912 3,975 4,014 $ 253 247 247 $ 36 30 30 Total Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,252 4,291 See notes to consolidated financial statements. 131 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Lanx, Inc. Sub-Industry Medical Device & Equipment Type of Investment(1) Senior Debt Matures October 2016 Interest rate Prime + 6.50% or Floor rate of 10.25% Revolving Line of Credit Matures October 2015 Interest rate Prime + 5.25% or Floor rate of 9.00% Principal Amount Cost(2) Value(3) $15,000 $ 14,428 $ 14,428 $ 5,500 5,300 5,300 Total Lanx, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,728 19,728 Novasys Medical, Inc. Medical Device & Equipment Senior Debt(9) Matures January 2013 Interest rate Fixed 8.00% Senior Debt(9) Matures August 2013 Interest rate Fixed 8.00% $ $ 65 22 Total Novasys Medical, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 20 85 65 20 85 Optiscan Biomedical, Corp.(6) Medical Device & Equipment Senior Debt Matures December 2013 Interest rate Prime + 8.20% or Floor rate of 11.45% Senior Debt(9) Matures April 2013 Interest rate Fixed 8.00% Senior Debt(9) Matures September 2013 Interest rate Fixed 8.00% $ 8,260 8,915 9,080 $ 288 288 288 $ 123 123 9,326 123 9,491 Total Optiscan Biomedical, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oraya Therapeutics, Inc. Medical Device & Equipment Senior Debt(9) Matures December 2013 Interest rate Fixed 7.00% $ 500 500 500 Total Oraya Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,298 Senior Debt(11) Matures September 2015 Interest rate Prime + 5.50% or Floor rate of 10.25% $10,000 9,798 10,079 10,579 USHIFU, LLC Medical Device & Equipment Senior Debt(11) Matures April 2016 Interest rate Prime + 7.75% or Floor rate of 11.00% $ 6,000 5,856 5,856 Total Debt Medical Device & Equipment (9.69%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,545 50,030 Navidea Biopharmaceuticals, Inc. (pka Diagnostic Senior Debt Neoprobe)(3) Matures December 2014 Interest rate Prime + 6.75% or Floor rate of 10.00% $ 5,741 5,691 5,752 Tethys Bioscience Inc. Diagnostic Senior Debt(11) Total Debt Diagnostic (3.06%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,631 Matures December 2015 Interest rate Prime + 8.40% or Floor rate of 11.65% $10,000 9,940 10,026 15,778 See notes to consolidated financial statements. 132 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Principal Amount Cost(2) Value(3) $ 761 $ 834 $ 834 $ 5,000 4,890 5,724 5,724 4,995 5,829 5,829 Portfolio Company Labcyte, Inc. Sub-Industry Biotechnology Tools Type of Investment(1) Senior Debt Matures May 2013 Interest rate Prime + 8.60% or Floor rate of 11.85% Senior Debt(11) Matures June 2016 Interest rate Prime + 6.70% or Floor rate of 9.95% Total Labcyte, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Debt Biotechnology Tools (1.13%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MedCall, LLC Healthcare Services, Other Senior Debt Matures January 2016 Interest rate 7.79% or Floor rate of 9.50% Senior Debt $ 4,908 4,844 4,695 Total MedCall, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matures January 2016 Interest rate LIBOR +8.00% or Floor rate of 10.00% $ 4,037 3,972 8,816 3,871 8,566 Pacific Child & Family Associates, LLC Healthcare Services, Other Senior Debt Matures January 2015 Interest rate LIBOR + 9.00% or Floor rate of 11.50% Revolving Line of Credit Matures January 2015 Interest rate LIBOR + 7.50% or Floor rate of 10.00% Senior Debt Matures January 2015 Interest rate LIBOR + 11.50% or Floor rate of 14.00%, PIK interest 3.75% $ 3,661 3,713 3,713 $ 1,500 1,490 1,490 $ 5,900 6,562 6,562 Total Pacific Child & Family Associates, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,765 11,765 ScriptSave (Medical Security Card Company, LLC) Healthcare Services, Other Senior Debt Matures Febuary 2016 Interest rate LIBOR + 8.75% or Floor rate of 11.25% $16,375 16,168 16,150 Total Debt Health Services, Other (7.07%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,749 36,481 Entrigue Surgical, Inc. Surgical Devices Senior Debt Matures December 2014 Interest rate Prime + 5.90% or Floor rate of 9.65% $ 2,463 2,431 2,427 Transmedics, Inc. Surgical Devices Senior Debt(11) Matures November 2015 Interest rate Fixed 12.95% $ 7,250 Total Debt Surgical Devices (1.92%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,464 9,895 7,464 9,891 See notes to consolidated financial statements. 133 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Westwood One Communications Women’s Marketing, Inc. Media/ Content/ Info Media/Content/ Info Senior Debt Matures October 2016 Interest rate LIBOR + 6.50% or Floor rate of 8.00% Senior Debt Matures May 2016 Interest rate Libor + 9.50% or Floor rate of 12.00%, PIK interest 3.00% Senior Debt(11) Matures November 2015 Interest rate Libor + 7.50% or Floor rate of 10.00% Total Women’s Marketing, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Zoom Media Corporation Senior Debt Media/Content/ Info Media/Content/ Info Matures December 2015 Interest rate Prime + 7.25% or Floor rate of 10.50%, PIK 3.75% Revolving Line of Credit Matures December 2014 Interest rate Prime + 5.25% or Floor rate of 8.50% Total Zoom Media Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Debt Media/Content/Info (9.83%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,458 50,721 Alphabet Energy, Inc. American Supercondutor Corporation(3) BrightSource Energy, Inc. Comverge, Inc. Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Senior Debt Matures February 2015 Interest rate Prime + 5.75% or Floor rate of 9.00% Senior Debt(11) Matures December 2014 Interest rate Prime + 7.25% or Floor rate of 11.00% Revolving Line of Credit Matures January 2013 Interest rate Prime + 7.25% or Floor rate of 10.50% Senior Debt Matures November 2017 Interest rate LIBOR + 8.00% or Floor rate of 9.50% Senior Debt Matures November 2017 Interest rate LIBOR + 9.50% or Floor rate of 11.00% Total Comverge, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Enphase Energy, Inc.(3) Senior Debt(11) Energy Technology Energy Technology Matures June 2014 Interest rate Prime + 5.75% or Floor rate of 9.00% Senior Debt Matures August 2016 Interest rate Prime + 8.25% or Floor rate of 11.50% $ 3,758 3,739 3,716 $ 7,400 7,321 7,321 Total Enphase Energy, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,060 11,037 See notes to consolidated financial statements. 134 Principal Amount Cost(2) Value(3) $20,475 $ 18,994 $ 17,575 $ 9,681 10,002 10,002 $16,362 16,105 26,107 15,787 25,789 $ 5,000 4,657 4,657 $ 3,000 2,700 7,357 2,700 7,357 $ 1,614 1,531 1,531 $ 9,231 9,161 9,438 $35,000 34,870 34,870 $20,000 19,577 19,577 $14,000 13,704 33,281 13,704 33,281 Portfolio Company Glori Energy, Inc. Integrated Photovoltaics, Inc. Polyera Corporation Redwood Systems, Inc. SCIenergy, Inc.(4) Solexel, Inc. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Sub-Industry Type of Investment(1) Principal Amount Cost(2) Value(3) Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Energy Technology Senior Debt(11) Matures June 2015 Interest rate Prime + 6.75% or Floor rate of 10.00% Senior Debt Matures February 2015 Interest rate Prime + 7.38% or Floor rate of 10.63% Senior Debt Matures June 2016 Interest rate Prime + 6.75% or Floor rate of 10.00% Senior Debt Matures February 2016 Interest rate Prime + 6.50% or Floor rate of 9.75% Senior Debt Matures September 2015 Interest rate Prime + 8.75% or Floor rate 12.00% Senior Debt Matures June 2013 Interest rate Prime + 8.25% or Floor rate of 11.50% Senior Debt Matures June 2013 Interest rate Prime + 7.25% or Floor rate of 10.50% $ 8,000 $ 7,832 $ 7,988 $ 2,572 2,494 2,508 $ 3,000 2,952 2,952 $ 5,000 4,965 4,965 $ 5,296 5,103 5,262 $ 2,884 2,877 2,877 $ 331 330 330 Total Solexel, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,207 3,207 Stion Corporation(4) Energy Technology Senior Debt Matures February 2015 Interest rate Prime + 6.75% or Floor rate of 10.00% $ 7,519 7,483 7,545 Total Debt Energy Technology (24.14%)*(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,938 124,584 Total Debt (160.38%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833,228 827,540 See notes to consolidated financial statements. 135 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Warrant Acceleron Pharmaceuticals, Inc. Drug Discovery & Development Common Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Series A Series B $ 46,446 426,000 110,270 Total Warrants Acceleron Pharmaceuticals, Inc. Anthera Pharmaceuticals Inc.(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582,716 Cempra, Inc.(3) Chroma Therapeutics, Ltd.(5)(10) Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Concert Pharmaceuticals, Inc.(4) Drug Discovery & Coronado Biosciences, Inc.(3) Dicerna Pharmaceuticals, Inc. Development Drug Discovery & Development Drug Discovery & Development Common Stock Warrants Common Stock Warrants 321,429 39,038 Preferred Stock Warrants Series D 325,261 Preferred Stock Warrants Series C 400,000 Common Stock Warrants Common Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Series A Series B Total Warrants Dicerna Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EpiCept Corporation(3) Horizon Pharma, Inc.(3) Insmed, Incorporated(3) Merrimack Pharmaceuticals, Inc.(3) NeurogesX, Inc.(3) PolyMedix, Inc.(3) Portola Pharmaceuticals, Inc. Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Common Stock Warrants Common Stock Warrants Common Stock Warrants Common Stock Warrants Common Stock Warrants Common Stock Warrants Preferred Stock Warrants Series B 687,023 73,009 50,000 525,000 660,000 1,235,000 325,204 22,408 329,931 302,143 3,421,500 627,586 39 69 35 143 984 187 490 367 142 28 236 311 575 4 231 570 155 503 480 152 $ 53 345 64 462 66 46 500 126 81 16 173 217 406 — — 1,316 641 400 9 298 Total Warrants Drug Discovery & Development (0.84%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,983 4,351 Bridgewave Communications Intelepeer, Inc. Neonova Holding Company OpenPeak, Inc. PeerApp, Inc.(4) Peerless Network, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Preferred Stock Warrants Series 5 2,942,618 Preferred Stock Warrants Series C 117,958 Preferred Stock Warrants Series A 450,000 Preferred Stock Warrants Series E 25,646 Preferred Stock Warrants Series B 298,779 Preferred Stock Warrants Series A 135,000 753 101 94 149 61 95 — 190 23 9 47 352 See notes to consolidated financial statements. 136 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Ping Identity Corporation UPH Holdings, Inc. Purcell Systems, Inc. Stoke, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Preferred Stock Warrants Series B 1,136,277 $ 52 $ 112 Common Stock Warrants 145,877 Preferred Stock Warrants Series B 110,000 Preferred Stock Warrants Preferred Stock Warrants Series C Series D 158,536 72,727 131 123 53 65 Total Stoke, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,263 118 Total Warrants Communications & Networking (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,677 Atrenta, Inc. Box, Inc.(4) Software Software Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Series D Series C Series B Series D-1 Total Box, Inc. Braxton Technologies, LLC. Central Desktop, Inc. Clickfox, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Series B Series B Series C Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Software Software Software 392,670 271,070 199,219 62,255 532,544 168,750 522,823 1,038,563 592,019 121 117 73 194 384 188 108 329 730 Total Clickfox, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Daegis Inc. (pka Unify 1,630,582 1,059 Corporation)(3) Endplay, Inc. Forescout Technologies, Inc. HighRoads, Inc. Hillcrest Laboratories, Inc. JackBe Corporation Kxen, Inc.(4) Rockyou, Inc. SugarSync Inc. Software Software Software Software Software Software Software Software Software Common Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Series B Series D Series B Series E Series C Series D Series B Series CC Series DD Total SugarSync Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Tada Innovations, Inc. Series B-2 White Sky, Inc. Series 3A WildTangent, Inc. Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Software Software Software 718,860 180,000 399,687 190,176 1,865,650 180,000 184,614 41,266 332,726 107,526 440,252 20,833 124,295 100,000 1,434 67 99 44 55 73 47 117 78 34 112 25 54 238 Total Warrants Software (1.51%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,225 7,776 See notes to consolidated financial statements. 137 52 62 135 57 192 1,039 322 2,235 3,242 566 6,043 — 166 332 213 545 75 39 202 9 70 54 13 — 123 30 153 — 3 82 600 63 675 309 — 106 119 889 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Clustrix, Inc. Luminus Devices, Inc. Shocking Technologies, Inc. Electronics & Computer Hardware Preferred Stock Warrants Electronics & Computer Hardware Common Stock Warrants Electronics & Computer Hardware Preferred Stock Warrants 26,386 Series A-1 181,818 Series B 49,732 $ 12 $ 13 Total Warrant Electronics & Computer Hardware (0.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Althea Technologies, Inc. Pacira Pharmaceuticals, Inc.(3) Quatrx Pharmaceuticals Company Specialty Pharmaceuticals Specialty Pharmaceuticals Specialty Pharmaceuticals Preferred Stock Warrants Series D 502,273 Common Stock Warrants 178,987 1,086 1,263 Preferred Stock Warrants Series E 340,534 528 — Total Warrants Specialty Pharmaceuticals (0.42%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,923 2,152 IPA Holdings, LLC Market Force Information, Inc. Seven Networks, Inc. ShareThis, Inc. Wageworks, Inc.(3) Wavemarket, Inc. Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Common Stock Warrants 650,000 Preferred Stock Warrants Series A 99,286 Preferred Stock Warrants Series C 1,821,429 Preferred Stock Warrants Series B 535,905 Common Stock Warrants 211,765 Preferred Stock Warrants Series E 1,083,333 275 24 174 547 252 106 485 84 130 543 2,023 61 Total Warrant Consumer & Business Products (0.64%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,378 3,326 Achronix Semiconductor Corporation Enpirion, Inc. iWatt, Inc. Semiconductors Semiconductors Semiconductors Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Series D Series D Series C Series D Total iWatt, Inc. Kovio Inc. Quartics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series B Series C Preferred Stock Warrants Preferred Stock Warrants Semiconductors Semiconductors 360,000 239,872 558,748 1,954,762 2,513,510 319,352 69,139 160 157 45 583 628 92 53 Total Warrants Semiconductors (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,090 AcelRX Pharmaceuticals, Inc.(3) Drug Delivery Drug Delivery ADMA Biologics, Inc. Alexza Pharmaceuticals, Inc.(3) Drug Delivery Drug Delivery BIND Biosciences, Inc. Drug Delivery Intelliject, Inc. Drug Delivery NuPathe, Inc.(3) Revance Therapeutics, Inc. Drug Delivery Transcept Pharmaceuticals, Common Stock Warrants Common Stock Warrants Common Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Common Stock Warrants Preferred Stock Warrants Inc.(3) Drug Delivery Common Stock Warrants Series C-1 Series B Series D 274,508 25,000 37,639 150,000 82,500 106,631 269,663 61,452 356 129 645 291 594 139 557 87 84 — 14 289 303 — — 387 406 128 8 446 574 165 618 44 Total Warrant Drug Delivery (0.46%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,798 2,389 See notes to consolidated financial statements. 138 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Blurb, Inc. Internet Consumer & Business Services Preferred Stock Warrants Preferred Stock Warrants Series B Series C 439,336 234,280 $ 323 636 $ 347 218 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673,616 959 Total Blurb, Inc. Invoke Solutions, Inc. Just.Me Prism Education Group, Inc. Reply! Inc. Second Rotation Tectura Corporation Trulia, Inc.(3) Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Internet Consumer & Business Services Common Stock Warrants 53,084 Preferred Stock Warrants Series A 102,299 Preferred Stock Warrants Series B 200,000 Preferred Stock Warrants Series B 137,225 Preferred Stock Warrants Series D 105,819 Preferred Stock Warrants Series B-1 253,378 Common Stock Warrants 56,053 38 20 43 320 105 51 188 Total Warrants Internet Consumer & Business Services (0.37%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,724 1,880 Buzznet, Inc. Cha Cha Search, Inc. Eccentex Corporation Intelligent Beauty, Inc. InXpo, Inc. Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Series B Series F Series A Series B Series C Series C-1 Total InXpo, Inc. Jab Wireless, Inc. RichRelevance, Inc. Solutionary, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A Series D Series A-2 Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants Information Services Preferred Stock Warrants 19,962 48,232 408,719 190,234 648,400 267,049 915,449 266,567 112,749 111,311 Total Warrants Information Services (0.22%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EKOS Corporation Gelesis, Inc.(6) Lanx, Inc. Novasys Medical, Inc. Medical Device & Equipment Medical Device & Equipment Medical Device & Equipment Medical Device & Equipment Preferred Stock Warrants Series C 4,448,135 LLC Interest 263,688 Preferred Stock Warrants Series C 1,203,369 Preferred Stock Warrants Common Stock Warrants Series D 580,447 109,449 689,896 Total Novasys Medial, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Optiscan Biomedical, Corp.(6) Medical Device & Equipment Medical Device & Equipment Preferred Stock Warrants Series D 6,206,187 1,069 Preferred Stock Warrants Common Stock Warrants Series C 716,948 95,498 Oraya Therapeutics, Inc. Total Oraya Therapeutics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812,446 See notes to consolidated financial statements. 139 9 58 31 230 98 25 123 265 98 96 910 327 78 441 131 2 133 676 66 742 565 — 20 — 802 113 12 368 — 5 3 579 43 24 67 420 28 5 1,107 — 95 445 — — — 151 314 62 376 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) USHIFU, LLC Medical Device & Equipment Preferred Stock Warrants Series G 141,388 $ 188 $ 188 Total Warrants Medical Device & Equipment (0.24%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,978 1,255 Navidea Biopharmaceuticals, Inc. (pka Neoprobe)(3) Tethys Bioscience, Inc. Diagnostic Diagnostic Common Stock Warrants Preferred Stock Warrants Series E 333,333 617,683 Total Warrants Diagnostic (0.10%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,127,624 Biotechnology Tools Preferred Stock Warrants Labcyte, Inc. 204,545 Biotechnology Tools Preferred Stock Warrants NuGEN Technologies, Inc. 30,114 Preferred Stock Warrants Series C Series B Series C Total NuGEN Technologies, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,659 Total Warrants Biotechnology Tools (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500 Entrigue Surgical, Inc. 40,436 Transmedics, Inc. 175,000 Preferred Stock Warrants Preferred Stock Warrants Preferred Stock Warrants Surgical Devices Surgical Devices Series B Series B Series D Total Transmedics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,457 Gynesonics, Inc. 1,474,261 Preferred Stock Warrants Preferred Stock Warrants Series A Series C Surgical Devices Total Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,597,718 Total Warrants Surgical Devices (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Everyday Health, Inc. (pka Waterfront Media, Inc.) Glam Media, Inc. Zoom Media Group, Inc. Media/Content/ Info Preferred Stock Warrants Media/Content/ Info Preferred Stock Warrants Media/Content/ Info Preferred Stock Warrants Series C Series D n/a 110,018 407,457 1,204 Total Warrants Media/Content/Info (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alphabet Energy, Inc. American Supercondutor Corporation(3) BrightSource Energy, Inc. Calera, Inc. EcoMotors, Inc. Enphase Energy, Inc.(3) Fulcrum Bioenergy, Inc. Glori Energy, Inc. GreatPoint Energy, Inc. Integrated Photovoltaics, Inc. Polyera Corporation Propel Biofuels, Inc. Redwood Systems, Inc. SCIenergy, Inc.(4) Solexel, Inc. Energy Technology Preferred Stock Warrants Series A 79,083 Energy Technology Common Stock Warrants Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Energy Technology Preferred Stock Warrants Energy Technology Common Stock Warrants Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Preferred Stock Warrants Energy Technology Series D Series C Series B Series C-1 Series C Series D-1 Series A-1 Series C Series C Series C Series D Series B 139,275 58,333 44,529 437,500 37,500 187,265 145,932 393,212 390,000 161,575 3,200,000 331,250 1,061,168 245,682 See notes to consolidated financial statements. 140 244 148 392 323 45 33 78 401 87 225 100 325 18 387 405 817 60 482 348 890 68 244 675 513 308 102 211 165 548 82 69 211 3 361 1,161 360 169 529 247 161 8 169 416 2 — 100 100 7 298 305 407 55 — 346 401 148 122 248 — 435 17 104 62 1 119 68 317 2 145 7 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Stion Corporation(4) Trilliant, Inc. Energy Technology Energy Technology Preferred Stock Warrants Preferred Stock Warrants Series E Series A 110,226 320,000 $ 317 161 $ 167 54 Total Warrants Energy Technology (0.39%)*(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,199 2,016 Total Warrants (5.73%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,060 29,550 Equity Aveo Pharmaceuticals, Inc.(3) Dicerna Pharmaceuticals, Inc. Inotek Pharmaceuticals Corp. Merrimack Pharmaceuticals, Inc.(3) Paratek Pharmaceuticals, Inc. Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Drug Discovery & Development Common Stock 167,864 Preferred Stock Series B 502,684 842 502 Preferred Stock Series C 15,334 1,500 1,351 488 — Common Stock Preferred Stock Common Stock 546,448 2,000 3,328 Series H 244,158 47,471 1,000 5 1,005 5,849 1,000 242 98 61 1,401 9 146 283 3 286 5,453 915 205 174 77 1,371 — 142 2,000 372 508 374 3,254 101 250 — — — — — 227 200 Total Paratek Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291,629 Total Equity Drug Discovery & Development (1.06%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acceleron Pharmaceuticals, Inc. Drug Delivery Preferred Stock Preferred Stock Preferred Stock Preferred Stock Series B Series C Series E Series F Total Acceleron Pharmaceuticals, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merrion Pharma, Plc.(3)(5)(10) Nupathe, Inc. Transcept Pharmaceuticals, Common Stock Common Stock Drug Delivery Drug Delivery 600,601 93,456 43,488 19,268 756,813 20,000 50,000 Inc.(3) Drug Delivery Common Stock 41,570 500 185 Total Equity Drug Delivery (0.33%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,056 1,698 E-band Communications, Corp.(6) Communications & Networking Preferred Stock Preferred Stock Preferred Stock Preferred Stock Series B Series C Series D Series E 564,972 649,998 847,544 1,987,605 Total E-band Communications, Corp. Glowpoint, Inc.(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050,119 Neonova Holding Company Peerless Network, Inc. Stoke, Inc. UPH Holdings, Inc. Communications & Networking Communications & Networking Communications & Networking Communications & Networking Communications & Networking Common Stock 114,192 Preferred Stock Series A 500,000 Preferred Stock Series A 1,000,000 1,000 3,692 Preferred Stock Series E 152,905 Common Stock 742,887 500 — 631 624 Total Equity Communications & Networking (1.04%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,105 5,374 See notes to consolidated financial statements. 141 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Atrenta, Inc. Software Preferred Stock Preferred Stock Series C Series D 1,196,845 635,513 $ $ 508 986 Total Atrenta, Inc. Box, Inc.(4) Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,832,358 390,625 158,127 124,511 220,751 38,183 Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock Series C Series D Series D-1 Series D-2 Series E Total Box, Inc. Caplinked, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A-3 Preferred Stock Software 932,197 53,614 1,494 500 500 1,000 2,001 500 4,501 52 1,042 1,604 2,646 5,117 2,071 1,632 2,892 500 12,212 77 Total Equity Software (2.89%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,047 14,935 Spatial Photonics, Inc. Virident Systems Electronics & Computer Hardware Preferred Stock Electronics & Computer Hardware Preferred Stock Series D 4,717,813 268 — Series D 6,546,217 5,000 4,922 Total Equity Electronics & Computer Hardware (0.95%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,268 4,922 750 750 819 — — 597 Quatrx Pharmaceuticals Company Specialty Pharmaceuticals Preferred Stock Series E 166,419 Total Equity Specialty Pharmaceuticals (0.00%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caivis Acquisition Corporation Facebook, Inc.(3) IPA Holdings, LLC Market Force Information, Inc. Wageworks, Inc.(3) Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Consumer & Business Products Common Stock Series A 295,861 Common Stock Series B 307,500 9,558 8,089 Preferred Stock LLC interest 500,000 Preferred Stock Series B 187,970 Common Stock Series D 19,260 500 500 250 711 657 343 Total Equity Consumer & Business Products (2.02%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,627 10,397 iWatt, Inc. Semiconductors Preferred Stock Series E 2,412,864 Total Equity Semiconductors (0.15%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buzznet, Inc. Good Technologies, Inc. (pka Visto Corporation) Solutionary, Inc. Information Services Preferred Stock Series C 263,158 Information Services Common Stock Information Services Preferred Stock Preferred Stock Series A-1 Series A-2 500,000 189,495 65,834 Total Solutionary, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,329 490 490 250 603 18 325 343 Total Equity Information Services (0.06%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,196 752 752 — — 235 82 317 317 See notes to consolidated financial statements. 142 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) Portfolio Company Sub-Industry Type of Investment(1) Series Shares Cost(2) Value(3) Gelesis, Inc.(6) Medical Device & Equipment LLC Interest LLC Interest LLC Interest 674,208 674,208 675,676 $ — $ 425 500 435 610 525 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,024,092 925 1,570 Total Gelesis, Inc. Lanx, Inc. Novasys Medical, Inc. Optiscan Biomedical, Corp.(6) Medical Device & Equipment Medical Device & Equipment Medical Device & Equipment Preferred Stock Series C 1,203,369 1,000 1,155 Preferred Stock Series D-1 4,118,444 1,000 Preferred Stock Preferred Stock Series B Series C-2 6,185,567 1,927,309 3,000 655 — 314 251 565 Total Optiscan Biomedical, Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,112,876 3,655 Total Equity Medical Device & Equipment (0.64%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,580 3,290 NuGEN Technologies, Inc. Biotechnology Tools Preferred Stock Series C 189,394 Total Equity Biotechnology Tools (0.12%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transmedics, Inc. Surgical Devices Preferred Stock Preferred Stock Preferred Stock Series B Series C Series D Total Transmedics, Inc. Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Stock Preferred Stock Series B Series C Surgical Devices 88,961 119,999 260,000 468,960 219,298 656,512 500 500 1,100 300 650 2,050 250 282 Total Gynesonics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875,810 532 600 600 — — 650 650 159 251 410 Total Equity Surgical Devices (0.20%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,582 1,060 Everyday Health, Inc. (pka Waterfront Media, Inc.) Media/Content/ Info Preferred Stock Series D 145,590 1,000 Total Equity Media/Content/Info (0.08%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 412 412 Total Equity (9.54%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,050 49,210 Total Investments (175.65%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $914,338 $906,300 Value as a percent of net assets * (1) Preferred and common stock, warrants, and equity interests are generally non-income producing. (2) Gross unrealized appreciation, gross unrealized depreciation, and net depreciation for federal income tax purposes totaled $19.9 million, $27.6 million and $7.8 million respectively. The tax cost of investments is $916.9 million (3) Except for warrants in twenty publicly traded companies and common stock in eight publicly traded companies, all investments are restricted at December 31, 2012 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. See notes to consolidated financial statements. 143 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. CONSOLIDATED SCHEDULE OF INVESTMENTS December 31, 2012 (dollars in thousands) (4) Debt investments of this portfolio company have been pledged as collateral under the Wells Facility. (5) Non-U.S. company or the company’s principal place of business is outside the United States. (6) Affiliate investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owns at least 5% but not more than 25% of the voting securities of the company. (7) Control investment that is defined under the Investment Company Act of 1940 as companies in which HTGC owners at least 25% but not more than 50% of the voting securities of the company (8) Debt is on non-accrual status at December 31, 2012, and is therefore considered non-income producing. (9) Convertible Senior Debt (10) Indicates assets that the Company deems not “qualifying assets” under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non- qualifying assets. (11) Denotes that all or a portion of the loan secures the notes offered in the Debt Securitization (as defined in Note 4). (12) In our quarterly and annual reports filed with the commission prior to this Annual Report on Form 10-K, we referred to this industry sector as “Clean Tech.” See notes to consolidated financial statements. 144 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 focused on providing senior secured loans to venture capital-backed companies in technology-related markets, including technology, biotechnology, life science, and energy and renewables technology industries at all stages of development. The Company sources its investments through its principal office located in Palo Alto, CA, as well as through its additional offices in Boston, MA, New York, NY, Boulder, CO and McLean, VA. The Company was incorporated under the General Corporation Law of the State of Maryland in December 2003. The Company is an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective January 1, 2006, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 5). Hercules Technology II, L.P. (“HT II”), Hercules Technology III, L.P. (“HT III”), and Hercules Technology IV, L.P. (“HT IV”), are Delaware limited partnerships that were formed in January 2005, September 2009 and December 2010, respectively. HT II and HT III were licensed to operate as small business investment companies (“SBICs”) under the authority of the Small Business Administration (“SBA”) on September 27, 2006 and May 26, 2010, respectively. As SBICs, HT II and HT III are subject to a variety of regulations concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments. HT IV was formed in anticipation of receiving an additional SBIC license; however, the Company has not yet applied for such license, and HT IV currently has no material assets or liabilities. The Company also formed Hercules Technology SBIC Management, LLC, or (“HTM”), a limited liability company in November 2003. HTM is a wholly owned subsidiary of the Company and serves as the limited partner and general partner of HT II and HT III (see Note 4 to the Company’s consolidated financial statements). HT II and HT III hold approximately $174.1 million and $285.1 million in assets, respectively, and they accounted for approximately 11.1% and 18.2% of our total assets, respectively, prior to consolidation at December 31, 2013. The Company also established wholly owned subsidiaries, all of which are structured as Delaware corporations and limited liability companies, to hold portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). By investing through these wholly owned subsidiaries, the Company is able to benefit from the tax treatment of these entities and create a tax structure that is more advantageous with respect to the Company’s RIC status. The consolidated financial statements include the accounts of the Company, its subsidiaries and its consolidated securitization VIE. All inter-company accounts 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. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the consolidated financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein. 2. Summary of Significant Accounting Policies Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries and all VIEs of which the Company is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. 145 A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE. To assess whether the Company has the power to direct the activities of a VIE that most significantly impact its economic performance, the Company considers all the facts and circumstances including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes identifying the activities that most significantly impact the VIE’s economic performance and identifying which party, if any, has power over those activities. In general, the party that makes the most significant decisions affecting the VIE is determined to have the power to direct the activities of a VIE. To assess whether the Company has the obligation to absorb the losses or the right to receive benefits that could potentially be significant to the VIE, the Company considers all of its economic interests, including debt and equity interests, servicing rights and fee arrangements, and any other variable interests in the VIE. If the Company determines that it is the party with the power to make the most significant decisions affecting the VIE, and the Company has a potentially significant interest in the VIE, then it consolidates the VIE. The Company performs ongoing reassessments, usually quarterly, of whether it is the primary beneficiary of a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The Company also reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are subject to the VIE consolidation framework. As of the date of this report, the only VIE consolidated by the Company is its securitization VIE formed in conjunction with the issuance of the Asset-Backed Notes (See Note 4). Valuation of Investments At December 31, 2013, 74.5% of the Company’s total assets represented investments in portfolio companies that are valued at fair value by the Board of Directors. Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is as determined in good faith by the Board of Directors. The Company’s investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification topic 820 Fair Value Measurements and Disclosures (“ASC 820”). The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, substantially all of the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. As such, the Company values substantially all of its investments at fair value as determined in good faith pursuant to a consistent valuation policy and the Company’s Board of Directors in accordance with the provisions of ASC 820 and the 1940 Act. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board may differ significantly from the value that would have been used had a readily available market existed for such investments, and the differences could be material. The Company may from time to time engage an independent valuation firm to provide the Company with valuation assistance with respect to certain portfolio investments on a quarterly basis. The Company intends to continue to engage an independent valuation firm to provide management with assistance regarding the Company’s determination of the fair value of selected portfolio investments each quarter unless directed by the Board of Directors to cancel such valuation services. The scope of services rendered by an independent valuation 146 firm is at the discretion of the Board of Directors. The Company’s Board of Directors is ultimately and solely responsible for determining the fair value of the Company’s investments in good faith. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, the Company’s Board of Directors has approved a multi-step valuation process each quarter, as described below: (1) the Company’s quarterly valuation process begins with each portfolio company being initially valued by the investment professionals responsible for the portfolio investment; (2) preliminary valuation conclusions are then documented and business based assumptions are discussed with the Company’s investment committee; (3) the Valuation Committee of the Board of Directors reviews the preliminary valuation of the investments in the portfolio as provided by the investment committee which incorporates the results of the independent valuation firm as appropriate; (4) the Valuation Committee discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of, where applicable, the respective independent valuation firm and the investment committee. ASC 820 establishes a framework for measuring the fair value of the assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. ASC 820 also enhances disclosure requirements for fair value measurements based on the level within the hierarchy of the information used in the valuation. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value in accordance with ASC 820 based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows: Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets at the measurement date. The types of assets carried at Level 1 fair value generally are equities listed in active markets. Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset in connection with market data at the measurement date and for the extent of the instrument’s anticipated life. Fair valued assets that are generally included in this category are warrants held in a public company. Level 3—Inputs reflect management’s best estimate of what market participants would use in pricing the asset at the measurement date. It includes prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Generally, assets carried at fair value and included in this category are the debt investments and warrants and equities held in a private company. 147 In accordance with ASU 2011-04, the following table provides quantitative information about the Company’s Level 3 fair value measurements of the Company’s investments as of December 31, 2013. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. Investment Type - Level Three Debt Investments Fair Value at December 31, 2013 Valuation Techniques/ Methodologies Unobservable Input(a) Range Weighted Average(c) Pharmaceuticals—Debt (in thousands) 25,811 250,607 Originated Within 6 Months Market Comparable Companies Medical Devices—Debt 46,900 34,723 Originated Within 6 Months Market Comparable Companies Origination Yield Hypothetical Market Yield Premium/(Discount) Origination Yield Hypothetical Market Yield Premium/(Discount) Technology—Debt Energy Technology—Debt 18,796 98,290 1,643 32,597 108,238 Liquidation Originated Within 6 Months Market Comparable Companies Originated Within 6 Months Market Comparable Companies Origination Yield Hypothetical Market Yield Lower Middle Market—Debt 121,347 31,818 12,576 Market Comparable Companies Broker Quote(b) Liquidation 13.36% 14.13% 14.87% 15.23% 14.26% 15.48% 15.17% 15.37% 16.12% 12.56% - 14.53% 13.83% - 15.47% (1.00%) - 0.00% 13.54% - 17.37% 14.32% - 17.37% (1.00%) - 1.00% 10.62% - 15.97% 14.72% - 21.08% 0.00% - 1.00% 30.00% - 70.00% 14.68% - 15.87% 15.37% (0.50%) - 1.50% 14.83% - 19.73% 0.00% - 1.00% 99.50% - 100.25% of par $2.0 - $22.5 million 20.00% - 80.00% Premium/(Discount) Probability weighting of alternative outcomes Origination Yield Hypothetical Market Yield Premium/(Discount) Hypothetical Market Yield Premium/(Discount) Price Quotes Par Value Probability weighting of alternative outcomes Debt Investments Where Fair Value Approximates Amortized Cost 15,906 22,236 500 Imminent Payoffs Debt Investments Maturing in Less than One Year Convertible Debt at Par $821,988 Total Level Three Debt Investments (a) The significant unobservable inputs used in the fair value measurement of our debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in our Consolidated Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Therapeutic, Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Internet Consumer and Business Services, Information Services, and Communications and Networking industries in the Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Electronics and Computer Hardware, Healthcare Services—Other, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments. Energy Technology, above, aligns with the Energy Technology Industry in the Schedule of Investments. (b) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. (c) The weighted averages are calculated based on the fair market value of each investment. 148 Investment Type - Level Three Debt Investments Pharmaceuticals—Debt Fair Value at December 31, 2012 Valuation Techniques/Methodologies Unobservable Input (a) Range (in thousands) $266,978 Market Comparable Companies Option Pricing Model (b) Hypothetical Market Yield Premium/ (Discount) Average Industry Volatility (c) Risk Free Interest Rate Estimated Time to Exit (in months) Medical Devices—Debt 46,022 Market Comparable Companies Hypothetical Market Yield Premium Technology—Debt 159,341 Market Comparable Companies Liquidation Hypothetical Market Yield Premium/ (Discount) Investment Collateral Energy Technology—Debt 91,305 Market Comparable Companies Hypothetical Market Yield Premium Lower Middle Market—Debt 263,894 Market Comparable Companies Broker Quote (d) Hypothetical Market Yield Premium Price Quotes Market Comparable Index Yield Spreads Par Value 12.83% - 16.11% (2.0%) - 1.0% 57.67% 0.190% 15.2 16.19% 0.0% - 1.0% 12.36% - 20.49% (1.5%) - 1.0% $0 - $7.4 million 12.69% 0.0% - 1.0% 10.75% -16.25% 0.0% -1.0% 78.0% -100% of par 4.33% - 5.93% $30.0 million Total Level Three Debt Investments $827,540 (a) The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, security liens, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation would result in a significantly lower (higher) fair value measurement, depending on the materiality of the investment. Debt investments in the industries noted in the Company’s Schedule of Investments are included in the industries note above as follows: Pharmaceuticals, above, is comprised of debt investments in the Specialty Pharmaceuticals, Drug Discovery and Development, Drug Delivery, and Diagnostics and Biotechnology industries in the Schedule of Investments. Medical Devices, above, is comprised of debt investments in the Therapeutic, Surgical Devices, Medical Devices and Equipment and Biotechnology Tools industries in the Schedule of Investments. Technology, above, is comprised of debt investments in the Software, Semiconductors, Electronics and Computer Hardware, Internet Consumer and Business Services, Information Services, Media/Content/Info and Communications and Networking industries in the Schedule of Investments. Lower Middle Market, above, is comprised of debt investments in the Communications and Networking, Software, Electronics and Computer Hardware, Information Services, Internet Consumer and Business Services, Media/Content/Info, and Specialty Pharmaceuticals industries in the Schedule of Investments. Energy Technology, above, aligns with the Energy Technology industry in the Schedule of Investments. (b) An option pricing model valuation technique was used to derive the conversion feature of convertible notes. (c) Represents the range of industry volatility used by market participants when pricing the investment. (d) A broker quote valuation technique was used to derive the fair value of loans which are part of a syndicated facility. 149 Investment Type - Fair Value at December 31, 2013 Valuation Techniques/ Methodologies Unobservable Input(a) Range Level Three Equity Investments (in thousands) $10,244 Market Comparable Companies 9,289 Market Adjusted OPM Backsolve 18,127 Other EBITDA Multiple(b) Revenue Multiple(b) Discount for Lack of Marketability(c) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) Level Three Warrant Investments $10,200 Market Comparable Companies EBITDA Multiple(b) Revenue Multiple(b) Discount for Lack of Marketability(c) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 8,913 Market Adjusted OPM Backsolve 9,595 Other Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 8.6x - 17.7x 0.7x - 13.8x 9.1% - 23.6% 43.4% - 110.7% 0.1% - 0.4% 6 - 30 45.6% - 109.7% 0.1% - 0.9% 6 - 42 44.0% 0.1% 12 5.0x - 51.4x 0.5x - 13.8x 6.4% - 36.0% 21.3% - 110.7% 0.1% - 1.0% 6 - 48 35.7% - 109.9% 0.1% - 2.7% 3 - 48 44.0% - 56.9% 0.1% - 1.0% 12 - 48 Total Level Three Warrant and Equity Investments $66,368 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. (c) Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. (d) Represents the range of average industry volatility used by market participants when pricing the investment. 150 Investment Type- Fair Value at December 31, 2012 Valuation Techniques/ Methodologies Unobservable Input(a) Range Level Three Warrant and Equity Investments (in thousands) $57,685 Market Comparable Companies EBITDA Multiple(b) Revenue Multiple(b) Discount for Lack of Marketability(c) 1.43x -20.68x 0.42x - 16.98x 10.4% - 25.2% Warrant positions additionally subject to: Option Pricing Model Average Industry Volatility(d) Risk-Free Interest Rate Estimated Time to Exit (in months) 46.49% - 141.2% 0.17% - 0.46% 12 - 48 Total Level Three Warrant and Equity Investments $57,685 (a) The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are revenue and/or EBITDA multiples and discounts for lack of marketability. Additional inputs used in the Black Scholes option pricing model include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date. (b) Represents amounts used when the Company has determined that market participants would use such multiples when pricing the investments. (c) Represents amounts used when the Company has determined market participants would take into account these discounts when pricing the investments. (d) Represents the range of industry volatility used by market participants when pricing the investment. Debt Investments The Company follows the guidance set forth in ASC 820 which establishes a framework for measuring the fair value of assets and liabilities and outlines a fair value hierarchy which prioritizes the inputs used to measure fair value and the effect of fair value measures on earnings. The Company’s debt securities are primarily invested in venture capital-backed companies in technology-related markets, including technology, biotechnology, life science and energy and renewables technology industries. Given the nature of lending to these types of businesses, the Company’s investments in these portfolio companies are considered Level 3 assets under ASC 820 because there is no known or accessible market or market indexes for debt instruments for these investment securities to be traded or exchanged. In making a good faith determination of the value of our investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the OID, if any, and PIK interest or other receivables which have been accrued to principal as earned. The Company then applies the valuation methods as set forth below. The Company applies a procedure that assumes a sale of investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. Under this process, the Company also evaluates the collateral for recoverability of the debt investments as well as applies all of its historical fair value analysis. The Company uses pricing on recently issued comparable debt securities to determine the baseline hypothetical market yields as of the measurement date. The Company considers each portfolio company’s credit rating, security liens and other characteristics of the investment to adjust the baseline yield to derive a hypothetical yield for each investment as of the measurement date. The anticipated future cash flows from each investment are then discounted at the hypothetical yield to estimate each investment’s fair value as of the measurement date. The Company’s process includes, among other things, the underlying investment performance, the current portfolio company’s financial condition and market changing events that impact valuation, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date. The Company values its syndicated loans, which represent less than 4.0% of the Company’s debt investment portfolio, using 151 broker quotes and bond indices amongst other factors. If there is a significant deterioration of the credit quality of a debt investment, the Company may consider other factors to estimate fair value, including the proceeds that would be received in a liquidation analysis. The Company records unrealized depreciation on investments when it believes that an investment has decreased in value, including where collection of a loan is doubtful or, if under the in-exchange premise, when the value of a debt security was to be less than amortized cost of the investment. Conversely, where appropriate, the Company records unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and, therefore, that its investment has also appreciated in value or, if under the in-exchange premise, the value of a debt security were to be greater than amortized cost. When originating a debt instrument, the Company generally receives warrants or other equity-related securities from the borrower. The Company determines the cost basis of the warrants or other equity-related securities received based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and warrants or other equity-related securities received. Any resulting discount on the debt investments from recordation of the warrant or other equity instruments is accreted into interest income over the life of the debt investments. Equity-Related Securities and Warrants Securities that are traded in the over-the-counter markets or on a stock exchange will be valued at the prevailing bid price at period end. The Company has a limited number of equity securities in public companies. In accordance with the 1940 Act, unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the measurement date. The Company estimates the fair value of warrants using a Black Scholes pricing model. At each reporting date, privately held warrant and equity-related securities are valued based on an analysis of various factors including, but not limited to, the portfolio company’s operating performance and financial condition and general market conditions, price to enterprise value or price to equity ratios, discounted cash flow, valuation comparisons to comparable public companies or other industry benchmarks. When an external event occurs, such as a purchase transaction, public offering, or subsequent equity sale, the pricing indicated by that external event is utilized to corroborate the Company’s valuation of the warrant and equity-related securities. The Company periodically reviews the valuation of its portfolio companies that have not been involved in a qualifying external event to determine if the enterprise value of the portfolio company may have increased or decreased since the last valuation measurement date. Investments measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations as of December 31, 2013 and as of December 31, 2012. The Company transfers investments in and out of Level 1, 2 and 3 securities as of the beginning balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period. During the year ended December 31, 2013, there were no transfers between Levels 1 or 2. (in thousands) Description Senior secured debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments at Fair Value as of December 31, 2013 Quoted Prices In Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ — — 15,009 — $15,009 $ — — — 6,930 $6,930 821,988 35,554 2,107 28,707 $888,356 12/31/2013 $821,988 35,554 17,116 35,637 $910,295 152 (in thousands) Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior secured debt Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments at Fair Value as of December 31, 2012 Quoted Prices In Active Markets For Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ — — 13,665 — $13,665 $ — — — 7,410 $7,410 $827,540 33,178 2,367 22,140 $885,225 12/31/2012 $827,540 33,178 16,032 29,550 $906,300 The table below presents reconciliation for all financial assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and December 31, 2012. Net change in unrealized appreciation or depreciation(2) Purchases Sales Repayments Gross Transfers into Level 3(1) Gross Transfers out of Level 3(1) Balance, January 1, 2013 Net Realized Gains (losses)(1) (in thousands) Balances, December 31, 2013 Senior Debt Preferred Stock . . . . . . . . Common Stock . . . . . . . . Warrants.. . . . . . . . . . . . . . . . . . . . . . . . . $827,540 33,178 2,367 22,140 $(9,536) 7,968 — 5,257 $(8,208) 7,682 (1,103) 6,173 $484,367 $ (8) $(469,780) 6,198 (18,572) 750 — 6,524 (10,350) — — — $ 769 776 93 — $(3,156) (1,676) — (1,037) $821,988 35,554 2,107 28,707 Total . . . . . . . . . . . . . . . . . $885,225 $ 3,689 $ 4,544 $497,839 $(28,930) $(469,780) $1,638 $(5,869) $888,356 (in thousands) Balance, January 1, 2012 Net Realized Gains (losses)(1) Net change in unrealized appreciation or depreciation(2) Purchases Sales Repayments Gross Transfers into Level 3 Gross Transfers out of Level 3 Balances, December 31, 2012 Senior Debt . . . . . . . . . . . . . . $585,767 29,929 Preferred Stock . . . . . . . . . . . 450 Common Stock . . . . . . . . . . . 26,284 Warrants . . . . . . . . . . . . . . . . $(5,178) $ (733) (16) $ $ 4,413 $(2,262) 3,761 5,873 (2,452) $545,913 $ (2,000) $(294,294) (6,553) (45) (9,211) 10,562 9,558 7,362 — — — Total . . . . . . . . . . . . . . . . . . . $642,430 $(1,514) $ 4,920 $573,395 $(17,809) $(294,294) $— 356 — — $356 $ (406) (4,144) (13,453) (4,256) $827,540 33,178 2,367 22,140 $(22,259) $885,225 Includes net realized gains (losses) recorded as realized gains or losses in the accompanying consolidated statements of operations. Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statements of operations. (1) (2) (3) Transfers in/out of Level 3 relate to the conversion of Optiscan Biomedical, Inc., Gynesonics, Inc., Philotic, Inc., and Tethys Bioscience, Inc. debt to equity, the conversion of OCZ Technology warrants to principal and the initial public offerings of Portola Pharmaceuticals, Inc., Acceleron Pharma, Inc., Bind, Inc, and ADMA Biologics, Inc. For the year ended December 31, 2013, approximately $4.4 million and $4.1 million in net unrealized appreciation was recorded for preferred stock and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $8.2 million and $1.1 million in net unrealized depreciation was recorded for debt and common stock Level 3 investments, respectively, relating to assets still held at the reporting date. For the year ended December 31, 2012, approximately $3.8 million in unrealized appreciation and $2.2 million in unrealized depreciation was recorded for equity and warrant Level 3 investments, respectively, relating to assets still held at the reporting date. For the same period, approximately $2.3 million in unrealized depreciation was recorded for Level 3 debt investments relating to assets still held at the reporting date. As required by the 1940 Act, the Company classifies its investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that the Company is deemed to “control”. Generally, under the 1940 Act, the Company is deemed to “control” a company in which it has invested if it owns 25% or more of the voting securities of such company or has greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of the Company, as defined in the 1940 Act, which are not control investments. The Company is deemed to be an “affiliate” of a company in which it has invested if it owns 5% or more but less than 25% of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments. 153 The following table summarizes our realized and unrealized gain and loss and changes in our unrealized appreciation and depreciation on control and affiliate investments for the years ended December 31, 2013, 2012, and 2011. At December 31, 2013 and December 31, 2012, the Company did not hold any Control Investments. (in thousands) Portfolio Company Type Fair Value at December 31, 2013 Investment Income Year ended December 31, 2013 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate Gelesis, Inc. Optiscan BioMedical, Corp. . . . . . . . . . . . . . . . . Affiliate Stion Corporation . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 473 4,784 5,724 $10,981 $ — 1,933 462 $2,395 $(1,193) (225) 593 $ (825) $— — — $— $— — — $— (in thousands) Portfolio Company Type Fair Value at December 31, 2012 Investment Income Year ended December 31, 2012 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) E-Band Communications, Corp. Gelesis, Inc. Optiscan BioMedical, Corp. . . . . . . . . . . . . . Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Affiliate . . . . . . . . . . . . . . . . Affiliate Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 1,665 10,207 $11,872 $ 4 712 1,649 $2,365 $ (18) 672 (2,722) $(2,068) $— — — $— $— — — $— (in thousands) Portfolio Company Type Fair Value at December 31, 2011 Investment Income Year ended December 31, 2011 Unrealized (Depreciation)/ Appreciation Reversal of Unrealized (Depreciation)/ Appreciation Realized Gain/(Loss) MaxVision Holdings, LLC. . . . . . . . . . . . . . . . . . Control . . . . . . . . . . . . . Affiliate E-Band Communications, Corp. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,027 — $1,027 $889 14 $903 $5,158 3,425 $8,583 $— — $— $— — $— During the year ended December 31, 2013, Stion Corporation became classified as an affiliate. The Company’s investment in E-Band Communications, Corp., a company that was an affiliate investment as of December 31, 2012, was liquidated during the year ended December 31, 2013. Approximately $3.3 million of realized losses and a reversal of $3.3 million of previously recorded unrealized depreciation was recognized on this affiliate equity investment during the year ended December 31, 2013. During the year ended December 31, 2012, Optiscan BioMedical, Corp. became classified as an affiliate. The Company’s investment in MaxVision Holding, L.L.C., a company that was a control investment as of December 31, 2011, was liquidated during the year ended December 31, 2012. On July 31, 2012, the Company received payment of $2.0 million for its total debt investments in Maxvision Holding, L.L.C. Approximately $8.7 million of realized losses and a reversal of $10.5 million of previously recorded unrealized depreciation was recognized on this control debt and equity investment during the year ended December 31, 2012. A summary of the composition of the Company’s investment portfolio as of December 31, 2013 and December 31, 2012 at fair value is shown as follows: (in thousands) Senior secured debt with warrants . . . . . . . . . . Senior secured debt . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $634,820 222,805 35,554 17,116 $910,295 69.7% 24.5% 3.9% 1.9% 100.0% $652,041 205,049 33,178 16,032 $906,300 72.0% 22.6% 3.7% 1.7% 100.0% 154 A summary of the Company’s investment portfolio, at value, by geographic location as of December 31, 2013 and December 31, 2012 is shown as follows: (in thousands) United States . . . . . . . . . . . . . . . . . . . . . . . . . . Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . England . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $864,003 25,798 10,131 9,863 500 $910,295 94.9% 2.8% 1.1% 1.1% 0.1% 100.0% $901,041 — — — 5,259 $906,300 99.4% — — — 0.6% 100.0% The following table shows the fair value the Company’s portfolio by industry sector at December 31, 2013 and December 31, 2012: (in thousands) Drug Discovery & Development . . . . . . . . . . . . . . . Energy Technology . . . . . . . . . . . . . . . . . . . . . . . . . Internet Consumer & Business Services . . . . . . . . . Medical Devices & Equipment . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drug Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Services . . . . . . . . . . . . . . . . . . . . . . . . Communications & Networking . . . . . . . . . . . . . . . Healthcare Services, Other . . . . . . . . . . . . . . . . . . . Specialty Pharmaceuticals . . . . . . . . . . . . . . . . . . . . Surgical Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . Electronics & Computer Hardware . . . . . . . . . . . . . Media/Content/Info . . . . . . . . . . . . . . . . . . . . . . . . . Biotechnology Tools . . . . . . . . . . . . . . . . . . . . . . . . Semiconductors . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer & Business Products . . . . . . . . . . . . . . . . Diagnostic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2013 December 31, 2012 Investments at Fair Value Percentage of Total Portfolio Investments at Fair Value Percentage of Total Portfolio $219,169 164,466 122,073 103,614 65,218 62,022 46,565 35,979 29,080 20,055 10,307 9,211 8,679 5,275 4,685 2,995 902 $910,295 24.1% 18.1% 13.4% 11.4% 7.2% 6.8% 5.1% 4.0% 3.2% 2.2% 1.0% 1.0% 1.0% 0.6% 0.5% 0.3% 0.1% 100.0% $188,479 126,600 136,149 54,575 70,838 74,218 53,523 37,560 36,481 12,473 11,358 12,715 51,534 6,845 2,922 13,723 16,307 $906,300 20.8% 14.0% 15.0% 6.0% 7.8% 8.2% 5.9% 4.1% 4.0% 1.4% 1.3% 1.4% 5.7% 0.8% 0.3% 1.5% 1.8% 100.0% (1) In our quarterly and annual reports filed with the Commission prior to this Annual Report of Form 10-K, we referred to this industry sector as “Clean Tech”. During the year ended December 31, 2013, the Company funded investments in debt securities and equity investments totaling approximately $491.1 million and $3.9 million, respectively. The Company converted approximately $3.2 million of debt to equity in four portfolio companies in the year ended December 31, 2013. During the year ended December 31, 2012, the Company funded investments in debt securities and equity investments, totaling approximately $486.8 million and $9.7 million, respectively. During the year ended December 31, 2012, the Company converted approximately $356,000 of debt to equity in one portfolio company. No single portfolio investment represents more than 10% of the fair value of the investments as of December 31, 2013 and December 31, 2012. During the year ended December 31, 2013, the Company recognized net realized gains of approximately $14.8 million on the portfolio. These net realized gains included gross realized gains of approximately $32.6 million primarily from the sale of investments in nine portfolio companies, partially offset by gross realized losses of approximately $17.8 million primarily from the liquidation of the Company’s investments in five portfolio companies. 155 During the year ended December 31, 2012, the Company recognized net realized gains of approximately $3.2 million on the portfolio. These net realized gains included $17.5 million of gross realized gains offset by $14.3 million of gross realized losses. The Company recorded gross realized gains of approximately $17.5 million primarily from the sale of investments in five portfolio companies. These gains were offset by gross realized losses of approximately $14.3 million primarily from the liquidation of the Company’s investments in four portfolio companies. Loan origination and commitment fees received in full at the inception of a loan are deferred and amortized into fee income as an enhancement to the related loan’s yield over the contractual life of the loan. Loan exit fees to be paid at the termination of the loan are accreted into interest income over the contractual life of the loan. The Company had approximately $4.0 million and $2.0 million of unamortized fees at December 31, 2013 and December 31, 2012, respectively, and approximately $14.4 million and $6.8 million in exit fees receivable at December 31, 2013 and December 31, 2012, respectively. The Company has loans in its portfolio that contain a payment-in-kind (“PIK”) provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. The Company recorded approximately $3.5 million and $1.5 million in PIK income in the years ended December 31, 2013 and 2012, 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 the years ended December 31, 2013 and December 31, 2012. In the majority of cases, the Company collateralizes its investments by obtaining a first priority security interest in a portfolio company’s assets, which may include its intellectual property. In other cases, the Company may obtain a negative pledge covering a company’s intellectual property. At December 31, 2013, approximately 62.8% of the Company’s portfolio company loans were secured by a first priority security in all of the assets of the portfolio company (including their intellectual property), 37.1% of portfolio company loans were to portfolio companies that were prohibited from pledging or encumbering their intellectual property and 0.1% of portfolio company loans had an equipment only lien. Income Recognition The Company records interest income on the accrual basis and recognizes it as earned in accordance with the contractual terms of the loan agreement to the extent that such amounts are expected to be collected. Original Issue Discount (“OID”) initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and is accreted into interest income over the term of the loan as a yield enhancement. When a loan becomes 90 days or more past due, or if management otherwise does not expect the portfolio company to be able to service its debt and other obligations, we will generally place the loan on non- accrual status and cease recognizing interest income on that loan until all principal has been paid. Any uncollected interest related to prior periods is reversed from income in the period that collection of the interest receivable is determined to be doubtful. However, the Company may make exceptions to this policy if the investment has sufficient collateral value and is in the process of collection. At December 31, 2013, the Company had two loans on non-accrual with a cumulative investment cost and fair value of approximately $23.3 million and $12.6 million, respectively, compared to one loan on non-accrual at December 31, 2012 with an approximate investment cost of $347,000 and no fair market value. During the fourth quarter of 2013 we recognized a realized loss of approximately $350,000 of principal on our debt investments in this company. 156 Paid-In-Kind and End of Term Income Contractual paid-in-kind (“PIK”) interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the portfolio company to be able to pay all principal and interest due. In addition, the Company may also be entitled to an end-of-term payment that is amortized into income over the life of the loan. To maintain the Company’s status as a RIC, PIK and end-of-term income must be paid out to stockholders in the form of dividends even though the cash has not yet been collected. Amounts necessary to pay these dividends may come from available cash or the liquidation of certain investments. Fee Income Fee income, generally collected in advance, includes loan commitment and facility fees for due diligence and structuring, as well as fees for transaction services and management services rendered by us to portfolio companies and other third parties. Loan and commitment fees are amortized into income over the contractual life of the loan. Management fees are generally recognized as income when the services are rendered. Loan origination fees are capitalized and then amortized into interest income using the effective interest rate method. In certain loan arrangements, warrants or other equity interests are received from the borrower as additional origination fees. The Company recognizes nonrecurring fees amortized over the remaining term of the loan commencing in the quarter relating to specific loan modifications. Certain fees may still be recognized as one-time fees, including prepayment penalties, fees related to select covenant default waiver fees and acceleration of previously deferred loan fees and original issue discount (OID) related to early loan pay-off or material modification of the specific debt outstanding. Equity Offering Expenses Our offering costs are charged against the proceeds from equity offerings when received. Debt Issuance Costs Debt issuance costs are fees and other direct incremental costs incurred by the Company in obtaining debt financing. Debt issuance costs are recognized as prepaid expenses and amortized over the life of the related debt instrument using the straight line method, which closely approximates the effective yield method. Prepaid financing costs, net of accumulated amortization, were as follows as of December 31, 2013 and December 31, 2012: (in thousands) As of December 31, 2013 2012 Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SBA Debenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 398 1,323 2,686 5,319 5,074 $ 867 1,900 4,074 6,287 5,877 $14,800 $19,005 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. 