|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
YTD
3/31/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asset Value, BOY
|
|
$
|
31,833,475
|
|
$
|
24,334,770
|
|
$
|
27,256,046
|
|
$
|
40,682,738
|
|
$
|
74,744,799
|
|
$
|
117,987,742
|
|
$
|
113,930,303
|
|
$
|
138,363,344
|
|
Gross
Write-Downs During Year
|
|
$
|
(2,532,730
|
)
|
$
|
(5,400,005
|
)
|
$
|
(1,256,102
|
)
|
$
|
(5,711,229
|
)
|
$
|
(3,450,236
|
)
|
$
|
(4,211,323
|
)
|
$
|
(7,810,794
|
)
|
$
|
(1,364,103
|
)
|
Gross
Write-Ups During Year
|
|
$
|
1,528,866
|
|
$
|
285
|
|
$
|
847,578
|
|
$
|
6,288,397
|
|
$
|
23,485,176
|
|
$
|
279,363
|
|
$
|
11,694,618
|
|
$
|
651
|
|
Gross
Write-Downs as a Percentage
of
Net Asset Value, BOY
|
|
|
-7.96
|
%
|
|
-22.19
|
%
|
|
-4.61
|
%
|
|
-14.04
|
%
|
|
-4.62
|
%
|
|
-3.57
|
%
|
|
-6.86
|
%
|
|
-0.99
|
%
|
Gross
Write-Ups as a Percentage of
Net
Asset Value, BOY
|
|
|
4.80
|
%
|
|
0.00
|
%
|
|
3.11
|
%
|
|
15.46
|
%
|
|
31.42
|
%
|
|
0.24
|
%
|
|
10.26
|
%
|
|
0.00
|
%
|
Net
Write-Downs/Write-Ups as a
Percentage
of Net Asset Value,
BOY
|
|
|
-3.15
|
%
|
|
-22.19
|
%
|
|
-1.49
|
%
|
|
1.42
|
%
|
|
26.8
|
%
|
|
-3.33
|
%
|
|
3.40
|
%
|
|
-0.99
|
%
|
We
have
discretion in the investment of our capital. However, we invest primarily
in
illiquid equity securities of private companies. Generally, these investments
take the form of preferred stock, are subject to restrictions on resale
and have
no established trading market. Our principal objective is to achieve long-term
capital appreciation. Therefore, a significant portion of our investment
portfolio provides little or no income in the form of dividends or interest.
We
earn interest income from fixed-income securities, including U.S. government
and
agency securities. The amount of interest income we earn varies with the
average
balance of our fixed-income portfolio and the average yield on this portfolio.
Interest income is secondary to capital gains and losses in our results
of
operations.
We
present the financial results of our operations utilizing accounting principles
generally accepted in the United States for investment companies. On this
basis,
the principal measure of our financial performance during any period is
the net
increase/(decrease) in our net assets resulting from our operating activities,
which is the sum of the following three elements:
Net
Operating Income / (Loss)
- the
difference between our income from interest, dividends, and fees and our
operating expenses.
Net
Realized Income / (Loss) on Investments
- the
difference between the net proceeds of sales of portfolio securities and
their
stated cost, plus income from interests in limited liability
companies.
Net
Increase / (Decrease) in Unrealized Appreciation or Depreciation on
Investments
- the
net unrealized change in the value of our investment portfolio.
Owing
to
the structure and objectives of our business, we generally expect to experience
net operating losses and seek to generate increases in our net assets from
operations through the long term appreciation of our venture capital
investments. We have relied, and continue to rely, on proceeds from sales
of
investments, rather than on investment income, to defray a significant
portion
of our operating expenses. Because such sales are unpredictable, we attempt
to
maintain adequate working capital to provide for fiscal periods when there
are
no such sales.
Background
and Overview
We
incorporated under the laws of the state of New York in August 1981. In
1983, we
completed an initial public offering and invested $406,936 in Otisville
BioTech,
Inc., which also completed an initial public offering later that year.
In 1984,
Charles E. Harris purchased a controlling interest in us which also made
him the
control person of Otisville. We then divested our other assets and became
a
financial services company, with the investment in Otisville as the initial
focus of our business activity.
In
1992,
we registered as an investment company under the 1940 Act, commencing operations
as a closed-end, non-diversified investment company. In 1995, we elected
to
become a business development company subject to the provisions of Sections
55
through 65 of the 1940 Act.
Throughout
our corporate history, we have made early stage venture capital investments
in a
variety of industries. We define venture capital investments as investments
in
start-up firms and small businesses with exceptional growth potential.
We have
invested a substantial portion of our assets in venture capital investments
of
private, development stage or start-up companies. These private businesses
tend
to be thinly capitalized, unproven, small companies that lack management
depth,
have little or no history of operations and are developing unproven
technologies. At March 31, 2008, $83,097,863, or 60.9 percent, of our net
assets
at fair value consisted of private venture capital investments, net of
unrealized depreciation of $915,914. At December 31, 2007, $78,110,384,
or 56.5
percent, of our net assets at fair value consisted of private venture capital
investments, net of unrealized depreciation of $4,567,144.
Since
our
investment in Otisville in 1983 through March 31, 2008, we have made a
total of
81 venture capital investments, including four private placement investments
in
securities of publicly traded companies. We have exited 47 of these 81
investments, realizing total proceeds of $143,895,288 on our invested capital
of
$56,349,559. As measured from first dollar in to last dollar out, the average
and median holding periods for these 47 investments were 3.77 years and
3.20
years, respectively. As measured by the 165 separate rounds of investment
within
these 47 investments, the average and median holding periods for the 165
separate rounds of investment were 2.93 years and 2.64 years,
respectively.
Results
of Operations
Three
months ended March 31, 2008, as compared to the three months ended March
31,
2007
In
the
three months ended March 31, 2008, and March 31, 2007, we had net decreases
in
net assets resulting from operations of $3,289,035 and 6,390,160, respectively.
Investment
Income and Expenses:
We
had
net operating losses of $2,480,618 and $2,667,118 for the three months
ended
March 31, 2008, and March 31, 2007, respectively. The variation in these
results
is primarily owing to the changes in investment income and operating expenses,
including non-cash expenses of $1,466,980 in 2008 and $1,690,181 in 2007
associated with the granting of stock options. During the three months
ended
March 31, 2008, and 2007, total investment income was $576,302 and $652,498,
respectively. During the three months ended March 31, 2008, and 2007, total
operating expenses were $3,056,920 and $3,319,616, respectively.
During
the three months ended March 31, 2008, as compared with the same period
in 2007,
investment income decreased owing to a decrease in our average holdings
of U.S.
government and agency securities. During the three months ended March 31,
2008,
our average holdings of such securities were $57,481,316, as compared with
$59,727,657 during the three months ended March 31, 2007.
Operating
expenses, including non-cash, stock-based compensation expense, were $3,056,920
and $3,319,616 for the three months ended March 31, 2008, and March 31,
2007,
respectively. The decrease in operating expenses for the three months ended
March 31, 2008, as compared to the three months ended March 31, 2007, was
primarily owing to decreases in salaries, benefits and stock-based compensation
expense and to decreases in administration and operations expense, professional
fees and directors' fees and expenses. Salaries, benefits and stock-based
compensation expense decreased by $101,471, or four percent, through March
31,
2008, as compared to March 31, 2007, primarily as a result of a decrease
in
non-cash expense of $223,201 associated with the Harris & Harris Group, Inc.
2006 Equity Incentive Plan (the "Stock Plan"), offset by an increase in
salaries
and benefits owing to an increase in our head count as compared with that
of the
same period in 2007. At March 31, 2008, we had 13 full-time employees,
as
compared with 10 full-time employees and one part-time employee at March
31,
2007. While the non-cash, stock-based compensation expense for the Stock
Plan
increased our operating expenses by $1,466,980, this increase was offset
by a
corresponding increase to our additional paid-in capital, resulting in
no net
impact to our net asset value. The non-cash, stock-based compensation expense
and corresponding increase to our additional paid-in capital may increase
in
future quarters. Administration and operations expense decreased by $79,010,
or
20.7 percent, through March 31, 2008, as compared to March 31, 2007, primarily
as a result of a decrease in our directors' and officers' liability insurance
expense and decreases in the cost of the annual report and proxy-related
expenses. Professional fees decreased by $43,963, or 24.1 percent, for
the three
months ended March 31, 2008, as compared with the same period in 2007,
primarily
as a result of a reduction in the cost of our annual compliance program
audit
and a reduction in certain accounting fees.
Realized
Income and Losses from Investments:
During
the three months ended March 31, 2008, we realized net losses on investments
of
$5,014,870, as compared with realized net losses on investments of $674
during
the three months ended March 31, 2007.
During
the three months ended March 31, 2008, we realized net losses of $5,014,870,
consisting primarily of a realized loss of $1,326,072 on our investment
in
Chlorogen, Inc., and a realized loss of $3,688,581 on our investment in
NanoOpto
Corporation. During the first of quarter of 2008, we received a payment
of
$105,714 from the NanoOpto Corporation bridge note.
During
the three months ended March 31, 2007, we realized net losses of $674,
consisting primarily of losses in Exponential Business Development Company,
partially offset by income from our investment in AlphaSimplex Group,
LLC.
Net
Unrealized Appreciation and Depreciation of Portfolio
Securities:
During
the three months ended March 31, 2008, net unrealized depreciation on total
investments decreased by $4,252,651, or 108.3 percent, from net unrealized
depreciation of $3,926,484 at December 31, 2007, to net unrealized appreciation
of $326,167 at March 31, 2008. Net unrealized depreciation on total investments
increased by $3,637,463, or 40.4 percent, during the three months ended
March
31, 2007, from net unrealized depreciation of $9,007,420 at December 31,
2006,
to net unrealized depreciation of $12,644,883 at March 31, 2007.
During
the three months ended March 31, 2008, net unrealized depreciation on our
venture capital investments decreased by $3,651,203, from $4,567,144 to
$915,941, owing primarily to net realized losses of $1,326,072 and $3,688,581
on
our investments in Chlorogen, Inc., and NanoOpto Corporation, respectively,
and
increases in the valuations of our investments in D-Wave Systems, Inc.,
of
$11,704, Exponential Business Development Company of $193 and NeoPhotonics
Corporation of $457, offset by decreases in the valuations of our investments
in
Ancora Pharmaceuticals, Inc., of $52,075, BridgeLux, Inc., of $1,345,
Crystal-IS, Inc., of $283, Kereos, Inc., of $38,893, Mersana Therapeutics,
Inc.,
of $5,406, Metabolon, Inc., of $734,465 and Questech Corporation of $462,437.
We
also had a decrease owing to foreign currency translation of $80,903 on
our
investment in D-Wave Systems, Inc. Unrealized appreciation on our U.S.
government securities portfolio increased from $640,660 at December 31,
2007, to
$1,242,108 at March 31, 2008.
During
the three months ended March 31, 2007, net unrealized depreciation on our
venture capital investments increased by $3,833,052, from $8,450,969 to
$12,284,021, owing primarily to decreases in the valuations of our investments
in Chlorogen, Inc., of $1,370,699, Evolved Nanomaterial Sciences, Inc.,
of
$1,228,281, Nanomix, Inc., of $459,772, NanoOpto Corporation, of $892,409
and
Questech Corporation, of $91,916, and an increase in the valuation of our
investment in Polatis, Inc., of $190,680. We also had an increase owing
to
foreign currency translation of $18,156 on our investment in D-Wave Systems,
Inc. Unrealized depreciation on our U.S. government securities portfolio
decreased from $556,451 at December 31, 2006, to $360,862 at March 31,
2007.
Results
of Operations
Years
Ended December 31, 2007, 2006, and 2005
During
the years ended December 31, 2007, 2006, and 2005, we had net (decreases)
increases in net assets resulting from operations of $(6,716,445),
$(11,773,112), and $6,716,376, respectively.
Investment
Income and Expenses:
During
the years ended December 31, 2007, 2006, and 2005, we had net operating
losses
of $11,827,543, $7,612,935, and $5,465,761, respectively. The variation
in these
results is primarily owing to the changes in investment income and operating
expenses, including non-cash expense of $8,050,807 in 2007 and $5,038,956
in
2006 associated with the granting of stock options. During the years ended
December 31, 2007, 2006, and 2005, total investment income was $2,705,636,
$3,028,761, and $1,540,862, respectively. During the years ended December
31,
2007, 2006, and 2005, total operating expenses were $14,533,179, $10,641,696,
and $7,006,623, respectively.
During
2007, as compared with 2006, investment income decreased from $3,028,761
to
$2,705,636, reflecting a decrease in our average holdings of U.S. government
and
agency securities throughout the period. During the twelve months ended
December
31, 2007, our average holdings of such securities were $62,184,565, as
compared
with $69,506,136 at December 31, 2006.
Operating
expenses, including non-cash, stock-based compensation expenses, were
$14,533,179 and $10,641,696 for the twelve months ended December 31, 2007,
and
December 31, 2006, respectively. The increase in operating expenses for
the
twelve months ended December 31, 2007, as compared to the twelve months
ended
December 31, 2006, was primarily owing to increases in salaries, benefits
and
stock-based compensation expenses and to increases in administration and
operations expense, professional fees and directors' fees and expenses.
Salaries, benefits and non-cash, stock-based compensation expense increased
by
$3,502,053, or 44.1 percent, through December 31, 2007, as compared to
December
31, 2006, primarily as a result of an increase in non-cash expense of $3,011,851
through December 31, 2007, associated with the Harris & Harris Group, Inc.
2006 Equity Incentive Plan (the "Stock Plan"). While the non-cash, stock-based,
compensation expense for the Stock Plan increased our operating expenses
by
$8,050,807, this increase was offset by a corresponding increase to our
additional paid-in capital, resulting in no net impact to our net asset
value.
The non-cash, stock-based, compensation expense and corresponding increase
to
our additional paid-in capital may increase in future quarters. Salaries
and
benefits also increased for the twelve months ended December 31, 2007,
owing to
an increase in our headcount as compared with that of the same period in
2006.
At December 31, 2007, we had 13 full-time employees, as compared with 10
full-time employees and one part-time employee at December 31, 2006.
Administration and operations expense increased by $182,573, or 14.6 percent,
for the twelve months ended December 31, 2007, as compared with the same
period
in 2006, owing to an increase in Nasdaq Global Market fees related to the
increase in our number of outstanding shares and increased office-related
and
travel expenses related to the increase in headcount. Professional fees
increased by $165,083, or 22.4 percent, primarily as a result of an increase
in
legal fees, an increase in audit fees and corporate consulting costs for
the
audit of our compliance program. Directors' fees and expenses increased
by
$94,310, or 27.7 percent, primarily as a result of additional meetings
held in
the period ended December 31, 2007, as compared with the period ended December
31, 2006, as well as an increase in the monthly retainers paid to committee
chairs and to the Lead Independent Director.
During
2006, investment income increased, reflecting an increase in our average
holdings of U.S. government and agency securities, as our average holdings
increased from $50,620,881 at December 31, 2005, to $69,506,136 at December
31,
2006, and as a result of an increase in interest rates during the year.
During
2005, investment income increased, reflecting an increase in our income
on U.S.
government and agency securities, as our holdings increased from $44,622,722
at
December 31, 2004 to $96,250,864 at December 31, 2005, and as a result
of an
increase in interest rates during the year.
The
increase in operating expenses for the year ended December 31, 2006, was
primarily owing to increases in salaries, benefits and stock-based compensation
expense, and directors' fees and expenses, offset by decreases in administrative
and operations expenses, profit-sharing expense and professional fees.
Salaries,
benefits and stock-based compensation expense increased by $5,474,243,
or 222.6
percent, for the year ended December 31, 2006, as compared with December
31,
2005, primarily as a result of non-cash expense of $5,038,956 associated
with
the Stock Plan adopted during the second quarter of 2006 and secondarily
as a
result of an increase in the number of full-time employees. The increase
in
salaries, benefits and stock-based compensation expense reflects expenses
associated with ten full-time employees and one part-time employee during
the
year ended December 31, 2006, as compared with an average of nine full-time
employees during the year ended December 31, 2005. Salaries, benefits and
stock-based compensation include $5,038,956 of non-cash expense associated
with
the Stock Plan, versus no such charge in 2005. Directors' fees and expenses
increased by $31,876, or 10.3 percent, as a result of additional meetings
held
in 2006 related to the adoption of the Stock Plan. Administrative and operations
expense decreased by $69,274, or 5.3 percent, primarily as a result of
a
decrease in our directors' and officers' liability insurance expense and
decreases in the cost of proxy-related expenses. Profit-sharing expense
for the
year ended December 31, 2006, was $50,875, as compared with $1,796,264
for
December 31, 2005, owing to the termination of the profit-sharing plan
effective
May 4, 2006. We recorded $50,875 of profit-sharing expense toward the remainder
of the 2005 profit-sharing payment in the year ended December 31, 2006,
because
of updated estimates of our ultimate tax liability for 2005. Professional
fees
decreased by $92,234, or 11.1 percent, for the year ended December 31,
2006, as
compared with December 31, 2005. Professional fees were lower for the year
ended
December 31, 2006, as compared with December 31, 2005, primarily as a result
of
the elimination of consulting costs incurred for a temporary Senior Controller
in 2005 and the reduction of some of our Sarbanes-Oxley-related compliance
costs
incurred in 2005.
The
increase in operating expenses during 2005 was primarily owing to increases
in
the profit-sharing provision, salaries and benefits, professional fees,
administration and operations, rent expense and Directors' fees and expenses.
Profit-sharing expense for 2005 was $1,796,264, an increase of $1,484,670
as
compared with 2004. Profit-sharing expense increased primarily as a result
of
the gains realized on the sale of NeuroMetrix, Inc., offset by the taxes
payable
by the Company on the deemed dividend and taxes payable on Built-In Gains.
The
profit-sharing expense was also impacted by the Company's decision to retain
its
net realized long-term capital gains for reinvestment for growth, rather
than
distribute them as a cash dividend. When the Company chooses to retain
its net
realized long-term capital gains, it declares a deemed dividend and pays
taxes
on behalf of shareholders. Conversely, when the Company distributes its
net
realized long-term capital gains as a cash dividend, the shareholders pay
all of
the taxes. The taxes payable by the Company on behalf of shareholders reduce
the
amount of profit against which the profit-sharing payable to employees
is
calculated. Had the Company chosen to distribute its net realized long-term
capital gains as a cash dividend, the provision for employee profit sharing
would have been $3,420,737 for 2005, rather than the actual provision for
employee profit sharing of $1,796,264 for 2005.
For
the
year ended December 31, 2005, as compared with 2004, salaries and benefits
increased by $530,945, or 27.5 percent, primarily as a result of the addition
of
three employees. Professional fees increased by $162,751, or 24.4 percent,
reflecting in part the expenses associated with ongoing compliance with
the
Sarbanes-Oxley Act of 2002. Administration and operations increased by
$600,824,
or 83.6 percent, primarily as the result of increases in travel expenses
associated with additional investments in portfolio companies, increases
in
expenses related to the preparation and distribution of the annual and
quarterly
reports and proxy statement owing to the increased number of shareholders,
and
an increase in the premium expense for director and officer liability insurance.
The premium expense for director and officer liability insurance increased
by
$339,810 to $512,038 in 2005, and the premium expense for 2006 is estimated
to
be $514,650. Rent expense increased by $60,148 or 39.7 percent, owing primarily
to the leasing of additional office space in California and New York. Directors'
fees and expenses in 2005 increased by $99,664 or 47.6 percent as a result
of an
increase in the fees paid to the directors for monthly retainer and meeting
attendance.
Realized
Income and Losses on Investments:
During
the years ended December 31, 2007, 2006, and 2005, we had net realized
income
from investments of $30,162, $258,693, and $14,208,789, respectively. The
variation in these results is primarily owing to variations in gross realized
income from investments and income taxes in each of the three years. For
the
years ended December 31, 2007, 2006, and 2005, realized income from investments,
before taxes, was $118,137, $31,338, and $23,862,037, respectively. Income
tax
expense (benefit) for the years ended December 31, 2007, 2006, and 2005
was
$87,975, $(227,355), and $9,653,248, respectively.
During
the year ended December 31, 2007, we realized net gains of $118,137, consisting
primarily of proceeds received from the sale of our interest in AlphaSimplex
Group, LLC, and income from our investment in Exponential Business Development
Company. During the year ended December 31, 2007, we recognized tax expense
of
$87,975, consisting of $74,454 of interest and penalties related to our
2005 tax
returns and $13,521 in current year expense.
During
the year ended December 31, 2006, we realized net gains of $31,338, consisting
primarily of proceeds received from the liquidation of Optiva, Inc., proceeds
received from Exponential Business Development Company, and net losses
realized
on our investment in AlphaSimplex Group, LLC. During 2005, we deemed the
securities we held in Optiva, Inc., worthless and recorded the proceeds
received
and due to us on the liquidation of our bridge notes, realizing a loss
of
$1,619,245. At December 31, 2005, we recorded a $75,000 receivable for
estimated
proceeds from the final payment on the Optiva, Inc., bridge notes. During
the
first quarter of 2006, we received payment of $95,688 from these bridge
notes,
resulting in the realized gain of $20,688 on Optiva, Inc. During the year
ended
December 31, 2006, we realized tax benefits of $227,355 for 2005 taxes
that had
been refunded.
During
the year ended December 31, 2005, our realized income from investments
before
taxes of $23,862,037 consisted primarily of a realized gain of $30,179,762
from
the sale of our investment in NeuroMetrix, Inc., offset by realized losses
of
$1,358,286, $2,093,968, $1,091,209, and $1,619,245, from the sale of our
shares
in Agile Materials & Technologies, Inc., Experion Systems, Inc.,
Nanotechnologies, Inc., and Optiva, Inc., respectively. Realized losses
on U.S.
government and agency securities totaled $422,383 for 2005. For the year
ended
December 31, 2005, our income tax expense on realized gains was $9,653,248,
which includes $8,122,367 of taxes payable by the Company on behalf of
shareholders in connection with the deemed dividend and $1,364,470 of taxes
on
Built-In Gains.
Net
Unrealized
Appreciation and Depreciation on Investments:
During
the year ended December 31, 2007, net unrealized depreciation on total
investments decreased by $5,080,936.
During
the years ended December 31, 2006, and 2005, net unrealized depreciation
on
total investments increased by $4,418,870 and $2,026,652,
respectively.
During
the year ended December 31, 2007, net unrealized depreciation on our venture
capital investments decreased by $3,883,825, or 46.0 percent, from $8,450,969
to
$4,567,144, owing primarily to increases in the valuations of our investments
in
BridgeLux, Inc., of $3,699,529, Crystal IS, Inc., of $13,819, CSwitch
Corporation of $48,935, D-Wave Systems, Inc., of $202,408, Exponential
Business
Development Company of $2,026, Innovalight, Inc., of $3,218,216, Kovio,
Inc., of
$125,000, Mersana Therapeutics, Inc., of $118,378, NanoGram Corporation
of
$2,437,136, NeoPhotonics Corporation of $2,160, SiOnyx, Inc., of $899,566,
Solazyme, Inc., of $612,291 and Zia Laser, Inc., of $6,329, offset by decreases
in the valuations of our investments in Ancora Pharmaceuticals, Inc., of
$100,561, Chlorogen, Inc., of $1,326,073, Evolved Nanomaterial Sciences,
Inc.,
of $2,800,000, Kereos, Inc., of $1,340,257, Nanomix, Inc., of $459,772,
NanoOpto
Corporation of $1,369,885, Polatis, Inc., of $9,534 and Questech Corporation
of
$404,712. We also had an increase owing to foreign currency translation
of
$307,636 on our investment in D-Wave Systems, Inc. Unrealized depreciation
on
our U.S. government and agency securities portfolio decreased from $556,451
at
December 31, 2006, to unrealized appreciation of $640,660 at December 31,
2007.
The
net
increase in unrealized depreciation on our venture capital investments
in 2006
was owing primarily to decreases in the valuations of our investments in
Nanomix, Inc., of $1,710,000, NanoOpto Corporation of $1,211,259, NeoPhotonics
Corporation of $254,238, Polatis, Inc., of $145,228, SiOnyx, Inc., of $679,950
and Zia Laser, Inc., of $172,500, and to increases in the valuations of
our
investments in Crystal IS of $19,735 and Questech Corporation of $259,628.
We
also had a decrease, owing to foreign currency translation, of $34,103
on our
investment in D-Wave Systems, Inc. Unrealized depreciation on our U.S.
government and agency securities portfolio increased from $69,541 at December
31, 2005, to $556,451 at December 31, 2006.
The
net
increase in unrealized depreciation on our venture capital investments
in 2005
was the result of the appreciation in value of $19,790,298 on investments
held,
offset by depreciation of $23,181,420 related to investments sold. The
change in
unrealized depreciation on investments held was owing to appreciation in
our
investment in NeuroMetrix, Inc., prior to the sale of our interest in it
as well
as to increases in the valuations of NanoGram Corporation, Nanosys, Inc.,
and
Nantero, Inc., of $313,534, $870,113 and $813,771, respectively. These
increases
were offset by decreases in the valuations of AlphaSimplex Group LLC, CSwitch
Corporation, Mersana Therapeutics, Inc., NanoOpto, Inc., Polatis, Inc.,
and Zia
Laser, Inc., of $109,464, $500,000, $563,097, $529,997, $169,827, and $1,312,500
respectively. The change in unrealized depreciation on investments sold
is owing
to the realization of the gain on our investment in NeuroMetrix, Inc.,
offset by
realizations of losses on our investments in Agile Materials and Technologies,
Inc., Experion Systems, Inc., Nanotechnologies, Inc., and Optiva, Inc.
Financial
Condition
March
31, 2008
At
March
31, 2008, our total assets and net assets were $140,772,639 and $136,541,289,
respectively. At December 31, 2007, they were $142,893,332 and $138,363,344,
respectively.
At
March
31, 2008, net asset value per share ("NAV") was $5.86, as compared with
$5.93 at
December 31, 2007. At March 31, 2008, and December 31, 2007, our shares
outstanding were 23,314,573.
Significant
developments in the three months ended March 31, 2008, included
an increase in the value of our venture capital investments of $4,987,479
and a
decrease in the value of our investment in U.S. government obligations
of
$6,604,493. The increase in the value of our venture capital investments,
from
$78,110,384 at December 31, 2007, to $83,097,863 at March 31, 2008, resulted
primarily from one new and seven follow-on investments and by a net increase
of
$3,651,203 in the net value of our previous venture capital investments.
The
decrease in the value of our U.S. government obligations, from $60,193,593
at
December 31, 2007, to $53,589,100 at March 31, 2008, is primarily owing
to the
use of funds for investments totaling $6,435,274 and net operating expenses.
The
following table is a summary of additions to our portfolio of venture capital
investments made during the three months ended March 31, 2008:
|
New
Investment
|
Amount
|
|
|
PolyRemedy,
Inc.
|
$ 244,500
|
|
|
|
|
|
|
Follow-on
Investment
|
|
|
|
Adesto
Technologies Corporation
|
$1,052,174
|
|
|
BridgeLux,
Inc.
|
$
1,000,001
|
|
|
D-Wave
Systems, Inc.
|
$
736,019
|
|
|
Metabolon,
Inc.
|
$
1,000,000
|
|
|
Nextreme
Thermal Solutions, Inc.
|
$
377,580
|
|
|
Phoenix
Molecular Corporation
|
$
25,000
|
|
|
Solazyme,
Inc.
|
$
2,000,000
|
|
|
|
|
|
|
Total
|
$
6,435,274
|
|
The
following tables summarize the values of our portfolios of venture capital
investments and U.S. government obligations, as compared with their cost,
at
March 31, 2008, and December 31, 2007:
|
|
March
31,
2008
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Venture
capital investments, at cost
|
|
$
|
84,013,804
|
|
$
|
82,677,528
|
|
Net
unrealized depreciation(1)
|
|
|
915,941
|
|
|
4,567,144
|
|
Venture
capital investments, at value
|
|
$
|
83,097,863
|
|
$
|
78,110,384
|
|
|
|
March
31,
2008
|
|
December
31, 2007
|
|
|
|
|
|
|
|
U.S.
government obligations, at cost
|
|
$
|
52,346,992
|
|
$
|
59,552,933
|
|
Net
unrealized appreciation(1)
|
|
|
1,242,108
|
|
|
640,660
|
|
U.S.
government obligations, at value
|
|
$
|
53,589,100
|
|
$
|
60,193,593
|
|
(1)At
March
31, 2008, and December 31, 2007, the net accumulated unrealized appreciation
(depreciation) on investments was $326,167 and $(3,926,484),
respectively.