157 Stock Based Compensation The Company has issued and may, from time to time, issue additional stock options and restricted stock to employees under our 2004 Equity Incentive Plan and Board members under our 2006 Equity Incentive Plan. Management follows ASC 718, formally known as FAS 123R “Share-Based Payments” to account for stock options granted. Under ASC 718, compensation expense associated with stock based compensation is measured at the grant date based on the fair value of the award and is recognized 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 (EPS) Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future service is required as a condition to the delivery of the underlying common stock. Income Taxes The Company operates to qualify to be taxed as a RIC under the Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual payment-in-kind interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non- cash expenses, such as realized losses and depreciation and amortization expense. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the 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) 98.2% 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 Requirements”). The Company 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). Depending on the level of taxable income earned in a tax year, we may choose to carry over taxable income in excess of current year distributions from such taxable income into the next tax year and pay a 4% excise tax on such income, as required. The maximum amount of excess taxable income that may be carried over for distribution in the next year under the Code is the total amount of dividends paid in the following year, subject to certain declaration and payment guidelines. To the extent we choose to carry over taxable income into the next tax year, dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income, the distribution of prior year taxable income carried over into and distributed in the current year, or returns of capital. At December 31, 2013, 2012, and 2011, no excise tax was recorded. We intend to distribute approximately $3.8 million of spillover earnings from the year ended December 31, 2013 to our shareholders in 2014. We 158 distributed approximately $1.5 million of spillover earnings from the year ended December 31, 2012 to our shareholders in 2013. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Comprehensive Income The Company reports all changes in comprehensive income in the Consolidated Statement of Operations. Comprehensive income is equal to net increase in net assets resulting from operations. Dividends Dividends and distributions to common stockholders are approved by the Board of Directors on a quarterly basis and the dividend payable is recorded on the ex-dividend date. We maintain an “opt out” dividend reinvestment plan that provides for reinvestment of our distribution on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors authorizes, and we declare a cash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividend automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends. During 2013, 2012, and 2011, the Company issued approximately 159,000, 219,000, and 167,000 shares, respectively, of common stock to shareholders in connection with the dividend reinvestment plan. Segments The Company lends to and invests in portfolio companies in various technology-related companies, including energy technology, life science, and special opportunity lower middle market companies. 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. Recent Accounting Pronouncements In June 2013, the FASB issued ASU 2013-08, “Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” which amends the criteria that define an investment company and clarifies the measurement guidance and requires new disclosures for investment companies. Under ASU 2013-08, an entity already regulated under the 1940 Act is automatically an investment company under the new GAAP definition, so we anticipate no impacts from adopting this standard on our statement of assets and liabilities or results of operations. We are currently assessing the additional disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. 3. Fair Value of Financial Instruments Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. The Company believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, accounts payable and accrued liabilities, approximate the 159 fair values of such items due to the short maturity of such instruments. The Convertible Senior Notes, 2019 Notes payable (the “April 2019 Notes” and the “September 2019 Notes”, together the “2019 Notes”), the Asset-Backed Notes and the SBA debentures as sources of liquidity remain a strategic advantage due to their flexible structure, long-term duration, and low fixed interest rates. At December 31, 2013, the April 2019 Notes were trading on the New York Stock Exchange for $1.021 per dollar at par value and the September 2019 Notes were trading on the New York Stock Exchange for $1.016 per dollar at par value. Based on market quotations on or around December 31, 2013, the Convertible Senior Notes were trading for $1.403 per dollar at par value and the Asset- Backed Notes were trading for $1.004 per dollar at par value. Calculated based on the net present value of payments over the term of the notes using estimated market rates for similar notes and remaining terms, the fair value of the SBA debentures would be approximately $222.7 million, compared to the carrying amount of $225.0 million as of December 31, 2013. See the accompanying Consolidated Schedule of Investments for the fair value of the Company’s investments. The methodology for the determination of the fair value of the Company’s investments is discussed in Note 2. The liabilities of the Company below are recorded at amortized cost and not at fair value on the Consolidated Statement of Assets and Liabilities. The following table provides additional information about the level in the fair value hierarchy of the Company’s liabilities at December 31, 2013. (in thousands) Description December 31, 2013 Identical Assets (Level 1) Observable Inputs (Level 2) Unobservable Inputs (Level 3) Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . Asset Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . April 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . September 2019 Notes . . . . . . . . . . . . . . . . . . . . . . SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,206 $ 89,893 $ 86,281 $ 87,248 $222,742 $— $— $— $— $— $105,206 $ — $ 86,281 $ 87,248 $ — $ — $ 89,893 $ — $ — $222,742 The following table provides information about the level in the fair value hierarchy of the Company’s liabilities at December 31, 2012. (in thousands) Description December 31, 2012 Identical Assets (Level 1) Observable Inputs (Level 2) Unobservable Inputs (Level 3) Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . Asset Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . April 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . September 2019 Notes . . . . . . . . . . . . . . . . . . . . . . SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77,813 $129,300 $ 83,307 $ 86,150 $242,300 $— $— $— $— $— $77,813 $ — $83,307 $86,150 $ — $ — $129,300 $ — $ — $242,300 4. Borrowings Outstanding Borrowings At December 31, 2013 and December 31, 2012, the Company had the following borrowing capacity and outstanding borrowings: (in thousands) December 31, 2013 December 31, 2012 Total Available Carrying Value(1) Total Available Carrying Value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SBA Debentures(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Notes . Asset-Backed Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible Senior Notes(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wells Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Union Bank Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000 170,364 89,557 75,000 75,000 30,000 $225,000 170,364 89,557 72,519 — — $225,000 170,364 129,300 75,000 75,000 30,000 $225,000 170,364 129,300 71,436 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $664,921 $557,440 $704,664 $596,100 (1) Except for the Convertible Senior Notes (as defined below), all carrying values are the same as the principal amount outstanding. 160 (2) At December 31, 2013 and at December 31, 2012, the total available borrowings under the SBA was $225.0 million, of which $76.0 million was available in HT II and $149.0 million was available in HT III. (3) Represents the aggregate principal amount outstanding of the Convertible Senior Notes (as defined below) less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.5 million at December 31, 2013 and $3.6 million at December 31, 2012. Long-term SBA Debentures On September 27, 2006, HT II received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $38.0 million in HT II as of December 31, 2013, HT II has the capacity to issue a total of $76.0 million of SBA guaranteed debentures, subject to SBA approval, of which $76.0 million was outstanding as of December 31, 2013. As of December 31, 2013, HT II has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2013, the Company held investments in HT II in 42 companies with a fair value of approximately $102.5 million, accounting for approximately 11.3% of the Company’s total portfolio. On May 26, 2010, HT III received a license to operate as a SBIC under the SBIC program and is able to borrow funds from the SBA against eligible investments and additional contributions to regulatory capital. With the Company’s net investment of $74.5 million in HT III as of December 31, 2013, HT III has the capacity to issue a total of $149.0 million of SBA guaranteed debentures, subject to SBA approval, of which $149.0 million was outstanding as of December 31, 2013. As of December 31, 2013, HT III has paid commitment fees and facility fees of approximately $1.5 million and $3.6 million, respectively. As of December 31, 2013, the Company held investments in HT III in 29 companies with a fair value of approximately $171.6 million, accounting for approximately 18.9% of the Company’s total portfolio. SBICs are designed to stimulate the flow of private equity capital to eligible small businesses. Under present SBA regulations, eligible small businesses include businesses that have a tangible net worth not exceeding $18.0 million and have average annual fully taxed net income not exceeding $6.0 million for the two most recent fiscal years. In addition, SBICs must devote 25.0% of its investment activity to “smaller” enterprises as defined by the SBA. A smaller enterprise is one that has a tangible net worth not exceeding $6.0 million and has average annual fully taxed net income not exceeding $2.0 million for the two most recent fiscal years. SBA regulations also provide alternative size standard criteria to determine eligibility, which depend on the industry in which the business is engaged and are based on such factors as the number of employees and gross sales. According to SBA regulations, SBICs may make long-term loans to small businesses, invest in the equity securities of such businesses and provide them with consulting and advisory services. Through its wholly-owned subsidiaries HT II and HT III, the Company plans to provide long-term loans to qualifying small businesses, and in connection therewith, make equity investments. HT II and HT III are periodically examined and audited by the SBA’s staff to determine their compliance with SBA regulations. If HT II or HT III fails to comply with applicable SBA regulations, the SBA could, depending on the severity of the violation, limit or prohibit HT II’s or HT III’s use of debentures, declare outstanding debentures immediately due and payable, and/or limit HT II or HT III from making new investments. In addition, HT II or HT III may also be limited in their ability to make distributions to the Company if they do not have sufficient capital in accordance with SBA regulations. Such actions by the SBA would, in turn, negatively affect the Company because HT II and III are the Company’s wholly owned subsidiaries. HT II and HT III were in compliance with the terms of the SBIC’s leverage as of December 31, 2013 as a result of having sufficient capital as defined under the SBA regulations. The rates of borrowings under various draws from the SBA beginning in April 2007 are set semiannually in March and September and range from 2.25% to 5.73%. Interest payments on SBA debentures are payable semiannually. There are no principal payments required on these issues prior to maturity and no prepayment penalties. 161 Debentures under the SBA generally mature ten years after being borrowed. Based on the initial draw down date of April 2007, the initial maturity of SBA debentures will occur in April 2017. In addition, the SBA charges a fee that is set annually, depending on the Federal fiscal year the leverage commitment was delegated by the SBA, regardless of the date that the leverage was drawn by the SBIC. The annual fees related to HT II debentures that pooled on September 22, 2010 were 0.406% and 0.285%, depending upon the year in which the underlying commitment was closed. The annual fees related to HT III debentures that pooled on March 27, 2013, were 0.804%. The annual fees on other debentures have been set at 0.906%. The average amount of debentures outstanding for the year ended December 31, 2013 for HT II was approximately $76.0 million with an average interest rate of approximately 5.34%. The average amount of debentures outstanding for the year ended December 31, 2013 for HT III was approximately $149.0 million with an average interest rate of approximately 3.41%. HT II and HT III hold approximately $174.1 million and $285.1 million in assets, respectively, and accounted for approximately 11.1% and 18.2% of the Company’s total assets prior to consolidation at December 31, 2013. As of December 31, 2013, the maximum statutory limit on the dollar amount of outstanding SBA guaranteed debentures issued by a single SBIC is $150.0 million, subject to periodic adjustments by the SBA, and a maximum amount of $225.0 million for funds under common control, subject to periodic adjustments by the SBA. In the aggregate, at December 31, 2013 there was $225.0 million principal amount of indebtedness outstanding incurred by our SBIC subsidiaries, the maximum statutory limit on the dollar amount of SBA guaranteed debentures under the SBIC program. The Company reported the following SBA debentures outstanding on its Consolidated Statement of Assets and Liabilities as of December 31, 2013 and December 31, 2012: (in thousands) Issuance/Pooling Date Maturity Date Interest Rate(1) 2013 2012 December 31, SBA Debentures: March 26, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2018 March 25, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2019 September 23, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2021 September 21, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 21, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022 March 21, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2022 September 19, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1, 2023 September 1, 2019 September 1, 2020 September 1, 2020 September 1, 2021 September 1, 2022 Total SBA Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Interest rate includes annual charge 2019 Notes 6.38% 5.53% 4.64% 3.62% 3.50% 4.37% 3.16% 3.28% 3.05% 3.05% 3.16% $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 25,000 11,250 24,250 24,750 $ 34,800 18,400 3,400 6,500 22,900 28,750 25,000 11,250 25,000 24,250 24,750 $225,000 $225,000 On March 6, 2012, the Company and U.S. Bank National Association (the “Trustee”) entered into an indenture (the “Base Indenture”). On April 17, 2012, the Company and the Trustee entered into the First Supplemental Indenture to the Base Indenture, dated April 17, 2012, relating to the Company’s issuance, offer and sale of $43.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “April 2019 Notes”). The sale of the April 2019 Notes generated net proceeds, before expenses, of approximately $41.7 million. On September 24, 2012, the Company and the Trustee, entered into the Second Supplemental Indenture to the Base Indenture, dated as of September 24, 2012, relating to the Company’s issuance, offer and sale of $75.0 million aggregate principal amount of 7.00% senior notes due 2019 (the “September 2019 Notes”). The sale of the September 2019 Notes generated net proceeds, before expenses, of approximately $72.75 million. 162 2019 Notes payable is compromised of: (in thousands) December 31, 2013 December 31, 2012 April 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying Value of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84,490 85,874 $170,364 $ 84,490 85,874 $170,364 April 2019 Notes The April 2019 Notes will mature on April 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after April 30, 2015, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The April 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on January 30, April 30, July 30 and October 30 of each year, commencing on July 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGZ.” The April 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the April 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under the Company’s credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under the Company’s revolving senior secured credit facility with Wells Fargo Capital Finance. The Base Indenture, as supplemented by the First Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the April 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the First Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding April 2019 Notes in a series may declare such April 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The April 2019 Notes were sold pursuant to an underwriting agreement dated April 11, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. In July 2012, the Company re-opened our April 2019 Notes and issued an additional amount of approximately $41.5 million in aggregate principal amount of April 2019 Notes, which includes exercise of an over-allotment option, bringing the total amount of the April 2019 Notes issued to approximately $84.5 million in aggregate principal amount. September 2019 Notes The September 2019 Notes will mature on September 30, 2019 and may be redeemed in whole or in part at the Company’s option at any time or from time to time on or after September 30, 2015, upon not less than 30 163 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption. The September 2019 Notes bear interest at a rate of 7.00% per year payable quarterly on March 30, June 30, September 30 and December 30 of each year, commencing on December 30, 2012, and trade on the New York Stock Exchange under the trading symbol “HTGY.” The September 2019 Notes are the Company’s direct unsecured obligations and rank: (i) pari passu with our other outstanding and future senior unsecured indebtedness, including without limitation, the $75 million in aggregate principal amount of the Convertible Senior Notes; (ii) senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the September 2019 Notes; (iii) effectively subordinated to all the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness, including without limitation, borrowings under the Company’s credit facilities; (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of Hercules Technology II, L.P. and Hercules Technology III, L.P. and borrowings under the Company’s revolving senior secured credit facility with Wells Fargo Capital Finance. The Base Indenture, as supplemented by the Second Supplemental Indenture, contains certain covenants including covenants requiring the Company to comply with (regardless of whether it is subject to) the asset coverage requirements set forth in Section 18 (a) (1)(A) as modified by Section 61(a)(1) of the 1940 Act to comply with the restrictions on dividends, distributions and purchase of capital stock set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act and to provide financial information to the holders of the September 2019 Notes and the Trustee if the Company should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934. These covenants are subject to important limitations and exceptions that are described in the Indenture, as supplemented by the Second Supplemental Indenture. The Indenture provides for customary events of default and further provides that the Trustee or the holders of 25% in aggregate principal amount of the outstanding September 2019 Notes in a series may declare such September 2019 Notes immediately due and payable upon the occurrence of any event of default after expiration of any applicable grace period. The September 2019 Notes were sold pursuant to an underwriting agreement dated September 19, 2012 among the Company and Stifel, Nicolaus & Company, Incorporated, as representative of the several underwriters named in the underwriting agreement. In October 2012, the underwriters exercised their over-allotment option for an additional $10.9 million of the September 2019 Notes, bringing the total amount of the September 2019 Notes issued to approximately $85.9 million in aggregate principal amount. For the years ended December 31, 2013 and 2012, the components of interest expense and related fees and cash paid for interest expense and fees for the April 2019 and September 2019 Notes are as follows: (in thousands) Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance cost 2013 $11,926 967 Total interest expense and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,893 2012 $5,139 423 $5,562 Cash paid for interest expense and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,926 $4,790 Year Ended December 31, As of December 31, 2013, the Company is in compliance with the terms of the indenture, and respective supplemental indenture, governing the April 2019 Notes and September 2019 Notes. 164 Asset-Backed Notes On December 19, 2012, the Company completed a $230.7 million term debt securitization in connection with which an affiliate of the Company made an offer of $129.3 million in aggregate principal amount of fixed-rate asset-backed notes (the “Asset-Backed Notes”), which Asset-Backed Notes were rated A2(sf) by Moody’s Investors Service, Inc. The Asset-Backed Notes were issued by Hercules Capital Funding Trust 2012-1 pursuant to a note purchase agreement, dated as of December 12, 2012, by and among the Company, Hercules Capital Funding 2012-1 LLC, as Trust Depositor (the “Trust Depositor”), Hercules Capital Funding Trust 2012- 1, as Issuer (the “Issuer”), and Guggenheim Securities, LLC, as Initial Purchaser, and are backed by a pool of senior loans made to certain of our portfolio companies and secured by certain assets of those portfolio companies and are to be serviced by the Company. Interest on the Asset-Backed Notes will be paid, to the extent of funds available, at a fixed rate of 3.32% per annum. The Asset-Backed Notes have a stated maturity of December 16, 2017. As part of this transaction, the Company entered into a sale and contribution agreement with the Trust Depositor under which the Company has agreed to sell or have contributed to the Trust Depositor certain senior loans made to certain of our portfolio companies (the “Loans”). The Company has made customary representations, warranties and covenants in the sale and contribution agreement with respect to the Loans as of the date of their transfer to the Trust Depositor. In connection with the issuance and sale of the Asset-Backed Notes, the Company has made customary representations, warranties and covenants in the note purchase agreement. The Asset-Backed Notes are secured obligations of the Issuer and are non-recourse to the Company. The Issuer also entered into an indenture governing the Asset-Backed Notes, which indenture includes customary representations, warranties and covenants. The Asset-Backed Notes were sold without being registered under the Securities Act of 1933, as amended (the “Securities Act”), to “qualified institutional buyers” in compliance with the exemption from registration provided by Rule 144A under the Securities Act and to institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who in each case, are “qualified purchasers” for purposes of Section 3(c)(7) under the 1940 Act. In addition, the Trust Depositor entered into an amended and restated trust agreement, which includes customary representation, warranties and covenants. The Loans are serviced by the Company pursuant to a sale and servicing agreement, which contains customary representations, warranties and covenants. The Company performs certain servicing and administrative functions with respect to the Loans. The Company is entitled to receive a monthly fee from the Issuer for servicing the Loans. This servicing fee is equal to the product of one-twelfth (or in the case of the first payment date, a fraction equal to the number of days from and including December 5, 2012 through and including January 15, 2013 over 360) of 2.00% and the aggregate outstanding principal balance of the Loans, excluding all defaulted Loans and all purchased Loans, as of the first day of the related collection period (the period from the 5th day of the immediately preceding calendar month through the 4th day of the calendar month in which a payment date occurs, and for the first payment date, the period from and including December 5, 2012, to the close of business on January 4, 2013). The Company also serves as administrator to the Issuer under an administration agreement, which includes customary representations, warranties and covenants. At December 31, 2013 and December 31, 2012, the Asset Backed Notes had an outstanding principal balance of $89.6 million and $129.3 million, respectively. Under the terms of the Asset Backed Notes, the Company is required to maintain a reserve cash balance, funded through interest and principal collections from the underlying securitized debt portfolio, which may be used to pay monthly interest and principal payments on the Asset-Backed Notes. The Company has segregated these funds and classified them as Restricted Cash. There was approximately $6.3 million of Restricted Cash as of December 31, 2013 funded through interest collections. There was no cash segregated at December 31, 2012 due to immaterial monthly interest collections for the period ended December 31, 2012. 165 Convertible Senior Notes In April 2011, the Company issued $75.0 million in aggregate principal amount of its 6.00% convertible senior notes (the “Convertible Senior Notes”) due in 2016. As of December 31, 2013, the carrying value of the Convertible Senior Notes, comprised of the aggregate principal amount outstanding less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes, is approximately $72.5 million. The Convertible Senior Notes mature on April 15, 2016 (the “Maturity Date”), unless previously converted or repurchased in accordance with their terms. The Convertible Senior Notes bear interest at a rate of 6.00% per year payable semiannually in arrears on April 15 and October 15 of each year, commencing on October 15, 2011. The Convertible Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities. Prior to the close of business on the business day immediately preceding October 15, 2015, holders may convert their Convertible Senior Notes only under certain circumstances set forth in the Indenture. On or after October 15, 2015 until the close of business on the scheduled trading day immediately preceding the Maturity Date, holders may convert their Convertible Senior Notes at any time. Upon conversion, the Company will pay or deliver, as the case may be, at its election, cash, shares of its common stock or a combination of cash and shares of its common stock. The conversion rate will initially be 84.0972 shares of common stock per $1,000 principal amount of Convertible Senior Notes (equivalent to an initial conversion price of approximately $11.89 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the conversion rate will be increased for converting holders. As of December 31, 2013, the conversion rate is 85.9941 shares of common stock per $1,000 principal amount of Convertible Senior Notes. The Company may not redeem the Convertible Senior Notes prior to maturity. No sinking fund is provided for the Convertible Senior Notes. In addition, if certain corporate events occur, holders of the Convertible Senior Notes may require the Company to repurchase for cash all or part of their Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest through, but excluding, the required repurchase date. The Convertible Senior Notes are accounted for in accordance with ASC 470-20 (previously FASB Staff Position No. APB 14- 1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”). In accounting for the Convertible Senior Notes, the Company estimated at the time of issuance that the values of the debt and the embedded conversion feature of the Convertible Senior Notes were approximately 92.8% and 7.2%, respectively. The original issue discount of 7.2% attributable to the conversion feature of the Convertible Senior Notes was recorded in “capital in excess of par value” in the accompanying consolidated statement of assets and liabilities. As a result, the Company records interest expense comprised of both stated interest expense as well as accretion of the original issue discount. Additionally, the issuance costs associated with the Convertible Senior Notes were allocated to the debt and equity components in proportion to the allocation of the proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. At the time of issuance, the debt issuance costs and equity issuance costs were approximately $2.9 million and $224,000, respectively. At the time of issuance and as of December 31, 2013, the equity component, net of issuance costs, as recorded in the “capital in excess of par value” in the balance sheet was approximately $5.2 million. 166 As of December 31, 2013 and December 31, 2012, the components of the carrying value of the Convertible Senior Notes were as follows: (in thousands) December 31, 2013 December 31, 2012 Principal amount of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Original issue discount, net of accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carrying value of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,000 (2,481) $72,519 $75,000 (3,564) $71,436 For the years ended December 31, 2013 and 2012, the components of interest expense, fees and cash paid for interest expense for the Convertible Senior Notes were as follows: (in thousands) Stated interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance cost Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 $4,500 1,083 577 $6,160 2012 $4,500 1,083 577 $6,160 Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,500 $4,500 The estimated effective interest rate of the debt component of the Convertible Senior Notes, equal to the stated interest of 6.0% plus the accretion of the original issue discount, was approximately 8.1% for both the years ended December 31, 2013 and December 31, 2012. As of December 31, 2013, the Company is in compliance with the terms of the indentures governing the Convertible Senior Notes. Wells Facility In August 2008, the Company entered into a $50.0 million two-year revolving senior secured credit facility with Wells Fargo Capital Finance (the “Wells Facility”). On June 20, 2011, the Company renewed the Wells Facility. Under this three-year senior secured facility, Wells Fargo Capital Finance has made commitments of $75.0 million. The facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $300.0 million, funded by additional lenders and with the agreement of Wells Fargo Capital Finance and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Wells Facility. On August 1, 2012, the Company entered into an amendment to the Wells Facility. The amendment reduces the interest rate floor by 75 basis points to 4.25% and extends the maturity date by one year to August 2015. Additionally, an amortization period of 12 months was added to pay down the principal balance as of the maturity date, and the unused line fee was reduced. Borrowings under the Wells Facility will generally bear interest at a rate per annum equal to LIBOR plus 3.50%, with a floor of 4.25% and an advance rate of 50% against eligible loans. The Wells Facility is secured by loans in the borrowing base. The Wells Facility requires payment of a non-use fee on a scale of 0.0% to 0.50% of the average monthly outstanding balance. The monthly payment of a non-use fee thereafter shall depend on the average balance that was outstanding on a scale between 0.0% and 0.50%. For the year ended December 31, 2013, this non-use fee was approximately $380,000. On June 20, 2011 the Company paid an additional $1.1 million in structuring fees in connection with the Wells Facility which is being amortized through the end of the term. The Wells Facility includes various financial and operating covenants applicable to the Company and its subsidiaries, in addition to those applicable to Hercules Funding II, LLC. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $362.0 million plus 90% of the cumulative amount of equity 167 raised after June 30, 2012. In addition, the tangible net worth covenant will increase by 90 cents on the dollar for every dollar of equity capital that the Company subsequently raises. As of December 31, 2013, the minimum tangible net worth covenant has increased to $478.5 million as a result of the Company’s follow-on public offerings. The Wells Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2013. At December 31, 2013, there were no borrowings outstanding on this facility. Union Bank Facility On February 10, 2010, the Company entered a $20.0 million one-year revolving senior secured credit facility with Union Bank (the “Union Bank Facility”). On November 2, 2011, the Company renewed and amended the Union Bank Facility and added a new lender under the Union Bank Facility. Union Bank and RBC Capital Markets (“RBC”) have made commitments of $30.0 million and $25.0 million, respectively. The Union Bank Facility contains an accordion feature, in which the Company can increase the credit line up to an aggregate of $150.0 million, funded by additional lenders and with the agreement of Union Bank and subject to other customary conditions. The Company expects to continue discussions with various other potential lenders to join the new facility; however, there can be no assurances that additional lenders will join the Union Bank Facility. On March 30, 2012, the Company entered into an amendment to the Union Bank Facility which permitted the Company to issue additional senior notes relating to the offer and sale of our 2019 Notes. On September 17, 2012, the Company entered into an amendment to the Union Bank Facility. Pursuant to the terms of the amendment, the Company is permitted to increase its unsecured indebtedness by an aggregate original principal amount not to exceed $200.0 million incurred after March 30, 2012 in one or more issuances, provided certain conditions are satisfied for each issuance. On December 17, 2012, the Company further amended the Union Bank Facility to remove RBC from the Union Bank Facility. Following the removal of RBC, the Union Bank Facility consists solely of Union Bank’s commitment of $30.0 million. In connection with the amendment, the maximum availability under the Union Bank Facility, subject to a borrowing base, was reduced from $55.0 million to $30.0 million. The Union Bank Facility contains an accordion feature, in which the Company could increase the credit line by up to $95.0 million in the aggregate, funded by commitments from additional lenders and with the agreement of Union Bank and subject to other customary conditions. There can be no assurances that additional lenders will join the Union Bank Facility. Borrowings under the Union Bank Facility will generally bear interest at a rate per annum equal to LIBOR plus 2.25% with a floor of 4.0%. The Union Bank Facility requires the payment of a non-use fee of 0.50% annually. For the year ended December 31, 2013, this nonuse fee was approximately $152,000. The Union Bank Facility is collateralized by debt investments in our portfolio companies, and includes an advance rate equal to 50.0% of eligible loans placed in the collateral pool. The Union Bank Facility generally requires payment of interest on a monthly basis. All outstanding principal is due upon maturity. The Union Bank Facility requires various financial and operating covenants. These covenants require the Company to maintain certain financial ratios and a minimum tangible net worth in an amount, when added to outstanding subordinated indebtedness, that is in excess of $314.0 million plus 90% of the amount of net cash proceeds received from the sale of common stock after March 31, 2011. As of December 31, 2013, the minimum tangible net worth covenant has increased to $472.8 million as a result of the Company’s follow-on public offerings. As amended, the Union Bank Facility will mature on May 1, 2015, with a borrowing termination date as of May 2, 2014 and a term out provision for the remaining 12 months. Union Bank Facility also provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control. The Company was in compliance with all covenants at December 31, 2013. 168 At December 31, 2013, there were no borrowings outstanding on this facility. Citibank Credit Facility The Company, through Hercules Funding Trust I, an affiliated statutory trust, had a securitized credit facility (the “Citibank Credit Facility”) with Citigroup Global Markets Realty Corp. which expired under normal terms. During the first quarter of 2009, the Company paid off all principal and interest owed under the Citibank Credit Facility. Citigroup has an equity participation right through a warrant participation agreement on the pool of loans and warrants collateralized under the Citibank Credit Facility. Pursuant to the warrant participation agreement, the Company granted to Citigroup a 10% participation in all warrants held as collateral. However, no additional warrants were included in collateral subsequent to the facility amendment on May 2, 2007. As a result, Citigroup is entitled to 10% of the realized gains on the warrants until the realized gains paid to Citigroup pursuant to the agreement equal $3,750,000 (the “Maximum Participation Limit”). The obligations under the warrant participation agreement continue even after the Citibank Credit Facility is terminated until the Maximum Participation Limit has been reached. During the year ended December 31, 2013, the Company reduced its realized gain by approximately $249,000 for Citigroup’s participation in the gain on sale of equity securities which were obtained from exercising portfolio company warrants which were included in the collateral pool. The Company recorded an increase on participation liability and a decrease on unrealized appreciation by a net amount of approximately $57,000 as a result of appreciation of fair value on the pool of warrants collateralized under the warrant participation agreement. The value of their participation right on unrealized gains in the related equity investments was approximately $370,000 as of December 31, 2013 and is included in accrued liabilities. There can be no assurances that the unrealized appreciation of the warrants will not be higher or lower in future periods due to fluctuations in the value of the warrants, thereby increasing or reducing the effect on the cost of borrowing. Since inception of the agreement, the Company has paid Citigroup approximately $1.6 million under the warrant participation agreement thereby reducing realized gains by this amount. The Company will continue to pay Citigroup under the warrant participation agreement until the Maximum Participation Limit is reached or the warrants expire. Warrants subject to the Citigroup participation agreement are set to expire between March 2014 and March 2018. 5. Income Taxes The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders. To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of its investment company taxable income, as defined by the Code. Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary in nature. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the year ended December 31, 2013 and 2012, the Company reclassified for book purposes amounts arising from permanent book/tax differences primarily related to accelerated revenue recognition for income tax purposes, respectively, as follows: (in thousands) December 31, 2013 2012 Distributions in excess of investment income . . . . . . . . . . . . . . . . . . Accumulated realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital $ 2,112 6,840 (8,952) $ 2,920 2,958 (5,878) 169 For income tax purposes, distributions paid to shareholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended December 31, 2013 and 2012 was ordinary income in the amounts of $66.5 million and $48.0 million, respectively. The aggregate gross unrealized appreciation of our investments over cost for federal income tax purposes was $48.8 million and $19.9 million as of December 31, 2013 and 2012, respectively. The aggregate gross unrealized depreciation of our investments under cost for federal income tax purposes was $44.5 million and $27.6 million as of December 31, 2013 and 2012, respectively. The net unrealized appreciation over cost for federal income tax purposes was $4.3 million as of December 31, 2013 and net unrealized depreciation over cost for federal income tax purposes was $7.8 million as of December 31, 2012. The aggregate cost of securities for federal income tax purposes was $906.2 million and $916.9 million as of December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Statement of Net Assets and Liabilities by temporary book/ tax differences primarily arising from the treatment of loan related yield enhancements. (in thousands) December 31, 2013 2012 Accumulated Capital Gains (Losses) . . . . . . . . . . . . . . . . . . . . . . . Other Temporary Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Undistributed Ordinary Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . . . . . . . . $(6,417) 1,134 3,764 (5,132) $(35,940) (3,726) 1,552 (10,480) Components of Distributable Earnings . . . . . . . . . . . . . . . . . . . . . . $(6,651) $(48,594) The Company will classify interest and penalties, if any, related to unrecognized tax benefits as a component of provision for income taxes. Based on an analysis of our tax position, there are no uncertain tax positions that met the recognition or measurement criteria. The Company is currently not undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The 2010- 2012 federal tax years for the Company remain subject to examination by the IRS. The 2009-2012 state tax years for the Company remain subject to examination by the California Franchise Tax Board. 6. Shareholders’ Equity On July 25, 2012, our Board of Directors approved an extension of the stock repurchase plan under the same terms and conditions that allowed the Company to repurchase up to $35.0 million of our common stock. The stock repurchase plan expired on February 26, 2013 and no shares were repurchased for the years ended December 31, 2013 and December 31, 2012. On March 13, 2013, the Company raised approximately $95.8 million, before deducting offering expenses, in a public offering of 8,050,000 shares of its common stock. On August 16, 2013, the Company entered into an “At-The-Market” (“ATM”) equity distribution agreement with JMP Securities LLC (“JMP”). The equity distribution agreement provides that the Company may offer and sell up to 8,000,000 shares of its common stock from time to time through JMP, as its sales agent. Sales of the Company’s common stock, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market,” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the NYSE or similar securities exchange or sales made to or through a market maker other than on an exchange, at prices related to the prevailing market prices or at negotiated prices. There were no sales under the ATM Program for the year ended December 31, 2013. The Company has issued stock options for common stock subject to future issuance, of which 833,923 and 2,574,749 were outstanding at December 31, 2013 and December 31, 2012, respectively. 170 7. Equity Incentive Plan The Company and its stockholders have authorized and adopted the 2004 Equity Incentive Plan (the “2004 Plan”) for purposes of attracting and retaining the services of its executive officers and key employees. Under the 2004 Plan, the Company is authorized to issue 7,000,000 shares of common stock. On June 1, 2011, stockholders approved an amended and restated plan and provided an increase of 1,000,000 shares, authorizing the Company to issue 8,000,000 shares of common stock under the 2004 Plan. The Company and its stockholders have authorized and adopted the 2006 Non-Employee Director Plan (the “2006 Plan” and, together with the 2004 Plan, the “Plans”) for purposes of attracting and retaining the services of its Board of Directors. Under the 2006 Plan, the Company is authorized to issue 1,000,000 shares of common stock. The Company filed an exemptive relief request with the Securities and Exchange Commission (“SEC”) to allow options to be issued under the 2006 Plan which was approved on October 10, 2007. On June 21, 2007, the stockholders approved amendments to the 2004 Plan and the 2006 Plan allowing for the grant of restricted stock. The amended Plans limit the combined maximum amount of restricted stock that may be issued under both Plans to 10% of the outstanding shares of the Company’s stock on the effective date of the Plans plus 10% of the number of shares of stock issued or delivered by the Company during the terms of the Plans. The amendments further specify that no one person shall be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all of the Company’s outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 25% of its outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of the Company’s outstanding warrants, options and rights issued to the Company’s directors, officers and employees, together with any restricted stock issued pursuant to the Plans, would exceed 15% of the Company’s outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the Plans, at the time of issuance shall not exceed 20% of our outstanding voting securities. A summary of the restricted stock activity under the Company’s 2006 and 2004 Plans for each of the three periods ended December 31 2013, 2012, and 2011 is as follows: Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 Plan 2004 Plan 21,668 10,000 — 31,668 5,000 — 36,668 — — 36,668 1,018,103 296,600 (123,502) 1,191,201 686,859 (59,019) 1,819,041 607,001 (30,264) 2,395,778 In 2013, 2012, and 2011, the Company granted approximately 607,001, 691,859 and 306,600 shares, respectively, of restricted stock pursuant to the Plans. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 will continue to vest on a monthly basis following their one year anniversary over the succeeding 36 months. During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short and long-term awards. Under the 2004 Plan, restricted stock awarded subsequent to March 3, 2013 will vest subject to continued employment based on two vesting schedules: short- term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. No restricted stock was granted pursuant to the 2004 Plan prior to 2009. 171 The Company determined that the fair value of restricted stock granted under the 2006 and 2004 Plans during the years ended December 31, 2013, 2012, and 2011 was approximately $7.7 million, $7.5 million, and $3.4 million, respectively. During the years ended December 31, 2013, 2012, and 2011 the Company expensed approximately $5.6 million, $3.9 million, and $2.6 million of compensation expense related to restricted stock, respectively. As of December 31, 2013, there was approximately $10.0 million of total unrecognized compensation costs related to restricted stock. These costs are expected to be recognized over a weighted average period of 2.25 years. The following table summarizes the activities for our unvested restricted stock for the years ended December 31, 2013, 2012, and 2011: Unvested Restricted Stock Units Unvested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted Stock Units 778,664 306,600 (340,253) (123,502) 621,509 691,859 (354,560) (59,019) 899,789 607,001 (440,629) (30,264) Unvested at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,035,897 Weighted Average Issuance Price $ 9.27 $11.14 $ 9.38 $ 9.63 $10.06 $10.83 $ 9.88 $ 9.95 $10.73 $12.72 $10.59 $11.24 $11.94 The SEC, through an exemptive order granted on June 22, 2010, approved amendments to the Plans which allow participants to elect to have the Company withhold shares of the Company’s common stock to pay for the exercise price and applicable taxes with respect to an option exercise (“net issuance exercise”). The exemptive order also permits the holders of restricted stock to elect to have the Company withhold shares of Hercules stock to pay the applicable taxes due on restricted stock at the time of vesting. Each individual can make, and does not preclude the participant from electing to make, a cash payment at the time of option exercise or to pay taxes on restricted stock. The following table summarizes the common stock options activities under the Company’s 2006 and 2004 Plans for each of the three periods ended December 31 2013, 2012, and 2011: Shares Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares Outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock Options 4,729,849 599,860 (178,101) (474,410) (463,594) 4,213,604 189,000 (564,196) (57,229) (1,206,430) 2,574,749 443,500 (2,003,988) (115,338) (65,000) Shares Outstanding at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833,923 Weighted Average Exercise Price $11.33 $10.59 $ 4.93 $10.21 $13.28 $11.40 $10.71 $ 5.56 $ 9.69 $12.84 $12.00 $14.51 $12.38 $10.38 $13.30 $12.53 Shares Expected to Vest at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571,153 $12.53 172 Options generally vest 33% one year after the date of grant and ratably over the succeeding 24 months. All options may be exercised for a period ending seven years after the date of grant. At December 31, 2013, options for approximately 263,000 shares were exercisable at a weighted average exercise price of approximately $10.13 per share with weighted average of remaining contractual term of 2.91 years. The Company determined that the fair value of options granted under the 2006 and 2004 Plans during the years ended December 31, 2013, 2012, and 2011 was approximately $1.1 million, $326,000, and $1.3 million, respectively. During the years ended December 31, 2013, 2012, and 2011, approximately $422,000, $416,000, and $557,000 of share-based cost due to stock option grants was expensed, respectively. As of December 31, 2013, there was $1.1 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 2.47 years. The fair value of options granted is based upon a Black Scholes option pricing model using the assumptions in the following table for each of the three periods ended December 31, 2013, 2012, and 2011 is as follows: Expected Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.90% 10% 4.5 46.39% 10% 4.5 46.39% 10% 4.5 0.56%-1.63% 0.49%-1.07% 0.68%-2.15% 2013 2012 2011 The following table summarizes stock options outstanding and exercisable at December 31, 2013: (Dollars in thousands, except exercise price) Options outstanding Options exercisable Range of exercise prices Weighted average remaining contractual life Number of shares $4.21-$9.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,638 $9.90-$14.86 . . . . . . . . . . . . . . . . . . . . . . . . . . 643,785 $15.44-$16.13 . . . . . . . . . . . . . . . . . . . . . . . . . 118,500 $4.21-$16.13 . . . . . . . . . . . . . . . . . . . . . . . . . . 833,923 3.73 5.20 6.84 5.31 Aggregate intrinsic value $ 669,702 2,450,744 111,000 Weighted average exercise price $ 7.05 $12.59 $15.46 Number of shares 53,883 208,887 — $3,231,446 $12.53 262,770 Weighted average remaining contractual life 3.34 2.80 — 2.91 Aggregate intrinsic value Weighted average exercise price $ 542,753 1,105,338 $ 6.33 $11.11 — $ — $1,648,091 $10.13 8. Earnings per Share Shares used in the computation of the Company’s basic and diluted earnings per share are as follows: (in thousands, except per share data) Numerator Year Ended December 31, 2013 2012 2011 Net increase in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,446 $ 46,759 $ 46,936 (38,490) Less: Dividends declared-common and restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66,454) (47,983) Undistributed earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,992 (1,224) 8,446 Undistributed earnings-common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Dividend declared-common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,992 65,123 (1,224) 46,967 8,446 37,826 Numerator for basic and diluted change in net assets per common share $ 98,115 $ 45,743 $ 46,272 Denominator Basic weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares issuable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,838 1,454 49,068 88 42,988 311 Weighted average common shares outstanding assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,292 49,156 43,299 Change in net assets per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.67 $ 1.63 $ 0.93 $ 0.93 $ 1.08 1.07 173 For the purpose of calculating diluted earnings per share for year ended December 31, 2013, the dilutive effect of the Convertible Senior Notes under the treasury stock method is included in this calculation because the Company’s share price was greater than the conversion price in effect ($11.63) for the Convertible Senior Notes for such period. The calculation of change in net assets resulting from operations per common share—assuming dilution, excludes all anti-dilutive shares. For the years ended December 31, 2013, 2012, and 2011, the number of anti- dilutive shares, as calculated based on the weighted average closing price of the Company’s common stock for the periods, was approximately 1,835,880, 2,574,749, and 2,583,707 shares, respectively. At December 31, 2013, the Company was authorized to issue 100,000,000 shares of common stock with a par value of $0.001. Each share of common stock entitles the holder to one vote. 9. Financial Highlights Following is a schedule of financial highlights for the three years ended December 31, 2013. Year Ended December 31, 2013 2012 2011 Per share data: Net asset value at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income(1) Net realized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized appreciation (depreciation) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total from investment operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase/(decrease) in net assets from capital share transactions . . . . . . . . . . . . . . . . . . . . Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense included in investment income(2) $ 9.75 1.24 0.25 0.20 1.69 0.10 (1.13) 0.10 $ 9.83 0.98 0.06 (0.09) 0.95 (0.14) (0.98) 0.09 Net asset value at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10.51 $ 9.75 $ 9.50 0.92 0.06 0.11 1.09 0.07 (0.90) 0.07 9.83 Ratios and supplemental data: Per share market value at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total return(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of operating expense to average net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of net investment income before provision for income tax expense and investment gains and losses to average net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average debt per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 16.40 58.49% 61,837 58,838 650,007 11.06% 12.12% 580,053 9.86 $ $ $ $ 11.13 28.28% 52,925 49,068 515,968 10.28% 10.01% 360,857 7.35 $ $ $ $ 9.44 -0.83% 43,853 42,988 431,041 9.61% 9.45% 238,873 5.56 (1) Net investment income per share is calculated as net investment income divided by the weighted average shares outstanding. (2) Stock option expense is a non-cash expense that has no effect on net asset value. Pursuant to ASC 718, net investment loss includes the expense associated with the granting of stock options which is offset by a corresponding increase in paid-in capital. (3) The total return for the period ended December 31, 2013, 2012 and 2011 equals the change in the ending market value over the beginning of the period price per share plus dividends paid per share during the period, divided by the beginning price assuming the dividend is reinvested on the date of the distribution. 10. Commitments and Contingencies The Company’s commitments and contingencies consist primarily of unused commitments to extend credit in the form of loans to the Company’s portfolio companies. The balance of unfunded contractual commitments to extend credit at December 31, 2013 totaled approximately $151.0 million. Approximately $77.4 million of these unfunded origination activity commitments as of December 31, 2013 are dependent upon the portfolio company reaching certain milestones before the debt commitment becomes available. Since a portion of these commitments may expire without being drawn, unfunded contractual commitments do not necessarily represent 174 future cash requirements. In addition, the Company had approximately $38.0 million of non-binding term sheets outstanding at December 31, 2013. Non-binding outstanding term sheets are subject to completion of the Company’s due diligence and final approval process, as well as the negotiation of definitive documentation with the prospective portfolio companies. Not all non-binding term sheets are expected to close and do not necessarily represent the Company’s future cash requirements. Certain premises are leased under agreements which expire at various dates through March 2020. Total rent expense amounted to approximately $1.1 million, $1.2 million, and $1.1 million during the years ended December 31, 2013, 2012, and 2011, respectively. Future commitments under the credit facility and operating leases were as follows at December 31, 2013: Contractual Obligations(1)(2) Payments due by period (in thousands) Total Less than 1 year 1 - 3 years 3 - 5 years After 5 years Borrowings(3)(4) Operating Lease Obligations(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $557,440 7,640 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $565,080 $ — 1,484 $1,484 $89,557 2,965 $72,519 1,774 $395,364 1,417 $92,522 $74,293 $396,781 (1) Excludes commitments to extend credit to our portfolio companies. (2) The Company also has a warrant participation agreement with Citigroup. See Note 4 to the Company’s consolidated financial statements. Includes $225.0 million in borrowings under the SBA debentures, $170.4 million of the 2019 Notes, $89.6 million in aggregate principal (3) amount of the Asset-Backed Notes and $72.5 million of the Convertible Senior Notes. (4) Except for the Convertible Senior Notes, all carrying values are the same as the principal amount outstanding. The aggregate principal amount outstanding of the Convertible Senior Notes is $75.0 million less the unaccreted discount initially recorded upon issuance of the Convertible Senior Notes. The total unaccreted discount for the Convertible Senior Notes was $2.5 million at December 31, 2013. (5) Long-term facility leases. The Company may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to seek to impose liability on the Company in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, the Company does not expect any current matters will materially affect the Company’s financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on the Company’s financial condition or results of operations in any future reporting period. 11. 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. 12. Concentrations of Credit Risk The Company’s customers are primarily privately held companies and public companies which are active in the drug discovery and development, energy technology, internet consumer and business services, medical devices and equipment, software, drug delivery, information services, communications and networking, healthcare services, specialty pharmaceuticals, surgical devices, electronics and computer hardware, media/ content/info, biotechnology tools, semiconductors, consumer and business products and diagnostic industry sectors. These sectors are characterized by high margins, high growth rates, consolidation and product and market extension opportunities. Value for companies in these sectors is often vested in intangible assets and intellectual property. Industry and sector concentrations vary as new loans are recorded and loans pay off. Loan revenue, consisting of interest, fees, and recognition of gains on equity and equity-related interests, can fluctuate 175 materially when a loan is paid off or a related warrant or equity interest is sold. Revenue recognition in any given year can be highly concentrated among several portfolio companies. For the years ended December 31, 2013 and December 31, 2012, our ten largest portfolio companies represented approximately 29.3% and 35.2% of the total fair value of our investments in portfolio companies, respectively. At December 31, 2013 and December 31, 2012, we had one and eight investments, respectively, that represented 5% or more of our net assets. At December 31, 2013, we had six equity investments representing approximately 75.7% of the total fair value of our equity investments, and each represented 5% or more of the total fair value of our equity investments. At December 31, 2012, we had six equity investments which represented approximately 70.9% of the total fair value of our equity investments, and each represented 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 last eight quarters ended December 31, 2013. This information was derived from the Company’s unaudited consolidated financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any further quarter. (in thousands, except per share data) 3/31/2013 6/30/2013 9/30/2013 12/31/2013 Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income before investment gains and losses . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . Change in net assets per common share (basic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,957 15,032 16,689 0.30 $34,525 17,610 20,879 0.34 $41,021 21,560 36,981 0.61 $33,210 18,864 24,897 0.40 Quarter Ended Total investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment income before investment gains and losses . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . . Change in net assets per common share (basic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,367 11,375 17,105 0.36 $23,858 12,310 48 — $23,901 11,351 4,745 0.09 $27,395 13,071 24,861 0.47 Quarter Ended 3/31/2012 6/30/2012 9/30/2012 12/31/2012 14. Subsequent Events Dividend Declaration On February 24, 2014 the Board of Directors declared a cash dividend of $0.31 per share to be paid on March 17, 2014 to shareholders of record as of March 10, 2014. This dividend would represent our thirty-fourth consecutive dividend declaration since our initial public offering, bringing the total cumulative dividend declared to date to $9.06 per share. Portfolio Company Developments As of December 31, 2013, we held warrants or equity positions in five companies that have filed registration statements on Form S-1 with the SEC in contemplation of potential initial public offerings, including Everyday Health, Inc. and four companies which filed confidentially under the JOBS Act. In addition, subsequent to December 31, 2013 the following portfolio companies in which we held investments as of December 31, 2013 completed initial public offerings or were acquired: 1. 2. In January 2014, Toshiba Corporation completed its acquisition of Hercules portfolio company OCZ Technology. The acquisition resulted in full repayment of the Hercules debt investment in OCZ Technology. In January 2014, Dicerna Pharmaceuticals, Inc. (NASDAQ: DRNA) completed its initial public offering of 6,900,000 shares of its common stock at $15.00 per share. 176 3. 4. 5. 6. In February 2014, Revance Therapeutics, Inc. (NASDAQ:RVNC) completed its initial public offering of 6,900,000 shares of its common stock at $16.00 per share. The company had initially filed confidentially in April 2013. In February 2014, Concert Pharmaceuticals, Inc. (NASDAQ:CNCE) completed its initial public offering of 6,000,000 shares of its common stock at $14.00 per share. The company had initially filed confidentially in December 2013. In February 2014, Uniqure B.V. (NASDAQ:QURE) completed its initial public offering of 5,400,000 shares of its common stock at $17.00 per share. The company had initially filed confidentially in November 2013. In February 2014, Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) completed its acquisition of Hercules portfolio company NuPathe Inc. (NASDAQ:PATH) at a price of $3.65 per share in cash and the right to receive contingent cash consideration payments of up to $3.15 per share, net to the seller in cash without interest. 177 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. Item 9a. Controls and Procedures 1. Disclosure Controls and Procedures Our chief executive and chief financial officers, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this annual report on Form 10-K, our chief executive and chief financial officers have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive and chief financial officers, as appropriate to allow timely decisions regarding required disclosure. 2. Internal Control Over Financial Reporting a. Management’s Annual Report on Internal Control Over Financial Reporting The Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial and accounting officer, approved and monitored by the Company’s Board of Directors, and implemented by management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 based on criteria established in Internal Control— Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013. 178 Report of the Independent Registered Public Accounting Firm The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by Pricewaterhousecoopers LLP, an independent registered public accounting firm who also audited the Company’s consolidated financial statements, as stated in their report, which is included in this Annual Report on Form 10-K. Changes in Internal Control Over Financial Reporting in 2013 There have been no changes in our internal control over financing reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other Information None. 179 PART III Item 10. Directors, Executive Officers and Corporate Governance Information in response to this Item is incorporated herein by reference to the information provided in our definitive Proxy Statement for our 2014 Annual Meeting of Shareholders (the “2014 Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 under the headings “Proposal I: Election Of Directors,” “Information About Executive Officers Who Are Not Directors” and “Certain Relationships And Transactions.” We have adopted a code of business conduct and ethics that applies to directors, officers and employees. The code of business conduct and ethics is available on our website at http//www.htgc.com. We will report any amendments to or waivers of a required provision of the code of business conduct and ethics on our website or in a Form 8-K. Item 11. Executive Compensation The information with respect to compensation of executives and directors is contained under the caption “Executive Compensation” in our 2014 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information with respect to security ownership of certain beneficial owners and management is contained under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation” in our 2014 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 13. Certain Relationships and Related Transactions and Director Independence The information with respect to certain relationships and related transactions is contained under the caption “Certain Relationships and Transactions” and the caption “Proposal I: Election of Directors” in our 2014 Proxy Statement and is incorporated in this Annual Report by reference in response to this item. Item 14. Principal Accountant Fees and Services The information with respect to principal accountant fees and services is contained under the captions “Principal Accountant Fees and Services” and “Proposal II: Ratification of Selection of Independent Registered Public Accountants” in our 2014 Proxy Statement and is incorporated in this Annual Report by reference to this item. 180 Item 15. Exhibits and Financial Statement Schedules 1. Financial Statements PART IV The following financial statements of Hercules Technology Growth Capital, Inc. (the “Company” or the “Registrant”) are filed herewith: AUDITED FINANCIAL STATEMENTS Consolidated Statements of Assets and Liabilities as of December 31, 2013 and December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Consolidated Statements of Operations for the three years ended December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 Consolidated Statements of Changes in Net Assets for the three years ended December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Consolidated Statements of Cash Flows for the three years ended December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Schedule of Investments as of December 31, 2013 . . . . . . . . . . . . . . . . . Consolidated Schedule of Investments as of December 31, 2012 . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 111 126 145 2. The following financial statement schedule is filed herewith: Schedule 12-14 Investments In and Advances to Affiliates . . . . . . . . . . . . . . . . . . . . . 182 3. Exhibits required to be filed by Item 601 of Regulation S-K. 181 HERCULES TECHNOLOGY GROWTH CAPITAL, INC. SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES As of and for the year ended December 31, 2013 (in thousands) Schedule 12-14 Portfolio Company Investment(1) Affiliate Investments Gelesis, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Stock Optiscan BioMedical, Corp. . . . . . . . . . . . . . . . Senior Debt Preferred Warrants Preferred Stock Preferred Warrants Stion Corporation . . . . . . . . . . . . . . . . . . . . . . . Senior Debt Preferred Warrants Total Control and Affiliate Investments . . . . Amount of Interest Credited to Income(2) Fair Value As of December 31, 2012 Gross Additions(3) Gross Reductions(4) Fair Value As of December 31, 2013 $ — — 1,933 — — 462 — $2,395 $ 1,570 95 9,491 564 151 7,547 167 $19,585 $ — — — 3,988 81 — 1,461 $5,530 $ (1,104) (88) (9,491) — — (3,451) — $ 466 7 — 4,552 232 4,096 1,628 $(14,134) $10,981 (1) Stock and warrants are generally non-income producing and restricted. The principal amount for debt is shown in the Consolidated Schedule of Investments as of December 31, 2013. (2) Represents the total amount of interest or dividends credited to income for the year an investment was an affiliate or control investment. (3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increase in unrealized appreciation or net decreases in unrealized depreciation. (4) Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increase in unrealized depreciation or net decreases in unrealized appreciation. 182 3. Exhibits Please note that the agreements included as exhibits to this Form 10-K are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about us or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time. Exhibit Number Description 3(a) 3(b) 3(c) 3(d) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 4(j) 4(k) 4(l) 4(m) 4(n) 10(a) 10(b) 10(c) 10(d) Articles of Amendment and Restatement.(8) Articles of Amendment, dated March 6, 2007.(7) Articles of Amendment, dated April 5, 2011.(22) Amended and Restated Bylaws, as amended by Amendment No. 1 thereto.* Specimen certificate of the Company’s common stock, par value $.001 per share.(1) Form of Dividend Reinvestment Plan.(1) Indenture between Hercules Funding Trust I and U.S. Bank National Association, dated as of August 1, 2005.(2) Indenture between Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of April 15, 2011.(23) Form of Note under the Indenture, dated as of April 15, 2011.(23) Indenture between the Registrant and U.S. Bank National Association, dated as of March 6, 2012.(26) First Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of April 17, 2012.(26) Second Supplemental Indenture between the Registrant and U.S. Bank National Association, dated as of September 24, 2012.(29) Form of 7.00% Senior Note due 2019, dated as of April 17, 2012 (Existing April 2019 Note) (included as part of Exhibit 4(g)).(26) Form of 7.00% Senior Note due 2019, dated as of July 6, 2012 (Additional April 2019 Note).(27) Form of 7.00% Senior Note due 2019, dated as of July 12, 2012 (Over-Allotment April 2019 Note).(28) Form of 7.00% Senior Note due 2019, dated as of September 24, 2012 (September 2019 Note) (included as part of Exhibit 4(h)).(29) Form of 7.00% Senior Note due 2019, dated as of October 2, 2012 (Over-Allotment September 2019 Note).(30) Form of 7.00% Senior Note due 2019, dated as of October 17, 2012 (Over-Allotment II September 2019 Note).(31) Credit Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of April 12, 2005.(8) Pledge and Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding, L.L.C., dated as of April 12, 2005.(8) First Amendment to Credit and Pledge Security Agreement between Hercules Technology Growth Capital, Inc. and Alcmene Funding L.L.C., dated as of August 1, 2005.(2) 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 as of March 6, 2006.(12) 183 Exhibit Number 10(e) 10(f) 10(g) 10(h) 10(i) 10(j) 10(k) 10(l) 10(m) 10(n) 10(o) 10(p) 10(q) 10(r) 10(s) 10(t) 10(u) 10(v) 10(w) 10(x) 10(y) Description Loan Sale Agreement between Hercules Funding LLC and Hercules Technology Growth Capital, Inc., dated as of August 1, 2005.(2) 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.(2) Indenture between Hercules Funding Trust I & U.S. Bank National Association, dated as of August 1, 2005.(2) 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.(2) Hercules Technology Growth Capital, Inc. 2004 Equity Incentive Plan (2011 Amendment and Restatement).(10) Hercules Technology Growth Capital, Inc. 2006 Non-Employee Director Plan (2007 Amendment and Restatement).(11) Form of Custody Agreement between the Company and Union Bank of California.(8) Form of Restricted Stock Award under the 2004 Equity Incentive Plan.(19) Subscription Agreement by and among the Company and the subscribers named therein, dated as of March 2, 2006.(17) Form of Incentive Stock Option Award under the 2004 Equity Incentive Plan.(8) Form of Nonstatutory Stock Option Award under the 2004 Equity Incentive Plan.(8) Form of Registrar Transfer Agency and Service Agreement between the Company and American Stock Transfer & Trust Company.(8) Warrant Agreement, dated as of June 22, 2004, between the Company and American Stock Transfer & Trust Company, as warrant agent.(9) Subscription Agreement, dated as of February 2, 2004, between the Company and the subscribers named therein.(8) Lease Agreement, dated as of June 13, 2006, between the Company and 400 Hamilton Associates.(4) Third Amendment to 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 July 28, 2006.(5) Second 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 as of December 6, 2006.(6) Fifth Amendment to Sale and Servicing Agreement 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 as of March 30, 2007.(13) Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG, dated as of May 2, 2007.(14) Fourth Amendment to the Warrant Participation Agreement by and among Hercules Technology Growth Capital, Inc. and Citigroup Global Markets Realty Corp., dated as of May 2, 2007.(15) Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 2, 2007.(15) 184 Exhibit Number 10(z) 10(aa) 10(bb) 10(cc) 10(dd) 10(ee) 10(ff) 10(gg) 10(hh) 10(ii) 10(jj) 10(kk) 10(ll) 10(mm) 10(nn) 10(oo) 10(pp) 10(qq) 10(rr) Description First Amendment to Amended and Restated Note Purchase Agreement by and among the Company, Hercules Funding Trust I, Hercules Funding I LLC, and Citigroup Global Markets, Inc., dated as of May 7, 2008.(16) Second Amendment to Amended and Restated Sale and Servicing Agreement by and among Hercules Funding Trust I, Hercules Funding I LLC, the Company, U.S. Bank National Association, Lyon Financial Services, Inc., Citigroup Global Markets Inc., and Deutsche Bank AG, dated as of May 7, 2008.(16) Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Foothill, LLC, dated as of August 25, 2008.(18) Sale and Servicing Agreement among Hercules Funding II LLC, the Company, Lyon Financial Services, Inc., and Wells Fargo Foothill, LLC, dated as of August 25, 2008.(18) Form of SBA Debenture.(19) First Amendment to Loan and Security Agreement by and among Hercules Funding II, LLC and Wells Fargo Foothill, LLC, dated as of April 30, 2009.(20) Loan and Security Agreement by Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of February 10, 2010.(21) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) Amended and Restated Loan and Security Agreement between the Company and Union Bank, N.A., dated as of November 2, 2011.(25) Second Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of June 20, 2011.(24) First Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of March 30, 2012.(32) Third Amendment to Loan and Security Agreement by and among Hercules Funding II LLC and Wells Fargo Capital Finance, LLC (f/k/a Wells Fargo Foothill, LLC), dated as of August 1, 2012.(33) Second Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of September 17, 2012.(34) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 17, 2012.(34) 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 as of March 6, 2006.(12) 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.(12) Warrant Participation Agreement between the Company and Citigroup Global Markets Realty Corp., dated as of August 1, 2005.(35) Indenture by and between Hercules Capital Funding Trust 2012-1 and U.S. Bank National Association, dated as of December 19, 2012.(36) Amended and Restated Trust Agreement by and between Hercules Capital Funding 2012-1 LLC and Wilmington Trust, National Association, dated as of December 19, 2012.(36) 185 Exhibit Number 10(ss) 10(tt) 10(uu) 10(vv) 10(ww) 10(xx) 10(yy) 14 21.1* 23.1* 31.1* 31.2* 32.1* 32.2* Description Sale and Servicing Agreement by and Among Hercules Capital Funding 2012-1 LLC, Hercules Capital Funding Trust 2012-1 LLC, Hercules Technology Growth Capital, Inc. and U.S. Bank National Association, dated as of December 19, 2012.(36) Sale and Contribution Agreement by and between Hercules Technology Growth Capital, Inc. and Hercules Capital Funding 2012-1 LLC, dated as of December 19, 2012.(36) Note Purchase Agreement among the Hercules Technology Growth Capital, Inc., Hercules Capital Funding 2012-1 LLC, as Trust Depositor, Hercules Capital Funding Trust 2012-1, as Issuer, and Guggenheim Securities, LLC, as Initial Purchaser, dated as of December 12, 2012.(36) Administration Agreement between Hercules Capital Funding Trust 2012-1LLC, Hercules Technology Growth Capital, Inc, Wilmington Trust, National Association, and U.S. Bank National Association, dated as of December 19, 2012.(36) Third Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 19, 2012.(36) Fourth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of December 2, 2013.* Fifth Amendment to Amended and Restated Loan and Security Agreement by and between Hercules Technology Growth Capital, Inc. and Union Bank, N.A., dated as of January 31, 2014.* Code of Ethics.(8) List of Subsidiaries. Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (1) (2) (3) (4) (5) (6) (7) (8) (9) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 8, 2005 (Registration No. 333-122950), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 5, 2005. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 2, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 13, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on July 28, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 6, 2006. Previously filed as part of the Current Report on Form 8-K of the Company, as filed on March 9, 2007. Previously filed as part of a Pre-Effective Amendment No. 1, as filed on May 17, 2005 (File No. 333-122950), to the Registration Statement on Form N-2 of the Company. Previously filed as part of the Registration Statement on Form N-2 of the Company (File No. 333-122950), as filed on February 22, 2005. (10) Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on June 22, 2007 and the Definitive Proxy Statement of the Company, as filed on April 29, 2011. (11) Previously filed as part of the Securities to be Offered to Employees in Employee Benefit Plans on Form S-8, as filed on October 10, 2007. (12) Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of the Company. (13) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 3, 2007. (14) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on May 5, 2007. 186 (15) Previously filed as part of the Pre-Effective Amendment No. 1, as filed on May 15, 2007 (File No. 333-141828), to the Registration Statement on Form N-2 of the Company. (16) Previously filed as part of Pre-Effective Amendment No. 2, as filed on June 5, 2008 (File No. 333-150403 ), to the Registration Statement on Form N-2 of the Company. (17) Previously filed as part of the Post-Effective Amendment No. 3, as filed on March 9, 2006 (File No. 333-126604), to the Registration Statement on Form N-2 of the Company. (18) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 27, 2008. (19) Previously filed as part of the Annual Report on Form 10-K of the Company, as filed on March 16, 2009. (20) Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 11, 2009. (21) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on February 17, 2010. (22) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 11, 2011. (23) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on April 18, 2011. (24) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on June 24, 2011. (25) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on November 11, 2011. (26) Previously filed as part of Post-Effective Amendment No. 1, as filed on April 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (27) Previously filed as part of Post-Effective Amendment No. 2, as filed on July 6, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (28) Previously filed as part of Post-Effective Amendment No. 3, as filed on July 12, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (29) Previously filed as part of Post-Effective Amendment No. 5, as filed on September 24, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (30) Previously filed as part of Post-Effective Amendment No. 7, as filed on October 2, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (31) Previously filed as part of Post-Effective Amendment No. 8, as filed on October 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (32) Previously filed as part of the Quarterly Report on Form 10-Q of the Company, as filed on May 8, 2012. (33) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on August 2, 2012. (34) Previously filed as part of Post-Effective Amendment No. 4, as filed on September 17, 2012 (File No. 333-179431), to the Registration Statement on Form N-2 of the Company. (35) Previously filed as part of the Pre-Effective Amendment No. 1, as filed on October 17, 2006 (File No. 333-136918), to the Registration Statement on Form N-2 of the Company. (36) Previously filed as part of the Current Report on Form 8-K of the Company, as filed on December 17, 2012. * Filed herewith 187 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. Date: February 27, 2014 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on February 27, 2014. Signature Title Date /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez /S/ JESSICA BARON Jessica Baron Chairman of the Board, President and Chief Executive Officer (principal executive officer) Vice President Finance and Chief Financial Officer (principal accounting officer) February 27, 2014 February 27, 2014 /S/ ALLYN C. WOODWARD, JR Director February 27, 2014 Allyn C. Woodward, Jr. /S/ JOSEPH W. CHOW Joseph W. Chow Director February 27, 2014 /S/ ROBERT P. BADAVAS Director February 27, 2014 Robert P. Badavas 188 Form 2 1310-K/A [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES OR EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 814-00702 Hercules Technology Growth Capital, Inc. (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 74-3113410 (I.R.S. Employer Identification Number) 400 Hamilton Avenue, Suite 310 Palo Alto, California 94301 (Address of principal executive offices) (650) 289-3060 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Shares, par value $0.001 per share Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES È NO ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ‘ No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Accelerated filer ‘ Non-accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $820.7 million based upon a closing price of $13.94 reported for such date on the New York Stock Exchange. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not intended and shall not be deemed to be an admission that, such persons are affiliates of the Registrant. On April 21, 2014, there were 62,708,894 shares outstanding of the registrant’s common stock, $0.001 par value. Documents incorporated by reference: Not applicable. DOCUMENTS INCORPORATED BY REFERENCE [THIS PAGE INTENTIONALLY LEFT BLANK] HERCULES TECHNOLOGY GROWTH CAPITAL, INC. FORM 10-K ANNUAL REPORT Explanatory Note Hercules Technology Growth Capital, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2013 pursuant to General Instruction G(3) to Form 10-K for the sole purpose of filing the information required to be disclosed pursuant to Part III of Form 10-K. In addition, the cover page and the list of exhibits of the Form 10-K have been updated and amended. Except for the amendments described above, this Form 10-K/A does not modify or update the disclosures in, or exhibits to, the Form 10-K. Part III. Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV. Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 13 32 34 34 37 1 PART III Item 10. Directors, Executive Officers and Corporate Governance Committees of the Board Our board has established an audit committee, a valuation committee, a compensation committee, and a nominating and corporate governance committee. A brief description of each committee is included in this Form 10-K/A and the charters of the audit, compensation, and nominating and corporate governance committees are available on the Investor Relations section of our website at http://investor.htgc.com/governance.cfm The table below provides current membership (M) and chairmanship (C) information for each standing board committee. Name Audit Valuation Compensation Nominating and Corporate Governance Robert P. Badavas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joseph W. Chow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allyn C. Woodward, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manuel A. Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C M M — M C M — M M C — M M C — During 2013, our board held 15 full board meetings, 20 committee meetings and acted by written consent. All of the directors attended at least 95% of the full board meetings and all of the respective committee meetings on which they serve. Each director makes a diligent effort to attend all board and committee meetings, as well as our annual meeting of stockholders. Each of the directors attended our 2013 annual meeting of stockholders in person. Audit Committee. Our board has established an audit committee. Our audit committee comprises Messrs. Badavas, Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the rules promulgated by the New York Stock Exchange, or NYSE, and the requirements to be a non-interested director as defined in Section 2(a)(19) of the 1940 Act. Mr. Badavas currently serves as chairman of our audit committee and is an “audit committee financial expert” as defined by applicable Securities and Exchange Commission, or SEC, rules. Our audit committee is responsible for assisting our board in fulfilling its oversight responsibilities related to: (i) appointing, overseeing and replacing, if necessary, our independent auditor; (ii) overseeing the accounting and financial reporting processes of Hercules and our subsidiaries; (iii) overseeing the integrity of the financial statements of Hercules and our subsidiaries; (iv) establishing procedures for complaints relating to accounting, internal accounting controls or auditing matters, (v) examining the independence qualifications and; (vi) preparing the report required by the SEC to be included in our annual proxy statement; (vii) assisting our board’s oversight of our compliance with legal and regulatory requirements; and (viii) assisting our board in fulfilling its oversight responsibilities related to the systems of internal controls and disclosure controls which management has established regarding finance, accounting, and regulatory compliance. During the last fiscal year, the audit committee held seven meetings and acted by written consent. Our audit committee provides assistance to our board in various matters, including, among other things, fulfilling its responsibilities with respect to the following: • annually, evaluating the appointment, compensation and retention of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for Hercules and our subsidiaries, including resolution of disagreements between management and the independent auditor regarding financial reporting; • preapproving any independent auditors’ engagement to render audit and/or permissible non-audit services (including the fees charged and proposed to be charged by the independent auditors); 2 • • • receiving formal written statements, at least annually, from the independent auditor regarding the auditor’s independence, including a delineation of all relationships between the auditor and us; discussing with the independent auditor any disclosed relationships or services that may impact the objectivity and independence of the independent auditor, addressing, at least annually, the matters, required by applicable requirements of the Public Company Accounting Oversight Board; recommending to our board actions to satisfy our board of the independence of the audit; and, if so determined by our audit committee, recommending that our board take appropriate action to oversee the independence of the auditor; at least annually, obtaining and reviewing a report from the independent auditor detailing the firm’s internal quality control procedures, any material issues raised by the independent auditor’s internal quality control review, peer review or any governmental or other professional inquiry performed within the past five years and any remedial actions implemented by the firm and all relationships between the independent auditor and us; annually, obtaining from the independent auditors a formal written statement of the fees billed in the last fiscal year for categories of services rendered by the independent auditors, and listed in our audit committee charter; • monitoring the rotation of the lead (or coordinating) audit partner (or other employees of the independent auditor if required by SEC rules and regulations) having primary responsibility for the audit and the audit partner responsible for reviewing the audit; • • • • • • • • considering the effect on us of: (i) any changes in accounting principles or practices proposed by management or the independent auditors; and (ii) any changes in service providers, such as the accountants, that could impact our internal control over financial reporting; evaluating the efficiency and appropriateness of the services provided by the independent auditors, including any significant difficulties with the audit or any restrictions on the scope of their activities or access to required records, data and information; reviewing with the independent auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on our financial statements; reviewing with the independent auditor the overall scope and plans for audits, including authority and organizational reporting lines and adequacy of staffing and compensation; interacting with the independent auditors, including meeting with the independent auditors at least four times during each fiscal year, reviewing and, where necessary, resolving any problems or difficulties the independent auditor may have encountered in connection with the annual audit or otherwise, any management letters provided to our audit committee and our responses; reviewing and discussing with management and the independent auditor our system of internal controls (including any significant deficiencies in the design or operation of those controls which could adversely affect our ability to record, process, summarize and report financial data), its financial and critical accounting practices, and policies relating to risk assessment and management; receiving and reviewing reports of the independent auditor discussing: (i) all critical accounting policies and practices to be used in the firm’s audit of our financial statements, (ii) all alternative treatments of financial information within generally accepted accounting principles, referred to as GAAP, that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor, and (iii) other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences; reviewing and discussing with management and the independent auditor our annual and quarterly financial statements; 3 • • • • • • • • • • reviewing material pending legal proceedings involving us and other contingent liabilities; periodically, meeting separately with management (or other personnel responsible for the internal audit function) and with independent auditors to discuss results of examinations of our internal controls and procedures; discussing with the independent auditors the matters required to be communicated to our audit committee in accordance with Statement on Auditing Standards No. 61; establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submissions by employees, consultants or contractors of concerns regarding questionable accounting or accounting matters; setting hiring policies relating to our hiring of employees or former employees of the independent auditors; producing an audit committee report for inclusion in our annual report on Form 10-K or proxy statement for the annual meeting of stockholders; reviewing the adequacy of our audit committee charter annually and submitting an audit committee charter to our board for approval; reporting recommendations to our board on a regular basis and annually performing, or participating in, an evaluation of our audit committee; reviewing such other matters as our board or the audit committee shall deem appropriate; and determining funding necessary for ordinary administrative expenses that are necessary or appropriate in carrying out our audit committee’s duties. Valuation Committee. Our board has established a valuation committee. Our valuation committee comprises Messrs. Badavas, Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the rules promulgated by the NYSE and the requirements to be a non- interested director as defined in Section 2(a)(19) of the 1940 Act. Mr. Chow currently serves as chairman of our valuation committee. Our valuation committee is responsible for reviewing and recommending to our full board the fair value of debt and equity securities in accordance with established valuation procedures. Our valuation committee may utilize the services of an independent valuation firm in determining the fair value of these securities. During the last fiscal year, our valuation committee held four meetings. Our committee provides assistance to our board in various matters, including, among other things, fulfilling its responsibilities with respect to the following: • • determining the fair value of our portfolio debt and equity securities and other assets in accordance with the 1940 Act and the valuation policies and procedures adopted by our board, as amended from time to time, in order to recommend the portfolio valuation to our full board for approval; and retaining, terminating and determining the compensation for an independent valuation firm and any legal, accounting or other expert or experts to assist in: (i) reviewing our valuation processes applicable to non-publicly traded companies; (ii) reviewing fair market value calculations as requested from time to time with respect to select companies; and (iii) carrying out our valuation committee’s duties and responsibilities. Compensation Committee. Our board has established a compensation committee. Our compensation committee comprises Messrs. Badavas, Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the rules promulgated by the NYSE and the requirements to be a non-interested director as defined in Section 2(a)(19) of the 1940 Act. Mr. Woodward currently serves as 4 chairman of our compensation committee. Our compensation committee determines compensation for our executive officers, and it administers our 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan. During the last fiscal year, our compensation committee held seven meetings and acted by written consent. Our compensation committee provides assistance to our board in various matters, including, among other things, fulfilling its responsibilities with respect to the following: • • • • • • • • • • • assisting our board in developing and evaluating potential candidates for executive positions (including the chief executive officer) and overseeing the development of executive succession plans; annually, reviewing and approving corporate objectives relevant to our chief executive officer’s and our other executive officer’s total compensation, evaluating our chief executive officer’s and our other executive officers’ performance to ensure that it is designed to achieve the objectives of rewarding our executive officers appropriately for their contributions to corporate growth and profitability and, together with our chief executive officer, evaluating and approving the compensation of our other executive officers; annually, determining and approving the compensation paid to our chief executive officer; annually, reviewing our compensation practices and the relationship among risk, risk management and compensation in light of our corporate objectives, including their safety and soundness and the avoidance of practices that would encourage excessive risk; periodically, reviewing our incentive compensation plans and perquisites, making recommendations to our board regarding the adoption of new employee incentive compensation plans and equity-based plans, and administering our existing incentive compensation plans and equity-based plans; periodically, evaluating the compensation of directors and making recommendations regarding adjustments to such compensation; producing a committee report on executive compensation for inclusion in the our annual report on Form 10-K or proxy statement for the annual meeting of stockholders in accordance with Item 407(e)(5) of Regulation S-K; annually reviewing and discussing with our management the executive compensation disclosure to be included in our annual report on Form 10-K or our proxy statement for the annual meeting of stockholders, including the Compensation Discussion and Analysis required by Item 402 of Regulation S-K, and subsequent to such review determining whether to recommend to our board that such disclosure be included in our annual report on Form 10-K or our proxy statement for the annual meeting of stockholders; periodically, reviewing and assessing the adequacy of our compensation committee charter and submitting any changes to our board for approval; determining funding necessary for ordinary administrative expenses that are necessary or appropriate in carrying out the committee’s duties; regularly, reporting recommendations to our board, and annually performing, or participating in, an evaluation of the committee, the results of which shall be presented to our board; • when it is determined by the committee that a consulting firm (or other expert) is to assist in the assessment of the CEO’s or other executive officer’s compensation, our committee is responsible for retaining and terminating such firm or experts and approving the consulting firm or other expert’s fee and other retention terms; • • retaining legal, accounting or other experts that our committee determines to be necessary to carry out its duties and determining compensation for such advisors; and reviewing such other matters as our board or the compensation committee deem appropriate. 