The
following table summarizes the fair value composition of our venture capital
investment portfolio at March 31, 2008, and December 31, 2007.
|
|
|
|
|
|
|
|
Category
|
|
|
|
March
31,
2008
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
Tiny
Technology
|
|
|
|
|
|
99.9
|
%
|
|
99.9
|
%
|
Other
Venture Capital Investments
|
|
|
|
|
|
0.1
|
%
|
|
0.1
|
%
|
Total
Venture Capital Investments
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
December
31, 2007
At
December 31, 2007, our total assets and net assets were $142,893,332 and
$138,363,344, respectively. Our net asset value ("NAV") per share at that
date
was $5.93, and our shares outstanding increased to 23,314,573 at December
31,
2007.
During
the twelve months ended December 31, 2007, significant developments included
an
increase in the value of our venture capital investments of $24,442,553
and an
increase in the value of our investment in U.S. government and agency
obligations of $1,537,446. The increase in the value of our venture capital
investments, from $53,667,831 at December 31, 2006, to $78,110,384 at December
31, 2007, resulted primarily from seven new and 20 follow-on investments
and by
a net increase of $3,883,825 in the net value of our venture capital
investments. The increase in the value of our U.S. government and agency
obligations, from $58,656,147 at December 31, 2006, to $60,193,593 at December
31, 2007, is primarily owing to the use of net proceeds of $12,993,168
received
through a registered stock offering and proceeds received from stock option
exercises of $10,105,511, offset by a payment of $80,236 for federal tax
and
interest and penalties, profit sharing payments of $261,661, net operating
expenses and by new and follow-on venture capital investments totaling
$20,595,161.
For
the
year ended December 31, 2007, the Company issued 999,556 shares and received
proceeds of $10,105,511 as a result of employee stock option
exercises.
The
following table is a summary of additions to our portfolio of venture capital
investments made during the twelve months ended December 31, 2007:
|
New
Investments
|
Cost
|
|
|
Adesto
Technologies Corporation
|
$
1,147,826
|
|
|
Ancora
Pharmaceuticals, Inc.
|
$
800,000
|
|
|
BioVex
Group, Inc.
|
$
2,500,000
|
|
|
Ensemble
Discovery Corporation
|
$
2,000,000
|
|
|
Lifco,
Inc.
|
$
946,528
|
|
|
Phoenix
Molecular Corporation
|
$
50,010
|
|
|
Siluria
Technologies, Inc.
|
$
160,723
|
|
|
|
|
|
|
Follow-on
Investments
|
|
|
|
BridgeLux,
Inc.
|
$
350,877
|
|
|
BridgeLux,
Inc.
|
$
233,918
|
|
|
BridgeLux,
Inc.
|
$
916,928
|
|
|
Cambrios
Technologies Corporation
|
$
1,300,000
|
|
|
New
Investments
|
Cost
|
|
|
Chlorogen,
Inc.
|
$
7,042
|
|
|
CSwitch
Corporation
|
$
32,624
|
|
|
CSwitch
Corporation
|
$
529,852
|
|
|
Innovalight,
Inc.
|
$
1,993,568
|
|
|
Kereos,
Inc.
|
$
540,000
|
|
|
Kovio,
Inc.
|
$
1,000,000
|
|
|
NanoGram
Corporation
|
$
851,393
|
|
|
Mersana
Therapeutics, Inc.
|
$
500,000
|
|
|
Nanomix,
Inc.
|
$
680,240
|
|
|
NanoOpto
Corporation
|
$
268,654
|
|
|
Nextreme
Thermal Solutions, Inc.
|
$
750,000
|
|
|
Polatis,
Inc.
|
$ 17,942
|
|
|
Polatis,
Inc.
|
$ 13,454
|
|
|
Polatis,
Inc.
|
$ 58,582
|
|
|
SiOnyx,
Inc.
|
$ 2,445,000
|
|
|
Solazyme,
Inc.
|
$ 500,000
|
|
|
|
|
|
|
Total
|
$20,595,161
|
|
The
following tables summarize the fair values of our portfolios of venture
capital
investments and U.S. government and agency obligations, as compared with
their
cost, at December 31, 2007, and December 31, 2006:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Venture
capital investments, at cost
|
|
$
|
82,677,528
|
|
$
|
62,118,800
|
|
Net
unrealized depreciation (1)
|
|
|
4,567,144
|
|
|
8,450,969
|
|
Venture
capital investments, at value
|
|
$
|
78,110,384
|
|
$
|
53,667,831
|
|
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
U.S.
government and agency obligations, at cost
|
|
$
|
59,552,933
|
|
$
|
59,212,598
|
|
Net
unrealized appreciation (depreciation)
(1)
|
|
|
640,660
|
|
|
(556,451
|
)
|
U.S.
government and agency obligations, at value
|
|
$
|
60,193,593
|
|
$
|
58,656,147
|
|
(1)At
December 31, 2007, and December 31, 2006, the net accumulated unrealized
depreciation on investments was $3,926,484 and $9,007,420,
respectively.
The
following table summarizes the fair value composition of our venture capital
investment portfolio at December 31, 2007, and December 31, 2006.
|
|
|
|
December
31,
|
|
Category |
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Tiny
Technology
|
|
|
|
|
|
99.9
|
%
|
|
99.9
|
%
|
Other
Venture Capital Investments
|
|
|
|
|
|
0.1
|
%
|
|
0.1
|
%
|
Total
Venture Capital Investments
|
|
|
|
|
|
100.0
|
%
|
|
100.0
|
%
|
December
31, 2006
At
December 31, 2006, our total assets and net assets were $118,328,590 and
$113,930,303, respectively. Our NAV per share at that date was $5.42, and
our
shares outstanding increased to 21,015,017 at December 31, 2006.
During
the twelve months ended December 31, 2006, significant developments included
an
increase in the value of our venture capital investments of $20,480,498
and a
decrease in the value of our investment in U.S. government and agency securities
of $37,594,717. The increase in the value of our venture capital investments,
from $33,187,333 at December 31, 2005, to $53,667,831 at December 31,
2006, resulted
primarily from six new and 10 follow-on investments, partially offset by
a net
decrease of $3,927,689 in the net value of our previous venture capital
investments. The decrease in the value of our U.S. government and agency
securities, from $96,250,864 at December 31, 2005, to $58,656,147 at December
31, 2006, was primarily owing to the use of funds for investments totaling
$24,408,187, tax payments of $9,425,922, profit-sharing payments of $1,897,072,
an increase in unrealized losses of $486,910 and payment of net operating
expenses.
During
December 2006, the Company also issued stock and received proceeds upon
the
exercise of employee stock options. Through December 31, 2006, the Company
issued 258,672 shares and received proceeds of $2,615,190 as a result of
option
exercises.
The
Company's liabilities decreased from $14,950,378 at December 31, 2005,
to
$4,398,287 at December 31, 2006, primarily owing to the payment of the
tax
payable on behalf of shareholders of $8,122,367 in January 2006, the payment
of
$1,897,072 in profit sharing in March 2006 and the reversal of the accrual
for
federal and state taxes payable of $1,514,967 recorded at December 31,
2005.
The
following table is a summary of additions to our portfolio of venture capital
investments made during the twelve months ended December 31, 2006:
|
New
Investments
|
Cost
|
|
|
D-Wave
Systems, Inc.
|
$
1,750,547
|
|
|
Evolved
Nanomaterial Sciences, Inc.
|
2,800,000
|
|
|
Innovalight,
Inc.
|
2,500,000
|
|
|
Metabolon,
Inc.
|
2,500,000
|
|
|
SiOnyx,
Inc.
|
750,000
|
|
|
Xradia,
Inc.
|
4,000,000
|
|
|
|
|
|
|
Follow-on
Investments
|
|
|
|
Chlorogen,
Inc.
|
$
221,438
|
|
|
Crystal
IS, Inc.
|
1,098,240
|
|
|
CSwitch
Corporation
|
2,850,000
|
|
|
NanoGram
Corporation
|
1,262,764
|
|
|
NanoOpto
Corporation
|
433,138
|
|
|
NeoPhotonics
Corporation
|
2,750,000
|
|
|
Nextreme
|
500,000
|
|
|
Polatis,
Inc.
|
89,310
|
|
|
Questech
Corporation
|
12,750
|
|
|
SiOnyx,
Inc.
|
890,000
|
|
|
Total
|
$
24,408,187
|
|
Cash
Flow
Year
Ended December 31, 2007
Net
cash
used in operating activities for the year ended December 31, 2007, was
$4,142,572, primarily owing to the payment of operating expenses.
Cash
used
in investing activities for the year ended December 31, 2007, was $20,697,886,
primarily reflecting a net increase in our investment in U.S. government
and
agency securities of $235,754 and investments in private placements of
$20,595,161, less proceeds from the sale of venture capital investments
of
$174,669.
Cash
provided by financing activities for the year ended December 31, 2007,
was
$23,098,679, reflecting
the issuance of shares in connection with the Stock Plan and the net proceeds
from the issuance of 1,300,000 new shares of our common stock on June 25,
2007,
in a registered direct follow-on offering.
Year
Ended December 31, 2006
Net
cash
used in operating activities for the year ended December 31, 2006, was
$14,955,302, primarily owing both to the payment of various federal, state
and
local taxes, including the tax paid on behalf of shareholders for the deemed
dividend, and to the payment of operating expenses.
Cash
provided by investing activities for the year ended December 31, 2006,
was
$13,198,611, primarily reflecting net proceeds from the sale of U.S. government
and agency securities of $37,593,589, less investments in private placements
of
$24,408,187.
Cash
provided by financing activities for the year ended December 31, 2006,
was
$2,615,190, reflecting
the issuance of shares in connection with the Stock Plan.
Year
Ended December 31, 2005
Net
cash
used in operating activities for the year ended December 31, 2005, was
$2,914,285, primarily owing to an increase in our operating
expenses.
Cash
used
in investing activities for the year ended December 31, 2005, was $33,049,325,
primarily reflecting a net increase in our investment in U.S. government
and
agency securities of $52,144,482 and investments in private placements
of
$16,251,339, less proceeds from the sale of venture capital investments
of
$35,392,200.
Cash
provided by financing activities for the year ended December 31, 2005,
was
$36,526,567, reflecting net proceeds from the issuance of 3,507,500 new
shares
of our common stock on September 14, 2005, in an underwritten follow-on
offering.
Liquidity
and Capital Resources
March
31, 2008
Our
primary sources of liquidity are cash, receivables and freely marketable
securities, net of short-term indebtedness. Our secondary sources of liquidity
are restricted securities of companies that are publicly traded.
At
March
31, 2008, and December 31, 2007, our total net primary liquidity was $54,309,215
and $61,183,136, respectively, and our secondary liquidity was $0 and $0,
respectively.
The
decrease in our primary liquidity from December 31, 2007, to March 31,
2008, is
primarily owing to the use of funds for investments and payment of net
operating
expenses.
On
June
25, 2007, we completed the sale of 1,300,000 shares of our common stock
from our
shelf registration statement for gross proceeds of $14,027,000; net proceeds
of
this offering, after placement agent fees and offering costs of $1,033,832,
were
$12,993,168. We used the net proceeds of this offering to make new investments
in tiny technology, as well as for follow-on investments in our existing
venture
capital investments and for working capital. Through March 31, 2008, we
have
used all of the net proceeds from this offering for these purposes.
On
April
4, 2008, we filed a Post-Effective Amendment to our registration statement
with
the SEC on Form N-2 to update our existing shelf registration statement
and
register an additional 1,300,000 shares of our common stock. After the
effective
date, the common stock may be sold at prices and on terms to be set forth
in one
or more supplements to the prospectus from time to time.
December
31, 2007
At
December 31, 2007, and December 31, 2006, our total net primary liquidity
was
$61,183,136 and $61,323,306, respectively, and our secondary liquidity
was $0
and $0, respectively.
Our
net
primary sources of liquidity are more than adequate to cover our gross
cash
operating expenses over the next 12 months. Our gross cash operating expenses
for 2007 and 2006 totaled $6,263,510 and $5,285,448, respectively.
The
increase in our primary liquidity from December 31, 2006, to December 31,
2007,
is primarily owing to the proceeds received through a registered direct
stock
offering from a shelf registration statement and proceeds received from
stock
option exercises, offset by the use of funds for investments and payment
of net
operating expenses. In the future, we may sell additional shares registered
pursuant to our shelf registration statement.
On
April
17, 2003, we signed a seven-year sublease for office space at 111 West
57th
Street
in New York City. On December 17, 2004, we signed a sublease for additional
office space at our current location. The subleases expire on April 29,
2010.
Total rent expense for our office space in New York City was $178,167 in
2007,
$174,625 in 2006 and $171,171 in 2005. Future minimum sublease payments
in each
of the following years are: 2008 -- $193,083; 2009 -- $197,700; and thereafter,
for the remaining term -- $65,969.
December
31, 2006
At
December 31, 2006, and December 31, 2005, our total net primary liquidity
was
$61,323,306 and $97,797,219, respectively, and our secondary liquidity
was $0
and $0, respectively.
Our
net
primary sources of liquidity were more than adequate to cover our gross
cash
operating expenses over the next 12 months. Our gross cash operating expenses
for 2006 and 2005 totaled $5,285,448 and $5,021,066, respectively.
The
decrease in our primary liquidity from December 31, 2005, to December 31,
2006,
was primarily owing to the use of funds for investments, profit-sharing
and tax
payments, as well as net operating expenses.
On
November 29, 2006, we filed a shelf registration statement with the SEC
on Form
N-2 to register 4,000,000 shares of our common stock. On December 11, 2006,
and
on April 23, 2007, we filed amended registration statements with the SEC.
On May
11, 2007, the SEC declared the registration statement effective. The common
stock may be sold at prices and on terms to be set forth in one or more
supplements to the prospectus from time to time.
AVAILABLE
INFORMATION
We
file
annual, quarterly and current reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934. You can inspect any
materials we file with the SEC, without charge, at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
202-942-8090 for further information on the Public Reference Room. The SEC
maintains a web site that contains reports, proxy statements and other
information regarding registrants, including us, that file such information
electronically with the SEC. The address of the SEC’s web site is www.sec.gov.
Information contained on the SEC’s web site about us is not incorporated into
this Prospectus and you should not consider information contained on the
SEC’s
web site to be part of this Prospectus.
You
may
obtain our annual reports, request other information about us and make
shareholder inquiries by calling toll free 1-877-TINY TECH. We also make
available our annual reports, free of charge, on our website at
www.TinyTechVC.com. Information on our website is not part of this Prospectus
and should not be considered as such when making your investment decision.
RISK
FACTORS
Investing
in our Common Stock involves significant risks relating to our business and
investment objective. You should carefully consider the risks and uncertainties
described below before you purchase any of our Common Stock. These risks
and
uncertainties are not the only ones we face. Unknown additional risks and
uncertainties, or ones that we currently consider immaterial, may also impair
our business. If any of these risks or uncertainties materialize, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Common Stock could decline,
and you could lose all or part of your investment.
Risks
related to the companies in our portfolio.
A
continuing lack of initial public offering opportunities may cause companies
to
stay in our portfolio longer, leading to lower returns, write-downs and
write-offs.
Beginning
in about 2001, many fewer venture capital-backed companies per annum have
been
able to complete initial public offerings (IPOs) than in the years of the
previous decade. Moreover, in 2007, according to VentureSource, the
venture capital-backed companies that completed IPOs had a median age of
about
8.3 years, which was older than the median age of venture capital-backed
IPOs in
any period since 2001-2002. Now that some of our companies are becoming
more mature, a continuing lack of IPO opportunities for venture capital-backed
companies could lead to companies staying longer in our portfolio as private
entities still requiring funding. In the best case, such stagnation would
dampen returns, and in the worst case, could lead to write-downs and write-offs
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
continuing lack of IPO opportunities for venture capital-backed companies
is
also causing some venture capital firms to change their strategies, which
is
causing some of them to reduce funding of their portfolio companies, making
it
more difficult for such companies to access capital and to fulfill their
potential, leading in some cases to write-downs and write-offs of such companies
by other venture capital firms, such as ourselves, who are co-investors in
such
companies.
Investing
in small, private companies involves a high degree of risk and is highly
speculative.
We
have
invested a substantial portion of our assets in privately held development
stage
or start-up companies, the securities of which are inherently illiquid. These
businesses tend to lack management depth, to have limited or no history of
operations and to have not attained profitability. Tiny technology companies
are
especially risky, involving scientific, technological and commercialization
risks. Because of the speculative nature of these investments, these securities
have a significantly greater risk of loss than traditional investment
securities. Some of our venture capital investments are likely to be complete
losses or unprofitable, and some will never realize their potential. We have
been and will continue to be risk seeking rather than risk averse in our
approach to venture capital and other investments. Neither our investments
nor
an investment in our Common Stock is intended to constitute a balanced
investment program.
We
may invest in companies working with technologies or intellectual property
that
currently have few or no proven commercial applications.
Nanotechnology,
in particular, is a developing area of technology, of which much of the future
commercial value is unknown, difficult to estimate and subject to widely
varying
interpretations. There are as of yet relatively few nanotechnology-enabled
products commercially available. The timing of additional future commercially
available nanotechnology products is highly uncertain.
Our
portfolio companies may not successfully develop, manufacture or market their
products.
The
technology of our portfolio companies is new and in many cases unproven.
Their
potential products require significant and lengthy product development,
manufacturing and marketing efforts. To date, many of our portfolio companies
have not developed any commercially available products. In addition, our
portfolio companies may not be able to manufacture successfully or to market
their products in order to achieve commercial success. Further, the products
may
never gain commercial acceptance. If our portfolio companies are not able
to
develop, manufacture or market successful tiny technology-enabled products,
they
will be unable to generate product revenue or build sustainable or profitable
businesses. Adverse conditions in the target markets of our portfolio companies
may limit or prevent commercial success regardless of the contribution of
tiny
technology to these products.
Our
portfolio companies working with tiny technology may be particularly susceptible
to intellectual property litigation.
Research
and commercialization efforts in tiny technology are being undertaken by
a wide
variety of government, academic and private corporate entities. As additional
commercially viable applications of tiny technology emerge, ownership of
intellectual property on which these products are based may be contested.
From
time to time, our portfolio companies are or have been involved in intellectual
property disputes and litigation. Any litigation over the ownership of, or
rights to, any of our portfolio companies’ technologies or products could have a
material adverse effect on those companies’ values.
Unfavorable
general economic conditions, as well as unfavorable conditions specific to
the
venture capital industry
or a segment of portfolio companies, could result in the inability of our
portfolio companies to access additional capital, leading to financial losses
in
our portfolio.
Most
of
the companies in which we have made or will make investments are susceptible
to
economic slowdowns or recessions. An economic slowdown or adverse capital
or
credit market conditions may affect the ability of a company in our portfolio
to
raise additional capital from venture capital or other sources or to engage
in a
liquidity event such as an initial public offering or merger. Certain types
of
portfolio companies, such as those engaged in solar, solid-state lighting
and
other alternative energy (cleantech) applications, which are currently in
favor
with the media and investors generally, may have a harder time accessing
capital
in the future if their industries subsequently fall out of fashion. Adverse
economic, capital or credit market conditions may lead to financial losses
in
our portfolio.
Unstable
credit markets could adversely affect our portfolio
companies.
Although
our portfolio companies rely primarily on equity financing, some of them
borrow
funds as well. For all but the most established companies, credit markets
are
currently unstable. During such periods of unstable credit availability,
there
can be no assurance that our portfolio companies will be able to borrow
money on
a timely basis or on reasonable terms, which could have a negative impact on
their operating performance, raise their cost of capital, or even jeopardize
their existence. Furthermore, certain of our portfolio companies manage
their
cash positions by investing in money-market funds, auction-rate securities,
or
other short-term securities that are vulnerable to current credit conditions.
Lack of liquidity in such investments, or even defaults by issuers of such
securities, could restrict the amount of cash available to such portfolio
companies. These events could lead to financial losses in our
portfolio.
The
value of our portfolio could be adversely affected if the technologies utilized
by our portfolio companies are found, or even rumored or feared, to cause
health
or environmental risks, or if legislation is passed that limits the
commercialization of any of these technologies.
Nanotechnology
has received both positive and negative publicity and is the subject
increasingly of public discussion and debate. For example, debate regarding
the
production of materials that could cause harm to the environment or the health
of individuals could raise concerns in the public’s perception of
nanotechnology, not all of which might be rational or scientifically based.
Tiny
technology in general and nanotechnology in particular are currently the
subject
of health and environmental impact research. If health or environmental concerns
about tiny technology or nanotechnology were to arise, whether or not they
had
any basis in fact, our portfolio companies might incur additional research,
legal and regulatory expenses, and might have difficulty raising capital
or
marketing their products. Government authorities could, for social or other
purposes, prohibit or regulate the use of nanotechnology. Legislation could
be
passed that could circumscribe the commercialization of any of these
technologies.
Our
portfolio companies may generate revenues from the sale of non-tiny
technology-enabled products.
We
consider a company to be a tiny technology company if a product or products,
or
intellectual property covering a product or products, that we consider to
be at
the microscale or smaller is material to its business plan. The core business
of
some of these companies may not be tiny technology-enabled products, and
therefore their success or failure may not be dependent upon the tiny technology
aspects of their business. In addition to developing products that we consider
tiny technology, some of these companies may also develop products that we
do
not consider enabled by tiny technology. Some of these companies will generate
revenues from the sale of non-tiny technology-enabled products. Additionally,
it
is possible that a portfolio company may decide to change its business focus
after our initial investment and decide to develop and commercialize non-tiny
technology-enabled products.
Risks
related to the illiquidity of our investments.
We
invest in illiquid securities and may not be able to dispose of them when
it is
advantageous to do so, or ever.
Most
of
our investments are or will be equity or equity-linked securities acquired
directly from small companies. These equity securities are generally subject
to
restrictions on resale or otherwise have no established trading market. The
illiquidity of most of our portfolio of equity securities may adversely affect
our ability to dispose of these securities at times when it may be advantageous
for us to liquidate these investments. We may never be able to dispose of
these
securities.
Unfavorable
economic conditions and regulatory changes could impair our ability to engage
in
liquidity events.
Our
business of making private equity investments and positioning our portfolio
companies for liquidity events might be adversely affected by current and
future
capital markets and economic conditions. The public equity markets currently
provide less opportunity for liquidity events than at times in the past when
there was more robust demand for initial public offerings, even for more
mature
technology companies than those in which we typically invest. The potential
for
public market liquidity could further decrease and could lead to an inability
to
realize potential gains or could lead to financial losses in our portfolio
and a
decrease in our revenues, net income and assets. Recent government reforms
affecting publicly traded companies, stock markets, investment banks and
securities research practices have made it more difficult for privately held
companies to complete successful initial public offerings of their equity
securities, and such reforms have increased the expense and legal exposure
of
being a public company. Slowdowns in initial public offerings may also be
having
an adverse effect on the frequency and prices of acquisitions of privately
held
companies. A lack of merger and/or acquisition opportunities for privately
held
companies also may be having an adverse effect on the ability of these companies
to raise capital from private sources. Public equity market response to
companies offering nanotechnology-enabled products is uncertain. An inability
to
engage in liquidity events could negatively affect our liquidity, our
reinvestment rate in new and follow-on investments and the value of our
portfolio.
Even
if some of our portfolio companies complete initial public offerings, the
returns on our investments in those companies would be
uncertain.
When
companies in which we have invested as private entities complete initial
public
offerings of their securities, these newly issued securities are by definition
unseasoned issues. Unseasoned issues tend to be highly volatile and have
uncertain liquidity, which may negatively affect their price. In addition,
we
are typically subject to lock-up provisions that prohibit us from selling
our
investments into the public market for specified periods of time after initial
public offerings. The market price of securities that we hold may decline
substantially before we are able to sell these securities. Most initial public
offerings of technology companies in the United States are listed on the
Nasdaq
Global Market. Government reforms of the Nasdaq Global Market have made
market-making by broker-dealers less profitable, which has caused broker-dealers
to reduce their market-making activities, thereby making the market for
unseasoned stocks less liquid than they might be otherwise.
Risks
related to our Company.
Because
there is generally no established market in which to value our investments,
our
Valuation Committee’s value determinations may differ materially from the values
that a ready market or third party would attribute to these
investments.
There
is
generally no public market for the equity securities in which we invest.
Pursuant to the requirements of the 1940 Act, we value all of the private
equity
securities in our portfolio at fair value as determined in good faith by
a
committee of independent members of our Board of Directors, which we call
the
Valuation Committee, pursuant to Valuation Procedures established by the
Board
of Directors. As a result, determining fair value requires that judgment
be
applied to the specific facts and circumstances of each portfolio investment
pursuant to specified valuation principles and processes. We are required
by the
1940 Act to value specifically each individual investment on a quarterly
basis
and record unrealized depreciation for an investment that we believe has
become
impaired. Conversely, we must record unrealized appreciation if we believe
that
our securities have appreciated in value. Our valuations, although stated
as a
precise number, are necessarily within a range of values that vary depending
on
the significance attributed to the various factors being
considered.
We
use
the Black-Scholes-Merton option pricing model to determine the fair value
of
warrants held in our portfolio. Option pricing models, including the
Black-Scholes-Merton model, require the use of subjective input assumptions,
including expected volatility, expected life, expected dividend rate, and
expected risk-free rate of return. In the Black-Scholes-Merton model, variations
in the expected volatility or expected term assumptions have a significant
impact on fair value. Because the securities underlying the warrants in
our
portfolio are not publicly traded, many of the required input assumptions
are
more difficult to estimate than they would be if a public market for the
underlying securities existed.
Without
a
readily ascertainable market value and because of the inherent uncertainty
of
valuation, the fair value that we assign to our investments may differ from
the
values that would have been used had an efficient market existed for the
investments, and the difference could be material. Any changes in fair value
are
recorded in our consolidated statements of operations as a change in the
"Net
(decrease) increase in unrealized appreciation on investments." See
"Determination of Net Asset Value."
In
the
venture capital industry, even when a portfolio of early-stage, high-technology
venture capital investments proves to be profitable over the portfolio's
lifetime, it is common for the portfolio's value to undergo a so-called
"J-curve" valuation pattern. This means that when reflected on a graph, the
portfolio’s valuation would appear in the shape of the letter "J," declining
from the initial valuation prior to increasing in valuation. This J-curve
valuation pattern results from write-downs and write-offs of portfolio
investments that appear to be unsuccessful, prior to write-ups for portfolio
investments that prove to be successful. Because early-stage companies typically
have negative cash flow and are by their nature inherently fragile, a valuation
process can more readily substantiate a loss of value than an increase in
value.
Even if our venture capital investments prove to be profitable in the long
run,
such J-curve valuation patterns could have a significant adverse effect on
our
net asset value per share and the value of our Common Stock in the interim.
Over
time, as we continue to make additional tiny technology investments, this
J-curve pattern may be less relevant for our portfolio as a whole, because
the
individual J-curves for each investment, or series of investments, may overlap
with previous investments at different stages of their J-curves.
Changes
in valuations of our privately held, early stage companies tend to be more
volatile than changes in prices of publicly traded
securities.
Investments
in privately held, early stage companies are inherently more volatile than
investments in more mature businesses. Such immature businesses are inherently
fragile and easily affected by both internal and external forces. Our investee
companies can lose much or all of their value suddenly in response to an
internal or external adverse event. Conversely, these immature businesses
can
gain suddenly in value in response to an internal or external positive
development. Moreover, because our ownership interests in such investments
are
valued only at quarterly intervals by our Valuation Committee, a committee
made
up of all of our independent members of our Board of Directors, changes in
valuations from one valuation point to another tend to be larger than changes
in
valuations of marketable securities which are revalued in the marketplace
much
more frequently, in some highly liquid cases, virtually
continuously.
We
expect to continue to experience material write-downs of securities of portfolio
companies.
Write-downs
of securities of our privately held companies have always been a by-product
and
risk of our business. We expect to continue to experience material write-downs
of securities of privately held portfolio companies. Write-downs of such
companies occur at all stages of their development. Such write-downs may
increase in dollar terms, frequency and as a percentage of our net asset
value
as our dollar investment activity in privately held companies continues to
increase, and the number of such holdings in our portfolio continues to grow.
Because the average size of each of our investments in tiny technology has
increased from year to year and continues to increase, the average size of
our
write-downs will probably also increase.
Because
we do not choose investments based on a strategy of diversification, the
value
of our business is subject to greater volatility than the value of companies
with more broadly diversified investments.
We
do not
choose investments based on a strategy of diversification. Therefore, we
may be
more vulnerable to events affecting a single sector or industry and therefore
subject to greater volatility than a company that follows a diversification
strategy. Accordingly, an investment in our Common Stock may present greater
risk to you than an investment in a diversified company.
We
are dependent upon key management personnel for future success, and may not
be
able to retain them.
We
are
dependent upon the diligence and skill of our senior management and other
key
advisers for the selection, structuring, closing and monitoring of our
investments. We utilize lawyers, and we utilize outside consultants, including
one of our directors, Lori D. Pressman, to assist us in conducting due diligence
when evaluating potential investments. There is generally no publicly available
information about the companies in which we invest, and we rely significantly
on
the diligence of our employees and advisers to obtain information in connec-tion
with our investment decisions. Our future success to a significant extent
depends on the continued service and coordination of our senior management
team,
and particularly on Charles E. Harris, our Chairman, Chief Executive Officer
and
a Managing Director, who will be subject to mandatory retirement pursuant
to the
Company's mandatory retirement policy for senior executives on December 31,
2008; on Douglas W. Jamison, our President, Chief Operating Officer and a
Managing Director, who has been designated by our Board of Directors as the
successor to Mr. Harris in his positions of Chairman and Chief Executive
Officer
as of January 1, 2009 upon his retirement; on Daniel B. Wolfe, our Chief
Financial Officer and a Managing Director; on Alexei A. Andreev and Michael
A.
Janse, each an Executive Vice President and Managing Director; and on Sandra
M.
Forman, our General Counsel, Chief Compliance Officer and Director of Human
Resources. The departure of any of our executive officers, key employees
or
advisers could materially adversely affect our ability to implement our business
strategy. We do not maintain for our benefit any key-man life insurance on
any
of our officers or employees.
We
will need to hire additional employees as the size of our portfolio
increases.
We
anticipate that it will be necessary for us to add investment professionals
with
expertise in venture capital and/or tiny technology and administrative and
support staff to accommodate the increasing size of our portfolio. We may
need
to provide additional scientific, business, accounting, legal or investment
training for our hires. There is competition for highly qualified personnel.
We
may not be successful in our efforts to recruit and retain highly qualified
personnel because the expenses that we incur as a heavily regulated, publicly
held company preclude our paying as high a percentage of our total expenses
in
cash compensation for employees as the private partnerships with which we
compete. Although we have the advantage of offering equity incentive
compensation, unlike those private partnerships, we cannot permit co-investment
in our investments by our employees, and we cannot give our employees 20
percent
or higher carried interests in our investments as incentive compensation
taxable
as long-term capital gains.
The
market for venture capital investments, including tiny technology investments,
is highly competitive.
We
face
substantial competition in our investing activities from many competitors,
including but not limited to: private venture capital funds; investment
affiliates of large industrial, technology, service and financial companies;
small business investment companies; hedge funds; wealthy individuals; and
foreign investors. Our most significant competitors typically have significantly
greater financial resources than we do. Greater financial resources are
particularly advantageous in securing lead investor roles in venture capital
syndicates. Lead investors typically negotiate the terms and conditions of
such
financings. Many sources of funding compete for a small number of attractive
investment opportunities. Hence, we face substantial competition in sourcing
good investment opportunities on terms of investment that are commercially
attractive.
In
addition to the difficulty of finding attractive investment opportunities,
our
status as a regulated business development company may hinder our ability
to
participate in investment opportunities or to protect the value of existing
investments.
We
are
required to disclose on a quarterly basis the names and business descriptions
of
our portfolio companies and the type and value of our portfolio securities.
Most
of our competitors are not subject to these disclosure requirements. Our
obligation to disclose this information could hinder our ability to invest
in
some portfolio companies. Additionally, other current and future regulations
may
make us less attractive as a potential investor than a competitor not subject
to
the same regulations.
Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.
Following
an initial investment in a portfolio company, we may make additional investments
in that portfolio company as "follow-on" investments, in order to: (1) increase
or maintain in whole or in part our ownership percentage; (2) exercise warrants,
options or convertible securities that were acquired in the original or
subsequent financing; or (3) attempt to preserve or enhance the value of
our
investment.
We
may
elect not to make follow-on investments or lack sufficient funds to make
such
investments. We have the discretion to make any follow-on investments, subject
to the availability of capital resources. The failure to make a follow-on
investment may, in some circumstances, jeopardize the continued viability
of a
portfolio company and our initial investment, or may result in a missed
opportunity for us to increase our participation in a successful operation,
or
may cause us to lose some or all preferred rights pursuant to "pay-to-play"
provisions that have become common in venture capital transactions. These
provisions require proportionate investment in subsequent rounds of financing
in
order to preserve preferred rights such as anti-dilution protection, liquidation
preferences and preemptive rights to invest in future rounds of financing.
Even
if we have sufficient capital to make a desired follow-on investment, we
may
elect not to make a follow-on investment because we may not want to increase
our
concentration of risk, because we prefer other opportunities or because we
are
inhibited by compliance with business development company requirements or
the
desire to maintain our tax status.
Bank
borrowing or the issuance of debt securities or preferred stock by us, to
fund
investments in portfolio companies or to fund our operating expenses, would
make
our total return to common shareholders more volatile.
Use
of
debt or preferred stock as a source of capital entails two primary risks.
The
first is the risk of leverage, which is the use of debt to increase the pool
of
capital available for investment purposes. The use of debt leverages our
available common equity capital, magnifying the impact on net asset value
of
changes in the value of our investment portfolio. For example, a business
development company that uses 33 percent leverage (that is, $50 of leverage
per
$100 of common equity) will show a 1.5 percent increase or decline in net
asset
value for each 1 percent increase or decline in the value of its total assets.
The second risk is that the cost of debt or preferred stock financing may
exceed
the return on the assets the proceeds are used to acquire, thereby diminishing
rather than enhancing the return to common shareholders. If we issue preferred
shares or debt, the common shareholders would bear the cost of this leverage.
To
the extent that we utilize debt or preferred stock financing for any purpose,
these two risks would likely make our total return to common shareholders more
volatile. In addition, we might be required to sell investments, in order
to
meet dividend, interest or principal payments, when it might be disadvantageous
for us to do so.
As
provided in the 1940 Act and subject to some exceptions, we can issue debt
or
preferred stock so long as our total assets immediately after the issuance,
less
some ordinary course liabilities, exceed 200 percent of the sum of the debt
and
any preferred stock outstanding. The debt or preferred stock may be convertible
in accordance with SEC guidelines, which might permit us to obtain leverage
at
more attractive rates. The requirement under the 1940 Act to pay, in full,
dividends on preferred shares or interest on debt before any dividends may
be
paid on our Common Stock means that dividends on our Common Stock from earnings
may be reduced or eliminated. An inability to pay dividends on our Common
Stock
could conceivably result in our ceasing to qualify as a regulated investment
company, or RIC, under the Code, which would in most circumstances be materially
adverse to the holders of our Common Stock. As of the date hereof, we do
not
have any debt or preferred stock outstanding.
We
are authorized to issue preferred stock, which would convey special rights
and
privileges to its owners senior to those of Common Stock
shareholders.
We
are
currently authorized to issue up to 2,000,000 shares of preferred stock,
under
terms and conditions determined by our Board of Directors. These shares would
have a preference over our Common Stock with respect to dividends and
liquidation. The statutory class voting rights of any preferred shares we
would
issue could make it more difficult for us to take some actions that might,
in
the future, be proposed by the Board and/or holders of Common Stock, such
as a
merger, exchange of securities, liquidation or alteration of the rights of
a
class of our securities, if these actions were perceived by the holders of
the
preferred shares as not in their best interests. The issuance of preferred
shares convertible into shares of Common Stock might also reduce the net
income
and net asset value per share of our Common Stock upon conversion.
Loss
of status as a RIC would reduce our net asset value and distributable
income.
We
currently intend to qualify as a RIC for 2008 under the Code. As a RIC, we
do
not have to pay federal income taxes on our income (including realized gains)
that is distributed to our shareholders. Accordingly, we are not permitted
under
accounting rules to establish reserves for taxes on our unrealized capital
gains. If we failed to qualify for RIC status in 2008 or beyond, to the extent
that we had unrealized gains, we would have to establish reserves for taxes,
which would reduce our net asset value, accordingly. In addition, if we,
as a
RIC, were to decide to make a deemed distribution of net realized capital
gains
and retain the net realized capital gains, we would have to establish
appropriate reserves for taxes that we would have to pay on behalf of
shareholders. It is possible that establishing reserves for taxes could have
a
material adverse effect on the value of our Common Stock. See
"Taxation."
We
operate in a heavily regulated environment, and changes to, or non-compliance
with, regulations and laws could harm our business.
We
are
subject to substantive SEC regulations as a business development company.
Securities and tax laws and regulations governing our activities may change
in
ways adverse to our and our shareholders’ interests, and interpretations of
these laws and regulations may change with unpredictable consequences. Any
change in the laws or regulations that govern our business could have an
adverse
impact on us or on our operations. Changing laws, regulations and standards
relating to corporate governance, valuation and public disclosure, including
the
Sarbanes-Oxley Act of 2002, new SEC regulations, new federal accounting
standards and Nasdaq Global Market rules, are creating additional expense
and
uncertainty for publicly held companies in general, and for business development
companies in particular. These new or changed laws, regulations and standards
are subject to varying interpretations in many cases because of their lack
of
specificity, and as a result, their application in practice may evolve over
time, which may well result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure
and
governance practices.
We
are
committed to maintaining high standards of corporate governance and public
disclosure. As a result, our efforts to comply with evolving laws, regulations
and standards have and will continue to result in increased general and
administrative expenses and a diversion of management time and attention
from
revenue-generating activities to compliance activities. In particular, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the
related regulations regarding our required assessment of our internal controls
over financial reporting and our external auditors' audit of that assessment
has
required the commitment of significant financial and managerial resources.
Moreover,
even though business development companies are not mutual funds, they must
comply with several of the regulations applicable to mutual funds, such as
the
requirement for the implementation of a comprehensive compliance program
and the
appointment of a Chief Compliance Officer. Further, our Board members, Chief
Executive Officer and Chief Financial Officer could face an increased risk
of
personal liability in connection with the performance of their duties. As
a
result, we may have difficulty attracting and retaining qualified board members
and executive officers, which could harm our business, and we have significantly
increased both our coverage under, and the related expense for, directors'
and
officers' liability insurance. If our efforts to comply with new or changed
laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, our reputation may be harmed. Also, as business
and financial practices continue to evolve, they may render the regulations
under which we operate less appropriate and more burdensome than they were
when
originally imposed. This increased regulatory burden is causing us to incur
significant additional expenses and is time consuming for our management,
which
could have a material adverse effect on our financial performance.
Market
prices of our Common Stock will continue to be volatile.
We
expect
that the market price of our Common Stock will continue to be volatile. The
price of the Common Stock may be higher or lower than the price you pay for
your
shares, depending on many factors, some of which are beyond our control and
may
not be directly related to our operating performance. These factors include
the
following:
|
•
|
stock
market and capital markets
conditions;
|
|
•
|
internal
developments in our Company with respect to our personnel, financial
condition and compliance with all applicable
regulations;
|
|
•
|
announcements
regarding any of our portfolio
companies;
|
|
•
|
announcements
regarding developments in the nanotechnology field in
general;
|
|
•
|
environmental
and health concerns regarding nanotechnology, whether real or
perceptual;
|
• announcements
regarding government funding and initiatives related to the development
of nanotechnology;
|
•
|
general
economic conditions and trends;
and/or
|
|
•
|
departures
of key personnel.
|
We
will
not have control over many of these factors, but expect that our stock price
may
be influenced by them. As a result, our stock price may be volatile, and
you may
lose all or part of your investment.
Quarterly
results fluctuate and are not indicative of future quarterly
performance.
Our
quarterly operating results fluctuate as a result of a number of factors.
These
factors include, among others, variations in and the timing of the recognition
of realized and unrealized gains or losses, the degree to which we and our
portfolio companies encounter competition in our markets and general economic
and capital markets conditions. As a result of these factors, results for
any
one quarter should not be relied upon as being indicative of performance
in
future quarters.
To
the extent that we do not realize income or choose not to retain after-tax
realized capital gains, we will have a greater need for additional capital
to
fund our investments and operating expenses.
As
a RIC,
we must annually distribute at least 90 percent of our investment company
taxable income as a dividend and may either distribute or retain our realized
net capital gains from investments. As a result, these earnings may not be
available to fund investments. If we fail to generate net realized capital
gains
or to obtain funds from outside sources, it would have a material adverse
effect
on our financial condition and results of operations as well as our ability
to
make follow-on and new investments. Because of the structure and objectives
of
our business, we generally expect to experience net operating losses and
rely on
proceeds from sales of investments, rather than on investment income, to
defray
a significant portion of our operating expenses. These sales are unpredictable
and may not occur. In addition, as a business development company, in order
to
pay dividends or repurchase shares, we are generally required to maintain
a
ratio of at least 200 percent of total assets to total borrowings and preferred
stock, which may restrict our ability to borrow to fund these requirements.
Lack
of capital could curtail our investment activities or impair our working
capital.
Investment
in foreign securities could result in additional risks.
We
may
invest in foreign securities, and we currently have one investment in a foreign
security. When we invest in securities of foreign issuers, we may be subject
to
risks not usually associated with owning securities of U.S. issuers. These
risks
can include fluctuations in foreign currencies, foreign currency exchange
controls, social, political and economic instability, differences in securities
regulation and trading, expropriation or nationalization of assets and foreign
taxation issues. In addition, changes in government administrations or economic
or monetary policies in the United States or abroad could result in appreciation
or depreciation of our securities and could favorably or unfavorably affect
our
operations. It may also be more difficult to obtain and enforce a judgment
against a foreign issuer. Any foreign investments made by us must be made
in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
Although
most of our investments are denominated in U.S. dollars, our investments
that
are denominated in a foreign currency are subject to the risk that the value
of
a particular currency may change in relation to the U.S. dollar, in which
currency we maintain financial statements and valuations. Among the factors
that
may affect currency values are trade balances, the level of short-term interest
rates, differences in relative values of similar assets in different currencies,
long-term opportunities for investment and capital appreciation and political
developments.
Risks
related to this offering.
Investing
in our stock is highly speculative and an investor could lose some or all
of the
amount invested.
Our
investment objective and strategies result in a high degree of risk in our
investments and may result in losses in the value of our investment portfolio.
Our investments in portfolio companies are highly speculative and, therefore,
an
investor in our Common Stock may lose his or her entire investment. The value
of
our Common Stock may decline and may be affected by numerous market conditions,
which could result in the loss of some or all of the amount invested in our
Common Stock. The securities markets frequently experience extreme price
and
volume fluctuations that affect market prices for securities of companies
in
general, and technology and very small capitalization companies in particular.
Because of our focus on the technology and very small capitalization sectors,
and because we are a very small capitalization company ourselves, our stock
price is especially likely to be affected by these market conditions. General
economic conditions, and general conditions in tiny technology in general
and
nanotechnology in particular and in the semi-conductor and information
technology, life sciences, materials science and other high technology
industries, may also affect the price of our Common Stock.
We
will have discretion over the use of proceeds of this
offering.
We
will
have flexibility in applying the proceeds of this offering. We may pay operating
expenses, including due diligence expenses on potential new investments,
from
the net proceeds. Our ability to achieve our investment objective may be
limited
to the extent that the net proceeds of the offering, pending full investment,
are used to pay operating expenses.
Our
shares might trade at discounts from net asset value or at premiums that
are
unsustainable over the long term.
Shares
of
business development companies like us may, during some periods, trade
at prices
higher than their net asset value and during other periods, as frequently
occurs
with closed-end investment companies, trade at prices lower than their
net asset
value. The possibility that our shares will trade at discounts from net
asset
value or at premiums that are unsustainable over the long term are risks
separate and distinct from the risk that our net asset value per share
will
decrease. The risk of purchasing shares of a business development company
that
might trade at a discount or unsustainable premium is more pronounced for
investors who wish to sell their shares in a relatively short period of
time
because, for those investors, realization of a gain or loss on their investments
is likely to be more dependent upon changes in premium or discount levels
than
upon increases or decreases in net asset value per share. Our Common Stock
may
not trade at a price higher than or equal to net asset value per share.
On March
31, 2008, our stock closed at $7.13 per share, a premium of $1.27 over
our net
asset value per share of $5.86 as of March 31, 2008.
The
Board of Directors intends to grant stock options to our
employees pursuant to the Company’s Equity Incentive Plan. When exercised, these
options may have a dilutive effect on existing
shareholders.
The
Board
of Directors intends to grant stock options to our employees pursuant to
the
Company's Equity Incentive Plan. Pursuant to the plan, the Company’s Board of
Directorsmay grant options from time to time for up to 20 percent of the
total
shares of stock issued and outstanding. As of the date hereof, options
have been
granted to all 10 of our officers and to two non-officier employees. When
options are exercised, net asset value per share will decrease if the net
asset
value per share at the time of exercise is higher than the exercise price.
Alternatively, net asset value per share will increase if the net asset
value
per share at the time of exercise is lower than the exercise price. Therefore,
existing shareholders will be diluted if the net asset value per share
at the
time of exercise is higher than the exercise price of the options. Even
though
issuance of shares pursuant to exercises of options increases the Company's
capital, and regardless of whether such issuance results in increases or
decreases in net asset value per share, such issuance results in existing
shareholders owning a smaller percentage of the shares
outstanding.
You
have no right to require us to repurchase your shares.
You
do
not have the right to require us to repurchase your shares of Common
Stock.
FORWARD-LOOKING
INFORMATION
This
Prospectus may contain "forward-looking statements" based on our current
expectations, assumptions and estimates about us and our industry. These
forward-looking statements involve risks and uncertainties. Words such as
"believe," "anticipate," "estimate," "expect," "intend," "plan," "will,"
"may,"
"might," "could," "continue" and other similar expressions identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements as a
result
of several factors more fully described in "Risk Factors" and elsewhere in
this
Prospectus. The forward-looking statements made in this Prospectus relate
only
to events as of the date on which the statements are made. We undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
You
should understand that under Sections 27A(b)(2)(B) of the Securities Act
of 1933
and Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
may
not as a technical matter apply to statements made in connection with this
offering.
USE
OF PROCEEDS
We
estimate the total net proceeds of the offering to be up to $21,296,000
based on
the last reported price for our Common Stock on May 28, 2008 of
$7.98.
We
expect
to invest or reserve for potential follow-on investment the net proceeds
of any
offering within two years from the completion of such offering. The net proceeds
of this offering invested after two years will only be used for follow-on
investments. Reserves for follow-on investments in any particular initial
investment may be no more than the greater of twice the investment to date
or
five times the initial investment in the case of seed-stage investments,
though
we may invest more than the amount reserved for this purpose in any particular
portfolio holding. Although we intend to make our initial investments
exclusively in companies that we believe are involved significantly in tiny
technology, we may also make follow-on investments in existing portfolio
companies involved in other technologies. Pending investment in portfolio
companies, we intend to invest the net proceeds of any offering of our Common
Stock in time deposits and/or income-producing securities that are issued
or
guaranteed by the federal government or an agency of the federal government
or
a
government-owned corporation, which may well yield less than our operating
expense ratio. We
may
also use the proceeds of this offering for operating expenses, including
due
diligence expenses on potential investments. Our portfolio companies rarely
pay
us dividends or interest, and we do not generate enough income from fixed
income
investments to meet all of our operating expenses. If
we pay
operating expenses from the proceeds, it will reduce the net proceeds of
the
offering that we will have available for investment.
PRICE
RANGE OF COMMON STOCK
Our
Common Stock is traded on the Nasdaq Global Market under the symbol "TINY."
The
following table sets forth for the quarters indicated, the high and low sale
prices on the Nasdaq Global Market per share of our Common Stock and the
net
asset value and the premium or discount from net asset value per share at
which
the shares of Common Stock were trading, expressed as a percentage of net
asset
value, at each of the high and low sale prices provided.
|
|
Market
Price
|
|
Net
Asset Value
("NAV")
Per Share
at
End of Period
|
Premium
or (Discount) as a
%
of NAV
|
Quarter
Ended
|
|
High
|
|
Low
|
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
16.10
|
|
12.75
|
|
5.60
|
187.5
|
127.7
|
June
30, 2006
|
|
14.26
|
|
9.57
|
|
5.54
|
157.4
|
72.7
|
September
30, 2006
|
|
12.99
|
|
9.38
|
|
5.54
|
134.5
|
69.3
|
December
31, 2006
|
|
15.16
|
|
11.80
|
|
5.42
|
179.7
|
117.7
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
13.58
|
|
11.00
|
|
5.27
|
157.7
|
108.7
|
June
30, 2007
|
|
14.32
|
|
11.01
|
|
5.54
|
158.5
|
98.7
|
September
30, 2007
|
|
11.79
|
|
9.51
|
|
5.69
|
107.2
|
67.1
|
December
31, 2007
|
|
11.10
|
|
8.00
|
|
5.93
|
87.2
|
34.9
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
8.98
|
|
5.76
|
|
5.86
|
53.2
|
(1.7)
|
Historically,
the shares of our Common Stock have traded at times at a discount and at
other
times at a premium to net asset value. The last reported price for our
Common
Stock on May 28, 2008 was $7.98 per share. As of May 27, 2008, we had
approximately 136 shareholders of record.
BUSINESS
We
are a
venture capital company specializing in tiny technology. We were incorporated
as
a New York corporation in 1981. In 1995, we elected to be regulated as
a
business development company under the 1940 Act. Our investment objective
is to
achieve long-term capital appreciation, rather than current income, by
making
venture capital investments in early-stage companies. Although our portfolio
includes one insignificant non-tiny technology investment made prior to
2001, we
now make our initial investments exclusively in tiny technology companies.
By
making these investments, we seek to provide our shareholders with a specific
focus on tiny technology through a portfolio of venture capital investments
that
address a variety of markets and products. We believe that we are the only
publicly traded business development company making initial venture capital
investments exclusively in tiny technology.
Nanotechnology,
microsystems and microelectromechanical systems, (MEMS), are often referred
to
collectively as "tiny technology," or "small technology," by scientists and
others in this field. Nanotechnology in particular is multidisciplinary and
widely applicable, and it incorporates technology that is significantly smaller
than is currently in widespread commercial use. Microsystems are measured
in
micrometers, which are units of measurement in millionths of a meter.
Nanotechnology is measured in nanometers, which are units of measurement
in
billionths of a meter. Because it is a new field, tiny technology, and
particularly nanotechnology, has significant scientific, engineering, regulatory
and commercialization risks.
Except
for our holdings of U.S. treasury securities for liquidity, all of our
current
investments are in privately held, venture-capital-backed companies. All
of our
active portfolio companies are involved in tiny technology. We define active
portfolio companies as those companies that are currently operating and
are not
in the process of unwinding their businesses. Tiny technology, particularly
nanotechnology, is found in many industries, including pharmaceuticals,
medical
devices, electronics and cleantech, which includes alternative-energy and
energy-saving products. A subset of our tiny-technology companies are focused
on
the commercialization of cleantech products, which we refer to as our “Tiny Tech
for Cleantech” portfolio. The use of nanotechnology-enabled advanced materials
for clean energy in particular is an area of increasing global interest,
and
these types of materials are the cornerstones of new generations of
photovoltaics, batteries, solid-state lighting, fuel cells, bio-fuels and
other
energy-related applications that are the focus of a number of recently
funded
early-stage companies. Although we have not specifically targeted investments
in
cleantech companies, as of March 31, 2008, eight of our 31 active portfolio
companies were in our "Tiny Tech for Cleantech" portfolio. These companies
represented 35.5 percent of the value of the active companies in our portfolio
as of March 31, 2008.
As
a
venture capital company, we make it possible, through the ownership of our
shares, for our shareholders to participate in this emerging field of tiny
technology at an earlier stage than would typically be possible for them.
By
making investments in companies that control intellectual property relevant
to
tiny technology, we are building a portfolio that we believe will be difficult
to replicate, as we believe it will likely become increasingly difficult
to
create new foundational intellectual property in nanotechnology.
As
is
usual in the venture capital industry, our venture capital investments are
primarily in convertible preferred stock, which is usually the most senior
security in a portfolio company’s equity capital structure until the company has
substantial revenues, and which gives us seniority over the holders of Common
Stock (usually including the founders) while preserving fully our participation
in the upside potential of the portfolio company through the conversion feature
and, in many cases, a dividend right payable in kind (which increases our
participation in the portfolio company) or potentially in cash.
We
have a
long history of investing in venture capital and of business development.
Our
approach is traditional, including a patient examination of available early
stage opportunities, thorough due diligence and close involvement with
management. Unlike most private equity and venture capital funds, we will
not be
subject to any requirement to return capital to investors. Such requirements
typically stipulate that these funds can only be invested once and, together
with any capital gains on such investment, must be returned to investors,
net of
fees and carried interest in profits, after a pre-agreed time period. These
provisions may cause private equity and venture capital funds to seek
investments that are likely to be able to be sold relatively quickly or to
seek
returns on their investments through mergers, public equity offerings or
other
liquidity events more quickly than they otherwise might. Because we typically
invest as part of a syndicate of venture capital firms, their time horizons
often determine ours, though we may provide seed capital before forming a
syndicate with other investors, or maintain our investment in an investee
company after it goes public, even after our co-investors sell or distribute
their shares.
In
addition, to the investor, we offer:
|
·
|
a
portfolio consisting of investments that are generally available
only to a
small, highly specialized group of professional venture capital
firms as
investors;
|
|
·
|
a
qualified team of professionals, including six full-time members
of
management, five of whom are designated as Managing Directors:
Charles E.
Harris, Douglas W. Jamison, Alexei A. Andreev, Michael A. Janse
and Daniel
B. Wolfe, and a Vice President, Misti Ushio, to evaluate and monitor
investments. One of our directors is also a consultant to us, Lori
D.
Pressman. These seven professionals collectively have expertise
in venture
capital, intellectual property and tiny technology to evaluate
and monitor
investments;
|
|
·
|
the
opportunity to benefit from our experience in a new field expected
to
permeate a variety of industries; and
|
|
·
|
through
the ownership of our publicly traded shares, a measure of liquidity
not
available in typical underlying venture capital portfolio
investments.
|
While
we
intend to make initial investments exclusively in companies that we believe
are
involved significantly in tiny technology, we may also make follow-on
investments in our one existing non-tiny technology portfolio company.
The
balance of our funds is primarily invested in short-term U.S. government
and
agency securities. We are an internally managed investment company because
our
officers and employees, under the general supervision of our Board of Directors,
control our operations. We have no investment adviser.
Subject
to our compliance with business development company and tax code requirements,
there are no limitations on the types of securities or other assets, foreign
or
domestic, in which we may invest. Investments may include the following:
|
·
|
equity,
equity-related securities (including warrants) and debt with equity
features from either private or public issuers, whether in corporate,
partnership or other form, including development stage or start-up
entities;
|
|
·
|
debt
obligations of all types having varying terms with respect to security
or
credit support, subordination, purchase price, interest payments
and
maturity; and
|
|
·
|
to
a limited extent, intellectual property, including patents, research
and
development in technology or product development that may lead
to patents
or other marketable technology.
|
Neither
our investments nor an investment in our securities constitutes a balanced
investment program. We have been and will continue to be risk seeking rather
than risk averse in our investment approach. We reserve the fullest possible
freedom of action regarding the types of investments we make and our
relationship with our portfolio companies, subject to our certificate of
incorporation, applicable law and regulations, and policy statements described
herein. Our tiny technology investment policy is not a "fundamental policy"
under the 1940 Act and, accordingly, may be changed without shareholder
approval, although we will give shareholders at least 60 days prior written
notice of any change.
Our
business is subject to federal regulation under the 1940 Act, under which
we
have elected to operate as a business development company. As a business
development company, we are subject to regulatory requirements, the most
significant of which relate to our investments and borrowings. The 1940 Act
provides that we may not make an investment in non-qualifying assets unless
at
the time at least 70 percent of the value of our total assets (measured as
of
the date of our most recently filed financial statements) consists of qualifying
assets. We must also maintain a coverage ratio of assets to senior securities
(such as debt and preferred stock) of at least 200 percent immediately after
giving effect to the issuance of any senior securities. We are also required
to
offer managerial assistance to our portfolio companies, in addition to our
investment. For tax purposes, we are a RIC under the Code.
We
believe that increasing the size of our assets should lower our expenses
as a
proportion of average net assets because some of our costs, such as
administration and public company expenses, are fixed and can be spread over
a
larger asset base and will decline as a percentage of assets as our assets
increase. In addition, with more assets, we expect the average size of our
investments to increase. Each due diligence investigation entails expenses
whether or not we complete the transaction, and the cost of due diligence,
negotiation and documentation of our investments does not vary proportionately
with the size of the investment or intended investment.