5 Nominating and Corporate Governance Committee. Our board has established a nominating and corporate governance committee. Our nominating and corporate governance committee comprises Messrs. Badavas, Chow and Woodward, each of whom is an independent director and satisfies the independence requirements for purposes of the rules promulgated by the NYSE and the requirements to be a non-interested director as defined in Section 2(a)(19) of the 1940 Act. Mr. Woodward currently serves as chairman of our nominating and corporate governance committee. Our nominating and corporate governance committee will nominate to our board for consideration candidates for election as directors to our board. During the last fiscal year, our nominating and corporate governance committee held two meetings. Our nominating and corporate governance committee met in December 2013 to consider candidates for election to our board for our 2014 annual meeting of stockholders. Our nominating and corporate governance committee provides assistance to our board in various matters, including, among other things, fulfilling its responsibilities with respect to the following: • • identifying individuals qualified to become board members, consistent with criteria approved by our board, receiving nominations for such qualified individuals, selecting, or recommending that our board select, the director nominees for our next annual meeting taking into account each candidate’s ability, judgment and experience and the overall diversity and composition of our board; recommending to our board candidates for election to our board and evaluating our board in accordance with criteria set forth in the committee’s charter; • monitoring board composition and recommending candidates as necessary to ensure that the number of independent directors serving on the Board satisfies the NYSE and SEC requirements; • • • • • • • • developing and periodically evaluating initial orientation guidelines and continuing education guidelines for each member of our board and each member of each committee thereof regarding his or her responsibilities as a director generally and as a member of any applicable committee of our board; establishing a policy under which our stockholders may recommend a candidate to the nominating and corporate governance committee for consideration for nomination as a director; recommending to our board qualified individuals to serve as committee members on the various board committees; recommending to our board or to the appropriate committee thereto processes for annual evaluations of the performance of our board, our chairman of the board and chief executive officer, and its standing audit committee, compensation committee and valuation committee; clearly articulating to each director what is expected of their tenure on our board, including directors’ basic duties and responsibilities with respect to attendance at board meetings and advance review of meeting materials; developing and periodically evaluating orientation guidelines and continuing education guidelines for each member of our board and each member of each committee thereof regarding his or her responsibilities as a director generally and as a member of any applicable committee of our board; reviewing our practices and policies with respect to directors, including the size of our board, the ratio of employee directors to non-employee directors, the meeting frequency of our board and the structure of board meetings and making recommendations to our board with respect thereto; overseeing the maintenance and presentation to our board of management’s plans for succession to senior management positions in the company; • monitoring and making recommendations to our board on matters of our policies and practices relating to corporate governance; • annually, evaluating our Code of Business Conduct and Ethics and, if appropriate, recommending changes to that code; 6 • • • • • • • • in concert with our board, reviewing our policies with respect to significant issues of corporate public responsibility, including charitable contributions; considering and reporting to our board any questions of possible conflicts of interest of board members; reviewing stockholder proposals regarding corporate governance and making recommendations to our board; reviewing and assessing the adequacy of the committee charter and the charters of other existing board committees, submitting any changes to our board for approval; reporting committee actions to our board on a regular basis and annually performing, or participating in, an evaluation of the committee; annually, performing or participating in, an evaluation of the performance of the committee, the results of which shall be presented to our board; retaining and terminating a search firm to assist in the identification of director candidates, and approving the search firm’s fees and other retention terms; and retaining legal, accounting or other experts that our committee determines to be necessary to carry out its duties, and to determine compensation for such advisors. Our nominating and corporate governance committee will consider qualified director nominees recommended by stockholders when such recommendations are submitted in accordance with our bylaws and any other applicable law, rule or regulation regarding director nominations. When submitting a nomination to our for consideration, a stockholder must provide certain information that would be required under applicable SEC rules, including the following minimum information for each director nominee: full name, age, and address; class, series and number of shares of our common stock beneficially owned by the nominee, if any; the date such shares were acquired and the investment intent of such acquisition; whether such stockholder believes the individual is an “interested person” of Hercules, as defined in the 1940 Act; and all other information required to be disclosed in solicitations of proxies for election of directors in an election contest or is otherwise required. In evaluating director nominees, our nominating and corporate governance committee considers the following factors: • the appropriate size and the diversity of our board; • whether or not the nominee is an “interested person” of Hercules as defined in Section 2(a)(19) of the 1940 Act; • • • • • our needs with respect to the particular talents and experience of its directors; the knowledge, skills and experience of nominees in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of our board; experience with accounting rules and practices; the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members; and all applicable laws, rules, regulations, and listing standards. Our nominating and corporate governance committee identifies nominees by first evaluating our current board members willing to continue in service. Our current board members with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of our board with that of obtaining a new perspective. If any member of our board does not wish to continue in service or if our nominating and corporate governance committee or our board decides not to re-nominate a member for re-election, or if our nominating and corporate governance committee recommends to expand the size of our board, our nominating and corporate governance 7 committee identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of our nominating and corporate governance committee and our Board provide suggestions as to individuals meeting the criteria of our nominating and corporate governance committee Consultants may also be engaged to assist in identifying qualified individuals. Information about the Directors and Executive Officers Set forth below is information, as of April 21, 2014, regarding Messrs. Badavas and Chow, who are being nominated for election as directors of Hercules by our stockholders at the 2014 annual meeting, as well as information about our other current directors whose terms of office will continue after the annual meeting, including each director’s (i) name and age; (ii) a brief description of their recent business experience, including present occupations and employment during at least the past five years; (iii) directorships, if any, that each director holds and has held during the past five years; and (iv) the year in which each person became a director of the Company. As the information that follows indicates, each nominee and each continuing director brings strong and unique experience, qualifications, attributes, and skills to our board. This provides our board, collectively, with competence, experience, and perspective in a variety of areas, including: (i) corporate governance and board service; (ii) executive management, finance, and accounting; (iii) venture capital financing with a technology- related focus; (iv) business acumen; and (v) an ability to exercise sound judgment. Moreover, our and nominating and corporate governance committee believes that it is important to seek nominees with a broad diversity of experience, professions, skills, geographic representation and backgrounds. Our nominating and corporate governance committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. We believe that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow our board to fulfill its responsibilities. Our board does not have a specific diversity policy, but considers diversity of race, religion, national origin, gender, sexual orientation, disability, cultural background and professional experiences in evaluating candidates for board membership. Name Interested Director: Age Positions Manuel A. Henriquez(1) . . . . . . . . . . . . . . . . . . . . . . 50 Chairman of the Board, President and Chief Executive Officer Independent Directors: Robert P. Badavas(2)(3)(4)(5) Joseph W. Chow(2)(3)(4)(5) Allyn C. Woodward, Jr.(2)(3)(4)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers: Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . . . . . . Michael Penney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 61 73 39 42 35 43 37 Director Director Director Vice President of Finance and Chief Financial Officer Senior Managing Director and Life Sciences Group Head Chief Credit Officer Former Senior Managing Director and Clean Technology Group Head(6) General Counsel, Secretary, Chief Compliance Officer (1) Mr. Henriquez is an interested person, as defined in section 2(a)(19) of the 1940 Act, of Hercules due to his position as an executive officer of the company. (2) Member of the audit committee. (3) Member of the valuation committee. (4) Member of the compensation committee. (5) Member of the nominating and corporate governance committee. (6) Mr. Fissori resigned from Hercules as of April 25, 2014. 8 Interested Directors Directors Mr. Henriquez is an “interested director” because he is our Chairman and Chief Executive Officer. Manuel A. Henriquez is a co-founder of Hercules and has been our Chairman and Chief Executive Officer since 2004 and our President since 2005. Prior to co-founding Hercules, 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 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 serves on the board of directors of Northeastern University, a global, experiential research university, the Lucile Packard Foundation for Children’s Health, the sole fundraising entity for Lucile Packard Children’s Hospital and the child health programs at Stanford University School of Medicine, as well as the Children’s Health Council, a diagnostic and treatment center for children and adolescents facing developmental and behavioral challenges. Mr. Henriquez received a B.S. in Business Administration from Northeastern University. Through his broad experience as an officer and director of several private and public companies, in addition to skills acquired with firms engaged in investment banking, banking and financial services, Mr. Henriquez brings to the Company a unique business expertise and knowledge of financing technology related companies as well as extensive financial and risk assessment abilities. Mr. Henriquez possesses a vast array of knowledge in venture capital financing which assists us in the markets in which we compete. Mr. Henriquez’s years of experience as our Chairman and Chief Executive Officer since co-founding the Company demonstrate his leadership skills that are valuable in his role as our Chairman and Chief Executive Officer. Independent Directors The following directors are “independent” under the NYSE rules and each of the following directors is not an “interested person” as defined in Section 2(a)(19) of the 1940 Act. Robert P. Badavas has served as a director since March 2006. Since January 2012, Mr. Badavas has served as President and Chief Executive Officer of PlumChoice, Inc. a venture backed technology, software and services company. Mr. Badavas also has served on the board of directors of PlumChoice since November 2010. Previously, Mr. Badavas served as President of Petros Ventures, Inc., a management and advisory services firm. Mr. Badavas was President and Chief Executive Officer of TAC Worldwide, a multi-national technical workforce management and business services company, from December 2005 through October 2009, and was Executive Vice President and Chief Financial Officer of TAC Worldwide from November 2003 to December 2005. Prior to joining TAC Worldwide, Mr. Badavas was a Partner and Chief Operating Officer of Atlas Venture, an international venture capital firm, from September 2001 to September 2003 and Chief Executive Officer at Cerulean Technology, Inc., a venture capital backed wireless application software company. Since May 2007, Mr. Badavas has served on the board of directors and is chairman of the Audit Committee of Constant Contact, Inc. (NASDAQ: CTCT), a provider of email and other engagement marketing products and services for small and medium sized organizations. In addition, Mr. Badavas serves as Vice-Chairman of the board of trustees of Bentley University in Waltham, MA. Mr. Badavas also serves on the board of Hellenic College/Holy Cross School of Theology in Brookline, MA where he serves on the Executive Committee of the board as its Treasurer and Chair of the Real Estate and Investment Committees. Mr. Badavas is Chairman Emeritus of The Learning Center for the Deaf in Framingham, MA and currently serves on the board’s Advancement and Finance Committees. Mr. Badavas is a certified public accountant with nine years of experience at PricewaterhouseCoopers LLP, an independent registered public accounting firm. Also, 9 Mr. Badavas has completed a program that studied strategies to make corporate boards more effective at the Harvard Business School. Mr. Badavas is active in board of director organizations and regularly attends professional seminars addressing issues of current import to boards of directors. Mr. Badavas is a magna cum laude graduate of Bentley University with a B.S. in Accounting and Finance. Through his prior experience as a director, chief executive officer, chief operating officer and chief financial officer, Mr. Badavas brings business expertise, executive leadership experience, finance, and audit skills to his Board service with the Company. Mr. Badavas’ expertise, experience and skills closely align with our operations, and his prior investment experience with venture capital firms and technology companies facilitates an in-depth understanding of our investment business. Mr. Badavas’ expertise and experience also qualify him to serve as Chairman of our Audit Committee and as our audit committee financial expert. Joseph W. Chow has served as a director since February 2004. Mr. Chow retired in March 2011 as Executive Vice President at State Street Corporation (NYSE: STT), a leading global provider of asset servicing and investment management services to institutional investors, where he was responsible for the development of business strategies for emerging economies. He served on the company’s Asia Pacific and European Executive Boards, as a board director of State Street’s Technology Center in China, and chaired State Street’s Corporate Environmental Sustainability Committee. Previously, having retired from State Street in 2003 and returned in 2004, he assumed the role of Executive Vice President and Chief Risk and Corporate Administration Officer responsible for Enterprise Risk Management, Compliance, Regulatory Affairs, Basel Capital Accord Implementation, and Community Affairs; he was a member of the Operating Group, the company’s most senior 11-member strategy and policy management committee. Prior to 2003, Mr. Chow was State Street’s Executive Vice President and Head of Credit and Risk Policy responsible for corporate-wide risk management, focusing on credit, market, operational, fiduciary, and compliance risks. He chaired the company’s Major Risk Committee, Fiduciary Review Committee, and Securities Finance Risk Management Committee and served as a member of the Asset Liability Management Committee and Financial Policy Committee. Before joining State Street, Mr. Chow worked at Bank of Boston in various international and corporate banking roles from 1981 to 1990 and specialized in the financing of emerging-stage high technology companies. Mr. Chow is a board trustee/director, and serves on the audit and investment committees of the Delaware Investments Family of Funds, a trustee of the Boston Children’s Museum and is a director of the Hong Kong Association of Massachusetts. He served on the board of directors of China Universal Asset Management, Inc. in Shanghai, the Greater Boston Chamber of Commerce, and the Asian Community Development Corporation, a not-for-profit community development corporation focused on building affordable housing in Boston. Mr. Chow is a graduate of Brandeis University with a B.A. in Economics. He also received a Master in City Planning from the Massachusetts Institute of Technology and an M.S. in Management (Finance) from the MIT Sloan School of Management. Through his experience as a senior executive of a major financial institution, Mr. Chow brings business expertise, finance and risk assessment skills to his Board service with the Company. Mr. Chow’s experience and skills closely align with our business, and his lending and credit experience facilitates an in-depth understanding of risk associated with the structuring of investments in technology related companies. Mr. Chow’s risk management expertise and credit related experience also qualify him to serve as Chairman of our Valuation Committee. 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., an independent investment dealer. He previously served as President of AHFG from 1995 to 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 subsequently 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 10 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. He is also a former director and chairman of Lecroy Corporation which was sold in August, 2012 and a former director of Viewlogic Systems, Inc. and Cayenne Software, Inc. Mr. Woodward serves on the boards of three private companies and is on the boards of advisors of five venture capital funds. Mr. Woodward holds an Executive Masters Professional Director Certification, their highest level award, from the American College of Corporate Directors, a public company director education and credentialing organization, is a member of the Board Leaders Group, and is a member of the National Association of Corporate Directors. 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 a member of the Investment Committee, the Finance Committee and the Private Equity 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. Mr. Woodward’s executive and board experience brings extensive business, finance and investment expertise to his Board service with the Company. His experiences with financial services, bank and technology- related companies provide a unique perspective on matters involving business, finance and technology. Mr. Woodward’s many board related experiences makes him skilled in leading committees requiring substantive expertise. He is uniquely qualified to lead in the continued development of our Board’s policies regarding compensation and governance best practices by serving as Chairman of our Compensation Committee and Nominating and Corporate Governance Committee and by serving as our Lead Independent Director. Information about Executive Officers who are not Directors The following information, as of April 21, 2014, pertains to our executive officers who are not directors of the Company. Jessica Baron joined Hercules in October 2006 as Corporate Controller and was promoted to Vice President of Finance in October 2010. Effective June 1, 2011, our board appointed Ms. Baron as Interim Chief Financial Officer and our board confirmed her appointment as the our permanent Chief Financial Officer on March 27, 2012. During her tenure at Hercules, Ms. Baron has been involved in financial reporting, financial process and systems design and implementation. Prior to joining Hercules, Ms. Baron served in strategic finance roles at Cisco Systems, Inc. from 2004 to 2006 and at Levi Strauss and Company from 2002 to 2004. Ms. Baron also served as a finance and accounting manager at Dominion Ventures and Dominion Capital Management from 2000 to 2002. She also was at PricewaterhouseCoopers LLP in supervisory roles in both its consulting and business assurance divisions from 1997 to 2000. Ms. Baron earned a Bachelor of Arts degree in Human Biology and a Master of Arts degree in Sociology from Stanford University and a Master of Business Administration degree with an emphasis in Finance from the University of California, Berkeley, Haas School of Business. She is a Certified Public Accountant in the state of California. Parag Shah joined Hercules in November 2004 as Managing Director of Life Sciences and was promoted to Senior Managing Director in June 2006. During March 2008 Mr. Shah was promoted by our board to the position of Life Science Group Head. Prior to joining Hercules, Mr. Shah served as Managing Director for Biogenesys Capital from April 2004 to November 2004. From April 2000 to April 2004, Mr. Shah was employed by Imperial Bank, where he served as a Senior Vice President and East Coast Life Sciences Group Head in Imperial Bank’s Technology and Life Sciences Division, beginning in October 2000, 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 Bachelor’s degree in Molecular Biology at the Massachusetts Institute of Technology, or 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 Institute’s Board of Associates in 2003. 11 Scott Bluestein joined Hercules in November 2010 as Chief Credit Officer. Mr. Bluestein previously served as founder and partner of Century Tree Capital Management from February 2009 until June 2010. Prior to that, he was managing director at Laurus-Valens Capital Management, a New York based investment firm specializing in providing financing to small and micro cap growth oriented businesses through a combination of secured debt and equity securities, including new investments, portfolio management, and restructurings from June 2003 until February 2010. Previously, Mr. Bluestein worked at UBS Investment Bank, where he was a member of their Financial Institutions Coverage Group focused on the Financial Technology space. Mr. Bluestein received his B.B.A. from Emory University. Todd Jaquez-Fissori joined Hercules in November 2009 as Managing Director and was promoted by our board to the position of Energy Technology Group Head in May 2011 and Technology Group Head in October 2011. In July, 2012, Mr. Jaquez-Fissori was appointed to the position of Senior Managing Director and Energy Technology Group Head. Before joining Hercules in 2009, Mr. Jaquez-Fissori served as a director at TriplePoint Capital from February 2008 to December 2008 and was the general partner in charge of clean technology investing at Siemens Venture Capital from March 2004 to February 2008. Prior to working at Siemens Venture Capital, Mr. Jaquez-Fissori served as a principal at Boulder Ventures from March 2000 to March 2004 and as an analyst at Mayfield from May 1996 to September 1998. Mr. Jaquez-Fissori received a B.A. from Penn State University and an M.B.A. from the University of Pennsylvania Wharton School of Business. Mr. Fissori resigned from Hercules as of April 25, 2014. Michael Penney joined Hercules in 2013 as General Counsel, Chief Compliance Officer and Secretary. Prior to joining Hercules, he served as Vice President and Senior Counsel for State Street Bank and Trust Company, where he was responsible for domestic and cross-border M&A and joint venture transactions, public offerings and general corporate and SEC matters from 2009 to 2013. From 2004 to 2009, Mr. Penney was a corporate associate with Wilmer Cutler Pickering Hale and Dorr LLP. Mr. Penney earned his J.D. from Boston College, and he received a B.A. in political science and economics from the University of Nebraska. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 and the disclosure requirements of Item 405 of SEC Regulation S-K require that our directors and executive officers, and any persons holding more than 10% of any class of our equity securities report their ownership of such equity securities and any subsequent changes in that ownership to the SEC, the NYSE and to us. Based solely on a review of the written statements and copies of such reports furnished to us by our executive officers, directors and greater than 10% beneficial owners, we believe that during fiscal year ended December 31, 2013 all Section 16(a) filing requirements applicable to the executive officers, directors and stockholders were timely satisfied. Code of Ethics Our code of ethics, which is signed by our directors and executive officers, requires that our directors and executive officers avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and the interests of Hercules. Pursuant to our code of ethics, which is available on our website at http:// investor.htgc.com/governance.cfm, each director and executive officer must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our audit committee. Certain actions or relationships that might give rise to a conflict of interest are reviewed and approved by our board. 12 Item 11. Executive Compensation Compensation Discussion and Analysis Executive Summary Hercules continued its strong performance during 2013. As discussed below and detailed in our annual report on Form 10-K, in 2013 Hercules posted a 52.0% increase in net investment income to approximately $73.1 million on record levels of total investment income of approximately $139.7 million. Our financial position at the conclusion of 2013 was also strong as evidenced by our $373.4 million of available liquidity at December 31, 2013. The total realized shareholder return on our common stock during fiscal 2013 was approximately 59%*, which ranked first against our Current Peer Group (as defined below under “—Assessment of Market Data; Changes to Peer Group”). In addition to our 2013 financial results, the following graph details the total shareholder return to our shareholders during the last five years, as compared to our Current Peer Group, the Standard & Poor’s 500 Stock Index and the Dow Jones Industrial Average: Comparison of 5 Year Cumulative Total Return* HTGC DOW S&P500 25P Peer Group 50P Peer Group 75P Peer Group 75P Peer Group - $475.41 HTGC - $345.19 S&P500 - $228.13 DOW - $216.36 50P Peer Group - $190.85 25P Peer Group - $167.97 $500 $400 $300 $200 $100 $0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 *$100 Invested on 12/31/08 in stock or index. For purposes of this calculation and these comparisons, total shareholder return is calculated as price appreciation plus reinvestment of dividends and the compounding effect of dividends paid on reinvested dividends. We believe our compensation actions relating to 2013 corporate and individual performance illustrate an alignment between the compensation of our named executive officers, or NEOs, during 2013, and the performance of Hercules on an absolute and relative basis. We further believe that our executive compensation programs utilize an effective mix of short- and long-term compensation components determined relative to key measures of our performance and the returns enjoyed by our shareholders. Consistent with our pay-for- performance philosophy, our compensation committee will make future compensation decisions in light of our performance, and, if our future performance were to lag behind our peers, our compensation committee would adjust NEO compensation accordingly. * For purposes of this calculation and comparison, total shareholder return is calculated as price appreciation plus reinvestment of dividends and the compounding effect of dividends paid on reinvested dividends. 13 This Compensation Discussion and Analysis, or CD&A, provides information relating to the following NEOs during 2013. Name Title Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman, President and Chief Executive Officer, or CEO Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer, or CFO Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Credit Officer, or CCO Todd Jaquez-Fissori(1) . . . . . . . . . . . . . . . . . . . . . . . . Senior Managing Director and Life Science Group Head Senior Managing Director and Clean Technology Group Head (1) Mr. Fissori resigned from Hercules as of April 25, 2014. Compensation Philosophy and Objectives Our compensation committee developed our 2013 compensation program, and the compensation paid to our NEOs during 2013 was approved by all of our independent directors. Our compensation programs are intended to align the interests of our shareholders with the interests of management, and to reward our NEOs for their collective and independent contributions to our performance. Our compensation programs are intended to, among other things: • • • provide the compensation and incentives necessary to attract, motivate and retain key executives critical to our continued success and growth, while also aligning management interests with the interests of our shareholders, focus management behavior and decision-making on goals that are consistent with the overall strategy of the business, ensure a linkage between NEO compensation and individual contributions to our performance, and • manage risk appropriately. We believe that our continued success during 2013 was attributable to our ability to motivate and retain and motivate our outstanding executive talent through the use of both current and long-term incentive compensation programs, especially in an environment of competition for top-quality executive talent in the venture debt industry. Overview Our compensation objectives are achieved through our executive compensation program, which for 2013 consisted of the following elements: Compensation Element Form of Compensation Compensation Objective Annual Base Salary Annual Cash Bonus Awards Long-Term Equity Incentive Awards Cash paid on a regular basis throughout the year Provide a level of fixed income that is competitive and allows us to retain and attract executive talent Cash awards paid on an annual basis following year-end Reward executives who contribute to our financial performance and strategic success during the year, and reward individual NEO achievements Equity incentive awards vesting ratably over three years based on continued employment with Hercules Reward executives who contribute to our success through the creation of shareholder value and to provide meaningful retention incentives, and reward individual NEO achievements Our compensation committee has also designed our compensation programs to reflect what it believes to be certain best practices in executive compensation. In particular: • we discontinued the practice of granting short-term equity awards, i.e., restricted stock awards that vest over two years, • we do not have employment agreements with any of our NEOs, 14 • we do not provide for cash severance payments or change of control benefits, • we do not have guaranteed retirement benefits, • we do not provide our NEOs with executive perquisite allowances beyond the benefit programs offered to all of our employees, • we maintain stock ownership guidelines that require members of senior management to own at least two times his or her annual salary in our common stock, and • our compensation committee engaged an independent compensation consultant in connection with its review of incentive compensation to be paid with respect to 2013 and to assist in the design of compensation structures applicable to 2014 and future fiscal periods. As discussed below under “—Annual Cash Bonuses”, Hercules experienced strong financial performance during 2013. We believe that the compensation package paid to each NEO with respect to our 2013 performance appropriately rewarded each NEO for his or her contribution to such performance. Response to 2013 Shareholder Advisory Vote on Executive Compensation At our 2013 annual meeting of shareholders, we provided our shareholders with the opportunity to cast an advisory vote on say-on-pay with respect to NEO compensation disclosed in our proxy statement for the 2013 annual meeting. As reported, 48% of our shareholders voted in favor of this advisory vote. In response to the less-than-majority support of our 2013 advisory vote on executive compensation, we sought feedback from our top 25 institutional shareholders who collectively held approximately 35% of our outstanding shares as of December 31, 2013. Through this outreach program, we engaged in direct dialogue with our largest institutional shareholders to gain broad-based insights on our executive compensation and corporate governance practices in an effort to provide clarity about our compensation practices and to better understand and address their concerns. Our compensation committee has considered this feedback in connection with its compensation decisions for 2013, and, in coordination with our compensation consultant, revised our peer group to better align it with our business. Our compensation committee reviewed in detail our company-specific performance factors (as further discussed below under “—Assessment of Hercules Performance”) against those of our revised, Current Peer Group in its evaluation of compensation paid with respect to 2013. Further, our compensation committee is continuing its work with our compensation consultant to review and evaluate the insights gained from this outreach and to design compensation structures intended to even more closely align NEO compensation with our performance. Establishing Compensation Levels Our compensation committee provides primary oversight of our compensation programs, including the design and administration of executive compensation plans, assessment and setting of corporate performance, as well as individual performance, metrics, and the approval of executive compensation. In addition, our compensation committee retains an independent compensation consultant, and where appropriate, discusses compensation–related matters with our CEO, as it relates to the other NEOs. Role of Compensation Committee Our compensation committee is comprised entirely of independent directors who are also non-employee directors as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended, referred to as the 1934 Act, independent directors as defined by the NYSE rules, and are not “interested persons” of Hercules, as defined by Section 2(a)(19) of the Investment Company Act of 1940, as amended, referred to as the 1940 Act. Messrs. Badavas, Chow and Woodward are the members of the compensation committee, and Mr. Woodward chairs the committee. 