Some
expenses are expected to increase as new investments are made. We plan to
add
personnel to enable us to enlarge the scope of our activities and our expertise
in tiny technology, and our hiring of new employees will increase with more
assets under management. We also believe that a larger number of outstanding
shares and a larger number of beneficial owners of shares could increase
the
level of our visibility and improve the trading liquidity of our shares on
the
Nasdaq Global Market. We may not realize any of these benefits.
Historical
Investment Track Record
We
incorporated under the laws of the State of New York in August 1981. In
1983, we
invested in Otisville BioTech, Inc. Since our investment in Otisville in
1983
through March 31, 2008, we have made a total of 81 venture capital investments,
including four private placement investments in securities of publicly
traded
companies (PIPES). We have exited 47 of these 81 investments, realizing
total
proceeds of $143,895,288 on our invested capital of $56,349,559. As measured
from first dollar in to last dollar out, the average and median holding
periods
for these 47 investments were 3.77 years and 3.20 years, respectively.
As
measured by the 165 separate rounds of investment within these 47 investments,
the average and median holding periods for the 165 separate rounds of investment
were 2.93 years and 2.64 years, respectively. Nineteen of the 47 investments
sold were profitable. The average and median holding periods, as measured
from
first dollar in, of these 19 profitable investments were 4.03 years and
3.35
years, respectively. Of these 19 profitable investments, seven were profitable
sales after initial public offerings (IPOs), eight were profitable mergers
and
acquisitions transactions and four were profitable sales of PIPES. As measured
from first dollar in, the average holding period for profitable exits after
IPOs, mergers and acquisitions transactions and PIPES were 4.26 years,
4.06
years and 1.07 years, respectively.
Twenty-eight
of the 47 investments sold were unprofitable. Twenty-seven of these investments
were unprofitable non-IPO disposals, and we sold one investment, Princeton
Video
Image, Inc., that had had an IPO, at a loss. As measured from the first
dollar
in, the average holding period for the 27 unprofitable non-IPO exits was
3.49
years and the holding period for the unprofitable IPO exit was 7.74 years.
Below
is a list of holding periods for our eight historical IPOs. As measured
from
first dollar in to IPO date, the average and median holding periods were
4.56
years and 3.88 years, respectively.
Historical
IPOs
|
Holding
Period to IPO
(yrs)
|
|
|
Alliance
Pharmaceutical Corporation
|
6.39
|
Ag
Services of America, Inc.
|
1.39
|
Molten
Metal Technology, Inc.
|
3.25
|
Nanophase
Technologies Corporation
|
3.07
|
Princeton
Video Image, Inc. (formerly Princeton Electronic
Billboard)
|
6.63
|
SciQuest,
Inc. (formerly BioSupplyNet)
|
3.09
|
Genomica
Corporation
|
4.52
|
NeuroMetrix,
Inc.
|
8.14
|
Average
|
4.56
|
Median
|
3.88
|
In
1994,
we invested in our first nanotechnology company, Nanophase Technologies
Corporation. Recognizing the potential of tiny technology, we continued
to
monitor developments in the field, and since 2001 we have made tiny technology
the exclusive focus of our initial investment activity. From August 2001
through
March 2008, all 39 of our initial investments have been in companies involved
in
the development of products and technologies based on tiny technology.
At
March
31, 2008, the remaining tiny technology venture capital investments in
our
portfolio, including one we invested in initially in 1994, were valued
at
$83,095,644, or 60.9 percent of our net assets, including net unrealized
depreciation of $900,748. At March 31, 2008, we had 31 active tiny technology
companies in our portfolio, and from first dollar in, the average and median
holding periods for these 31 venture capital investments were 3.16 years
and
2.87 years, respectively.
Tiny
Technology Companies in Our Active Portfolio as of
3-31-08
|
Holding
Period (yrs)
|
|
|
Adesto
Technologies Corporation
|
1.11
|
Ancora
Pharmaceuticals Inc.
|
0.91
|
BioVex
Group, Inc.
|
0.51
|
BridgeLux,
Inc. (formerly eLite Optoelectronics, Inc.)
|
2.87
|
Cambrios,
Inc.
|
3.39
|
CFX
Battery, Inc. (formerly Lifco, Inc.)
|
0.78
|
Crystal
IS, Inc.
|
3.53
|
CSwitch
Corporation
|
3.85
|
D-Wave
Systems, Inc.
|
1.95
|
Ensemble
Discovery Corporation
|
0.82
|
Innovalight,
Inc.
|
1.95
|
Kereos,
Inc.
|
2.87
|
Kovio,
Inc.
|
2.39
|
Mersana
Therapeutics, Inc. (formerly Nanopharma Corporation)
|
6.13
|
Metabolon,
Inc.
|
2.22
|
Molecular
Imprints, Inc.
|
4.01
|
NanoGram
Corporation
|
4.92
|
Nanomix,
Inc.
|
3.28
|
Nanosys,
Inc.
|
4.99
|
Nantero,
Inc.
|
6.65
|
NeoPhotonics
Corporation 2004
|
4.32
|
Nextreme
Thermal Solutions, Inc.
|
3.32
|
Phoenix
Molecular, Inc.
|
0.46
|
Polatis,
Inc. (formerly Continuum Photonics, Inc.)
|
5.77
|
PolyRemedy,
Inc.
|
0.14
|
Questech
Corporation (formerly Intaglio, Ltd.)
|
13.86
|
Siluria
Technologies, Inc.
|
0.45
|
SiOnyx,
Inc.
|
1.89
|
Solazyme,
Inc.
|
3.35
|
Starfire
Systems, Inc.
|
3.90
|
Xradia,
Inc.
|
1.25
|
|
|
Average
|
3.16
|
Median
|
2.87
|
Tiny
Technology
Tiny
technology refers to nanotechnology, microsystems and MEMS, a variety of
enabling technologies with critical dimensions below 100 micrometers. In
our
view, tiny technology is neither an industry nor a single technology. Tiny
technology manifests itself in tools, materials, systems and devices that
address broad markets, including instrumentation, alternative energy,
electronics, photonics, computing, medical devices, pharmaceutical
manufacturing, drug delivery and drug discovery. The development and
commercialization of tiny technology often require the integration of multiple
disciplines, including biology, physics, chemistry, materials science, computer
science and the engineering sciences.
Examples
of tiny technology-enabled products currently on the market are quite diverse.
They include sensors, accelerometers used in automobiles to sense impact
and
deploy airbags, cosmetics with ingredients that block ultraviolet light but
are
invisible to the human eye, nanoclays used for strength in the running boards
of
minivans, textiles with liquid-stain repellant surfaces, fast-acting painkillers
and pharmaceutical therapeutics.
The
following is a summary of the products currently released or under development
by our active portfolio companies:
Tiny
Technology Companies in Our Portfolio as of 3-31-08
|
Products
Released / Available for Purchase
|
|
Products
in Development
|
Adesto
Technologies Corporation
|
|
|
Semiconductor
products
|
Ancora
Pharmaceuticals Inc.
|
Custom
carbohydrate synthesis projects
|
|
Synthetic
carbohydrates for
Pharmaceutical
markets
|
BioVex
Group, Inc.
|
|
|
Novel
biologics for treatment of cancer and infectious
disease
|
BridgeLux,
Inc. (formerly eLite Optoelectronics, Inc.)
|
High
brightness LEDs
|
|
Additional
colors and types of HB-LEDs
|
Cambrios,
Inc.
|
|
|
Transparent
conductors
|
Crystal
IS, Inc.
|
Aluminum
Nitride Substrates
|
|
High-performance
UV Devices
|
CFX
Battery, Inc.
(formerly
Lifco, Inc.)
|
|
|
Primary
and rechargeable batteries
|
CSwitch
Corporation
|
|
|
High-bandwidth
configurable switches
|
D-Wave
Systems, Inc.
|
|
|
High-speed
analog / quantum computing
|
Ensemble
Discovery Corporation
|
|
|
DNA
Programmed chemistry for discovery of new therapeutics
|
Innovalight,
Inc.
|
|
|
Thin-film
photovaltics modules
|
Kereos,
Inc.
|
|
|
Emulsion-based
targeted therapeutics and molecular imaging agents
|
Kovio,
Inc.
|
|
|
Semiconductor
products using printed electronics
|
Mersana
Therapeutics, Inc. (formerly Nanopharma Corporation)
|
|
|
Oncology-focused
therapeutic products
|
Metabolon,
Inc.
|
Metabolomics
profiling services, Mselect and MProve Clinical
|
|
Biomarker
discovery and diagnostic tools
|
Molecular
Imprints, Inc.
|
Tools
for nanoimprint lithography
|
|
Production
scale tools for nanoimprint lithography
|
NanoGram
Corporation
|
Tools
and service business for discovery and production of
nanoparticles
|
|
Application
specific nanoparticles
|
Nanomix,
Inc.
|
Carbon-nanotube
based hydrogen sensors.
|
|
Carbon-nanotube
based sensors
|
Nanosys,
Inc.
|
Nanotechnology-enabled
products for optical and life science applications
|
|
Flexible
electronic devices, non-volatile memory, consumables for life
sciences and
fuel cells
|
Nantero,
Inc.
|
|
|
Carbon-nanotube
based non-volatile memory
|
NeoPhotonics
Corporation
|
Active
and passive optical components for optical networking
|
|
Additional
products for optical
networking
|
Tiny
Technology Companies in Our Portfolio as of 3-31-08
|
Products
Released / Available for Purchase
|
|
Products
in Development
|
|
|
|
|
Nextreme
Thermal Solutions, Inc.
|
Embedded
thermoelectric cooler (eTEC) and UPF Optocooler and cooling LEDs
and laser
diodes
|
|
Thermoelectric
devices for thermal management of integrated circuits and for
power
generation
|
Phoenix
Molecular, Inc.
|
|
|
Products
for the separation of chiral molecules
|
Polatis,
Inc. (formerly Continuum Photonics, Inc.)
|
Microelectromechanical-enabled
optical switches
|
|
Additional
optical switching products
|
PolyRemedy,
Inc.
|
|
|
Robotic
manufacturing platform for wound treatment patches
|
Questech
Corporation (formerly Intaglio, Ltd.)
|
Decorative
tiles made of stone and microscale-metal materials
|
|
|
Siluria
Technologies, Inc.
|
|
|
Nanomaterial-enabled
products for a diverse set of markets
|
SiOnyx,
Inc.
|
|
|
Optical
detectors for detection and imaging of visible and infrared
light
|
Solazyme,
Inc.
|
Algae-produced
oil for biodiesel
|
|
Algae-produced
products including nutraceuticals, industrial chemicals and
energy
|
Starfire
Systems, Inc.
|
Ceramic
brake rotors and pads and silicon-carbide polymers
|
|
Ceramic-based
parts for applications in electronics, aerospace and automotive
industries
|
Xradia,
Inc.
|
3-D
x-ray transmission and x-ray fluorescence microscopes and
optics
|
|
Additional
x-ray imaging tools
|
|
|
|
|
Within
tiny technology, nanotechnology refers to devices and processes with critical
dimensions below 0.1 micron, equal to 100 nanometers. A nanometer is 0.000000001
meter, or one billionth of a meter. It is at the scale below 100 nanometers,
the
nanoscale, that quantum effects begin to dominate classical macroscale physics.
At the nanoscale, size- and shape-dependent properties of materials allow
previously unattainable material and device performance. Microsystems and
MEMS
both refer to materials, devices and processes that are on a micrometer size
scale. A micrometer, which is also referred to as a micron, is 0.000001 meter,
or one millionth of a meter. In practice, any device, or device enabled by
components, in a size range from 100 microns down to 0.1 micron may be
considered "micro."
Nanotechnology
There
are
various definitions of nanotechnology. Regardless of the definition used,
the
technology being defined qualifies as tiny technology. A commonly used measure
of nanotechnology includes all materials, devices and processes with critical
dimensions below 100 nanometers. Nanotechnology is defined by the U.S.
Government’s National Nanotechnology Initiative as research and technology
development at the atomic, molecular or macromolecular levels, in the length
scale of approximately 1 - 100 nanometer range, to provide a fundamental
understanding of phenomena and materials at the nanoscale and to create and
use
structures, devices and systems that have novel properties and functions
because
of their small and/or intermediate size.
The
nanoscale is the scale at which quantum effects begin to dominate classical
macroscale physics. At the nanoscale, size- and shape-dependent properties
of
materials allow heretofore unattainable material and device performance.
Nanotechnology science and its implications are currently the subject of
intense
research and development efforts in governmental, academic and corporate
sectors, in the United States and in
other
countries.
Government
research funding and patenting activity, prerequisites to successful
commercialization of nanotechnology, have been growing rapidly in recent
years.
Currently, researchers in the field are collaborating with entrepreneurs
and
venture capitalists to form companies around nanotechnology platforms. The
first
generation of nanotechnology products consists of instrumentation that permits
visualization and manipulation of matter at the nanoscale, as well as passive
nanostructures such as coatings, nanoparticles and polymers. Examples of
commercial instrumentation include nanoimprint lithography equipment, new
variations of the atomic force microscope and highly sensitive gene and protein
detecting arrays. Examples of commercial nanostructures include cosmetics
with
ingredients that block ultraviolet light but that are invisible to the human
eye, nanoclays used for strength in the running boards of minivans, textiles
with liquid-stain repellant surfaces and fast-acting painkillers.
We
believe that the next generation of nanotechnology products will likely consist
of active nanostructures, including transistors, targeted drugs and chemicals,
actuators and adaptive structures. Examples of products being developed include
semiconductor nanowires that act as tiny transistors; functionalized,
drug-delivering polymers that allow the release of therapeutics to be controlled
by temperature, pH or a magnetic field at specified locations within the
body;
and engineered membrane structures for filtration.
We
project that longer-term product opportunities may include integrated
nanosystems involving heterogeneous nanocomponents and various assembling
techniques. Patent applications explaining the science of these discoveries
have
recently been filed, and the first commercial entities formed to develop
these
technologies are emerging from universities, federal government labs and
industrial research centers. Future product opportunities may include
exponentially denser and faster electronic devices, with individual molecules
acting as transistors; tissues and organs engineered from self-assembling
polymers that form biomimetic structures; and new forms of computing developed
by exploiting the superposition of quantum particles.
Microsystems
Microsystems
are similar to MEMS, but without mechanical parts. Microsystems are microscale
machines that sense information from the environment and provide a response
to
it. A microsystem often integrates mechanical, fluidic, optical and pneumatic
components into a single system.
Examples
of two established microsystem technologies include microarrays and
lab-on-a-chip. Microarrays can identify thousands of genes simultaneously
and
usually perform one type of analysis multiple times. Lab-on-a-chip is a small
chip containing microfluidic channels that quickly separate liquids and gases
in
order to permit microsensors to analyze the properties of the liquids and
gases.
The following are additional fields in which microsystems are currently being
used:
|
·
|
Military/Aerospace
— telemetry, communications, guidance systems, control circuitry
and
avionics.
|
|
·
|
Geophysical
Exploration — seismic data acquisition and geophysical measurement
equipment.
|
|
·
|
Medical
Instrumentation — instrument motor controls and diagnostic
devices.
|
|
·
|
Satellite
Systems — power monitoring and control
circuits.
|
|
·
|
Industrial
Electronic Systems — measurement and diagnostics on rotating
machinery.
|
|
·
|
Opto-Electronics
— sub-miniature temperature controls and laser diode drivers for
data
transmission.
|
MEMS
MEMS
often refers to three-dimensional devices with features between one and 100
microns that integrate electrical and mechanical structures. MEMS devices
often
contain a combination of sensors, actuators, mechanical structures and
electronics that detect or respond to thermal, biological, chemical or optical
information. To date, most commercial MEMS devices are batch fabricated out
of
silicon, using techniques based on standard semiconductor processes. Examples
of
devices incorporating MEMS technology include airbag release systems, smart
pens
for digital signatures, the Sony AIBO™ entertainment robot and Texas
Instruments’ Digital Light Processing Cinema™ system.
Although
the practical application of tiny technology requires great expertise to
implement in manufacturing processes, we believe that tiny technology’s broad
applicability potentially presents significant and diverse market opportunities.
Our strategy is to invest in what we believe to be the best of these tiny
technology companies in which we have the opportunity to invest, with emphasis
on nanotechnology companies, assuming that we regard the terms of the investment
to be acceptable.
GENERAL
DESCRIPTION OF OUR PORTFOLIO COMPANIES
The
following are brief descriptions of each portfolio company in which we
were
invested as of March 31, 2008. The portfolio companies are presented in
three
categories: companies where we directly or indirectly own more than 25
percent
of the outstanding voting securities of the portfolio company; companies
where
we directly or indirectly own five percent to 25 percent of the outstanding
voting securities of the portfolio company or where we hold one or more
seats on
the portfolio company’s Board of Directors and, therefore, are deemed to be an
affiliated person under the 1940 Act; and companies where we directly or
indirectly own less than five percent of the outstanding voting securities
of
the portfolio company and where we have no other affiliations. The value
described below for each portfolio company is its fair value as determined
by
the Valuation Committee of our Board of Directors. Each portfolio company
that
we believe is not significantly involved in tiny technology is designated
by an
asterisk (*).
Controlled
Affiliated Companies:
Evolved
Nanomaterial Sciences, Inc. (ENS),
was
located at 675 Massachusetts Avenue, Cambridge, Massachusetts 02139, and
was
developing
a number of nanotechnology-enabled approaches for the resolution of chiral
molecules. As of March 31, 2008, we held 5,870,021 shares of Series A
Convertible Preferred Stock (representing 52.10 percent of the total shares
of
Series A Convertible Preferred Stock Outstanding) of ENS. On September
30, 2007,
ENS filed for Chapter 7 bankruptcy. As of the date above, our Valuation
Committee valued the Series A Convertible Preferred Stock held by us at
$0.
Phoenix
Molecular, Inc.,
located
at 111 West 57th
Street,
New York, New York 10019, is developing a number of nanotechnology-enabled
approaches for the resolution of chiral molecules. As of March 31, 2008,
we held
1,000 shares of Common Stock (representing 100 percent of the total shares
of
Common Stock outstanding) of Phoenix Molecular and $75,000 in Convertible
Bridge
Notes (representing 100 percent of the total Convertible Bridge Notes
outstanding). As of the date above, our Valuation Committee valued the
total
amount of securities of Phoenix Molecular held by us at $77,011. Daniel
B. Wolfe
and Douglas W. Jamison serve as Directors of the company.
SiOnyx,
Inc.,
located
at 100 Cummings Center, Beverly, Massachusetts 01915, is developing
silicon-based optoelectronic products enabled by its proprietary material,
"Black Silicon." As of March 31, 2008, we held 233,499 shares of Series
A
Convertible Preferred Stock (representing 100 percent of the total shares
of
Series A Convertible Preferred Stock outstanding), 2,966,667 shares of
Series
A-1 Convertible Preferred Stock (representing 42.38 percent of the total
shares
of Series A-1 Convertible Preferred Stock outstanding), and 4,207,537 shares
of
Series A-2 Convertible Preferred Stock (representing 22.23 percent of the
total
shares of Series A-2 Convertible Preferred Stock) of SiOnyx. As
of the
date above, our Valuation Committee valued the total amount of shares of
SiOnyx
held by us at $4,304,616. The
Chief
Executive Officer of the company is Stephen D. Saylor. Charles E. Harris
serves
as a Director of the company, and Daniel B. Wolfe serves as an observer
to the
Board of Directors of the company.
Non-Controlled
Affiliated Companies:
Adesto
Technologies Corporation,
located
at 1225 Innsbruck Drive, Sunnyvale, California 94089, is a "fables" company
that
develops semiconductor products. As of March 31, 2008, we held 6,547,619
shares
of Series A Convertible Preferred Stock (representing 18.72 percent of
the total
shares of Series A Convertible Preferred Stock outstanding) of Adesto.
As of the
above date, our Valuation Committee valued the total amount of shares of
Adesto
held by us at $2,200,000. The Chief Executive Officer of the company is
Narbeh
Derhacobian. Michael A. Janse serves as a Director of the
company.
Ancora
Pharmaceuticals Inc.,
located at 200 Boston Avenue, Medford, Massachusetts 02155, is
developing unique carbohydrate-based therapeutics
including immunomodulatory drugs such as vaccines. Ancora also works with
pharmaceutical and industrial partners to provide customized
carbohydrate material. As
of
March
31,
2008,
we held
909,091 shares of Series B Convertible Preferred Stock (representing 71.23
percent of the total shares of Series B Convertible Preferred Stock outstanding)
of Ancora, as well as warrants to purchase 754,717 shares of Series B
Convertible Preferred Stock of the company at $1.06 per share.
As of
the above date, our Valuation Committee valued the total
amount of securities of
Ancora
held by us at $647,364. The Chief Executive Officer of the company is John
Pena.
Douglas
W. Jamison
serves
as a Director
of the
company.
Misti
Ushio serves as an observer to the Board of Directors of the
company.
BridgeLux,
Inc.,
located at 1170 Sonora Court, Sunnyvale, California 94086, is developing
high-power indium gallium nitride light emitting diodes that are used in
various
solid state lighting, mobile appliance, signage, and automotive applications.
BridgeLux
aims to use its proprietary designs and processes to manufacture high-power
light emitting diodes in order to decrease the cost of production and increase
adoption of solid-state lighting solutions in residential and commercial
applications. The
company’s main competition include companies that manufacture and sell light
emitting diodes such as Cree, Inc., Philips Lumileds Lighting Company,
and
Nichia Corporation. The
company
is highly dependent on its intellectual property position and its ability
to
protect this position. Revenue generated by the company may be affected
positively or negatively by government regulations that favor one form
of
lighting solution over another. As
of
March 31, 2008, we held 1,861,504 shares of Series B Convertible Preferred
Stock
(representing 11.70 percent of the total shares of Series B Convertible
Preferred Stock outstanding),2,130,699
shares of Series C Convertible Preferred Stock (representing 6.61 percent
of the
total shares of Series C Convertible Preferred Stock outstanding) and 666,667
shares of Series D Convertible Preferred Stock (representing 3.33 percent
of the
total shares of Series D Convertible Preferred Stock outstanding)
of
BridgeLux ,
as
well
as warrants to purchase 163,900 shares of Series C Convertible Preferred
Stock
of the company at $0.7136 per share.
As
of the
above date, our Valuation Committee valued of the total amount of securities
of
BridgeLux held by us at $7,218,652. The Chief Executive Officer of the
company
is Mark Swoboda. Michael A. Janse serves as an observer to the Board of
Directors of the company.
Cambrios
Technology Corporation,
located
at 2450 Bayshore Parkway, Mountain View, California 94043,
is
developing methods of synthesizing nanomaterials and assembling them into
useful
structures for use in applications in electronics, solar energy and solid-state
lighting. As of March
31,
2008,
we held
1,294,025 shares of Series B Convertible Preferred Stock (representing
10.78
percent of the total shares of Series B Convertible Preferred Stock outstanding)
and 1,300,000 shares of Series C Convertible Preferred Stock (representing
6.66
percent of the total shares of Series C Convertible Preferred Stock outstanding)
of Cambrios. As of the above date, our Valuation Committee valued the total
amount of shares of Cambrios held by us at $2,594,025. The Chief Executive
Officer of the company is Michael R. Knapp. Michael A. Janse serves as
an
observer to the Board of Directors of the company.
CFX
Battery, Inc.,
located
at 3943
Veselich Avenue, Los Angles, California 90039, is
developing primary
and rechargeable batteries enabled by nanotechnology. As
of
March
31,
2008,
we held
1,208,262 shares of Series A Convertible Preferred Stock (representing
13.17
percent of the total shares of Series A Convertible Preferred Stock outstanding)
of CFX Battery. As of the date above, our Valuation Committee valued the
Series
A Convertible Preferred Stock held by us at $946,528. The Chief Executive
Officer of the company is Joe Fisher. On February 28, 2008, Lifco merged
with
CFX Battery, Inc. The surviving entity is CFX Battery, Inc. Alexei A. Andreev
serves as an observer to the Board of Directors of the
company.
Crystal
IS, Inc.,
located
at 70 Cohoes Avenue, Green Island, New York 12183, is developing methods
to
produce large, single-crystal substrates of aluminum nitride (AlN) for
use in
the gallium nitride semiconductor industry. As of March
31,
2008,
we held
391,571 shares of Series A Convertible Preferred Stock (representing 5.66
percent of the total shares of Series A Convertible Preferred Stock outstanding)
and 1,300,376 shares of Series A-1 Convertible Preferred Stock (representing
9.51 percent of the total shares of Series A-1 Convertible Preferred Stock
outstanding) of Crystal IS, as well as warrants to purchase 21,977 shares
of
Series A-1 Convertible Preferred Stock of the company at $0.78 per share.
As of
the date above, our Valuation Committee valued the total amount of securities
of
Crystal IS held by us at $1,333,255. The Chief Executive Officer of the
company
is Nicholas J. Wood. Michael A. Janse serves as an observer to the Board
of
Directors of the company.
CSwitch
Corporation,
located
at 3131 Jay Street, Santa Clara, California 95054, is developing the next
generation of low-power, efficient, and highly-integrated system-on-a-chip
(SOC)
solutions for a wide range of communications-based platforms. As of March
31,
2008,
we held
6,863,118 shares of Series A-1 Convertible Preferred Stock (representing
9.76
percent of the total shares of Series A-1 Convertible Preferred Stock
outstanding) and $529,852 in Convertible Bridge Notes (representing 9.62
percent
of the total Convertible Bridge Notes outstanding) of CSwitch. As of the
date
above, our Valuation Committee valued the total amount of securities of
CSwitch
held by us at $3,983,708. The Chief Executive Officer of the company is
Doug
Laird. Alexei A. Andreev serves as a Director of the
company.
D-Wave
Systems, Inc.,
located
at 100-4401 Still Creek Drive, Burnaby, British Columbia, V5C 6G9, Canada,
is
developing
high-performance quantum computing systems for commercial use in logistics,
bioinformatics, life and physical sciences, quantitative finance and electronic
design automation. As of March
31,
2008,
we held
2,000,000 shares of Series B Convertible Preferred Stock (representing
13.55
percent of the total number of shares of Series B Convertible Preferred
Stock
outstanding) and 678,264 shares of Series C Convertible Preferred Stock
(representing 4.42 percent of the total shares of Series C Convertible
Preferred
Stock outstanding) of D-Wave. As of the date above, our Valuation Committee
valued the total amount of securities of D-Wave Systems held by us at
$2,893,308. The Chief Executive Officer of the company is Herb Martin.
Alexei A.
Andreev serves as a Director of the company. D-Wave Systems, Inc. is not
an
eligible portfolio company under the 1940 Act, because it operates primarily
outside the United States.
Ensemble
Discovery Corporation,
located
at 99 Erie Street, Cambridge, Massachusetts 02139, is developing classes
of drugs and bioassays based on its proprietary DNA-Programmed Chemistry™ (DPC™)
platform. Using DPC, Ensemble has built a product platform that will support
the
development of novel classes of therapeutics and bioassays for research
and
diagnostics. As
of
March
31,
2008,
we held
1,449,275 shares of Series B Convertible Preferred Stock (representing
13.33
percent of the total shares of Series B Convertible Preferred Stock outstanding)
of Ensemble. As of the date above, our Valuation Committee valued the Series
B
Convertible Preferred Stock held by us at $2,000,000. The Chief Executive
Officer of the company is Michael D. Taylor. Daniel B. Wolfe serves as
an
observer to the Board of Directors of the company.
Innovalight,
Inc.,
located
at 965 East Arques, Sunnyvale, California 94085, is developing renewable
energy products based on silicon nanotechnology.
Innovalight is focused on bringing ultra low-cost solar power modules to
the
marketplace. The company uses a proprietary silicon-ink process to print
thin-film solar power modules. Leveraging the advantages of solvent-based
processing, Innovalight aims to accelerate the promise of more affordable
solar
power solutions for residential and commercial applications. The market
for
solar-energy solutions is estimated to be $15 billion and expected to grow
to
$36 billion by 2010. Innovalight is a development company and has yet to
generate significant revenues from the commercial sale of products. The
company’s main competition in this market include companies such as First Solar,
Inc., Evergreen Solar, Inc., Sunpower, Inc., and Canadian Solar, Inc.,
as these
companies are also focused on the commercialization of solar power modules.
The
company
is highly dependent on its intellectual property position and its ability
to
protect this position. Revenue generated by the company may be affected
positively or negatively by government regulations that favor one form
of energy
generation over another. As
of
March
31,
2008,
we held
16,666,666 shares of Series B Convertible Preferred Stock (representing
33.33
percent of the total shares of Series B Convertible Preferred Stock outstanding)
and 5,810,577 shares of Series C Convertible Preferred Stock (representing
7.12
percent of the total shares of Series C Convertible Preferred Stock outstanding)
of Innovalight. The
Chief
Executive Officer of the company is Conrad Burke. The Chief Technical Officer
and Vice President of Engineering is Homer Antoniadis. The Chairman of
the Board
of Directors of the company is Alf Bjørseth. As
of the
date above, our Valuation Committee valued the total amount of shares held
by us
at $7,711,784. Michael A. Janse serves as a Director of the
company.
Kereos,
Inc.,
located
at 4041 Forest Park Ave., Saint Louis, Missouri 63108, is developing molecular
imaging agents and targeted therapeutics for the detection and treatment
of
cancer and cardiovascular disease based on proprietary ligand-targeted
emulsion
technologies. As of March
31,
2008,
we held
545,456 shares of Series B Convertible Preferred Stock (representing 8.06
percent of the total shares of Series B Convertible Preferred Stock outstanding)
of Kereos. As of the date above, our Valuation Committee valued the Series
B
Convertible Preferred Stock held by us at $120,850. The Chief Executive
Officer
of the company is Robert A. Beardsley. Daniel B. Wolfe serves as an observer
to
the Board of Directors of the company.
Kovio,
Inc.,
located
at 1145 Sonora Court, Sunnyvale, California 94086, is developing semiconductor
products using thin film technologies, printed electronics and nanoparticle
inks. As of March
31,
2008,
we held
2,500,000 shares of Series C Convertible Preferred Stock (representing
20.21
percent of the total shares of Series C Convertible Preferred Stock outstanding)
and 800,000 shares of Series D Convertible Preferred Stock (representing
4.40
percent of the total shares of Series D Convertible Preferred Stock outstanding)
of Kovio. As of the date above, our Valuation Committee valued the total
amount
of shares held by us at $4,125,000. The Chief Executive Officer of the
company
is Amir Mashkoori. Alexei A. Andreev serves as an observer to the Board
of
Directors of the company.
Mersana
Therapeutics, Inc.,
located
at 840 Memorial Drive, Cambridge, Massachusetts 02139, is a pharmaceutical
company founded to develop advanced drug delivery systems based on proprietary
molecular constructs and "biological stealth" materials. As of
March
31,
2008,
we held
68,451 shares of Series A Convertible Preferred Stock (representing 87.50
percent of the total shares of Series A Convertible Preferred Stock outstanding)
and 866,500 shares of Series B Convertible Preferred Stock (representing
8.22
percent of the total shares of Series B Convertible Preferred Stock outstanding)
of Mersana, as well as warrants to purchase 91,625 shares of Series B
Convertible Preferred Stock of the company at a price of $2.00 per share.
As of the date above, our Valuation Committee valued the total securities
of
Mersana held by us at $1,982,876. The Chief Executive Officer of the
company is Julie A. Olson. Charles E. Harris serves as a Director of the
company. Misti Ushio serves as an observer to the Board of Directors of
the
company.
Metabolon,
Inc.,
located
at 800 Capitola Drive, Durham, North Carolina 27713, is using
a
proprietary technology platform in metabolomics to map changes in metabolic
pathways for the identification of biomarkers and the early diagnosis of
disease
states.
As of
March
31,
2008,
we held
2,173,913 shares of Series B Convertible Preferred Stock (representing
31.25
percent of the total shares of Series B Preferred Stock outstanding) and
869,565
shares of Series B-1 Convertible Preferred Stock (representing 32.74 percent
of
the total shares of Series B-1 Convertible Preferred Stock outstanding)
of
Metablolon as well as warrants to purchase 434,783 shares of Series B-1
Convertible Preferred Stock of the company at a price of $1.15 per share.
As of
the date above, our Valuation Committee valued the total amount of securities
of
Metabolon held by us at $2,765,535. The Chief Executive Officer of the
company
is John Ryals. Douglas W. Jamison serves as an observer to the Board of
Directors of the company.
NanoGram
Corporation,
located
at 165 Topaz Street, Milpitas, California 95035, is using its proprietary
laser-deposition technologies to deposit inorganic nanocrystals for
energy-related applications such as photovoltaics, solid-state lighting
and
batteries. As of March
31,
2008
we held
63,210 shares of Series I Convertible Preferred Stock (representing 1.99
percent
of the total shares of Series I Convertible Preferred Stock outstanding),
1,250,904 shares of Series II Convertible Preferred Stock (representing
12.47
percent of the total shares of Series II Convertible Preferred Stock
outstanding) and 1,242,144 shares of Series III Convertible Preferred Stock
(representing 6.74 percent of the total shares of Series III Convertible
Preferred Stock outstanding) and 432,179
shares of Series IV Convertible Preferred Stock (representing 2.66 percent
of
the total shares of Series IV Convertible Preferred Stock outstanding)
of
NanoGram. As of the date above, our Valuation Committee valued the total
amount
of shares of NanoGram held by us at $5,887,222. The Chief Executive Officer
of
the company is Kieran F. Drain. Alexei A. Andreev serves as an observer
to the
Board of Directors of the company.
Nanomix,
Inc.,
located
at 5980 Horton Street, Emeryville, California 94608, is developing
nanoelectronic sensors that integrate carbon nanotube electronics with
silicon
microstructures. As of March
31,
2008,
we held
977,917 shares of Series C Convertible Preferred Stock (representing 18.12
percent of the total shares of Series C Convertible Preferred Stock outstanding)
and
6,802,397 shares of Series D Convertible Preferred Stock (representing
6.49
percent of the total shares of Series D Convertible Preferred Stock outstanding)
of
Nanomix. As of the above date, our Valuation Committee valued the total
amount
of shares of Nanomix held by us at $1,010,468. The Chief Executive Officer
of
the company is Garrett Gruener. Michael A. Janse serves as a Director of
the
Company.
Nextreme
Thermal Solutions, Inc.,
located
at 3908 Patriot Drive, Durham, North Carolina, 27703, is developing
next-generation thermoelectrics based on its unique, thin-film technology
for
applications that require high-performance solutions for thermal management
solutions. As of March
31,
2008,
we held
1,750,000 shares of Series A Convertible Preferred Stock (representing
16.82
percent of the total shares of Series A Convertible Preferred Stock outstanding)
and $377,580 in Convertible Bridge Notes (representing 16.82 percent of
the
total Convertible Bridge Notes outstanding) of Nextreme. As of the above
date,
our Valuation Committee valued the total amount of securities of Nextreme
held
by us at $2,127,580. The Chief Executive Officer of the company is Jesko
von
Windheim. Douglas W. Jamison serves as a Director of the Company. Daniel
B.
Wolfe serves as an observer to the Board of Directors of the
company.
Questech
Corporation,
located
at 92 Park Street, Rutland, Vermont 05701, manufactures and sells tile
and trim
products, based on its proprietary technology, with revenue generated from
stock
products. We originally invested in Questech on May 26, 1994. We did not
invest
in Questech as a tiny technology company, but Questech’s proprietary technology
is dependent on micro-scale processes. Thus, Questech may be regarded as
a tiny
technology holding. As of March
31,
2008,
we held
655,454 shares of Common Stock (representing 8.07 percent of the total
shares of
Common Stock outstanding) of Questech, as well as warrants to purchase
10,000
shares of Common Stock of the company at $1.50 per share. As of the date
above,
our Valuation Committee valued the total amount of securities of Questech
held
by us at $129,817. The Chief Executive Officer of the company is Barry
J.
Culkin.
Siluria
Technologies, Inc.,
located
at 2750 Sand Hill Road, Menlo Park, California 94025, is developing
next-generation nanomaterials. As of March
31,
2008,
we held
482,218 shares of Series S-2 Convertible Preferred Stock (representing
10.72
percent of the total shares of Series S-2 Convertible Preferred Stock
outstanding) of Siluria. As of the above date, our Valuation Committee
valued
the Series S-2 Convertible Preferred Stock of Siluria held by us at $160,723.
The General Manager of the company is Alex Tkachenko.
Michael
A. Janse serves as an observer to the Board of Directors of the
company.
Solazyme,
Inc.,
located
at 561 Eccles Avenues, South San Francisco, California 94080, is developing
agal
biodiesel, industrial chemicals and special ingredients based on synthetic
biology. As of March
31,
2008,
we held
988,204 shares of Series A Convertible Preferred Stock (representing 12.76
percent of the total shares of outstanding of Series A Convertible Preferred
Stock),
495,246
shares of Series B Convertible Preferred Stock (representing 5.77 percent
of the
total shares of outstanding of Series B Convertible Preferred Stock) and
$2,000,000
in Convertible Bridge Notes (representing 32.00 percent of the total Convertible
Bridge Notes outstanding) of
Solazyme. As of the date above, our Valuation Committee valued the total
amount
of securities of Solazyme held by us at $3,507,225. The Chief Executive
Officer
of the company is Jonathan S. Wolfson. Douglas W. Jamison serves as an
observer
to the Board of Directors of the company.
Xradia,
Inc.,
located
at 5052 Commercial Circle, Concord, California 94520, is developing and
manufacturing a suite of high-resolution x-ray microscopes and fluorescence
imaging systems for non-destructive imaging of embedded internal
structures.
As of
March 31, 2008, we held 3,121,099 shares of Series D Convertible Preferred
Stock
(representing 57.14 percent of the total shares of Series D Convertible
Preferred Stock Outstanding) of Xradia. As of the date above, our Valuation
Committee fair valued the Series D Convertible Preferred Stock held by
us at
$4,000,000. The Chief Executive Officer of the company is Rod Browning.
Alexei
A. Andreev serves as a Director of the company.
Zia
Laser, Inc.,
was
located at 801 University Boulevard SE, Albuquerque, New Mexico 87106,
and was
developing quantum dot-based semiconductor laser technology for application
in
microprocessors. As of March
31,
2008,
we held
1,500,000 shares of Series C Convertible Preferred Shares (representing
17.48
percent of the total shares of Series C Convertible Preferred Shares
outstanding) of Zia Laser. On November 30, 2006, the assets of Zia Laser
were
acquired by Innolume, Inc. As of the above date, our Valuation Committee
valued
the Series C Convertible Preferred Shares of Zia Laser held by us at $21,330.
Unaffiliated
Companies:
BioVex
Group, Inc.,
located
at 34 Commerce Way, Woburn, Massachusetts 01801, is developing biological
treatments for cancer and the prevention of infectious disease. As of
March
31,
2008,
we held
2,799,552 shares of Series E Convertible Preferred Stock (representing
9.92
percent of the total shares of Series E Convertible Preferred Stock outstanding)
of BioVex. As of the above date, our Valuation Committee valued the Series
E
Convertible Preferred Stock of BioVex held by us at $2,500,000. The Chief
Executive Officer of the company is Philip Astley-Sparke. Misti Ushio serves
as
an observer to the Board of Directors of the company.
*Exponential
Business Development Company,
located
at 460 Oakridge Common, South Salem, New York 10590, is a venture capital
partnership that invests in early stage manufacturing, software development
and
communication technology industries in the Albany area. As of March
31,
2008,
we held
one Limited Partnership Unit (representing 0.87 percent of the total Limited
Partnership Units outstanding) of the company. As of the date above, our
Valuation Committee valued the Limited Partnership Unit held by us at $2,219.
The manager of the portfolio of the company is NewTek Capital,
Inc.
Molecular
Imprints, Inc.,
located
at 1807 West Braker Lane, Austin, Texas 78758, is developing lithography
systems
and technology for manufacturing applications in the areas of nanodevices,
microstructures, advanced packaging, bio devices, optical components and
semiconductor devices. As of March
31,
2008,
we held
1,333,333 shares of Series B Convertible Preferred Stock (representing
6.55
percent of the total shares of Series B Preferred Stock outstanding) and
1,250,000 shares of Series C Convertible Preferred Stock (representing
14.75
percent of the total shares of Series C Convertible Preferred Stock outstanding)
of Molecular Imprints, as well as warrants to purchase 125,000 shares of
Series
C Convertible Preferred Stock of the company at a price of $2.00 per share.
As
of the date above, our Valuation Committee valued the total amount of securities
of Molecular Imprints held by us at $4,500,000. The Chief Executive Officer
of
the company is Mark Melliar-Smith. Alexei A. Andreev serves as an observer
to
the Board of Directors of the company.
Nanosys,
Inc.,
located
at 2625 Hanover Street, Palo Alto, California 94304, is a company with
broad-based intellectual property that is initially commercializing applications
in macroelectronics, memory, and fuel cells. These applications incorporate
zero
and one-dimensional, nanometer-scale materials, such as nanowires and nanodots
(quantum dots), as their principal active elements. As of March
31,
2008,
we held
803,428 shares of Series C Convertible Preferred Stock (representing 4.00
percent of the total shares of Series C Convertible Preferred Stock outstanding)
and 1,016,950 shares of Series D Convertible Preferred Stock (representing
6.28
percent of the total shares of Series D Preferred Stock outstanding) of
Nanosys.
As of the date above, our Valuation Committee valued the total amount of
shares
of Nanosys held by us at $5,370,116. The Chief Executive Officer of the
company
is Steven Goldby.
Nantero,
Inc.,
located
at 25-E Olympia Avenue, Woburn, Massachusetts 01801, is developing non-volatile
random access memory based on carbon nanotubes. As of March 31, 2008, we
held
345,070 shares of Series A Convertible Preferred Stock (representing 8.17
percent of the total shares of Series A Preferred Stock outstanding), 207,051
shares of Series B Convertible Preferred Stock (representing 3.08 percent
of the
total shares of Series B Convertible Preferred Stock outstanding) and 188,315
shares of Series C Convertible Preferred Stock (representing 3.75 percent
of the
total shares of Series C Convertible Preferred Stock outstanding) of Nantero.
As
of the date above, our Valuation Committee valued the total amount of shares
of
Nantero held by us at $2,246,409. The Chief Executive Officer of the company
is
Greg Schmergel.
NeoPhotonics
Corporation,
located
at 2911 Zanker Road, San Jose, California 95134, is developing functional
optical component arrays to offer integrated optical "systems on a chip"
to
component vendors. As of March
31,
2008,
we held
716,195 shares of Common Stock (representing 1.50 percent of the total
shares of
Common Stock outstanding), 1,831,256 shares of Series 1 Convertible Preferred
Stock (representing 4.05 percent of the total Series 1 Convertible Preferred
Stock), 741,898 shares of Series 2 Convertible Preferred Stock (representing
3.46 percent of the total shares of Series 2 Convertible Preferred Stock
outstanding) and 2,750,000 shares of Series 3 Convertible Preferred Stock
(representing 2.76 percent of the total shares of Series 3 Convertible
Preferred
Stock outstanding) of NeoPhotonics, as well as warrants to purchase 30,427
shares of Common Stock of the company at $0.15 per share. As of the date
above,
our Valuation Committee valued the total amount of securities of NeoPhotonics
held by us at $5,459,216. The Chief Executive Officer of the company is
Timothy
S. Jenks. Alexei A. Andreev serves as an observer to the Board of Directors
of
the company.
Polatis,
Inc.,
located
at 5 Fortune Drive, Billerica, Massachusetts 01821, is developing a family
of
MEMS switches for optical network applications, based on Polatis’s proprietary
piezoelectric ceramic substrates. As of March
31,
2008,
we held
16,775 shares of the Series A-1 Convertible Preferred Stock (representing
6.17
percent of the total shares of Series A-1 Convertible Preferred Stock
outstanding), 71,611 shares of Series A-2 Convertible Preferred Stock
(representing 4.65 percent of the total Series A-2 Convertible Preferred
Stock
outstanding), 4,774 shares of Series A-4 Convertible Preferred Stock
(representing 4.65 percent of the total shares of Series A-4 Convertible
Preferred Stock outstanding) and 16,438 shares of Series A-5 Convertible
Preferred Stock (representing 1.79 percent of the total shares of Series
A-5
Convertible Preferred Stock outstanding) of Polatis. As of the date above,
our
Valuation Committee valued the total amount of shares of Polatis held by
us at
$276,526. The Chief Executive Officer of the company is David Lewis. Lori
D.
Pressman serves as an observer to the Board of Directors of the
company.
PolyRemedy,
Inc.,
located
at 2637 Marine Way, Suite 100, Mountain View, California 94043, is developing
a
robotic manufacturing platform for wound treatment patches. As of March
31,
2008, we held 287,647 shares of Series B-1 Convertible Preferred Stock
(representing 1.52 percent of the total shares of the Series B-1 Convertible
Preferred Stock outstanding) of PolyRemedy. As of the date above, our Valuation
Committee valued the total amount of shares of PolyRemedy held by us at
$244,500. The Chief Executive Officer of the company is Daniel A. Eckert.
Alexei
A.
Andreev serves as an observer to the Board of Directors of the
company.
Starfire
Systems, Inc.,
located
at 10 Hermes Road, Malta, New York 12020, offers a family of patented silicon
carbide forming polymers for the manufacture of advanced ceramic materials
applications. As of March
31,
2008,
we held
375,000 shares of Common Stock (representing 4.59 percent of the total
shares of
Common Stock outstanding) and 600,000 shares of Series A-1 Convertible
Preferred
Stock (representing 12.87 percent of the total shares of Series A-1 Convertible
Preferred Stock outstanding) of Starfire. As of the above date, our Valuation
Committee valued the total amount of shares of Starfire held by us at $750,000.
The Chief Executive Officer of the company is Richard M. Saburro. Douglas
W.
Jamison serves as an observer to the Board of Directors of the
company.
Although
Ancora, BridgeLux, Crystal IS, Metabolon, Molecular Imprints, NanoGram, Nanomix,
Nanosys, NeoPhotonics, Nextreme, Polatis, Questech, Solazyme, Starfire Systems
and Xradia are all generating revenues ranging from nominal to significant
from
commercial sales of products and/or services, they are all still relatively
early-stage companies with the attendant risks. Additionally, with the
exceptions of BridgeLux, Exponential, Molecular Imprints, NeoPhotonics, Questech
and Xradia we consider all of the foregoing portfolio companies to be
development-stage companies. This term is used to describe a company that
devotes substantially all of its efforts to establishing a new business,
and
either has not yet commenced its planned principal operations, or it has
commenced such operations but has not realized significant revenue from them.
Any of the private companies may require additional funding that may not
be
obtainable at all or on the terms of their most recent fundings, which would
result in partial or complete write-downs in the value of our investment.
In
general, private equity is difficult to obtain, especially in the current
capital markets environment. Each company is dependent upon a single or small
number of customers and/or key operating personnel. All of the foregoing
companies rely heavily upon the technology associated with their respective
business or, in the case of Exponential, with the companies in which it invests.
Therefore, each company places great importance on its relevant patents,
trademarks, licenses, algorithms, trade secrets, franchises or concessions.
Lastly, each company is particularly vulnerable to general economic, private
equity and capital markets conditions and to changes in government regulation,
interest rates or technology.
As
a
participant in the venture capital business, we invest primarily in private
companies for which there is generally no publicly available information.
Because of the private nature of these businesses, there is a need to maintain
the confidentiality of the financial and other information that we have for
the
private companies in our portfolio. We believe that maintaining this confidence
is important, as disclosure of such information could disadvantage our portfolio
companies and could put us at a disadvantage in attracting new investments.
Therefore, we do not intend to disclose financial or other information about
our
portfolio companies, unless required, because we believe doing so may put
them
at an economic or competitive disadvantage, regardless of our level of ownership
or control.
DETERMINATION
OF NET ASSET VALUE
Our
investments can be classified into five broad categories for valuation
purposes:
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Equity-related
securities;
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Investments
in intellectual property, patents, research and development in
technology
or product development;
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Long-term
fixed-income securities;
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Short-term
fixed-income securities; and
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The
1940
Act requires periodic valuation of each investment in our portfolio to
determine
net asset value. Under the 1940 Act, unrestricted securities with readily
available market quotations are to be valued at the current market value;
all
other assets must be valued at “fair value” as determined in good faith by or
under the direction of the Board of Directors.
Our
Board
of Directors is responsible for (1) determining overall valuation guidelines
and
(2) ensuring the valuation of investments within the prescribed
guidelines.
Our
Valuation Committee, comprised of all of the independent Board members,
is
responsible for reviewing and approving the valuation of our assets within
the
guidelines established by the Board of Directors.
The
values assigned to these investments are based on available information
and do
not necessarily represent amounts that might ultimately be realized, as
such
amounts depend on future circumstances and cannot reasonably be determined
until
the individual investments are actually liquidated or become readily
marketable.
Approaches
to Determining Fair Value
Statement
of Financial Accounting Standards No. 157, "Fair Value Measurements," ("SFAS
No.
157") defines fair value as the price that would be received to sell an
asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price).
The
main
approaches to measuring fair value utilized are the market approach and
the
income approach.
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Market
Approach:
The market approach uses prices and other relevant information
generated
by market transactions involving identical or comparable assets
or
liabilities. For example, the market approach often uses market
multiples
derived from a set of comparables. Multiples might lie in ranges
with a
different multiple for each comparable. The selection of where
within the
range each appropriate multiple falls requires judgment considering
factors specific to the measurement (qualitative and quantitative).
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Income
Approach:
The income approach uses valuation techniques to convert future
amounts
(for example, cash flows or earnings) to a single present value
amount
(discounted). The measurement is based on the value indicated
by current
market expectations about those future amounts. Those valuation
techniques
include present value techniques; option-pricing models, such
as the
Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a
lattice model), which incorporate present value techniques; and
the
multi-period excess earnings method, which is used to measure
the fair
value of certain assets.
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SFAS
No.
157 classifies the inputs used to measure fair value by these approaches
into
the following hierarchy:
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Level
1:
Unadjusted quoted prices in active markets for identical assets
or
liabilities.
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Level
2:
Quoted prices in active markets for similar assets or liabilities,
or
quoted prices for identical or similar assets or liabilities
in markets
that are not active, or inputs other than quoted prices that
are
observable for the asset or
liability.
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Level
3:
Unobservable inputs for the asset or
liability.
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Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement.
The
Company applies the methods for determining fair value discussed above
to the
valuation of investments in each of the five broad categories as
follows:
Equity-Related
Securities
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market approach
is
used to fair value these types of securities: readily available public
market
quotations; the cost of the Company’s investment; transactions in a company's
securities or unconditional firm offers by responsible parties as a factor
in
determining valuation; the financial condition and operating results of
the
company; the long-term potential of the business and technology of the
company;
the values of similar securities issued by companies in similar businesses;
multiples to revenue, net income or EBITDA that similar securities issued
by
companies in similar businesses receive; the proportion of the company's
securities we own and the nature of any rights to require the company to
register restricted securities under applicable securities laws; and the
rights
and preferences of the class of securities we own as compared to other
classes
of securities the portfolio company has issued. When the income approach
is used
to value warrants, the Company uses the Black-Scholes-Merton
formula.
Investments
in Intellectual Property, Patents, Research and Development in Technology
or
Product Development
These
investments are fair valued using the market approach. The Company may
consider
factors specific to these types of investments when using the market approach
including: the cost of the Company’s investment; investments in the same or
substantially similar intellectual property or patents or research and
development in technology or product development or offers by responsible
third
parties; the results of research and development; product development progress;
commercial prospects; term of patent projected markets; and other subjective
factors.
As
of
March 31, 2008, we did not have any investments in intellectual property,
patents, research and development in technology or product
development.
Long-Term
Fixed-Income Securities
Long-term
fixed-income securities for which market quotations are readily available
are
valued using the most recent bid quotations when available.
Long-term
fixed-income securities for which market quotations are not readily available
are fair valued using the market approach. The factors that may be considered
when valuing these types of securities by the market approach include:
credit
quality; interest rate analysis; quotations from broker-dealers; prices
from
independent pricing services that the Board believes are reasonably reliable;
and reasonable price discovery procedures and data from other
sources.
Short-Term
Fixed-Income Securities
Short-Term
fixed-income securities are valued using the market approach in the same
manner
as long-term fixed-income securities until the remaining maturity is 60
days or
less, after which time such securities may be valued at amortized cost
if there
is no concern over payment at maturity.
All
Other Securities
All
other
securities are reported at fair value as determined in good faith by the
Valuation Committee using the approaches for determining valuation as described
above. As of March 31, 2008, we did not have any of these
investments.
For
all
other securities, the reported values shall reflect the Valuation Committee's
judgment of fair values as of the valuation date using the outlined basic
approaches of valuation discussed above. They do not necessarily represent
an
amount of money that would be realized if we had to sell such assets in
an
immediate liquidation. Thus, valuations as of any particular date are not
necessarily indicative of amounts that we may ultimately realize as a result
of
future sales or other dispositions of investments we hold.
Determinations
of Net Asset Value in Connection with Offerings
In
connection with each offering of our Common Stock, our Board of Directors
or a
committee thereof is required to make the determination that we are not selling
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. Our Board of Directors considers
the following factors, among others, in making such determination:
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the
net asset value of our Common Stock disclosed in the most recent
periodic
report we filed with the SEC;
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our
Management’s assessment of whether any material change in the net asset
value of our Common Stock has occurred (including through the realization
of gains on the sale of our portfolio securities) from the period
beginning on the date of the most recently disclosed net asset
value of
our Common Stock to the period ending two days prior to the date
of the
sale of our Common Stock; and
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the
magnitude of the difference between the net asset value of our
Common
Stock disclosed in the most recent periodic report we filed with
the SEC
and 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 the offering price of
our Common
Stock in the proposed offering.
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Moreover,
to the extent that there is even a remote possibility that we may (i) issue
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 our registration statements) to suspend
the
offering of our Common stock if the net asset value of our Common Stock
fluctuates by certain amounts in certain circumstances until the prospectus
is
amended, the Board of Directors will elect, in the case of clause
(i) above, either to postpone the offering until such time that there is no
longer the possibility of the occurrence of such event or to undertake to
determine the net asset value of our Common Stock 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 the net asset value of our Common
Stock
to ensure that such undertaking has not been triggered.
INVESTMENT
POLICIES
Investments
and Strategies
The
following is a summary description of the types of assets in which we may
invest, the investment strategies we may utilize and the attendant risks
associated with our investments and strategies. For a full description of
our
investments and strategies, please refer to our Annual Report on Form
10-K.
Equity,
Equity-Related Securities and Debt with Equity Features
We
may
invest in equity, equity-related securities and debt with equity features.
These
securities include common stock, preferred stock, debt instruments convertible
into common or preferred stock, limited partnership interests, other beneficial
ownership interests and warrants, options or other rights to acquire any
of the
foregoing.
We
may
make investments in companies with operating histories that are unprofitable
or
marginally profitable, that have negative net worth or that are involved
in
bankruptcy or reorganization proceedings. These investments would involve
businesses that management believes have turn around potential through the
infusion of additional capital and management assistance. In addition, we
may
make investments in connection with the acquisition or divestiture of companies
or divisions of companies. There is a significantly greater risk of loss
with
these types of securities than is the case with traditional investment
securities.
We
may
also invest in publicly traded securities of whatever nature, including
relatively small, emerging growth companies that management believes have
long-term growth possibilities. Pursuant to a rule adopted by the SEC, our
investments in U.S. non-financial public companies whose securities are not
listed on a securities exchange will generally be treated as qualifying assets
for purposes of maintaining our business development company status if we
acquire such investments in private placements or secondary market
transactions.
Warrants,
options and convertible or exchangeable securities generally give the investor
the right to acquire specified equity securities of an issuer at a specified
price during a specified period or on a specified date. Warrants and options
fluctuate in value in relation to the value of the underlying security and
the
remaining life of the warrant or option, while convertible or exchangeable
securities fluctuate in value both in relation to the intrinsic value of
the
security without the conversion or exchange feature and in relation to the
value
of the conversion or exchange feature, which is like a warrant or option.
When
we invest in these securities, we incur the risk that the option feature
will
expire worthless, thereby either eliminating or diminishing the value of
our
investment.
Our
investments in equity securities usually involve securities of private companies
that are restricted as to sale and cannot be sold in the open market without
registration under the Securities Act of 1933 or pursuant to a specific
exemption from these registrations. Opportunities for sale are more limited
than
in the case of marketable securities, although these investments may be
purchased at more advantageous prices and may offer attractive investment
opportunities. Even if one of our portfolio companies completes an initial
public offering, we are typically subject to a lock-up agreement, and the
stock
price may decline substantially before we are free to sell. Even if we have
registration rights to make our investments more marketable, a considerable
amount of time may elapse between a decision to sell or register the securities
for sale and the time when we are able to sell the securities. The prices
obtainable upon sale may be adversely affected by market conditions or negative
conditions affecting the issuer during the intervening time.