15 Our compensation committee operates pursuant to a charter that sets forth the mission of the committee and its specific goals and responsibilities. A key component of our compensation committee’s goals and responsibilities is to evaluate and make recommendations to our board regarding the compensation of our NEOs, and to review their performance relative to their compensation to assure that they are compensated effectively in a manner consistent with the compensation philosophy discussed above. In addition, our compensation committee evaluates and makes recommendations to our board regarding the compensation of the directors for their services. Annually, our compensation committee: • • • evaluates our CEO’s performance to ensure that the compensation program is designed to achieve the objectives of retaining and properly rewarding our CEO appropriately for his contributions to corporate performance, reviews our CEO’s evaluation of the other NEOs’ performance to ensure that the compensation program is designed to achieve the objectives of retaining and properly rewarding our other NEOs appropriately for their contributions to corporate performance, determines and approves the compensation paid to our CEO, and • with input from our CEO, reviews and approves the compensation of the other NEOs. Our compensation committee periodically reviews our compensation programs and equity incentive plans to ensure that such programs and plans are consistent with our corporate objectives and appropriately align our NEOs’ interests with those of our shareholders. Our compensation committee also administers our stock incentive arrangements with our NEOs and other employees. Our compensation committee may not delegate its responsibilities discussed above. Role of Compensation Consultant Our compensation committee has engaged Frederic W. Cook & Co., Inc., referred to as F.W. Cook, as an independent outside compensation consultant to assist the compensation committee and provide advice on a variety of compensation matters relating to CEO compensation, compensation paid to our other NEOs, peer group selection, compensation program design, market and industry compensation trends, director compensation levels and regulatory developments. F.W. Cook was hired by and reports directly to the compensation committee. While F. W. Cook may work directly with our CEO or other members of management on behalf of the compensation committee, any such work is under the control and supervision of the compensation committee. Our compensation consultant does not provide any other services to Hercules. The compensation committee has assessed the independence of F.W. Cook pursuant to the NYSE rules, and Hercules has concluded that the consultant’s work for the compensation committee did not raise any conflicts of interest. Role of Chief Executive Officer From time to time and at our compensation committee’s request, our CEO will attend limited and selected portions of the committee’s meetings to discuss our performance and compensation-related matters. Our CEO does not attend executive sessions of the committee, unless invited by our compensation committee. While he does not participate in any deliberations relating to his own compensation, our CEO reviews on at least an annual basis the performance of each of the other NEOs and other executive officers. Based on these performance reviews and our overall performance, our CEO makes recommendations to our compensation committee on any changes to base salaries, incentive compensation awards and equity awards. Our compensation committee considers the recommendations submitted by our CEO, as well as data and analysis provided by management and F.W. Cook, but retains full discretion to approve or recommend for board approval all executive and director compensation. Assessment of Market Data; Changes to Peer Group To determine the competitiveness of executive compensation levels, our compensation committee analyzes market data of certain companies, including internally and externally managed BDCs, private equity firms and other asset management and financial services companies. 16 During 2012, the compensation committee primarily looked to a comparative group of companies to perform compensation comparisons. That comparative group of companies comprised: American Capital, Ltd.; BofI Holdings, Inc.; Bridge Capital Holdings; Capital Southwest Corporation; Fortress Investment Group LLC; ICG Group, Inc.; KCAP Financial, Inc.; Main Street Capital Corporation; MCG Capital Corporation; PacWest Bancorp; SVB Financial Group; and Triangle Capital Corporation. During 2014, our compensation committee, based on the advice of F.W. Cook, performed a review of our peer group. Based on this review, and the advice of F.W. Cook, our compensation committee approved changes to our peer group to better align our peer group to our business. This revised peer group, referred to as the Current Peer Group, was used as a factor in determining the annual cash bonus awards made with respect to 2013 (which were paid in 2014), along with the various performance considerations further described below under “—Annual Cash Bonus Awards”. The Current Peer Group consists of the following 20 internally managed and externally managed BDCs: Internally Managed American Capital Capital Southwest KCAP Financial Main Street Capital MCG Capital Medallion Financial Triangle Capital Externally Managed Apollo Investment Ares Capital BlackRock Kelso Capital Fifth Street Finance Golub Capital BDC Medley Capital New Mountain Finance PennantPark Investment Prospect Capital Solar Capital TCP Capital THL Credit TICC Capital The following table provides further financial information with respect to the Current Peer Group as of December 31, 2013. Company Name Financials ($M) Mgmt Revenue Assets Market Cap as of 12/31/13 Ares Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Capital Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prospect Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Apollo Investment Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fifth Street Finance Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solar Capital Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Main Street Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BlackRock Kelso Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PennantPark Investment Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Golub Capital BDC Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Mountain Finance Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TICC Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Triangle Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medley Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCP Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Southwest Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THL Credit Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medallion Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MCG Capital Corp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KCAP Financial Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E I E E E E I E E E E E I E E I E I I I $882 $487 $626 $370 $241 $164 $116 $132 $131 $ 91 $115 $105 $101 $103 $ 70 $ 11 $ 75 $ 36 $ 50 $ 48 $8,142 $6,009 $5,194 $3,380 $2,454 $1,708 $1,360 $1,282 $1,255 $1,265 $1,148 $ 998 $ 815 $ 885 $ 803 $ 780 $ 673 $ 595 $ 514 $ 459 $5,252 $4,418 $3,189 $1,905 $1,287 $1,000 $1,298 $ 694 $ 772 $ 827 $ 679 $ 551 $ 765 $ 557 $ 596 $ 532 $ 559 $ 358 $ 313 $ 269 17 Company Name Financials ($M) Mgmt Revenue Assets Market Cap as of 12/31/13 All Companies (n=20) 75th Percentile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Median . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25th Percentile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hercules Tech Growth Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $183 $110 $ 73 $140 $1,895 $1,202 $ 797 $1,222 $1,290 $ 730 $ 555 $1,013 * “E” signifies that the BDC is externally managed, and “I” signifies that the BDC is internally managed The items taken into account by our compensation committee include, but are not limited to, base compensation, bonus compensation, restricted stock awards, carried interest and other compensation paid by other internally managed and externally managed BDCs, including the 2% base management fee and 20% incentive fee generally charged by externally managed BDCs. In addition to actual levels of compensation, our compensation committee also analyzed the approach other BDCs were taking with regard to their compensation practices. However, our compensation committee does not specifically benchmark the compensation of our NEOs against that paid by other companies with publicly traded securities because, in addition to our Current Peer Group, our competitors for executive talent also include private equity firms, venture capital firms, mezzanine lenders, hedge funds and other specialty finance companies that do not publicly disclose compensation paid to individual executive officers. Assessment of Hercules Performance In determining annual compensation for our NEOs, our compensation committee analyzes and evaluates the individual achievements and performance of our NEOs as well as the overall operating performance and achievements of Hercules. We believe that the alignment of (i) our business plan, (ii) shareholder expectations and (iii) our employee compensation is essential to long-term business success in the interest of our shareholders and employees and to our ability to attract and retain executive talent, especially in an environment of competition for top-quality executive talent in the venture debt industry. Our business plan involves taking on investment risk over an extended period of time, and a premium is placed on our ability to maintain stability and growth of net asset values as well as continuity of earnings growth to pass through to shareholders in the form of recurring dividends over the long term. Our strategy is to generate income and capital gains from our investments in the debt with warrant securities, and to a lesser extent direct equity, of our portfolio companies. This income supports the anticipated payment of dividends to our shareholders. Therefore, a key element of our return to shareholders is current income through the payment of dividends. This recurring payout requires a methodical asset acquisition analyses as well as highly active monitoring and management of our investment portfolio over time. To accomplish these functions, our business requires implementation and oversight by management and key employees with highly specialized skills and experience in the venture debt industry. A substantial part of our employee base is dedicated to the generation of new investment opportunities to allow us to sustain and grow dividends and to the maintenance of asset values in our portfolio. In reviewing and approving the compensation packages for our NEOs and other key employees, our compensation committee considers numerous factors relative to both the performance and achievement of our strategic and corporate objectives, executive performance factors and the individual performance of each of our NEOs. The most significant company-specific performance factors considered by our compensation committee include the following, among others: • • • • • performance against annual gross commitment origination goals, performance against annual gross funding goals, gross new commitment yields, our efficiency ratio, which measures the ratio of our compensation and administrative expenses versus our revenues, total and net investment income, 18 • • • • • • • net investment margin, realized and unrealized gains and losses, overall credit performance, liquidity levels, total shareholder return, return on shareholder’s equity, based on net investment income, and return on average assets, based on net investment income. Elements of Executive Compensation and 2013 Compensation Determinations Base Salary We believe that base salaries are a fundamental element of our compensation program. Our compensation committee establishes base salaries for each NEO to reflect (i) the scope of the NEO’s industry experience, knowledge and qualifications, (ii) the NEO’s position and responsibilities and contributions to our business growth and (iii) salary levels and pay practices of those companies with whom we compete for executive talent. Our compensation committee considers base salary levels at least annually as part of its review of the performance of NEOs and from time to time upon a promotion or other change in job responsibilities. During its review of base salaries for our executives, the compensation committee primarily considers: individual performance of the executive, including leadership and execution of strategic initiatives and the accomplishment of business results for our company; market data provided by our compensation consultant; our NEOs total compensation, both individually and relative to our other NEOs; and for NEOs other than the CEO, the base salary recommendations of our CEO. At its meeting on March 4, 2013, recognizing the continuing compensation objectives of retaining its senior management team, our compensation committee approved salary increases for Ms. Baron, Mr. Bluestein and Mr. Jaquez-Fissori. Also, on March 4, 2013, our compensation committee approved a 3% increase in base salary for Messrs. Henriquez and Shah. These salary increases for our NEOs are set forth in the table below. NEO 2012 Base Salary 2013 Base Salary Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $735,000 $235,000 $337,050 $270,000 $225,000 $757,050 $285,000 $347,162 $300,000 $260,000 (1) Mr. Fissori resigned from Hercules as of April 25, 2014. Annual Cash Bonus Awards During 2013, our compensation committee, together with input from our CEO, developed a specific bonus pool for the 2013 operating year to be available for our annual cash bonus program. The amount determined to be available for our annual cash program was dependent upon many factors, including those outlined previously under “—Assessment of Hercules Performance”. Our compensation committee designs our annual cash bonuses to motivate our NEOs to achieve financial and non-financial objectives consistent with our operating plan. As a general guideline, our compensation committee generally targets cash bonuses to amounts equal to 50% to 100% of an NEO’s base salary; however, such bonus amounts may exceed these targets in the event of exceptional company and individual performance. However, our compensation committee retains discretion in the sizing and awarding of cash bonuses for each NEO to ensure that individual bonus determinations appropriately balance the interests of our shareholders, while 19 rewarding an NEO’s contributions to our performance. Accordingly, should actual company and NEO performance exceed expected performance during the year, our compensation committee may adjust individual cash bonuses to take such superior performance into account. Conversely, where an NEO’s performance is below expectations, our compensation committee will determine the NEO’s annual cash bonus in light of such performance. We typically determine and award cash bonuses for our NEOs during the first quarter of the following year. In evaluating the performance of our NEOs to arrive at their 2013 cash bonus awards, our compensation committee considered the performance factor achievements discussed above under “—Assessment of Hercules Performance,” and the committee compared our performance and the returns of our shareholders against the performance and shareholder returns of other BDCs. Our compensation committee also considered the following aspects of our 2013 operating performance in the sizing of the bonus pool with respect to 2013 and in the determination of specific NEO cash bonus awards: • Shareholder Return—The total realized shareholder return on our common stock during fiscal 2013 was approximately 59%, which ranked first against our Current Peer Group (the 100th percentile)*. • Originations—We had record origination levels of approximately $705.0 million in debt and equity commitments to new and existing portfolio companies. • Total Investment Income—We had a record level of total investment income of approximately $139.7 million, an increase of 43.3% compared to $97.5 million in the fiscal year ended December 31, 2012, or fiscal 2012. • Net Investment Income—We increased our net investment income, or NII, by 52.0% to approximately $73.1 million, as compared to $48.1 million for fiscal 2012. NII per share increased by approximately 27.1% to $1.22 on 58.8 million basic weighted average shares outstanding, as compared to $0.96 per share on 49.1 million basic weighted average shares outstanding for fiscal 2012. • Strong Liquidity Position—We finished fiscal 2013 in a strong liquidity position with approximately $373.4 million in available liquidity, including $268.4 million in cash and $105.0 million in bank credit facility availability. • Record Level of M&A and IPO Exits—Our portfolio companies announced or completed 27 liquidity (M&A and IPOs) events during 2013, the highest in our history. Our compensation committee further reviewed each NEOs’ specific performance achievements and contributions to our 2013 financial performance. When sizing our cash bonus pool and allocating bonus awards, our compensation committee also evaluated the total compensation paid to our NEOs and other employees against the expense ratios of other BDCs. With respect to 2013, the committee considered company-wide compensation expense as a percentage of average assets among the peers in the Current Peer Group. For the fiscal year ended December 31, 2013, our compensation expense fell between the 25th percentile and the median of the Current Peer Group. * For purposes of this calculation and comparison, total shareholder return is calculated as price appreciation plus reinvestment of dividends and the compounding effect of dividends paid on reinvested dividends. 20 Based on the foregoing considerations and analysis, and after due deliberation, our compensation committee awarded our NEOs the following annual cash bonuses with respect to 2013: NEO 2013 Cash Bonus Award As Percentage of 2013 Base Salary Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,136,000 $ 271,000 $ 350,000 $ 360,000 $ 312,000 150% 95% 100% 120% 120% (1) Mr. Fissori resigned from Hercules as of April 25, 2014. Long-Term Equity Incentive Compensation Our long-term equity incentive compensation is designed to develop a strong linkage between pay and our strategic goals and performance, as well as to align the interests of our NEOs, and other executives and key employees, with those of our shareholders by awarding long-term equity incentives in the form of stock options and restricted stock. These awards are made pursuant to our 2004 Equity Incentive Plan, as amended, referred to as the 2004 Plan. Initial Option Grants Historically, we have issued option awards under our 2004 Plan upon initial employment. These options generally vest, subject to continued employment, over a period of four years. Options are granted as incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to the extent permitted, with the remainder granted as nonqualified stock options. The exercise price for option grants under our 2004 Plan is equal to the closing price of our common stock on the NYSE on the date that such grant is approved by our board. During 2013, none of our NEOs received an option award, and no stock options were awarded to our NEOs for the 2012 fiscal year. Restricted Stock Awards In May 2007, we received SEC exemptive relief, and our shareholders approved amendments to the 2004 Plan, permitting us to grant restricted stock awards. We believe that annual restricted stock awards to our NEOs are a critical part of our compensation program as they allow us to: • align our business plan, shareholders interests and employee concerns, • manage dilution associated with equity-based compensation, • match the return expectations of the business more closely with our equity-based compensation plan, and • retain key management talent. In our view, restricted stock motivates performance that is more consistent with the type of return expectations that we have established for our shareholders. Accordingly, our compensation committee awards annual restricted stock award grants to our NEOs. These awards typical vest over three years. For 2013, when determining the size of restricted stock grants for our NEOs, our compensation committee assessed each NEO’s individual performance, our overall company performance, as well as the levels of equity compensation paid by other companies with whom we compete for executive talent. 21 Based on this performance assessment, and after due consideration, our compensation committee, on March 4, 2013, awarded the following short-term and long-term equity incentive awards, in the form of restricted stock, to our NEOs related to their performance during the prior fiscal year as set forth in the tables below. The value of the restricted stock awards listed below was determined to be the closing price of our common stock on the NYSE on March 4, 2013, the date of restricted stock award grants. These restricted stock awards vest subject to continued employment based on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one- fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. Short-term Awards Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term Awards Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori 2013 Short-term Restricted Stock Awards 103,774 14,151 15,330 15,723 13,267 2013 Long-term Restricted Stock Awards 196,540 18,082 51,101 39,308 9,827 Grant Date 03/04/2013 03/04/2013 03/04/2013 03/04/2013 03/04/2013 Grant Date 03/04/2013 03/04/2013 03/04/2013 03/04/2013 03/04/2013 Fair Value of Restricted Stock Awards $1,320,005 $ 180,001 $ 194,998 $ 199,997 $ 168,756 Fair Value of Restricted Stock Awards $2,499,989 $ 230,003 $ 650,005 $ 499,998 $ 124,999 Limitations on Grants Under 2004 Plan; Other Plan Terms The 2004 Plan limits the combined maximum amount of restricted stock that may be issued under both of our 2004 Plan and our 2006 Non-Employee Director Plan to 10% of the outstanding shares of our stock on the effective date of the 2004 Plan and 2006 Non-Employee Director Plan plus 10% of the number of shares of stock issued or delivered by us during the terms of the 2004 Plan and 2006 Non-Employee Director Plan. The prior amendments approved under our 2004 Plan further specify that no one person will be granted awards of restricted stock relating to more than 25% of the shares available for issuance under the 2004 Plan. Further, the amount of voting securities that would result from the exercise of all our outstanding warrants, options and rights, together with any restricted stock issued pursuant to the 2004 Plan and 2006 Non-Employee Director Plan, at the time of issuance will not exceed 25% of our outstanding voting securities, except that if the amount of voting securities that would result from such exercise of all of our outstanding warrants, options and rights issued to our directors and executive officers, together with any restricted stock issued pursuant to the 2004 Plan and 2006 Non- Employee Director Plan, would exceed 15% of our outstanding voting securities, then the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued pursuant to the 2004 Plan and 2006 Non-Employee Director Plan, at the time of issuance will not exceed 20% of our outstanding voting securities. All restricted stock grants under the 2004 Plan made prior to March 4, 2013 will continue to vest on a monthly basis following their one year anniversary over the succeeding 36 months. During 2012, the Compensation Committee adopted a policy that provided for awards with different vesting schedules for short and long-term awards. Under the 2004 Plan, restricted stock awards vest subject to continued employment based 22 on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. Eligibility includes all of our NEOs. Each grant of restricted stock under the 2004 Plan to our NEOs will contain such terms and conditions, including consideration and vesting, as our Board deems appropriate and as allowed for within the provisions of the 2004 Plan. Under the 2006 Non-Employee Director Plan, restricted stock vests one-third each year on the anniversary of the date of the grant over a three-year period. 2014 Restricted Stock Awards In April 2014, our compensation committee further assessed each NEO’s individual performance, our overall company performance and the levels of equity compensation paid by other companies with whom we compete for executive talent. Based on this assessment, and after due consideration, our compensation committee awarded the following long-term equity incentive awards, in the form of restricted stock, in the amounts and on the dates set forth in the tables below. As previously noted, our compensation committee discontinued the use of short-term equity awards, and the awards listed below have the three-year vesting terms noted below. Grant Date Long-Term Restricted Stock Awards Fair Value of Restricted Stock Awards on Grant Date(3) Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04/10/2014 04/15/2014 04/10/2014 04/14/2014 04/10/2014 04/14/2014 04/10/2014 04/14/2014 04/10/2014 04/14/2014 275,000(1) 160,000(2) 20,000(1) 17,500(2) 60,000(1) 75,000(2) 25,000(1) 45,000(2) 20,000(1) 30,000(2) $3,792,250 $2,200,000 $ 275,800 $ 242,025 $ 827,400 $1,037,250 $ 344,750 $ 622,350 $ 275,800 $ 414,900 (1) Restricted stock award vests as to one-fourth on the 11-month anniversary of the date of grant and quarterly over the succeeding 36 months. (2) Restricted stock award vests one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. (3) Based on the closing prices per share of our common stock of $13.79 and $13.83 on April 10, 2014 and April 14, 2014, respectively. (4) Mr. Fissori resigned from Hercules as of April 25, 2014. Other Elements of Compensation; Benefits and Perquisites; Change of Control Payments Severance No NEO or employee of the Company has a written severance agreement. Benefits and Perquisites Our NEOs receive the same benefits and perquisites as other full-time employees. Our benefits program is designed to provide competitive benefits and is not based on performance. Other than the benefits described below, our NEOs do not receive any other benefits, including retirement benefits, or perquisites from Hercules. Our NEOs and other full-time employees receive general health and welfare benefits, which consist of life, long- term and short-term disability, health, dental, vision insurance benefits and the opportunity to participate in our defined contribution 401(k) plan. During 2013, our 401(k) plan provided for a match of contributions by the company for up to $17,000 per full-time employee. 23 Potential Payments Upon Termination or Change of Control No NEO or employee of Hercules has a written employment agreement. Upon specified covered transactions (as defined in the 2004 Plan), in which there is an acquiring or surviving entity, our board may provide for the assumption of some or all outstanding awards, or for the grant of new awards in substitution, by the acquirer or survivor or an affiliate of the acquirer or survivor, in each case on such terms and subject to such conditions as our board determines. In the absence of such an assumption or if there is no substitution, except as otherwise provided in the award, each award will become fully exercisable prior to the covered transaction on a basis that gives the holder of the award a reasonable opportunity, as determined by our board, to participate as a shareholder in the covered transaction following exercise, and the award will terminate upon consummation of the covered transaction. A covered transaction includes the following: (i) a merger or other transaction in which the company is not the surviving corporation or which results in the acquisition of all or substantially all of our then outstanding common stock by a single person or entity or by a group of persons and/or entities; (ii) a sale of substantially all of our assets; (iii) a dissolution or liquidation of Hercules; or (iv) a change in a majority of our board’s composition unless approved by a majority of the directors continuing in office. Internal Pay Equity Analysis Our compensation program is designed with the goal of providing compensation to our NEOs that is fair, reasonable, and competitive. To achieve this goal, we believe it is important to compare compensation paid to each NEO not only with compensation in our comparative group companies, as discussed above, but also with compensation paid to each of our other NEOs. Such an internal comparison is important to ensure that compensation is equitable among our NEOs. As part of our compensation committee’s review, we made a comparison of our CEO’s total compensation paid for the year ending December 31, 2013 against that paid to our other NEOs during the same year. Upon review, our compensation committee determined that our CEO’s compensation relative to that of our other NEOs was justified relative to the compensation paid to our other NEOs because of his level and scope of responsibilities, expertise and performance history, and other factors deemed relevant by our compensation committee, as compared to the other NEOs. Our compensation committee also reviewed the mix of the individual elements of compensation paid to our NEOs for this period. In the course of its review, our compensation committee also considered the individual performance of each NEO and any changes in responsibilities of the NEO. Based on its review, our compensation committee determined that our CEO’s total compensation comprised of base salary, annual cash bonus and short and long-term equity incentive and retention awards was properly aligned in comparison to total compensation paid to the other NEOs. Stock Ownership Guidelines We maintain stock ownership guidelines, which are outlined in our Corporate Governance Guidelines, because we believe that material stock ownership by our executives plays a role in effectively aligning the interests of these employees with those of our shareholders and strongly motivates our executives to build long- term shareholder value. Pursuant to our stock ownership guidelines, each member of senior management is required to beneficially own at least two times the individual’s annual salary in Hercules common stock, based on market value, within three years of joining Hercules. Our Board may make exceptions to this requirement based on particular circumstances. Each NEO has exceeded his respective guideline as of April 21, 2014. Tax and Accounting Matters Stock-Based Compensation. We account for stock-based compensation, including options and shares of restricted stock granted pursuant to our 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan in accordance with the requirements of FASB ASC Topic 718. Under the FASB ASC Topic 718, we estimate the 24 fair value of our option awards at the date of grant using the Black-Scholes-Merton option-pricing model, which requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates on the expected term, volatility and forfeiture rates of the awards. Forfeitures are not estimated due to our limited history but are reversed in the period in which forfeiture occurs. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, are likely to change our valuation assumptions used to value stock-based awards granted in future periods. We estimate the fair value of our restricted stock awards based on the grant date market closing price. Deductibility of Executive Compensation. When analyzing both total compensation and individual elements of compensation paid to our NEOs, our compensation committee considers the income tax consequences to Hercules of its compensation policies and procedures. In particular, our compensation committee considers Section 162(m) of the Internal Revenue Code, which limits the deductibility of non-performance-based compensation paid to certain of the NEOs to $1,000,000 per affected NEO. Our compensation committee intends to balance its objective of providing compensation to our NEOs that is fair, reasonable, and competitive with the company’s capability to take an immediate compensation expense deduction. Our board believes that the best interests of Hercules and our shareholders are served by executive compensation programs that encourage and promote our principal compensation philosophy, enhancement of shareholder value, and permit our compensation committee to exercise discretion in the design and implementation of compensation packages. Accordingly, we may from time to time pay compensation to our NEOs that may not be fully tax deductible, including certain bonuses and restricted stock. Stock options granted under our stock plan are intended to qualify as performance-based compensation under Section 162(m) and are generally fully deductible. We will continue to review our executive compensation plans periodically to determine what changes, if any, should be made as a result of the limitation on deductibility. Compensation Committee Report We have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on our review and discussions with management, we recommend to the board that the Compensation Discussion and Analysis be included in Hercules Technology Growth Capital, Inc.’s Annual Report on Form 10- K for the fiscal year ended December 31, 2013. Respectfully Submitted, The Compensation Committee Allyn C. Woodward, Jr., Chairman Robert P. Badavas Joseph W. Chow The information contained in the report above shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent specifically incorporated by reference therein. 25 Risk Assessment of the Compensation Programs Our board believes that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on Hercules. We have designed our compensation programs, including our incentive compensation plans, with specific features to address potential risks while rewarding employees for achieving long-term financial and strategic objectives through prudent business judgment and appropriate risk taking. The “Compensation Discussion and Analysis” section describes generally our compensation policies and practices that are applicable for executive and management employees. We use common variable compensation designs across all employees of Hercules with a significant focus on individual performance and contribution along with achievement of certain corporate objectives as generally described in the foregoing Compensation Discussion and Analysis. In view of the current economic and financial environment, our compensation committee and our board reviewed our compensation programs to assess whether any aspect of the programs would encourage any of our employees to take any unnecessary or inappropriate risks that could threaten the value of Hercules. Our compensation committee has designed our compensation programs to reward our employees for achieving annual profitability and long-term increase in stockholder value. Our board recognizes that the pursuit of corporate objectives possibly leads to behaviors that could weaken the link between pay and performance, and, therefore, the correlation between the compensation delivered to employees and the return realized by shareholders. Accordingly, our compensation committee has designed our executive compensation program to mitigate these possibilities and to ensure that our compensation practices and decisions are consistent with our risk profile. These features include the following: • • • • bonus payouts and short-term equity incentive awards that are not based solely on corporate performance objectives, but also require achievement of individual performance objectives, the financial opportunity in our long-term equity incentive program that is best realized through long- term appreciation of our stock price, which mitigates excessive short-term risk-taking, annual cash bonuses that are paid in one installment after the end of the fiscal year to which the bonus payout relates, and final decision making by our compensation committee and our board on all awards. Additionally, our compensation committee considered an assessment of compensation-related risks for all of our employees. Based on this assessment, the committee concluded that our compensation programs do not create risks that are reasonably likely to have a material adverse effect on Hercules. In making this evaluation, our compensation committee reviewed the key design elements of our compensation programs in relation to industry “best practices,” as well as the means by which any potential risks may be mitigated, such as through our internal controls and oversight by management and our board. In addition, management completed an inventory of incentive programs below the executive level and reviewed the design of these incentives and concluded that such incentive programs do not encourage excessive risk-taking. 