Venture
Capital Investments
We
expect
to invest in development stage or start-up businesses. Substantially all
of our
long-term investments are in thinly capitalized, unproven, small companies
focused on risky technologies. These businesses also tend to lack management
depth, to have limited or no history of operations and to have not attained
profitability. Because of the speculative nature of these investments, these
securities have a significantly greater risk of loss than traditional investment
securities. Some of our venture capital investments are likely to be complete
losses or unprofitable and some will never realize their potential.
We
may
own 100 percent of the securities of a start-up investment for a period of
time
and may control the company for a substantial period. Start-up companies
are
more vulnerable than better capitalized companies to adverse business or
economic developments. Start-up businesses generally have limited product
lines,
service niches, markets and/or financial resources. Start-up companies are
not
well-known to the investing public and are subject to potential bankruptcy,
general movements in markets and perceptions of potential growth.
In
connection with our venture capital investments, we may participate in providing
a variety of services to our portfolio companies, including the following:
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formulating
operating strategies;
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formulating
intellectual property strategies;
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assisting
in financial planning;
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providing
management in the initial start-up stages; and
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establishing
corporate goals.
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We
may
assist in raising additional capital for these companies from other potential
investors and may subordinate our own investment to that of other investors.
We
may also find it necessary or appropriate to provide additional capital of
our
own. We may introduce these companies to potential joint venture partners,
suppliers and customers. In addition, we may assist in establishing
relationships with investment bankers and other professionals. We may also
assist with mergers and acquisitions. We do not derive income from these
companies for the performance of any of the above services.
We
may
control, be represented on or have observer rights on the Board of Directors
of
a portfolio company by one or more of our officers or directors, who may
also
serve as officers of the portfolio company. We indemnify our officers and
directors for serving on the Boards of Directors or as officers of portfolio
companies, which exposes us to additional risks. Particularly during the
early
stages of an investment, we may in effect be involved in the conduct of the
operations of the portfolio company. As a venture company emerges from the
developmental stage with greater management depth and experience, we expect
that
our role in the portfolio company’s operations will diminish. Our goal is to
assist each company in establishing its own independent capitalization,
management and Board of Directors. We expect to be able to reduce our interest
in those start-up companies which become successful.
Debt
Obligations
We
may
hold debt securities for income and as a reserve pending more speculative
investments. Debt obligations may include U.S. government and agency securities,
commercial paper, bankers’ acceptances, receivables or other asset-based
financing, notes, bonds, debentures, or other debt obligations of any nature
and
repurchase agreements related to these securities. These obligations may
have
varying terms with respect to security or credit support, subordination,
purchase price, interest payments and maturity from private, public or
governmental issuers of any type located anywhere in the world. We may invest
in
debt obligations of companies with operating histories that are unprofitable
or
marginally profitable, that have negative net worth or are involved in
bankruptcy or reorganization proceedings, or that are start-up or development
stage entities. In addition, we may participate in the acquisition or
divestiture of companies or divisions of companies through issuance or receipt
of debt obligations. As of March 31, 2008, the debt obligations held in our
portfolio consisted of convertible bridge notes and U.S. Treasury
securities.
It
is
likely that our investments in debt obligations will be of varying quality,
including non-rated, unsecured, highly speculative debt investments with
limited
marketability. Investments in lower-rated and non-rated securities, commonly
referred to as "junk bonds," are subject to special risks, including a greater
risk of loss of principal and non-payment of interest. Generally, lower-rated
securities offer a higher return potential than higher-rated securities but
involve greater volatility of price and greater risk of loss of income and
principal, including the possibility of default or bankruptcy of the issuers
of
these securities. Lower-rated securities and comparable non-rated securities
will likely have large uncertainties or major risk exposure to adverse
conditions and are predominantly speculative with respect to the issuer’s
capacity to pay interest and repay principal in accordance with the terms
of the
obligation. The occurrence of adverse conditions and uncertainties to issuers
of
lower-rated securities would likely reduce the value of lower-rated securities
held by us, with a commensurate effect on the value of our shares.
The
markets in which lower-rated securities or comparable non-rated securities
are
traded generally are more limited than those in which higher-rated securities
are traded. The existence of limited markets for these securities may restrict
our ability to obtain accurate market quotations for the purposes of valuing
lower-rated or non-rated securities and calculating net asset value or to
sell
securities at their fair value. Any economic downturn could adversely affect
the
ability of issuers’ lower-rated securities to repay principal and pay interest
thereon. The market values of lower-rated and non-rated securities also tend
to
be more sensitive to individual corporate developments and changes in economic
conditions than higher-rated securities. In addition, lower-rated securities
and
comparable non-rated securities generally present a higher degree of credit
risk. Issuers of lower-rated securities and comparable non-rated securities
are
often highly leveraged and may not have more traditional methods of financing
available to them, so that their ability to service their debt obligations
during an economic downturn or during sustained periods of rising interest
rates
may be impaired. The risk of loss owing to default by these issuers is
significantly greater because lower-rated securities and comparable non-rated
securities generally are unsecured and frequently are subordinated to the
prior
payment of senior indebtedness. We may incur additional expenses to the extent
that we are required to seek recovery upon a default in the payment of principal
or interest on our portfolio holdings.
The
market value of investments in debt securities that carry no equity
participation usually reflects yields generally available on securities of
similar quality and type at the time purchased. When interest rates decline,
the
market value of a debt portfolio already invested at higher yields can be
expected to rise if the securities are protected against early call. Similarly,
when interest rates increase, the market value of a debt portfolio already
invested at lower yields can be expected to decline. Deterioration in credit
quality also generally causes a decline in market value of the security,
while
an improvement in credit quality generally leads to increased
value.
Foreign
Securities
We
may
make investments in securities of issuers whose principal operations are
conducted outside the United States, and whose earnings and securities are
stated in foreign currency. In order to maintain our status as a business
development company, our investments in the stocks of companies organized
outside the U.S. would be limited to 30 percent of our assets, because we
must
invest at least 70 percent of our assets in "qualifying assets" and securities
of foreign companies are not "qualifying assets."
Compared
to otherwise comparable investments in securities of U.S. issuers, currency
exchange risk of securities of foreign issuers is a significant variable.
The
value of these investments to us will vary with the relation of the currency
in
which they are denominated to the U.S. dollar, as well as with intrinsic
elements of value such as credit risk, interest rates and performance of
the
issuer. Investments in foreign securities also involve risks relating to
economic and political developments, including nationalization, expropriation,
currency exchange freezes and local recession. Securities of many foreign
issuers are less liquid and more volatile than those of comparable U.S. issuers.
Interest and dividend income and capital gains on our foreign securities
may be
subject to withholding and other taxes that may not be recoverable by us.
We may
seek to hedge all or part of the currency risk of our investments in foreign
securities through the use of futures, options and forward currency purchases
or
sales.
Intellectual
Property
We
believe there is a role for organizations that can assist in technology
transfer. Scientists and institutions that develop and patent intellectual
property perceive the need for and rewards of entrepreneurial commercialization
of their inventions.
Our
form
of investment may be:
|
·
|
funding
research and development in the development of a technology;
|
|
·
|
obtaining
licensing rights to intellectual property or patents;
|
|
·
|
acquiring
intellectual property or patents; or
|
|
·
|
forming
and funding companies or joint ventures to further commercialize
intellectual property.
|
Income
from our investments in intellectual property or its development may take
the
form of participation in licensing or royalty income, fee income, or some
other
form of remuneration. Investment in developmental intellectual property rights
involves a high degree of risk that can result in the loss of our entire
investment as well as additional risks including uncertainties as to the
valuation of an investment and potential difficulty in liquidating an
investment. Further, investments in intellectual property generally require
investor patience as investment return may be realized only after or over
a long
period. At some point during the commercialization of a technology, our
investment may be transformed into ownership of securities of a development
stage or start-up company as discussed under "Venture Capital Investments"
above.
Other
Strategies
In
pursuit of our investment strategy, we may employ one or more of the following
strategies in order to enhance investment results.
Borrowing
and Margin Transactions
We
may
from time to time borrow money or obtain credit by any lawful means from
banks,
lending institutions, other entities or individuals, in negotiated transactions.
We may issue, publicly or privately, bonds, debentures or notes, in series
or
otherwise, with interest rates and other terms and provisions, including
conversion rights, on a secured or unsecured basis, for any purpose, up to
the
maximum amounts and percentages permitted for closed-end investment companies
under the 1940 Act. The 1940 Act currently prohibits us from borrowing any
money
or issuing any other senior securities (other than preferred stock and other
than temporary borrowings of up to five percent of our assets), if in giving
effect to the borrowing or issuance, the value of our total assets would
be less
than 200 percent of our total liabilities (other than liabilities not
constituting senior securities). We may pledge assets to secure any borrowings.
We currently have no leverage and have no current intention to issue preferred
stock.
A
primary
purpose of our borrowing power is for leverage, to increase our ability to
acquire investments both by acquiring larger positions and by acquiring more
positions. Borrowings for leverage accentuate any increase or decrease in
the
market value of our investments and thus our net asset value. Since any decline
in the net asset value of our investments will be borne first by holders
of
Common Stock, the effect of leverage in a declining market would be a greater
decrease in net asset value applicable to the Common Stock than if we were
not
leveraged. Any decrease would likely be reflected in a decline in the market
price of the Common Stock. To the extent the income derived from assets acquired
with borrowed funds exceeds the interest and other expenses associated with
borrowing, our total income will be greater than if borrowings were not used.
Conversely, if the income from assets is not sufficient to cover the borrowing
costs, our total income will be less than if borrowings were not used. If
our
current income is not sufficient to meet our borrowing costs (repayment of
principal and interest), we might have to liquidate our investments when
it may
be disadvantageous to do so. Our borrowings for the purpose of buying most
liquid equity securities will be subject to the margin rules, which require
excess liquid collateral marked to market daily. If we are unable to post
sufficient collateral, we would be required to sell securities to remain
in
compliance with the margin rules. These sales might be at disadvantageous
times
or prices.
Repurchase
of Shares
Our
shareholders do not have the right to compel us to redeem our shares. We
may,
however, purchase outstanding shares of our Common Stock from time to time,
subject to approval of our Board of Directors and compliance with applicable
corporate and securities laws. The Board of Directors may authorize purchases
from time to time when they are deemed to be in the best interests of our
shareholders, but could do so only after notification to shareholders. The
Board
of Directors may or may not decide to undertake any purchases of our Common
Stock.
Our
repurchases of our common shares would decrease our total assets and would
therefore likely have the effect of increasing our expense ratio. Subject
to our
investment restrictions, we may borrow money to finance the repurchase of
our
Common Stock in the open market pursuant to any tender offer. Interest on
any
borrowings to finance share repurchase transactions will reduce our net assets.
If, because of market fluctuations or other reasons, the value of our assets
falls below the required 1940 Act coverage requirements, we may have to reduce
our borrowed debt to the extent necessary to comply with the requirement.
To
achieve a reduction, it is possible that we may be required to sell portfolio
securities at inopportune times when it may be disadvantageous to do so.
Since
1998, we have repurchased a total of 1,828,740 shares of our Common Stock
at a
total cost of $3,405,531, or $1.86 per share. On July 23, 2002, because of
our
strategic decision to invest in tiny technology, our Board of Directors
reaffirmed its commitment not to authorize the repurchase of additional shares
of our Common Stock.
Portfolio
Company Turnover
Changes
with respect to portfolio companies will be made as our management considers
necessary in seeking to achieve our investment objective. The rate of portfolio
turnover will not be treated as a limiting or relevant factor when circumstances
exist which are considered by management to make portfolio changes
advisable.
Although
we expect that many of our investments will be relatively long term in nature,
we may make changes in our particular portfolio holdings whenever it is
considered that an investment no longer has substantial growth potential
or has
reached its anticipated level of performance, or (especially when cash is
not
otherwise available) that another investment appears to have a relatively
greater opportunity for capital appreciation. We may also make general portfolio
changes to increase our cash to position us in a defensive posture. We may
make
portfolio changes without regard to the length of time we have held an
investment, or whether a sale results in profit or loss, or whether a purchase
results in the reacquisition of an investment which we may have only recently
sold. Our investments in privately held companies are illiquid, which limits
portfolio turnover.
The
portfolio turnover rate may vary greatly from year to year as well as during
a
year and may also be affected by cash requirements.
MANAGEMENT
OF THE COMPANY
BOARD
OF DIRECTORS AND EXECUTIVE OFFICERS
Set
forth
below are the names, ages, positions and principal occupations during the
past
five years of our directors and executive officers. We have no advisory board.
Our business address and that of our officers and directors is 111 West
57th
Street,
Suite 1100, New York, New York 10019.
Executive
Officers
Messrs.
Harris, Jamison, Wolfe, Andreev and Janse are Managing Directors and are
primarily responsible for the day to day management of our portfolio. They
have
served in this capacity since 1984, 2002, 2008, 2005 and 2007, respectively.
Charles
E. Harris. Mr.
Harris, 65, currently serves as our Chairman, Chief Executive Officer and
as a
Managing Director. He has served as our Chief Executive Officer since July
1984
and as a Managing Director since January 2004. He has been a member of our
Board
of Directors and served as Chairman of the Board since April 1984. He also
served as our Chief Compliance Officer from February 1997 to February 2001.
He
is Chairman of the Board, Chief Executive Officer and a Director of Harris
&
Harris Enterprises, a wholly owned subsidiary of the Company. His wife serves
as
our Corporate Secretary. He is a director of Mersana Therapeutics, Inc.,
and of
SiOnyx, Inc., privately held nanotechnology-enabled companies in which we
have
investments. He was a member of the Advisory Panel for the Congressional
Office
of Technology Assessment. Prior to joining us, he was Chairman of Wood,
Struthers and Winthrop Management Corporation, the investment advisory
subsidiary of Donaldson, Lufkin and Jenrette. He is currently a member of
the
New York Society of Security Analysts. He was, until 2004, a Trustee and
head of
the Audit Committee of Cold Spring Harbor Laboratory, a not-for-profit
institution that conducts research and education programs in the biological
sciences, and he is currently a member of its President’s Council. He also
serves as a Trustee and head of the Audit Committee of the Nidus Center,
a
not-for-profit, life sciences, business incubator in St. Louis, Missouri.
He is
a life-sustaining fellow of MIT and a shareholder of its Entrepreneurship
Center. He is an "interested person" as defined in Section 2(a)(19) of the
1940
Act, as a beneficial owner of more than five percent of our Common Stock,
as a
control person and as one of our officers. He was graduated from Princeton
University (A.B.) and from the Columbia University Graduate School of Business
(M.B.A.).
Douglas
W. Jamison.
Mr.
Jamison, 38, has served as President and as Chief Operating Officer since
January 1, 2005, as Treasurer from March 2005 to May 2008, as a Managing
Director since January 2004, as Chief Financial Officer from January 2005
through December 2007 and as Vice President from September 2002 through December
2004. He has been a member of our Board of Directors since May 2007. Since
January 2005, he has been President and a Director of Harris & Harris
Enterprises, Inc., a wholly owned subsidiary of Harris & Harris Group,
Inc. Upon Mr. Harris's retirement, scheduled for December 31, 2008, the Board
of
Directors has named Mr. Jamison to succeed Mr. Harris in Mr. Harris's positions
as Chairman and Chief Executive Officer. Mr. Jamison is a director of Ancora
Pharmaceuticals, Inc., of Nextreme Thermal Solutions, Inc., and of Phoenix
Molecular Corporation, privately held nanotechnology-enabled companies in
which
we have investments. He is Co-Editor-in-Chief of "Nanotechnology Law &
Business." He is Co-Chair of the Advisory Board, Converging Technology Bar
Association, a member of the University of Pennsylvania Nano-Bio Interface
Ethics Advisory Board and a member of the Advisory Board, Massachusetts
Technology Collaborative Nanotechnology Venture Forum. His professional
societies include the Association of University Technology Managers. From
1997
to 2002, he worked as a senior technology manager at the University of Utah
Technology Transfer Office, where he managed intellectual property in physics,
chemistry and the engineering sciences. He was graduated from Dartmouth College
(B.A.) and the University of Utah (M.S.).
Daniel
B. Wolfe.
Mr.
Wolfe, 31, has served as Chief Financial Officer and as a Managing Director
since January 2008, as Principal from January 2007 to January 2008, as Senior
Associate from January 2006 to January 2007, and as Vice President from July
2004 to January 2008. He is a director of Phoenix Molecular Corporation,
a
privately held nanotechnology-enabled company in which we have an investment.
Prior to joining us, he served as a consultant to Nanosys, Inc. (from 2002
to
2004), to CW Group (from 2001 to 2004) and to Bioscale, Inc. (from January
2004
to June 2004). From February 2000 to January 2002, he was the Co-founder
and
President of Scientific Venture Assessments, Inc., a provider of scientific
analysis of prospective investments for venture capital placements and of
scientific expertise to high-technology companies. He was graduated from
Rice
University (B.A., Chemistry), where his honors included the Zevi and Bertha
Salsburg Memorial Award in Chemistry and the Presidential Honor Roll, and
from
Harvard University (A.M., Ph.D., Chemistry), where he was an NSF Predoctoral
Fellow.
At
our
request, Mr. Wolfe was interim Chief Executive Officer of Evolved Nanomaterial
Sciences, Inc. ("ENS"), one of our portfolio companies, from July 1, 2007
to
September 28, 2007. ENS filed for Chapter 7 bankruptcy on September 30,
2007.
Alexei
A. Andreev.
Mr.
Andreev, 36, has served as an Executive Vice President and as a Managing
Director since March 2005. From 2002 to March 2005, he was an Associate
with
Draper Fisher Jurvetson, a venture capital firm. In 2001, he was a Summer
Associate with TLcom Capital Partners, a London-based venture capital fund
backed by Morgan Stanley. From 1997 to 2000, he was an Associate at Renaissance
Capital Group/Sputnik Funds, a venture capital fund in Moscow, Russia.
Previously, he was a researcher at the Centre of Nanotechnology, Isan,
in
Troitsk, Russia. He is a director of CSwitch Corporation, of D-Wave Systems,
Inc., and of Xradia, Inc., privately-held nanotechnology-enabled companies
in
which we have investments. He is a director of the American Business Association
of Russian Expatriates. He was graduated with a B.S. with honors in
Engineering/Material Sciences, with a Ph.D. in Solid State Physics from
Moscow
Steel and Alloys Institute and with an M.B.A. from the Stanford Graduate
School
of Business.
Michael
A. Janse.
Mr.
Janse, 39, has served as an Executive Vice President and as a Managing Director
since April 2007. From January 2007 to April 2007 he was a Principal with
ARCH
Venture Partners and was an Associate from June 2002 to January 2007, following
earlier roles as an intern and then consultant. He concentrated on
investment opportunities in advanced semiconductor products, nanotechnology,
and
novel materials. From 1995 to 2000, Mr. Janse worked in Motorola's Semiconductor
Products Sector (now Freescale Semiconductor, Inc.) as a process engineer,
and
later marketed semiconductor components to manufacturers of personal computers
and networking products. He is a director of Adesto Technologies Corp., of
Innovalight, Inc., and of Nanomix, Inc., privately-held nanotechnology-enabled
companies in which we have investments. He was graduated from Brigham Young
University (B.S., Chemical Engineering) and The University of Chicago (M.B.A.).
Sandra
Matrick Forman, Esq.
Ms.
Forman, 42, has served as General Counsel, as Chief Compliance Officer and
as
Director of Human Resources since August 2004. From 2001 to 2004, she was
an
Associate at Skadden, Arps, Slate, Meagher & Flom LLP, in the
Investment Management Group. From May to August 2000, she was a summer associate
with Latham & Watkins LLP in its London office. From August to December
2000, she served as an intern in the office of the General Counsel, United
States Department of Defense, Office of the Secretary of Defense. From June
to
August 1999, she served as an intern for the Honorable Ronald S. Lew, United
States Federal District Court, Central District of California. She was graduated
from New York University (B.A.), where her honors included National Journalism
Honor Society, and from the University of California Los Angeles (J.D.),
where
her honors included Order of the Coif and membership on the Law Review. She
is
currently a member of the working group for the National Venture Capital
Association model documents.
Misti
Ushio.
Ms.
Ushio, 36, has served as a Vice President and Associate since May 2007. From
June 2006 to May 2007, Ms. Ushio was a Technology Licensing Officer at Columbia
University. From May 1996 to May 2006, she was employed by Merck & Co.,
Inc., most recently as a Senior Research Biochemical Engineer with the
Bioprocess R&D group. She was graduated from Johns Hopkins University (B.S.,
Chemical Engineering), Lehigh University (M.S., Chemical Engineering) and
University College London (Ph.D., Biochemical Engineering).
Patricia
N. Egan.
Ms.
Egan, 33, has served as Chief Accounting Officer, as Vice President and
as
Senior Controller since June 2005. From June 2005 to December 2005 and
from
August 2006 to May 2008, she served as an Assistant Secretary. She also
serves
as Chief Accounting Officer, as Treasurer and as Secretary of Harris &
Harris Enterprises, Inc., a wholly owned subsidiary of the Company. From
1996 to
2005, she served as a Manager at PricewaterhouseCoopers LLP in its financial
services group. She was graduated from Georgetown University (B.S., Accounting),
where her honors included the Othmar F. Winkler Award for Excellence in
Community Service. She is a Certified Public Accountant.
Mary
P. Brady. Ms.
Brady, 47, has served as a Vice President and Controller since November
2005,
and as an Assistant Secretary from November 2005 to May 2008. From 2003
through
2005, she served as a senior accountant at Clarendon Insurance Company
in its
program accounting group. She served from 2000 to 2003 as a senior associate
at
PricewaterhouseCoopers LLP in its financial services group. She was graduated
Summa Cum Laude from Lehman College (B.S., Accounting). She is a Certified
Public Accountant.
Jennifer
M. McGovern.
Ms.
McGovern, 30, has served as an Assistant Vice President, Counsel and an
Assistant Secretary from August 2007. From June 2006 to August 2006, she
worked
as a law clerk at Luskin, Stern & Eisler LLP. From January 2006 to April
2006, she was an intern in the Office of the General Counsel, New York Stock
Exchange. From July 1999 to June 2004, she worked at BlackRock, Inc., first
as
an Analyst, and then as an Associate, in the Private Client Group. She was
graduated from Columbia University (B.A., Art History, Economics), and from
Brooklyn Law School (J.D.), cum laude, where she was the Managing Editor
of the
Brooklyn
Journal of International Law
and a
member of the Moot Court Honor Society.
Susan
T. Harris.
Ms.
Harris, 63, has served as our Secretary since July 2001. From July 1999 to
July
2003, she was employed by Harris & Harris Enterprises, Inc., our wholly
owned subsidiary, working primarily in financial public relations. From July
2001 to July 2003, she served as Secretary and Treasurer of Harris & Harris
Enterprises, Inc. Since 1972, she has been an investor relations consultant,
operating as a sole proprietor prior to 1999, and again from July 2003 to
the
present. She was graduated from Wellesley College (B.A., Economics). Ms.
Harris’s husband serves as the Chairman, Chief Executive Officer and as a
Managing Director of the Company.
Board
of Directors
Our
Board
of Directors supervises our management. The responsibilities of each director
include, among other things, the oversight of the investment approval process,
the quarterly valuation of our assets, and the oversight of our financing
arrangements.
Interested
Directors:
Charles
E. Harris. See
biography under "Executive Officers."
Douglas
W. Jamison. See
biography under “Executive Officers.”
Lori
D. Pressman. Ms.
Pressman, 50, has served as a member of our Board of Directors since March
2002.
She has served as a consultant to us on tiny technology, intellectual property
and in our due diligence work on certain prospective investments. She also
acts
as an observer for us at Board meetings of certain portfolio companies in
the
Boston area. She is a business consultant providing advisory services to
start-ups and venture capital companies , including certain of our portfolio
companies. She consults internationally on technology transfer practices
and
metrics for non-profit and government organizations. From 1999 to 2001, she
was
Chair of the Survey Statistics and Metrics Committee of the Association of
University Technology Managers. From September 1989 to July 2000, she was
employed by MIT in its Technology Licensing Office; she served as a Technology
Licensing Officer from 1989 to 1995 and as Assistant Director of the Technology
Licensing Office from 1996 to 2000. She was graduated from the Massachusetts
Institute of Technology (S.B., Physics) and the Columbia School of Engineering
(MSEE). She may be considered to be an "interested person" of the Company
because of the consulting work she does for us.
Independent
Directors:
W.
Dillaway Ayres, Jr. Mr.
Ayres, 57, has served as a member of our Board of Directors since November
2006.
He has served as the Chief Operating Officer of Cold Spring Harbor Laboratory,
a
research and educational institution in the biological sciences, since November
of 2000. Prior to joining Cold Spring Harbor Laboratory in 1998, Mr. Ayres
had a
20-year business career during which he worked as a corporate executive,
investment banker and entrepreneur. In 1996, he co-founded Business & Trade
Network, Inc., a business-to-business, venture capital-backed Internet company.
Prior to that he worked for five years as a Managing Director of Veronis,
Suhler
& Associates, a boutique investment banking firm in New York specializing in
the media/ communications industry. At Veronis, Suhler, he focused on investing
the firm’s private equity fund. He was graduated from Princeton University
(A.B., English) and from the Columbia University Graduate School of Business
(M.B.A., Finance).
Dr.
C. Wayne Bardin. Dr.
Bardin, 73, has served as a member of our Board of Directors since December
1994. Since 1996, he has served as the President of Bardin LLC, a consulting
firm to pharmaceutical companies. From 1998 to 2003, he served as President
of
Thyreos Corp., a privately held, start-up pharmaceutical company. From 1978
through 1996, he was Vice President of The Population Council. His professional
appointments have included: Professor of Medicine, Chief of the Division
of
Endocrinology, The Milton S. Hershey Medical Center of Pennsylvania State
University and Senior Investigator, Endocrinology Branch, National Cancer
Institute. He has also served as a consultant to several pharmaceutical
companies. He has been appointed to the editorial boards of 15 journals.
He has
also served on national and international committees and boards for the National
Institutes of Health, World Health Organization, The Ford Foundation and
numerous scientific societies. He was graduated from Rice University (B.A.),
Baylor University (M.S., M.D.) and he received a Doctor Honoris Causa from
the
University of Caen, the University of Paris and the University of
Helsinki.
Dr.
Phillip A. Bauman. Dr.
Bauman, 52, has served as a member of our Board of Directors since February
1998. Since 1999, he has been Senior Attending of Orthopedic Surgery at St.
Luke’s/Roosevelt Hospital Center in Manhattan and since 2000, he has served as
an elected member of the Executive Committee of the Medical Board of St.
Luke's/Roosevelt Hospital. Since 2005, he has been on the Board of Managers
for
the Hudson Crossing Surgery Center. Since 1997, he has been Assistant Professor
of Orthopedic Surgery at Columbia University. Since 1994, he has been a Vice
President of Orthopedic Associates of New York. He is an active member of
the
American Academy of Orthopaedic Surgeons, the American Orthopaedic Society
for
Sports Medicine, the New York State Society of Orthopaedic Surgeons and the
American Medical Association. He was graduated from Harvard College (A.B.),
Harvard University (A.M., Biology) and the College of Physicians and Surgeons
at
Columbia University (M.D.).
G.
Morgan Browne. Mr.
Browne, 73, has served as a member of our Board of Directors since June 1992.
Since 2004, he has been President and since 2000, a Trustee of Planting Fields
Foundation, a supporting institution of Planting Fields Arboretum State Historic
Park. He is Chairman of the OSI Pharmaceuticals Foundation which supports
cancer
and diabetes patient care and science education. From 2001 to 2003, he served
as
Chief Financial Officer of Cold Spring Harbor Laboratory, a not-for-profit
institution that conducts research and education programs in the biological
sciences. From 1985 to 2000, he was the Administrative Director of Cold Spring
Harbor Laboratory. In prior years, he was active in the management of numerous
scientifically based companies as an officer, as an individual consultant
and as
an associate of Laurent Oppenheim Associates, Industrial Management Consultants.
He was a founding director of the New York Biotechnology Association. He
was
graduated from Yale University (B.A.).
Dugald
A. Fletcher. Mr.
Fletcher, 78, was appointed Lead Independent Director on November 2, 2006.
Since
1996, he has served as a member of our Board of Directors. Since 1984, h
e has
served as President of Fletcher & Company, Inc., a management consulting
firm. Until the end of 1997, he was Chairman of Binnings Building Products
Company, Inc. His previous business appointments include: adviser to
Gabelli/Rosenthal LP, a leveraged buyout fund; Chairman of Keller Industries,
building and consumer products; Senior Vice President of Booz-Allen &
Hamilton; President of Booz-Allen Acquisition Services; Executive Vice President
of Paine Webber Jackson & Curtis and a Director of Paine Webber, Inc.; and
President of Baker Weeks and Co., Inc., a New York Stock Exchange member
firm.
He is currently a Trustee of the Gabelli Growth Fund and a Director of the
Gabelli Convertible and Income Securities Fund, Inc. He was graduated from
Harvard College (A.B.) and Harvard Business School (M.B.A.).
Charles
E. Ramsey. Mr.
Ramsey, 65, has served as a member of our Board of Directors since October
2002.
Since 1997, he has been a consultant. He is a retired founder and principal
of
Ramsey/Beirne Associates, Inc., an executive search firm that specialized
in
recruiting top officers for high technology companies, many of which were
backed
by venture capital. He is Chairman Emeritus of Bridges to Community, a
non-governmental organization dedicated to construction projects in Nicaragua.
As Chairman Emeritus, he serves on the Executive, Personnel and Administration
and Fund Development Committees. He was graduated from Wittenberg University
(B.A.).
James
E. Roberts. Mr.
Roberts, 62, has served as a member of our Board of Directors since June
1995.
Since January 2006, he has been President of AequiCap Insurance Company and
since September 2007, President of AequiCap Program Administrators. Mr. Roberts
is also a senior officer of various other AequiCap affiliated entities. From
November 2002 to October 2005, he was Executive Vice President and Chief
Underwriting Officer of the Reinsurance Division of Alea North America Company
and Senior Vice President of Alea North America Insurance Company. From October
1999 to November 2002, he was Chairman and Chief Executive Officer of the
Insurance Corporation of New York, Dakota Specialty Insurance Company, and
Recor
Insurance Company Inc., all members of the Trenwick Group, Ltd. From October
1999 to March 2000, he served as Vice Chairman of Chartwell Reinsurance Company
(also a member of Trenwick Group, Ltd.) and from March 2000 to November 2002
he
was the company's Chairman and CEO. He was graduated from Cornell University
(A.B.).
Richard
P. Shanley.
Mr.
Shanley, 61, joined our Board on March 12, 2007. From February 2001 to December
31, 2006, he was a partner of Deloitte & Touche LLP. From March 1976 to
January 2001, he was employed by Eisner LLP and was a partner from 1982 until
2001. During his over 30 years of public accounting experience, he served
as
lead audit partner on numerous audit engagements for public and private
companies and companies making public stock offerings, including those requiring
application of Sarbanes-Oxley Section 404. He served as lead audit partner
primarily for biotech, pharmaceutical and high-tech companies, including
companies enabled by nanotechnology. He has been actively involved on the
Biotech Council of New Jersey, the New Jersey Technology Council, the New
York
Biotechnology Association, the Connecticut Venture Group, the Biotechnology
Industry Organization and the NanoBusiness Alliance. He is an active member
of
the New York State Society of Certified Public Accountants and the American
Institute of Certified Public Accountants. He is currently serving his fourth
term on the New York State Society of CPA's Professional Ethics Committee.
He is
a licensed Certified Public Accountant in New Jersey and New York. He was
graduated from Fordham University (B.S.) and Long Island University (M.B.A.
in
Accounting).
Committees
of the Board of Directors
Our
Board
of Directors maintains six standing committees: an Executive Committee, an
Audit
Committee, a Compensation Committee, a Nominating Committee, a Valuation
Committee and an Independent Directors Committee. All of the members of each
committee other than Mr. Harris and Mr. Jamison (who sit on the Executive
Committee) are non-interested directors (as defined in Section 2(a)(19) of
the
1940 Act).
The
Executive Committee has and may exercise those rights, powers and authority
that
the Board of Directors from time to time grants to it, except where action
by
the full Board is required by statute, an order of the SEC or our charter
or
bylaws. The Executive Committee did not meet as a separate committee and
did not
act by unanimous written consent in 2007. The members of the Executive Committee
are Messrs. Harris (Chairman), Jamison, Browne, Ramsey and Dr.
Bardin.
The
Audit
Committee operates pursuant to a charter that sets forth the responsibilities
of
the Audit Committee. The Audit Committee’s responsibilities include selecting
and retaining our independent registered public accounting firm, reviewing
with
the independent registered public accounting firm the planning, scope and
results of their audit and our financial statements and the fees for services
performed, reviewing with the independent registered public accounting
firm the
adequacy of internal control systems, reviewing our annual financial statements
and receiving our audit reports and financial statements. The Audit Committee
met four times and did not act by unanimous written consent in 2007. The
members
of the Audit Committee are Messrs. Shanley (Chairman), Roberts, Browne,
Ayres
and Fletcher, all of whom are considered independent under the rules promulgated
by the Nasdaq Global Market.
The
Compensation Committee operates pursuant to a written charter and determines
the
compensation for our executive officers and the amount of salary and bonus
to be
included in the compensation package for each of our officers. The Compensation
Committee met four times and acted by unanimous written consent once in 2007.
The members of the Compensation Committee are Messrs. Roberts (Chairman),
Fletcher, Ramsey and Dr. Bauman.
The
Nominating Committee acts pursuant to a written charter as an advisory committee
to the Board by identifying individuals qualified to serve on the Board as
directors and on committees of the Board, and recommending nominees to stand
for
election as directors at the next annual meeting of shareholders. The Nominating
Committee met one time and did not act by unanimous written consent in 2007.
The
members of the Nominating Committee are Dr. Bardin (Chairman) and Messrs.
Ayres,
Shanley and Dr. Bauman.
The
Nominating Committee will consider director candidates recommended by
shareholders. In considering candidates submitted by shareholders, the
Nominating Committee will take into consideration the needs of the Board
and the
qualifications of the candidate. The Nominating Committee may also take into
consideration the number of shares held by the recommending shareholder and
the
length of time that such shares have been held. To have a candidate considered
by the Nominating Committee, a shareholder must submit the recommendation
in
writing and must include:
• The
name
of the shareholder and evidence of the person's ownership of shares of the
Company, including the number of shares owned and the length of time of
ownership;
• The
name
of the candidate, the candidate's resume or a listing of his or her
qualifications to be a Director of the Company and the person's consent to
be
named as a Director if selected by the Nominating Committee and nominated
by the
Board and consent to serve if elected; and
• If
requested by the Nominating Committee, a completed and signed director's
questionnaire.
The
shareholder recommendation and information described above must be sent
to the
Company's Corporate Secretary, c/o Harris & Harris Group, Inc., 111 West
57th Street, Suite 1100, New York, New York 10019, and must be received
by the
Corporate Secretary not less than 90 days nor more than 120 days prior
to the
anniversary of the date of the Company's immediately preceding annual meeting
of
shareholders or, if the meeting has moved by more than 30 days, it must
be
received by the Corporate Secretary not later than the close of business
on the
10th
day
following the day on which notice of the date of the annual meeting was
mailed
or such public disclosure of the date of the annual meeting was made, whichever
first occurs.
The
Valuation Committee reviews and approves the valuation of our assets, from
time
to time, as prescribed by the 1940 Act, pursuant to Valuation Procedures
established by our Board of Directors. The Valuation Committee met six times
and
did not act by unanimous written consent in 2007. The members of the Valuation
Committee are Messrs. Browne (Chairman), Ayres, Fletcher, Ramsey, Roberts,
Shanley and Drs. Bardin and Bauman.
The
Independent Directors Committee has the responsibility of proposing corporate
governance and long-term planning matters to the Board of Directors and making
the required determinations pursuant to the 1940 Act. The Independent Directors
Committee met four times and did not act by unanimous written consent in
2007.
The members of the Independent Directors Committee are Messrs. Fletcher
(Chairman), Ayres, Browne, Ramsey, Roberts, Shanley and Drs. Bardin and
Bauman.
On
November 2, 2006, the Board of Directors appointed an Ad Hoc Pricing Committee.
The Pricing Committee is responsible for approving the price of any offering
of
our Common Stock, approving the number of shares being offered in such offering,
providing final approval of the underwriting agreement and handling any other
details as are necessary to effect any transactions pursuant to this
registration statement. The members of the Pricing Committee are Messrs.
Harris
(Chairman), Browne and Dr. Bardin.
The
following table sets forth the dollar
range of equity securities beneficially
owned by each director as of December 31, 2007.
Name
of Director
|
Dollar
Range of Equity Securities
Beneficially
Owned (1)(2)(3)
|
Interested
Directors
|
|
Charles
E. Harris(4)
|
Over
$100,000
|
Douglas
W. Jamison (4)
|
Over
$100,000
|
Lori
D. Pressman (5)
|
$50,001
- $100,000
|
|
|
Independent
Directors
|
|
W.
Dillaway Ayres, Jr.
|
$10,001
- $50,000
|
Dr.
C. Wayne Bardin
|
Over
$100,000
|
Dr.
Phillip A. Bauman
|
Over
$100,000
|
G.
Morgan Browne
|
Over
$100,000
|
Dugald
A. Fletcher
|
Over
$100,000
|
Charles
E. Ramsey
|
Over
$100,000
|
James
E. Roberts
|
Over
$100,000
|
Richard
P. Shanley
|
$10,001
- $50,000
|
___________________
(1)
|
Beneficial
ownership has been determined in accordance with Rule 16a-1(a)(2)
under
the 1934 Act.
|
(2)
|
The
dollar ranges are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000
and
over $100,000.
|
(3)
|
The
dollar ranges are based on the price of the equity securities as
of
December 31, 2007.
|
(4)
|
Denotes
an individual who is an "interested person" as defined in the 1940
Act.
|
(5)
|
Denotes
an individual who may be considered an "interested person" because
of
consulting work performed for us.
|
Principal
Shareholders and Ownership by Directors and Executive
Officers
Set
forth
below is information as of May 28, 2008, with respect to the beneficial
ownership of our Common Stock by (i) each of our directors and named executive
officers (as defined below) and (ii) all of our directors and executive
officers
as a group. Except as otherwise indicated, to our knowledge, all shares
are
beneficially owned and investment and voting power is held by the persons
named
as owners. At this time, we are unaware of any shareholder owning 5 percent
or
more of the outstanding shares of Common Stock other than the ones noted
below.
Unless otherwise provided, the address of each holder is c/o Harris & Harris
Group, Inc., 111 West 57th
Street,
Suite 1100, New York, New York 10019.
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of
Beneficial
Ownership(1)
|
|
Percentage
of Outstanding
Common
Shares Owned(2)
|
|
|
|
|
|
Independent
Directors:
|
|
|
|
|
W.
Dillaway Ayres, Jr.
|
|
6,331
|
|
*
|
Dr.
C. Wayne Bardin
|
|
29,324(3)
|
|
*
|
Dr.
Phillip A. Bauman
|
|
31,759(4)
|
|
*
|
G.
Morgan Browne
|
|
36,191
|
|
*
|
Dugald
A. Fletcher
|
|
24,621
|
|
*
|
Charles
E. Ramsey
|
|
41,717
|
|
*
|
James
E. Roberts
|
|
26,047
|
|
*
|
Richard
P. Shanley
|
|
5,324
|
|
*
|
|
|
|
|
|
Interested
Directors:
|
|
|
|
|
Charles
E. Harris
|
|
1,928,890(5)
|
|
8.0
|
Douglas
W. Jamison
|
|
330,548(6)
|
|
1.4
|
Lori
D. Pressman
|
|
9,437
|
|
*
|
|
|
|
|
|
Named
Executive Officers:
|
|
|
|
|
Alexei
A. Andreev
|
|
334,921(7)
|
|
1.4
|
Sandra
M. Forman
|
|
161,793(8)
|
|
*
|
Michael
A. Janse
|
|
247,782(9)
|
|
1.1
|
|
|
|
|
|
All
directors and executive officers as
a
group (19 persons)
|
|
3,478,364
(10)
|
|
13.7
|
|
|
|
|
|
________________
*
Less
than 1 percent.
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 of
the
Securities Exchange Act of 1934.
|
(2)
|
The
percentage of ownership is based on 23,314,573 shares of common
stock
outstanding as of May 28, 2008, together with the exercisable
options for
such shareholder, as applicable. In computing the percentage
ownership of
a shareholder, shares that can be acquired upon the exercise
of
outstanding options are not deemed outstanding for purposes of
computing
the percentage ownership of any other person.
|
(3)
|
Includes
5,441 shares owned by Bardin LLC for the Bardin LLC Profit-Sharing
Keogh.
|
(4)
|
Includes
5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's wife; 100
shares
owned by Adelaide Polk-Bauman, Dr. Bauman's daughter; 100 shares
owned by
Milbry Polk-Bauman, Dr. Bauman's daughter; and 100 shares owned
by Mary
Polk-Bauman, Dr. Bauman's daughter. Ms. Milbry C. Polk is the custodian
for the accounts of the three
children.
|
(5)
|
Includes
1,039,559 shares owned by Mrs. Susan T. Harris, Mr. Harris’s wife and our
Corporate Secretary, 35,266 shares owned by Mr. Harris and 854,065
shares
that can be acquired upon the exercise of outstanding options
by Mr.
Harris.
|
(6)
|
Includes
310,905 shares that can be acquired upon the exercise of outstanding
options.
|
(7)
|
Includes
324,652 shares that can be acquired upon the exercise of outstanding
options.
|
(8)
|
Includes
250 shares owned by Edward Forman, Ms. Forman's husband, 270
shares owned
jointly with Edward Forman and 154,091 shares that can be acquired
upon
the exercise of outstanding options by Ms.
Forman.
|
(9)
|
Includes
247,782 shares that can be acquired upon the exercise of outstanding
options.
|
(10)
|
Includes
2,151,404 shares that can be acquired upon the exercise of outstanding
options.
|
EXECUTIVE
COMPENSATION
Compensation
Discussion & Analysis
Overview
This
Compensation Discussion & Analysis ("CD&A") describes the material
elements of compensation awarded to, earned by, or paid to our principal
executive officer, principal financial officer and the three most highly
paid
executive officers (other than the principal executive officer and the principal
financial officer) serving as such at the end of 2007 (the "named executive
officers"), who are:
|
·
|
Charles
E. Harris, our Chairman, Chief Executive Officer and a Managing
Director;
|
|
·
|
Douglas
W. Jamison, our President, Chief Operating Officer, Chief Financial
Officer (in 2007) and a Managing Director;
|
|
·
|
Alexei
A. Andreev, an Executive Vice President and a Managing
Director;
|
|
·
|
Michael
A. Janse, an Executive Vice President and a Managing Director;
and
|
|
·
|
Sandra
M. Forman, our General Counsel, Chief Compliance Officer and Director
of
Human Resources.
|
This
CD&A focuses on the information contained in the following tables and
related footnotes and narrative for primarily the last completed fiscal year,
and we also describe compensation actions taken before or after the last
completed fiscal year to the extent it enhances the understanding of our
executive compensation for the last completed fiscal year. Pursuant to our
Compensation Committee's written charter, the Committee oversees the design
and
administration of our executive compensation program. The Committee ensures
that
the total compensation paid to our executive officers is fair, reasonable
and
competitive.
Compensation
Program Objectives and Philosophy
In
General. The
objectives of the Company's compensation program are to:
|
·
|
attract,
motivate and retain employees by providing market-competitive compensation
while preserving company resources;
|
|
·
|
maintain
our leadership position as a venture capital firm specializing
in tiny
technology, especially nanotechnology; and
|
|
·
|
align
management's interests with shareholders' interests.
|
To
achieve the above objectives, the Committee has designed a comprehensive
compensation program in 2007 for our executive officers and all 12 of our
permanent, full-time employees that is composed of a base salary and equity
awards in the form of stock options. The Committee believes that the equity
component of compensation is a crucial component of our compensation package.
Shorter-term and longer-term vesting stock options are utilized for shorter-term
and longer-term incentive, and to make the Company's compensation program
more
competitive, particularly with compensation programs of private partnerships
that, unlike the Company, are able to award carried interests taxable as
long-term gains and to permit co-investments in deals. Such private partnerships
also are more easily able to pay cash bonuses because they do not have the
expenses associated with being publicly traded. Our executive compensation
programs and related data are reviewed throughout the year and on an annual
basis by the Committee to determine if the compensation program is providing
its
intended results.
The
Committee believes that retention is especially important for a company of
our
size (12 permanent employees) and the specialized nature of our business.
Our
employees have been selected and trained to support our focus on investment
in
tiny-technology companies and our specialized regulation and administration
as a
business development company. Our tiny-technology focus requires highly
specialized scientific knowledge. There are relatively few individuals who
have
both such scientific knowledge and venture capital experience. Additionally,
our
business development company structure requires specialized management,
administrative, legal and financial knowledge of our specific regulatory
regime.
Because there are very few business development companies, it would be difficult
to find replacements for certain executive, legal and financial positions.
Competitive
Market.
For our
investment-team members, the competition for retention and recruitment is
primarily private venture capital firms, hedge funds and, to a lesser extent,
investment banking firms. Such a fund commonly pays at least 20 percent of
the
profits (including capital gains), or carried interest, of each newly-raised
fund to the management firm, which awards interests to its partners and
employees. For our legal and accounting professionals, in addition to the
foregoing, the competition is other public companies without regard to industry,
asset management companies and legal and accounting firms. The Company does
not
have a readily identifiable peer group, because most business development
companies are not early-stage venture-capital companies, and most other
early-stage venture-capital companies are not publicly traded. Thus, we do
not
emphasize the use of peer comparison groups in the design of our compensation
program. We do utilize compensation comparables, on an individual basis,
to the
extent that they seem appropriately analogous, as provided to the Committee
by
an independent compensation consultant, as one factor in determining
compensation.
Compensation
Process. On
an
annual basis, the Committee reviews and approves each element of compensation
for each of our executive officers, taking into consideration the recommendation
of our Chief Executive Officer (for compensation other than his own, which
is
subject to his employment agreement as discussed below) in the context of
the
Committee's compensation philosophy, to ensure that the total compensation
program and the weight of each of its elements meets the overall objectives
discussed above. For the Chief Compliance Officer, the Committee recommends
her
compensation to the full Board, for approval by at least a majority of the
non-interested directors (as defined in Section 2(a)(19) of the 1940 Act).
In
2007,
an independent compensation consultant, Johnson & Associates, supplied the
Committee with market data on all officers' positions. The information provided
for 2007-2008 was for private-equity firms, venture capital firms and broad
investment management firms, and was adjusted in an effort to reflect
compensation for a venture capital firm with $100 - $200 million in assets
under
management. Data was also provided for public companies with comparable market
capitalizations. Further data was provided for 1940 Act compliance personnel
(collectively, the "Identified Group"). The independent consultant did not
identify the names of companies included in the Indentified Group. The Committee
considers recommendations from the Chief Executive Officer regarding salaries,
along with factors such as individual performance, current and potential
impact
on Company performance, reputation, skills and experience. When determining
compensation, the Committee considers the importance of retaining certain
key
officers whose replacement would be challenging owing to the Company's status
as
a 1940 Act company and owing to its tiny-technology specialty. The Committee
also considers the highly specialized nature of certain positions in determining
overall compensation.
When
addressing executive compensation matters, the Committee generally meets
outside
the presence of all executive officers except our Chief Executive Officer
and
our General Counsel, each of whom leaves the meeting when his/her compensation
is reviewed.
Regulatory
Considerations.
The
1940 Act permits business development companies to either pay out up to 20
percent of net income after taxes through the implementation of a profit-sharing
plan or issue up to 20 percent of shares issued and outstanding through
implementation of a stock-option plan. The exercise price of stock options
may
not be less than the current market value at the date of issuance of the
options.
We
have
applied for exemptive relief from the SEC permitting us to issue restricted
stock pursuant to the Harris & Harris Group, Inc. 2006 Equity Incentive Plan
(the "Stock Plan") to employees and to permit non-employee directors to
participate in the Stock Plan. Until such time as we receive such exemptive
relief and such provisions are approved by shareholders, we will not issue
any
shares of restricted stock and our non-employee directors will not participate
in the Stock Plan.
The
Company has been informed that the SEC has commenced its review of the exemptive
application, and we have received and responded to formal written comments.
We
cannot, however, evaluate whether or when an order regarding our application
for
the relief requested may be granted.
We
have
also designed our Stock Plan with the intention that awards made thereunder
generally will qualify as performance-based compensation under Section 162(m)
of
the Internal Revenue Code of 1986 (the "Code"), but we reserve the right
to pay
amounts thereunder that do not qualify as such performance-based compensation
if
we determine such payments to be appropriate in light of our compensation
objectives from time to time. Section 162(m) of the Code disallows a tax
deduction to publicly held companies for compensation paid to their chief
executive officer or any of their three other most highly compensated executive
officers and chief financial officer, to the extent that compensation exceeds
$1
million per covered officer in any fiscal year. However, if compensation
qualifies as performance-based, the limitation does not apply.
Our
status as a regulated investment company under Subchapter M of the Code makes
the deductibility of our compensation arrangements a much less important
factor
for the Committee to consider than it would be if we were an operating company.
Under Subchapter M, the Company cannot deduct operating expenses from its
long-term capital gains, which are its most significant form of income. The
Company presently has more operating expenses than it can deduct for tax
purposes, even before equity compensation.
Compensation
Components
The
principal elements of our executive compensation program for 2007 are base
salary, equity and other benefits and perquisites. The Committee believes
that
each element is essential to achieve the Company's objectives as set forth
above. The Committee is mindful of keeping cash compensation expenses at
as low
a level of total operating expenses as is consistent with maintaining the
Company's competitiveness versus private venture capital funds while meeting
the
expenses of complying with the regulatory requirements of a publicly traded
company. Therefore, the equity component of compensation is key to keeping
overall compensation competitive, while making prudent use of the Company's
resources.
Base
Salaries.
We
recognize the need to pay our named executive officers, and other employees,
a
competitive annual base salary. We review base salaries for our named executive
officers annually. In 2007, the Committee compared salary ranges for all
executive officers against the Identified Group. Base salaries are generally
adjusted annually for inflation and also based on changes in the marketplace
and
an executive's individual performance, salary position among peers, career
growth potential and/or a change in responsibilities. Other than Mr. Harris,
whose salary was set pursuant to his employment agreement as described below,
all of the named executive officers are paid the same base salary.
Effective
January 1, 2007, the base salary of Sandra M. Forman, our General Counsel,
Chief
Compliance Officer and Director of Human Resources, was increased from $215,000
in 2006 to $267,403 in 2007, to remain market competitive for her services
and
to put her base salary on parity with our Managing Directors.
All
other
named executive officers received cost of living adjustments in 2007. There
presently are no contemplated increases in base salary for any of the named
executive officers in 2008 other than cost-of-living adjustments.
Equity
Incentive Awards.
In
General
Commencing
in 2006, we have provided the opportunity for our named executive officers
and
other employees to earn longer-term and shorter-term equity incentive awards.
Equity incentive awards in the form of options potentially generate cash
for the
Company that can be used for portfolio company investments and for working
capital.
Longer-Term
Equity Incentive Awards
The
longer-term equity incentive awards provide employees with the incentive
to stay
with us for longer periods of time, which in turn provides us with greater
stability. Longer-term equity incentive awards are meant to substitute for
carried interest that our investment professionals would receive were they
employed by private-sector venture capital firms, which typically pay at
least
20 percent of profits before any taxes, and that carried interest is usually
in
the form of long-term capital gains, not ordinary income.
The
Committee believes that strategically timed awards of restricted stock are
also
important to ensuring the retention, stability and desired succession of
executive talent, but the Company is not permitted to grant awards of restricted
stock unless the Company receives an exemptive order from the SEC to do
so.
On July
11, 2006, we filed an application with the SEC to obtain such exemptive relief
(as described above) and in June 2007 and February 2008, the Company responded
to comments from the staff of the SEC on the application. If we receive the
exemptive relief, the Committee will not grant any awards of restricted stock
unless the amended Stock Plan is approved by shareholders, and such awards
would
be longer term.
Shorter-Term
Equity Incentive Awards
Shorter-term
equity incentive awards help to motivate employees in the short term, as
we
generally do not pay annual cash bonuses. Without cash bonuses or cash retained
through the exercise and sale of shorter-term options, the Committee's
independent compensation consultant has advised that certain key positions
are
not competitive when compared with the Identified Group. Shorter-term equity
incentive awards also permit each executive officer to increase his/her
ownership in Company stock, pursuant to minimum share ownership guidelines
established by our Board. Shorter-term vesting periods also have the potential
of generating cash for the company in the short term, through the purchase
of
stock in the course of the exercise of options, that can be used for making
venture-capital investments and for working capital.
If
the
named executive officers, exclusive of Mr. Harris, as he is scheduled to
retire
on December 31, 2008, do not receive sufficient cash from the exercise and
sale
of stock options in a year to provide market-competitive total compensation,
as
determined by the Committee, based on advice from the independent compensation
consultant, the Committee will pay the named executive officers cash bonuses.
No
such discretion was exercised in 2007. The Committee believes that retention
of
key employees is crucial because of the specialized nature of our business
as
described more fully below. Additionally, the Committee has considered that,
owing to the scheduled retirement of Mr. Harris, the importance of retaining
the
other team members has increased.
Awards
Under the Stock Plan
In
accordance with the Stock Plan, which was approved by shareholders at the
2006
Annual Meeting of Shareholders, the Committee can issue options from time
to
time for up to 20 percent of the total shares of stock issued and outstanding.
Thus, the number of shares of stock able to be reserved for the grant of
awards
under the Stock Plan will automatically increase (or decrease) with each
increase (or decrease) in the number of shares of stock issued and outstanding.
The Board intends to increase the number of shares reserved for stock option
grants (currently 4,662,915) from time to time as the number of outstanding
shares increases. The Committee may grant awards under the Stock Plan to
the
full extent permitted at the time of each grant in order to compete with
private
equity firms by retaining the specially qualified and trained personnel that
have been carefully recruited and developed for the Company's specialized
business. Because our primary competitors are organized as private partnerships,
they do not have the overhead of a publicly traded company. As a consequence,
unlike the Company, they can afford for cash compensation to be a larger
percentage of their total expenses. Unlike us, they are not prohibited from
paying out at least 20 percent of their profits to key employees, primarily
in
the form of long-term capital gains. They also, unlike us, are permitted
to
grant their employees co-investment rights.
Under
the
Stock Plan, no more than 25 percent of the shares of stock reserved for the
grant of the awards under the Stock Plan may be restricted stock awards at
any
time during the term of the Stock Plan. If any shares of restricted stock
are
awarded, such awards will reduce on a percentage basis the total number of
shares of stock for which options may be awarded. If we do not receive exemptive
relief from the SEC to issue restricted stock, all shares granted under the
Stock Plan may be subject to stock options. If we were to receive such exemptive
relief and were to issue the full 25 percent of the shares of stock reserved
for
grant under the Stock Plan as restricted stock, no more than 75 percent of
the
shares granted under the Stock Plan could be subject to stock options. No
more
than 1,000,000 shares of our common stock may be made subject to awards under
the Stock Plan to any individual in any year.
On
June
27, 2007, the Committee and the full Board of Directors approved individual
stock-option awards for certain officers and employees of the Company. The
terms
and conditions of the stock options granted were set forth in award agreements
between the Company and each award recipient. A total of 1,700,609 stock
options
were granted with vesting dates ranging from December 2007 to June 2014,
with an
exercise price of $11.11, which was the closing volume weighted average price
on
the date of the grant. Upon exercise, the shares will be issued from our
previously authorized but unissued shares.
The
Committee has generally granted the same number of stock options to each
of the
Managing Directors, with the exception of Mr. Harris as discussed below.
Additionally, in 2007, the Committee granted an additional 50,000 options
to Mr.
Jamison in anticipation of his growing role in the Company as the successor
to
Mr. Harris as Chief Executive Officer in 2009 upon Mr. Harris's retirement.
In
2007, Mr. Janse received an additional 429,128 options to give him an equivalent
number of options to Mr. Andreev.
The
number of options per employee and the vesting and expiration dates were
originally proposed by the independent consultant after conversations with
the
Chairman of the Committee and input from the Chief Executive Officer (with
respect to options other than his own). All awards granted to executive
officers
vest subject to continued employment with the Company through each applicable
vesting date, except for certain retirees. All stock-option awards to officers
will be subject to stock-retention guidelines (as described in the section
"Share Ownership Guidelines" below).