26 Executive Compensation Tables Summary Compensation Table The following table provides information concerning the compensation earned by our NEOs for the fiscal years ended December 31, 2013, December 31, 2012 and December 31, 2011. Name and Principal Position Year Salary ($)(1) Bonus ($)(2) Stock Awards ($)(3) All Other Compensation ($)(4) Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman & Chief Executive Officer Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Managing Director and Life Science Group Head Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Credit Officer Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Senior Managing Director and Energy Technology Group Head(5) 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 2013 2012 2011 $757,050 $735,000 $735,000 $285,000 $235,000 $175,000 $347,162 $337,050 $337,050 $300,000 $270,000 $250,000 $260,000 $225,000 $175,000 $1,136,000 $ 880,000 $ 825,000 $3,819,994 $2,648,450 $1,395,000 $ 287,442 $ 180,000 85,000 $ $ 410,004 $ 653,600 $ 139,500 $ 350,000 $ 195,000 $ 275,000 $ 845,003 $1,140,455 $ 697,500 $ 360,000 $ 185,000 $ 135,000 $ 699,995 $ 378,350 83,700 $ $ 312,000 $ 225,000 $ 145,000 $ 293,755 $ 439,450 $ 111,600 $639,950 $439,683 $288,834 $106,821 $ 69,720 $ 19,701 $225,899 $212,965 $160,652 $107,645 $ 45,075 7,033 $ $ 80,056 $ 44,550 6,600 $ Total ($) $6,352,994 $4,703,133 $3,243,834 $1,089,267 $1,138,320 $ 419,201 $1,768,064 $1,885,470 $1,470,202 $1,467,640 $ 878,425 $ 475,733 $ 945,811 $ 934,000 $ 438,200 (1) Salary column amounts represent base salary compensation received by each NEO for the listed fiscal year. (2) Bonus column amounts represent the annual cash bonus earned during the fiscal year and awarded and paid out during the first quarter of the following fiscal year. The bonus amount for Ms. Baron includes a one-time bonus payment of $16,442, which was awarded to her on September 12, 2013 in light of her strong continued performance during 2013. (3) The amounts reflect the aggregate grant date fair value of restricted stock awards made to our NEOs during the applicable year computed in accordance with FASB ASC Topic 718. The grant date fair value of each restricted stock award is measured based on the closing price of our common stock on the date of grant. (4) Represents matching contributions under our 401(k) plan of (a) $17,000 in 2013 to Messrs. Henriquez, Shah, Bluestein and Jacquez- Fissori and Ms. Baron, (b) $6,500 in 2012 to Messrs. Henriquez, Shah, Bluestein and Jacquez-Fissori and Ms. Baron, (c) $6,500 in 2011 to Messrs. Henriquez, Shah and Ms. Baron, and (d) $2,083 to Mr. Bluestein in 2011. Dividends to Messrs. Henriquez, Shah, Bluestein, Jacquez-Fissori, and Ms. Baron in the amount of $622,950, $208,899, $90,645, $63,056 and $89,821, respectively, were paid on unvested restricted stock awards during 2013. Dividends to Messrs. Henriquez, Shah, Bluestein, Jacquez-Fissori, and Ms. Baron in the amount of $433,183, $206,465, $38,575, $38,050 and $63,220, respectively, were paid on unvested restricted stock awards during 2012. Dividends to Messrs. Henriquez, Shah, Bluestein, Jaquez-Fissori, and Ms. Baron in the amount of $282,334, $154,152, $4,950, $6,600 and $13,201, respectively, were paid on unvested restricted stock awards during 2011. NEOs did not receive any other perquisites or personal benefits from Hercules. (5) Mr. Fissori resigned from Hercules as of April 25, 2014. 27 Grants of Plan Based Awards The following table sets forth certain information with respect to the restricted stock awards granted during the fiscal year ended December 31, 2013 to each of our NEOs. No stock options were awarded to our NEOs during the fiscal year ended December 31, 2013. Name and Principal Position Short Term Awards All Other Stock Awards: Number of Shares of Stock or Units(1) All Other Option Awards: Number of Securities Underlying Options Grant Date Grant Date Fair Value of Stock and Option Awards(2) Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chairman and Chief Executive Officer Jessica Baron(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Senior Managing Director and Life Sciences Group Head Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chief Credit Officer Todd Jaquez-Fissori(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Senior Managing Director and Clean Technology Group Head Long Term Awards Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chairman and Chief Executive Officer Jessica Baron(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Senior Managing Director and Life Sciences Group Head Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Chief Credit Officer Todd Jaquez-Fissori(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03/04/2013 Former Senior Managing Director and Clean Technology Group Head 103,774 14,151 15,330 15,723 13,267 196,540 18,082 51,101 39,308 9,827 — — — — — — — — — — $1,320,005 $ 180,001 $ 194,998 $ 199,997 $ 168,756 $2,499,989 $ 230,003 $ 650,005 $ 499,998 $ 124,999 (1) Restricted stock awards vest based on two vesting schedules: short-term awards vest one-half on the one year anniversary of the date of the grant and quarterly over the succeeding 12 months, and long-term awards vest one-fourth on the one year anniversary of the date of grant and quarterly over the succeeding 36 months. When payable, dividends are paid on a current basis on the unvested shares. (2) The amounts reflect the aggregate grant date fair value of restricted stock awards made to our NEOs during 2013 computed in accordance with FASB ASC Topic 718. 28 Outstanding Equity Awards at Fiscal Year End The following table shows outstanding stock option awards classified as exercisable and unexercisable and stock awards as of December 31, 2013 for each of the NEOs: Option Awards Number of Securities Underlying Unexercised Options Exercisable Number of Securities Underlying Unexercised Options Unexercisable Option Exercise Price ($) Option Expiration Date Stock Awards Number of Shares or Units of Stock That Have Not Vested Market Value of Shares or Units of Stock That Have Not Vested(1) Name and Principal Position Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . Chairman and Chief Executive Officer Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Managing Director and Life Science Group Head — — — — — — — — — — — — — — — — — — Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . Chief Credit Officer 95,539 Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . Former Senior Managing Director and Clean Technology Group Head — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — $9.90 11/23/2017 — — — — — — — — — — — — — — 14,063 39,063 137,813 196,540 103,774 344 125 3,907 19,688 14,063 18,082 14,151 1,563 6,563 19,532 59,344 15,330 51,101 2,344 19,688 15,723 39,308 3,125 14,063 9,688 13,267 9,827 $ 230,633 $ 640,633 $2,260,133 $3,223,256 $1,701,894 5,642 $ 2,050 $ $ 64,075 $ 322,883 $ 230,633 $ 296,545 $ 232,076 $ 25,633 $ 107,633 $ 320,325 $ 973,242 $ 251,412 $ 838,056 $ 38,442 $ 322,883 $ 257,857 $ 644,651 51,250 $ $ 230,633 $ 158,883 $ 217,579 $ 161,163 (1) Market value is computed by multiplying the closing market price of the Company’s stock at December 31, 2013 by the number of shares. 29 Options Exercised and Stock Vested The following table sets forth certain information with respect to options exercised and the shares of restricted stock that vested during the fiscal year ended December 31, 2013 to each of our NEOs. Name and Principal Position Current NEOs Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman & Chief Executive Officer Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Managing Director and Life Science Group Head Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Credit Officer Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Senior Managing Director and Clean Technology Group Head Option Awards Stock Awards Number of Shares Acquired on Exercise Value Realized on Exercise Number of Shares Acquired on Vesting Value Realized on Vesting 798,116 $1,402,859 200,938 $2,731,718 38,759 $ 60,468 31,249 $ 419,694 394,055 $1,319,604 97,094 $1,320,086 29,461 $ 114,723 17,187 $ 228,931 — — 18,749 $ 257,027 Options Exercised and Stock Vested The following table sets forth certain information with respect to options exercised and the shares of restricted stock that vested during the fiscal year ended December 31, 2013 to each of our NEOs. Name and Principal Position Current NEOs Manuel Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman & Chief Executive Officer Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Financial Officer Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Managing Director and Life Science Group Head Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chief Credit Officer Todd Jaquez-Fissori . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Former Senior Managing Director and Clean Technology Group Head Option Awards Stock Awards Number of Shares Acquired on Exercise Value Realized on Exercise Number of Shares Acquired on Vesting Value Realized on Vesting 798,116 $1,402,859 200,938 $2,731,718 38,759 $ 60,468 31,249 $ 419,694 394,055 $1,319,604 97,094 $1,320,086 29,461 $ 114,723 17,187 $ 228,931 — — 18,749 $ 257,027 Compensation Committee Interlocks and Insider Participation All members of our compensation committee are independent directors and none of the members are present or past employees of Hercules. No member of our compensation committee: (i) has had any relationship with Hercules requiring disclosure under Item 404 of Regulation S-K under the Securities Exchange Act of 1934; or (ii) is an executive officer of another entity, at which one of our executive officers serves on our board. 30 Compensation of Directors Our compensation committee has the authority from our board for the appointment, compensation and oversight of our outside compensation consultant. Our compensation committee generally engages a compensation consultant every other year to assist it with its responsibilities related to our director compensation program. The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as the case may be, to each of our directors during the fiscal year ended December 31, 2013. Name Fees Earned or Paid in Cash ($)(1) Stock Awards ($) Option Awards ($) All Other Compensation ($)(2) Total ($) Robert P. Badavas . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joseph W. Chow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allyn C. Woodward, Jr. . . . . . . . . . . . . . . . . . . . . . . . Manuel A. Henriquez(3) $167,000 $169,000 $184,000 — — — — — — — — — $2,716 $2,716 $4,566 — $169,716 $171,716 $188,566 — (1) Messrs. Badavas, Chow and Woodward earned $117,000, $119,000 and $134,000, respectively, and each elected to receive an additional retainer fee of 3,445 shares of our common stock in lieu of cash. The total value of the shares issued to each of Mr. Badavas, Mr. Chow and Mr. Woodward for services in fiscal 2013 was $50,000. (2) Represents dividends paid on unvested restricted stock awards during 2013. (3) As an employee director, Mr. Henriquez does not receive any compensation for his service as a director. The compensation Mr. Henriquez receives as our chief executive officer is disclosed in the Summary Compensation Table. As of December 31, 2013, Messrs. Badavas, Chow and Woodward had outstanding options in the amount of 5,000, 5,000 and 10,000, respectively. As of December 31, 2013, Messrs. Badavas, Chow and Woodward held unvested shares of restricted stock in the amount of 1,666, 1,666 and 3,333, respectively. As compensation for serving on our board, each of our independent directors receives an annual fee of $50,000 and the chairperson of each committee receives an additional $15,000 annual fee. Each independent director also receives $2,000 for each board or committee meeting they attend, whether in person or telephonically. In 2013, we granted each independent director an additional retainer of $50,000, which was distributed as shares of common stock in lieu of cash. In addition, upon re-election to the board of directors, each independent director is granted an option to purchase 15,000 shares and an additional award of 5,000 shares of restricted stock; however, no such options or awards were granted in 2013 because the director re-elected to our board, Manuel Henriquez, is an interested, employee director and is not eligible to receive such a grant. Employee directors and non-independent directors do not receive compensation for serving on our board. In addition, we reimburse our directors for their reasonable out-of-pocket expenses incurred in attending board meetings. Directors do not receive any perquisites or other personal benefits from us. Under current SEC rules and regulations applicable to business development companies, referred to as a BDC, a BDC may not grant options or restricted stock to non-employee directors unless it receives exemptive relief from the SEC. We filed an exemptive relief request with the SEC to allow options and restricted stock to be issued to its non-employee directors, which was approved on October 10, 2007. On June 22, 2010, we received approval from the SEC regarding our exemptive relief request permitting its employees to exercise their stock options and restricted stock and pay any related income taxes using a cashless exercise program. On June 21, 2007, our stockholders approved amendments to the 2004 Equity Incentive Plan and the 2006 Non-Employee Director Plan allowing for the grant of restricted stock. The 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan limit the combined maximum amount of restricted stock that may be issued under both of the 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan to 10% of the outstanding shares of our common stock on the effective date of the 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan plus 10% of the number of shares of common stock issued or delivered by us during the terms of the 2004 Equity Incentive Plan and 2006 Non-Employee Director Plan. 31 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity Compensation Plan Information The following table sets forth information as of December 31, 2013, with respect to compensation plans under which the Company’s equity securities are authorized for issuance: Plan Category Equity compensation plans approved by stockholders: 2004 Equity Incentive Plan . . . . . . . . . . . . . . . . . . 2006 Non-Employee Director Plan . . . . . . . . . . . . Equity compensation plans not approved by stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total (a) Number of Securities to be issued upon exercise of outstanding options, restricted stock and warrants (b) Weighted-average exercise price of outstanding options, restricted stock and warrants (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 813,923 20,000 — 833,923 $12.57 $10.60 — $11.59 1,613,348 853,332 — 2,466,680 Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of April 21, 2014, the beneficial ownership of each current director, each nominee for director, our named executive officers for the year ended December 31, 2013, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC. Common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of April 21, 2014 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 ownership is based on 62,708,894 shares of common stock outstanding as of April 21, 2014. 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 their spouses under applicable law. Unless otherwise indicated, the address of all executive officers and directors is c/o Hercules Technology Growth Capital, Inc., 400 Hamilton Avenue, Suite 310, Palo Alto, California 94301. 32 The Company’s directors are divided into two groups—interested directors and independent directors. Interested directors are “interested persons” as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, referred to as the 1940 Act. Name and Address of Beneficial Owner Number of Shares Owned Beneficially(1) Percentage of Class Interested Director: Manuel Henriquez(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,102,208 3.4% Independent Directors: Robert P. Badavas(3) Joseph W. Chow(4) Allyn C. Woodward, Jr.(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Named Executive Officers: Jessica Baron(6) Parag Shah(7) Scott Bluestein(8) Todd Jaquez-Fissori(9)(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,399 129,325 228,611 142,293 463,577 297,362 94,483 * * * * * * * Executive officers and directors as a group (nine persons)(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,597,258 5.5% Less than 1% * (1) Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. (2) Includes 782,938 shares of restricted stock. Includes shares of the Company’s common stock held by certain trusts controlled by Mr. Henriquez. Includes 5,000 shares of common stock that can be acquired upon the exercise of outstanding options and 1,666 shares of restricted common stock. Includes 5,000 shares of common stock that can be acquired upon the exercise of outstanding options and 1,666 shares of restricted common stock. Includes 5,000 shares of common stock that can be acquired upon the exercise of outstanding options and 3,333 shares of restricted common stock. Includes 90,534 shares of restricted common stock. Includes 247,169 shares of restricted common stock. Includes 95,539 shares of common stock that can be acquired upon the exercise of outstanding options and 125,989 shares of restricted common stock. Includes 86,923 shares of restricted common stock. (9) (10) Includes 110,539 shares of common stock that can be acquired upon the exercise of outstanding options and 1,184,218 shares of (3) (4) (5) (6) (7) (8) restricted common stock. (11) Mr. Fissori resigned from Hercules as of April 25, 2014. The following table sets forth as of April 21, 2014, the dollar range of our securities owned by our directors and executive officers. Name Dollar Range of Equity Securities Beneficially Owned(1) Interested Director: Manuel A. Henriquez . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Directors: Robert P. Badavas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joseph W. Chow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allyn C. Woodward, Jr. Executive Officers: Jessica Baron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parag Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scott Bluestein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Todd Jaquez-Fissori(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . over $100,000 over $100,000 over $100,000 over $100,000 over $100,000 over $100,000 over $100,000 over $100,000 (1) Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended. (2) Mr. Fissori resigned from Hercules as of April 25, 2014. 33 Item 13. Certain Relationships and Related Transactions and Director Independence Certain Relationships and Related Transactions We have procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons related to Hercules. As a BDC, the 1940 Act restricts us from participating in transactions with any persons affiliated with Hercules, including our officers, directors, and employees and any person controlling or under common control with us. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with Hercules, our officers screen each of our transactions for any possible affiliations, close or remote, between the proposed portfolio investment, the Company, companies controlled by us and our employees and directors. We will not enter into any agreements unless and until we are satisfied that no affiliations prohibited by the 1940 Act exist or, if such affiliations exist, we have taken appropriate actions to seek board review and approval or exemptive relief from the SEC for such transaction. Director Independence The NYSE’s listing standards and Section 2(a)(19) of the 1940 Act require that a majority of our board and every member of our audit, compensation, and nominating and corporate governance committees are “independent.” Under the NYSE’s listing standards and our Corporate Governance Guidelines, no director will be considered to be independent unless and until our board affirmatively determines that such director has no direct or indirect material relationship with our company or our management. Our board reviews the independence of its members annually. In determining that Messrs. Badavas, Chow and Woodward are independent, our board, through the nominating and corporate governance committee, considered the financial services, commercial, family and other relationships between each director and his or her immediate family members or affiliated entities, on the one hand, and Hercules and its subsidiaries, on the other hand. Item 14. Principal Accountant Fees and Services The following aggregate fees by PricewaterhouseCoopers LLP, or PwC, our independent registered public accounting firm, were billed to us for work attributable to 2013 and 2012 audit, tax and other services. Fiscal Year Ended December 31, 2013 December 31, 2012 Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit-Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fees: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,153,400 — 77,300 — $ $1,230,700 $1,541,800 — $ 104,400 — $1,646,200 Services rendered by PwC in connection with fees presented above were as follows: Audit Fees. Audit fees include fees for services that normally would be provided by the accountant in connection with statutory and regulatory filings or engagements and that generally only the independent accountant can provide. In addition to fees for the audit of our annual financial statements, the audit of the effectiveness of our internal control over financial reporting and the review of our quarterly financial statements in accordance with generally accepted auditing standards, this category contains fees for comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC. 34 Audit-Related Fees. Audit related fees are assurance related services that traditionally are performed by the independent accountant, such as attest services that are not required by statute or regulation. Tax Fees. Tax fees in fiscal years 2013 and 2012 include professional fees for tax compliance and tax advice. All Other Fees. Fees for other services would include fees for products and services other than the services reported above. Other fees billed in fiscal years 2013 and 2012 relate to on-line technical accounting software service. Our audit committee has considered the compatibility of non-audit services with the auditor’s independence. Pre-Approval Policy Our audit committee has established a pre-approval policy that describes the permitted audit, audit-related, tax and other services to be provided by PwC, our independent registered public accounting firm. The policy requires that our audit committee pre-approve all audit and non-audit services performed by the independent auditor in order to assure that the provision of such service does not impair the auditor’s independence. In accordance with the pre-approval policy, our audit committee includes every year a discussion and pre-approval of such services and the expected costs of such services for the year. Any requests for audit, audit-related, tax and other services that have not received general pre-approval at the first audit committee meeting of the year must be submitted to our audit committee for specific pre-approval, irrespective of the amount, and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings of our audit committee. However, our audit committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to our audit committee at its next scheduled meeting. Our audit committee does not delegate its responsibilities to pre-approve services performed by the independent registered public accounting firm to management. Audit Committee Report Management is responsible for our internal controls and the financial reporting process. The independent auditors are responsible for performing an independent audit of our financial statements in accordance with auditing standards generally accepted in the United States and expressing an opinion on the conformity of those audited financial statements in accordance with accounting principles generally accepted in the United States. Our audit committee’s responsibility is to monitor and oversee these processes. Our audit committee is also directly responsible for the appointment, compensation and oversight of our independent registered public accounting firm. Review with Management Our audit committee has reviewed the audited financial statements and met and held discussions with management regarding the audited financial statements. Management has represented to our audit committee that the our financial statements were prepared in accordance with accounting principles generally accepted in the United States. Review and Discussion with Independent Registered Public Accounting Firm Our audit committee has discussed with PwC, our independent registered public accounting firm, matters required to be discussed by Statement of Auditing Standards No. 61, as amended (AICPA, Professional 35 Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. SAS No. 61, as amended, requires our independent registered public accounting firm to discuss with our audit committee, among other things, the following: • methods used to account for significant unusual transactions; • • • the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus; the process used by management in formulating particularly sensitive accounting estimates and the basis for the auditors’ conclusions regarding the reasonableness of those estimates; and disagreements with management over the application of accounting principles, the basis for management’s accounting estimates and the disclosures in the consolidated financial statements. Our audit committee received and reviewed the written disclosures and the letter from the independent registered public accounting firm required by the applicable Public Company Accounting Oversight Board rule regarding the independent accountant’s communications with audit committees concerning independence and has discussed with the auditors the auditors’ independence. Our audit committee has also considered the compatibility of non-audit services with the auditors’ independence. During 2013, our audit committee met with members of senior management and the independent registered public accounting firm to review the certifications provided by our chief executive officer and our chief financial officer under the Sarbanes-Oxley Act of 2002, referred to as Sarbanes-Oxley, the rules and regulations of the SEC and the overall certification process. At these meetings, our officers reviewed each of the Sarbanes-Oxley certification requirements concerning internal control over financial reporting and any fraud, whether or not material, involving management or other employees with a significant role in internal control over financial reporting. Conclusion Based on our audit committee’s discussion with management and the independent registered public accounting firm, our audit committee review of the audited financial statements, the representations of management and the report of the independent registered public accounting firm to our audit committee, our audit committee recommended that our board include the audited financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for filing with the SEC. Our audit committee also recommended the selection of PricewaterhouseCoopers LLP to serve as our independent registered public accounting firm for the year ending December 31, 2014. The Audit Committee Robert P. Badavas, Chairman Allyn C. Woodward, Jr. Joseph W. Chow The Audit Committee Report does not constitute soliciting material, and shall not be deemed to be filed or incorporated by reference into any other Company filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the Audit Committee Report by reference therein. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HERCULES TECHNOLOGY GROWTH CAPITAL, INC. Date: April 29, 2014 By: /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez Chief Executive Officer In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the following capacities on April 29, 2014. Signature Title Date /S/ MANUEL A. HENRIQUEZ Manuel A. Henriquez /S/ JESSICA BARON Jessica Baron Chairman of the Board, President and Chief Executive Officer (principal executive officer) Vice President Finance and Chief Financial Officer (principal accounting officer) April 29, 2014 April 29, 2014 /S/ ALLYN C. WOODWARD, JR Director April 29, 2014 Allyn C. Woodward, Jr. /S/ JOSEPH W. CHOW Joseph W. Chow Director April 29, 2014 /S/ ROBERT P. BADAVAS Director April 29, 2014 Robert P. Badavas 37 [THIS PAGE INTENTIONALLY LEFT BLANK] Milestones Reached in 2013 Corporate Information Corporate Headquarters 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 www.htgc.com Independent Registered Public Accounting Firm PricewaterhouseCoopers, LLP Three Embarcadero Center San Francisco, CA 94111 www.pwc.com/us Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 T +1 800 937 5449 www.amstock.com The transfer agent maintains shareholder records for Hercules Technology Growth Capital, Inc. Please contact American Stock Transfer & Trust Company, LLC, directly for changes of address, transfers of stock, and replacement of lost certificates. Form 10-K Annual Report The company is pleased to provide corporate information without charge upon written request to: Investor Relations Department Hercules Technology Growth Capital, Inc. 400 Hamilton Avenue, Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 Investor Relations on the Web For more information related to investing in the company, please see the Investor Relations tab on our website at www.htgc.com. Stock Listing Common stock traded on the New York Stock Exchange under the symbol: HTGC Bond quotes under New York Stock Exchange symbols: HTGZ, HTGY Board of Directors Robert P. Badavas Director Joseph W. Chow Director Manuel A. Henriquez Chairman, President, and Chief Executive Officer Allyn C. Woodward Jr. Director Management Manuel A. Henriquez Chairman, President, and Chief Executive Officer Jessica Baron Chief Financial Officer Scott Bluestein Chief Investment Officer Michael Penney General Counsel and Chief Compliance Officer Parag I. Shah Senior Managing Director and Group Head, Life Science This annual report is printed on paper and at a printing facility certified by the Forest Stewardship Council® (FSC) ®. From forest management to paper production to printing, FSC® certification represents the highest social and environmental standards. The paper contains wood from well-managed forests and controlled sources. This is certified in accordance with the rules of the Forest Stewardship Council®. Design by: Michael Patrick Partners www.michaelpatrickpartners.com The statements contained in this Annual Report that are not purely historical are forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements including, without limitation, the risks, uncertainties, including the uncertainties surrounding the current market, and other factors we identify from time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained in this Annual Report are made as of the date hereof, and Hercules assumes no obligation to update the forward-looking statements for subsequent events. $1.2 Billion in Total Assets $705 Million in New Originations a record high for the company 95 Pre-IPO Companies in Hercules’ warrant and equity portfolio represent potential upside for shareholders Realized Total Shareholder Return was Approximately 59%* includes stock appreciation and dividends *Past performance does not guarantee future results. You should not rely on our past performance as a guarantee of your future investment performance. Over 265 Portfolio Companies have chosen Hercules as their financing partner of choice 17% Return on Average Equity 27 Announced and Completed IPO and M&A Events from a diversified portfolio of venture capital–backed/pre-IPO companies $317.4 Million in Dividends Paid Out over 33 Consecutive Quarters $4 Billion in Commitments since Inception < 84 Active Loan Investments 43% Increase of Total Investment Income compared to 2012 $8.75 Cumulative Dividends Declared since IPO to December 31, 2013 6976_CVR_C3.indd 2 Untitled-1 5 5/24/14 2:54 AM 5/24/14 2:43 AM H E R C U L E S T E C H N O L O G Y C A P I T A L G R O W T H T 2 13Annual Report A N N U A L R E P O R 2 0 1 3 2013 in Review Financing the Growth of Tomorrow’s Companies Today™ Palo Alto, CA (Headquarters) 400 Hamilton Avenue Suite 310 Palo Alto, CA 94301 T +1 650 289 3060 F +1 650 473 9194 McLean, VA 1600 Tysons Boulevard 8th Floor McLean, VA 22102 T +1 703 245 3184 F +1 703 245 3001 WWW. HTGC. COM Boston, MA 31 St. James Avenue Suite 790 Boston, MA 02116 T +1 617 314 9973 F +1 617 314 9997 New York, NY 100 Park Avenue 34th Floor New York, NY 10017 T +1 212 774 3611 F +1 212 843 3411 6976_CVR_C3.indd 1 Untitled-1 6 5/24/14 2:54 AM 5/24/14 2:43 AM 

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