In
2006
and 2007, new grants were planned in advance of, and in anticipation of,
the
expiration of prior grants. Commencing in 2008, the Committee may give
quarterly, rather than annual, grants to executive officers. The Committee
believes that giving four smaller grants quarterly, rather than one annual
grant, will more closely align employees' interests with those of shareholders.
We do not time stock option grants in coordination with the release of material,
non-public information, nor do we time the release of material, non-public
information for the purpose of affecting the value of executive
compensation.
Option
grants in 2007 were not subject to performance goals. Other than stock options
being tied to stock price, no other items of corporate performance were taken
into account at the time of grant, because of the difficulty of determining
annual performance metrics. Business development companies like us do not
report
earnings per share; moreover, write-downs and write-offs of investments are
an
expected part of our risk-seeking strategy, and it is not uncommon for even
our
most successful investments to take years to come to fruition. The Committee
may
create performance goals for the vesting of restricted stock (subject to
receipt
of an exemptive order). If performance goals are used in the future, the
Board
will have the authority to make equitable adjustments to the performance
goals
in recognition of unusual or non-recurring events affecting the Company or
the
financial statements of the Company, in response to changes in applicable
laws
or regulations or to account for items of gain, loss or expense determined
to be
extraordinary or unusual in nature or infrequent in occurrence or related
to the
disposal of a segment of a business or related to a change in accounting
principles.
Generally,
the Committee is made aware of the tax and accounting treatment of various
compensation alternatives. SFAS 123(R) requires us to record the fair value
of
equity awards on the date of grant as a component of equity. We account for
the
Stock Plan in accordance with the provisions of SFAS No. 123(R), "Share-Based
Payment," which requires that we determine the fair value of all share-based
payments to employees, including the fair value of grants of employee stock
options, and record these amounts as an expense in the Statement of Operations
over the vesting period with a corresponding increase to our additional paid-in
capital. The increase to our operating expenses is offset by the increase
to our
additional paid-in capital, resulting in no net impact to our net asset value.
Thus, the granting of options is expected to have no net impact on our net
asset
value. If and when the options are exercised, the net asset value per share
will
be decreased if the net asset value per share at the time of exercise is
higher
than the exercise price, and increased if the net asset value per share at
the
time of exercise is lower than the exercise price. As a result, although
we
consider the accounting treatment of granting options, we do not consider
the
accounting treatment to be a dominant factor in the form and/or design of
awards.
Additionally,
we do not record tax benefits associated with expensing of stock options,
because we intend to qualify as a RIC under Subchapter M of the Code. As
a RIC,
we cannot use all of our existing operating expenses for tax purposes.
10b5-1
Plans
We
have
established a policy of permitting our officers to enter into trading plans
to
sell shares of our common stock in accordance with Rule 10b5-1 of the Securities
Act of 1934. The policy allows our participating officers to adopt a
pre-arranged stock trading plan to buy or sell pre-determined amounts of
our
common stock over a period of time. This policy was established in recognition
of the liquidity and diversification objectives of our officers, including
enabling our officers to sell certain shares of our common stock (such as
some
of the shares of our common stock they acquire upon exercise of stock options,
to pay for the exercise of options, to provide for taxes triggered by the
exercise of options and to generate cash from the exercise of options).
Benefits
and Perquisites. We
provide the opportunity for our named executive officers and other full-time
employees to receive certain perquisites and general health and welfare
benefits, discussed more fully below, which consist of life- and
health-insurance benefits, reimbursement for certain medical expenses and
gym-membership fees. We also offer participation in our defined contribution
401(k) plan. For the year ended December 31, 2007, the Committee approved
a
401(k) plan match of 100 percent of employee contributions. Except as provided
in our employment agreement with Mr. Harris, our executive officers generally
receive the same benefits and perquisites as our full-time administrative
employees.
Profit
Sharing.
Prior
to the adoption of the Stock Plan, the Company maintained the Amended and
Restated Harris & Harris Group, Inc. Employee Profit-Sharing Plan (the "2002
Plan"). Under the 2002 Plan, approximately 90 percent of the amount determined
as "qualifying income" was paid out to participants pursuant to distribution
percentages determined by the Committee. The remaining payment was paid out
after we finalized our tax returns for each plan year. Effective May 4, 2006,
the 2002 Plan was terminated. On January 31, 2007, a final profit sharing
award
of $261,661 was paid to certain participants related to the 2005 plan year
after
finalization of our tax returns for 2005. Please see the "Non-Equity Incentive
Plan Compensation" column and accompanying footnote in the 2007 Summary
Compensation Table for more information about profit sharing
awards.
Internal
Pay Equity.
In
2007, the Committee discussed the internal pay equity of the named executive
officers. The Committee noted that Mr. Harris's compensation is appropriate
based on the unique qualifications and skills required for the Chief Executive
Officer position in our Company and his role as Founder. The Committee further
noted that our investment professionals work together as a team rather than
as a
collection of individuals, which was the basis for the Committee's decision
to
pay all Managing Directors (except for Mr. Harris) identically. The Committee
believes that, on a small team, all members must pull their full weight.
Accordingly, the Committee believes that the team approach to compensation
promotes teamwork among the Managing Directors. The Committee also noted
that
Ms. Forman's base salary was on parity with the Managing Directors to make
her
compensation competitive based on her 1940 Act specialty and her management
role
in the Company as General Counsel, Chief Compliance Officer and Director
of
Human Resources. The Committee further noted that the Managing Directors
should
receive more stock options than other employees based on their income-generating
role and to keep their total compensation competitive with private
venture-capital firms.
Compensation
of our Chief Executive Officer
The
Committee reviews all elements of the compensation of Charles E. Harris,
our
Chairman, Chief Executive Officer and a Managing Director, on an annual basis
and then makes a determination about his compensation without his presence,
subject to his employment agreement.
Pursuant
to that agreement, as most recently amended as of August 2, 2007 (the
"Employment Agreement"), during the period of employment, Mr. Harris is to
receive compensation in the form of base salary, with automatic yearly
adjustments to reflect inflation, which amounted to a minimum required base
salary of $246,651 for 2006. In addition, the Board may increase such salary,
and subsequently decrease it, but not below the level provided for by the
automatic adjustments described above. Mr. Harris's base salary for 2006
was
increased to $300,000 (thereby also increasing his SERP benefit as described
below) in part in recognition of a 74 percent decrease in Mr. Harris's
profit-sharing allocation in recent years in order to provide additional
profit
sharing to other employees. This was the first salary increase for Mr. Harris,
other than cost-of-living adjustments, since 1994. Mr. Harris's base salary
for
2007 and 2008 was increased to $306,187 and $314,623, respectively, based
on
cost-of-living adjustments.
In
2007,
the Committee granted to Mr. Harris the following stock options:
|
Expiration
Date
|
Year
of Vesting
|
Exercise
|
|
of
Options
|
2007
|
2008
|
Price
|
|
|
|
|
|
9
Yr NQSO (vest 50% on
|
|
|
|
|
12/27/07,
50% vest of 12/27/08)
|
6/26/2016
|
120,491
|
120,490
|
$11.11
|
The
amount of options granted to Mr. Harris was based on creating long-term
incentives for Mr. Harris with respect to strategy and investment, balance
sheet, personnel and lease decisions despite his scheduled retirement, in
recognition of his role as Founder of the Company, and as an incentive for
him
to sign upon his retirement a three-year non-compete agreement covering the
period after his retirement.
Under
his
employment agreement, Mr. Harris is entitled to participate in all compensation
and employee benefit plans or programs, and to receive all benefits,
perquisites, and emoluments, for which salaried employees are eligible. Under
the Employment Agreement, we furnish Mr. Harris with certain perquisites,
which
include a company car, health-club membership, personal trainer, membership
in
certain social or country clubs, a reimbursement for an annual physical
examination and up to a $5,000 annual reimbursement, adjusted for inflation,
over the period of the agreement, for personal financial or tax
advice.
The
Employment Agreement also provides Mr. Harris with life insurance for the
benefit of his designated beneficiary in the amount of at least $2,000,000;
provides reimbursement for uninsured medical expenses, not to exceed $10,000
per
annum, adjusted for inflation, over the period of the agreement; provides
Mr.
Harris and his spouse with long-term care insurance; and provides Mr. Harris
with disability insurance providing for continuation of 100 percent of his
base
salary for a specified period. These benefits are for the term of the Employment
Agreement. The Employment Agreement provides that the term of Mr. Harris's
employment may not be extended beyond December 31, 2008, unless a committee
of
the Board consisting of non-interested Directors extends the date by one
year
pursuant to the Executive Mandatory Retirement Benefit Plan, and Mr. Harris
agrees to serve beyond December 31, 2008.
Mr.
Harris's Employment Agreement also provides for a supplemental executive
retirement plan (the "SERP") and a severance compensation agreement for his
benefit. See "2007 Non-Qualified Deferred Compensation" below for more
information about the SERP. For more information about Mr. Harris's severance
compensation, please see "Potential Payments upon Termination or Change in
Control" below.
The
Committee determined that the Employment Agreement, the severance compensation
agreement and the awards made to Mr. Harris in 2007 pursuant to the Stock
Plan
are appropriate based on the unique qualifications and skills required for
the
Chief Executive Officer position in our Company. Our Chief Executive Officer
must have expertise in managing a public company, managing a business
development company and managing a venture-capital company. He must also
have
knowledge of tiny technology, particularly nanotechnology, have stature within
both the nanotechnology community and the venture-capital community and have
relationships with the investment banking community.
Share
Ownership Guidelines
Our
Board
of Directors has established a retained stock-ownership policy for our officers.
Pursuant to the policy, each executive officer is expected to own at least
25
percent of the net shares (after sales of stock to cover the purchase price
and
taxes triggered by the exercise of options) that he or she purchases in a
calendar year through the exercise of options covering up to $75,000 of
underlying stock based on current market value on the day of each transaction.
Each executive officer must then retain at least 50 percent of the net shares
(after sales of stock to cover the purchase price and taxes triggered by
the
exercise of options) above $75,000 until his or her purchases reach the
following share ownership levels:
|
|
Ownership
Level
|
|
|
Managing
Directors
(including
CEO)
|
$4,500,000
|
|
|
Other
Deal Team Members (including General Counsel)
|
$2,500,000
|
|
|
Other
Officers
|
1
X
Base Salary
|
|
After
reaching the above ownership levels, each executive officer is expected to
retain 25 percent of the net shares (after sales of stock to cover the purchase
price and taxes triggered by the exercise of options) that he or she purchases
in any calendar year through the exercise of options. The policy aligns the
interests of our officers and directors with the interests of shareholders.
Our
Chief Executive Officer currently exceeds the guidelines. Other executive
officers are working toward the ownership levels as stock options are
exercised.
Compensation
and Share Ownership of Our Managing Directors
Messrs.
Harris, Jamison, Andreev, Janse and Wolfe are Managing Directors and are
primarily responsible for the day-to-day management of our portfolio. They
have
served in this capacity since 1984, 2002, 2005, 2007 and 2008 respectively,
although the title "Managing Director" was first utilized by our Company
in
2004.
See
the
“Compensation Discussion and Analysis - Compensation of our Chief Executive
Officer” above for more information about the compensation of Mr. Harris.
Messrs. Jamison, Andreev, Janse and Wolfe each receive a fixed base salary
as
determined by our Compensation Committee, participate in the Equity Incentive
Plan (as described above) and receive all benefits, perquisites, and emoluments
for which salaried employees are eligible.
The
following table sets forth the dollar range of equity securities beneficially
owned by each Managing Director as of December 31, 2007.
Name
of Managing Director
|
|
Dollar
Range of Equity Securities
Beneficially
Owned
(1)(2)
|
|
Charles
E. Harris
|
|
Over
$1,000,000(3)
|
|
Douglas
W. Jamison
|
|
Over
$1,000,000(4)
|
|
Alexei
A. Andreev
|
|
Over
$1,000,000(5)
|
|
Michael
A. Janse
|
|
Over
$1,000,000(6)
|
|
Daniel
B. Wolfe
|
|
$500,001
- $1,000,000(7)
|
|
___________________
(1) Beneficial
ownership has been determined in accordance with Rule 16a-1(a)(2) of the
1934
Act.
(2) The
dollar ranges are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000,
$100,001-$500,000, $500,001-$1,000,000 and over $1,000,000.
(3) Includes
600,841 shares that can be acquired upon the exercise of outstanding
options.
(4)
Includes
247,681 shares that can be acquired upon the exercise of outstanding
options.
(5)
Includes
261,428 shares that can be acquired upon the exercise of outstanding
options.
(6)
Includes
237,891 shares that can be acquired upon the exercise of outstanding
options.
(7)
Reported
as of May 28, 2008. Mr. Wolfe was promoted to Managing Director as of January
1,
2008. Includes 111,999 shares that can be acquired upon the exercise of
outstanding options.
Related
Party Transactions
In
the
ordinary course of business, the Company enters into transactions with portfolio
companies that may be considered related party transactions. Other than these
transactions, for the fiscal year ended December 31, 2007, there were no
transactions, or proposed transactions, in which the registrant was or is
a
participant in which any related person had or will have a direct or indirect
material interest.
In
order
to ensure that the Company does not engage in any prohibited transactions
with
any persons affiliated with the Company, the Company has implemented procedures,
which are set forth in the Company’s Compliance Manual. Our Audit Committee must
review in advance any "related party" transaction, or series of similar
transactions, to which the Company or any of its subsidiaries was or is to
be a
party, in which the amount involved exceeds $120,000 and in which such related
party had, or will have, a direct or indirect material interest. The Board
of
Directors reviews these procedures on an annual basis.
In
addition, the Company’s Code of Conduct for Directors and Employees ("Code of
Conduct"), which is signed by all employees and directors on an annual basis,
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and the interests of
the Company. Pursuant to the Code of Conduct, each employee and director
must
disclose any conflicts of interest, or actions or relationships that might
give
rise to a conflict, to the Chief Compliance Officer. The Independent Directors
Committee is charged with monitoring and making recommendations to the Board
of
Directors regarding policies and practices relating to corporate governance.
If
there were any actions or relationships that might give rise to a conflict
of
interest, such actions or relationships would be reviewed and approved by
the
Board of Directors.
Remuneration
of Named Executive Officers
2007
Summary Compensation Table
The
following table sets forth a summary for the years ended December 31, 2007,
and
December 31, 2006, of the cash and non-cash compensation paid to our named
executive officers. The primary elements of each named executive officer’s total
compensation reported in the table are base salary and equity incentives
consisting of stock options. The Summary Compensation Table should be read
in
conjunction with the CD&A and the other tables and narrative descriptions
that follow.
Name
and Principal Position
|
Year
|
Salary
($)
|
Option
Awards(1)
($)
|
Non-Equity
Incentive Plan Compensation (2)
($)
|
Change
in Pension Value and Nonqualified Compensation Earnings(3)
($)
|
All
Other Compensation
($)(4)(6)(7)
|
Total
($)
|
Charles
E. Harris
Chairman
of the Board,
Chief
Executive Officer, Managing Director(5)
|
2007
2006
|
306,187
300,000
|
3,374,224
2,034,482
|
0
29,067
|
42,063
54,692
|
418,479
405,628
|
4,140,953
2,823,869
|
Douglas
W. Jamison
President,
Chief Operating Officer, Chief Financial Officer (2007), Managing
Director, Former Vice President
|
2007
2006
|
267,403
262,000
|
953,931
668,677
|
0
3,957
|
0
--
|
15,500
15,000
|
1,236,834
949,634
|
Alexei
A. Andreev
Managing
Director, Executive Vice President
|
2007
2006
|
267,403
262,000
|
897,250
668,677
|
0
0
|
--
--
|
15,500
15,000
|
1,180,153
945,677
|
Michael
A. Janse
Managing
Director, Executive Vice President(8)
|
2007
2006
|
184,211
--
|
873,201
--
|
0
--
|
--
--
|
45,500
--
|
1,102,912
--
|
Sandra
M. Forman, Esq.
General
Counsel, Chief Compliance Officer, Director of Human
Resources
|
2007
2006
|
267,403
215,000
|
559,229
381,595
|
0
1,580
|
--
--
|
15,500
15,000
|
842,132
613,175
|
(1)
|
The
figures in this column do not represent amounts actually paid
to the named
executive officers, but represent the aggregate dollar amount
of
compensation cost recognized by us in 2007 under FAS 123(R) for
options
granted in 2007 and prior years. We use the Black-Scholes-Merton
model to
calculate compensation cost under FAS 123(R). You may find more
information about the assumptions we use in the Black-Scholes-Merton
model
under "Fair Valuation of Option
Awards."
|
(2)
|
These
amounts represent the actual amounts earned as a result of realized
gains
during the year ended December 31, 2005, and paid out in 2006 and
2007,
under the Harris & Harris Group Employee Profit-Sharing Plan. These
2006 amounts are in addition to the $1,107,088 for Mr. Harris,
$165,308
for Mr. Jamison, and $62,685 for Ms. Forman reported in the 2005
proxy and
were determined in 2006 based on the finalization of our 2005 tax
returns.
|
(3)
|
Represents
increase in pension obligation. There were no preferential or above
market
earnings on Mr. Harris’s deferred
compensation.
|
(4)
|
The
amounts reported for Mr. Harris for 2007 represent actual amounts
of
benefits paid or payable including personal use of an automobile
totaling
$10,252, membership in a private club totaling $11,026, membership
in a
health club and use of a trainer totaling $19,333, medical care
reimbursement, consultation with a financial planner totaling $21,505,
long-term disability insurance, group term-life insurance, long-term
care
insurance for him and his wife and $20,500 in employer contributions
to
the Harris & Harris Group, Inc. 401(k) Plan. It also includes the
employer contribution to his SERP totaling $306,187.
|
(5)
|
In
2007 and 2006, Mr. Harris's wife received compensation of $25,000
and
$21,000, respectively for serving as our Secretary.
|
(6)
|
The
amounts reported for Mr. Janse for 2007 represent qualified moving
expenses paid totaling $30,000 and $15,500 in employer contributions
to
the Harris & Harris Group 401(k)
Plan.
|
(7)
|
Except
for Mr. Harris (see footnote 4 above), and Mr. Janse (see footnote
6
above), amounts reported for 2007 represent our contributions on
behalf of
the named executive to the Harris & Harris Group, Inc. 401(k) Plan.
The named executive did not earn any other compensation reportable
in this
column that met the threshold reporting
requirements.
|
(8)
|
Mr.
Janse joined the Company in April
2007.
|
Fair
Valuation of Option Awards
We
account for the Stock Plan in accordance with the provisions of SFAS No.
123(R),
"Share-Based Payment," which requires that we determine the fair value of
all
share-based payments to employees, including the fair value of grants of
employee stock options, and record these amounts as an expense in the Statement
of Operations over the vesting period with a corresponding increase to our
additional paid-in capital. The increase to our operating expenses is offset
by
the increase to our additional paid-in capital, resulting in no net impact
to
our net asset value. Additionally, we do not record the tax benefits associated
with the expensing of stock options, because we currently intend to qualify
as a
RIC under Subchapter M of the Code.
The
fair
value of each stock option award is estimated on the date of grant using
the
Black-Scholes-Merton option pricing model as permitted by SFAS No. 123(R).
The
stock options were awarded in five different grant types, each with different
contractual terms. The assumptions used in the calculation of fair value
using
the Black-Scholes-Merton model for each contract term for grants in 2007
were as
follows:
|
|
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|
Contractual
|
of
Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
Type
of Award
|
Term
|
Granted
|
in
Yrs
|
Factor
|
Yield
|
Rates
|
Per
Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
1.5
Years
|
380,000
|
1
|
42.6%
|
0%
|
4.93%
|
$2.11
|
Non-qualified
stock options
|
2.5
Years
|
600,540
|
2
|
40.1%
|
0%
|
4.91%
|
$2.92
|
Non-qualified
stock options
|
3.5
Years
|
338,403
|
3
|
44.7%
|
0%
|
4.93%
|
$3.94
|
Non-qualified
stock options
|
9
Years
|
381,666
|
Ranging
from 4.75- 6.28
|
Ranging
from 57.8% to 59.9%
|
0%
|
Ranging
from 4.97% to 5.01%
|
Ranging
from $5.92 to $6.85
|
|
|
|
|
|
|
|
|
Total
|
|
1,700,609
|
|
|
|
|
|
An
option's expected term is the estimated period between the grant date and
the
exercise date of the option. As the expected-term period increases, the fair
value of the option and the compensation cost will also increase. The
expected-term assumption is generally calculated using historical stock option
exercise data. The Company does not have historical exercise data to develop
such an assumption. In cases where companies do not have historical data
and
where the options meet certain criteria, SEC Staff Accounting Bulletin 107
("SAB
107") provides the use of a simplified expected-term calculation. Accordingly,
the Company calculated the expected terms using the SAB 107 simplified
method.
Expected
volatility is the measure of how the stock's price is expected to fluctuate
over
a period of time. An increase in the expected volatility assumption yields
a
higher fair value of the stock option. Expected volatility factors for the
stock
options were based on the historical fluctuations in the Company’s stock price
over a period commensurate with the expected term of the option, adjusted
for
stock splits and dividends.
The
expected-dividend yield assumption is traditionally calculated based on a
company's historical dividend yield. An increase to the expected-dividend
yield
results in a decrease in the fair value of the option and resulting compensation
cost. Although the Company has declared deemed dividends in previous years,
most
recently in 2005, the amounts and timing of any future dividends cannot be
reasonably estimated. Therefore, for purposes of calculating fair value,
the
Company has assumed an expected- dividend yield of 0 percent.
The
risk-free interest rate assumptions are based on the annual yield on the
measurement date of a zero-coupon U.S. Treasury bond, the maturity of which
equals the option’s expected term. Higher assumed interest rates yield higher
fair values.
2007
Grants of Plan-Based Awards
The
following table presents information regarding the equity incentive awards
granted to the named executive officers during the fiscal year ended December
31, 2007.
Name
|
Grant
Date
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards: Number of Securities Underlying
Options
(#)
|
Exercise
or Base Price of Option Awards* ($/Sh)
|
Closing
Price on Grant Date
($)
|
Grant
Date Fair Value of
Stock
and
Option
Awards
|
Charles
E. Harris
|
June
27, 2007
|
N/A
|
240,981
|
$11.11
|
$11.15
|
$1,460,345
|
Douglas
W. Jamison
|
June
27, 2007
|
N/A
|
250,000
|
$11.11
|
$11.15
|
$785,737
|
Alexei
A. Andreev
|
June
27, 2007
|
N/A
|
200,000
|
$11.11
|
$11.15
|
$628,590
|
Michael
A. Janse
|
June
27, 2007
|
N/A
|
629,128
|
$11.11
|
$11.15
|
$2,038,717
|
Sandra
M. Forman
|
June
27, 2007
|
N/A
|
135,000
|
$11.11
|
$11.15
|
$420,312
|
*Equals
the closing volume weighted average price on the date of grant.
2007
Outstanding Equity Awards at Fiscal Year-End
The
following table presents information regarding the outstanding equity awards
held by each of the named executive officers as of December 31,
2007.
|
Option
Awards
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Option
Exercise Price
($)
|
Option
Expiration
Date
|
Charles
E. Harris
|
8,820
451,530
20,000
0
120,491
|
9,891(1)
230,000(1)
0
26,666(2)
120,490(3)
|
$10.11
$10.11
$10.11
$10.11
$11.11
|
June
26, 2016
June
26, 2016
June
26, 2008
June
26, 2009
June
26, 2016
|
Douglas
W. Jamison
|
8,647
138,200
53,334
47,500
0
0
|
69,237(4)
0
106,666(2)
0
110,135(3)
92,365(5)
|
$10.11
$10.11
$10.11
$11.11
$11.11
$11.11
|
June
26, 2016
June
26, 2008
June
26, 2009
Dec.
27, 2008
Dec.
27, 2009
Dec.
27, 2010
|
Alexei
A. Andreev
|
12,735
157,359
53,334
38,000
0
0
|
69,237(4)
0
106,666(2)
0
88,108(3)
73,892(5)
|
$10.11
$10.11
$10.11
$11.11
$11.11
$11.11
|
June
26, 2016
June
26, 2008
June
26, 2009
Dec.
27, 2008
Dec.
27, 2009
Dec.
27, 2010
|
Michael
A. Janse
|
9,891
228,000
0
0
|
69,237(6)
0
248,108(3)
73,892(5)
|
$11.11
$11.11
$11.11
$11.11
|
June
26, 2016
Dec.
27, 2008
Dec.
27, 2009
Dec.
27, 2010
|
Sandra
M. Forman
|
12,600
55,000
25,000
26,600
0
0
|
69,237(4)
0
50,000(2)
0
61,676(3)
46,724(5)
|
$10.11
$10.11
$10.11
$11.11
$11.11
$11.11
|
June
26, 2016
June
26, 2008
June
26, 2009
Dec.
27, 2008
Dec.
27, 2009
Dec.
27, 2010
|
(1)
|
Options
vest 100 percent on June 26,
2008.
|
(2)
|
Options
vest in two equal installments on June 26, 2008, and December
26,
2008.
|
(3)
|
Options
vest 100 percent on December 27,
2008.
|
(4)
|
Options
vest in seven equal installments on June 26, 2008, June 26, 2009,
June 26,
2010, June 26, 2011, June 26, 2012, June 26, 2013, and June 26,
2014.
|
(5)
|
Options
vest 100 percent on December 27,
2009.
|
(6)
|
Options
vest in seven equal installments on June 27, 2008, June 27, 2009,
June 27,
2010, June 27, 2011, June 27, 2012, June 27, 2013, and June 27,
2014.
|
2007
Option Exercises and Stock Vested
The
following table presents information regarding the exercises of stock options
by
named executive officers for the fiscal year ended December 31,
2007.
|
Option
Awards
|
Name
|
Number
of Shares Acquired on Exercise
(#)
|
Value
Realized on
Exercise
($)
|
Charles
E. Harris
|
192,466
|
244,291
|
Douglas
W. Jamison
|
199,048
|
359,391
|
Alexei
A. Andreev
|
185,040
|
343,632
|
Michael
A. Janse
|
0
|
0
|
Sandra
M. Forman
|
121,834
|
210,136
|
2007
Pension Benefits
The
following table presents information about the pension benefits attributable
to
the named executive officers as of December 31, 2007, and any pension benefit
payments to them during 2007.
Name
|
Plan
Name
|
Number
of Years Credited Service
(#)
|
Present
Value of Accumulated Benefits
($)
|
Payments
During Last Fiscal Year
($)
|
Charles
E. Harris
|
Executive
Mandatory Retirement Plan
|
24
|
147,302
|
0
|
Douglas
W. Jamison
|
Executive
Mandatory Retirement Plan
|
3
|
0
|
0
|
The
present value of accumulated benefits amount reported in the table above
was
calculated pursuant to FAS 87, "Employers' Accounting for Pensions" and FAS
158,
"Employers' Accounting for Pensions and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R)." Several statistical
and other factors that attempt to anticipate future events are used in
calculating the expense and liability values related to our pension plan.
These
factors include a discount rate assumption of 5.75 percent and use of the
94GAM
mortality table. The calculation also assumes that the benefit is earned
uniformly over the employees' careers. Any benefit attributable to service
prior
to the effective date of the plan is amortized over each person's future
working
lifetime.
Executive
Mandatory Retirement Benefit Plan
On
March
20, 2003, in order to begin planning for eventual management succession,
the
Board of Directors voted to establish the Executive Mandatory Retirement
Benefit
Plan for individuals who are employed by us in a bona fide executive or high
policy-making position. The plan was amended and restated effective January
1,
2005, to comply with certain provisions of the Internal Revenue Code. There
are
currently four individuals that qualify under the plan: Charles E. Harris,
the
Chairman and Chief Executive Officer, Douglas W. Jamison, the President and
Chief Operating Officer, Daniel B. Wolfe, the Chief Financial Officer, and
Mel
P. Melsheimer, the former President, Chief Operating Officer and Chief Financial
Officer. Under this plan, mandatory retirement takes place effective December
31
of the year in which the eligible individuals attain the age of 65. On an
annual
basis beginning in the year in which the designated individual attains the
age
of 65, a committee of the Board consisting of non-interested directors may
determine for our benefit to postpone the mandatory retirement date for that
individual for one additional year.
Under
applicable law prohibiting discrimination in employment on the basis of age,
we
can impose a mandatory retirement age of 65 for our executives or employees
in
high policy-making positions only if each employee subject to the mandatory
retirement age is entitled to an immediate retirement benefit at retirement
age
of at least $44,000 per year. The benefits payable at retirement to Mr. Harris
and Mr. Melsheimer under our existing 401(k) plan do not equal this threshold.
The plan was established to provide the difference between the benefit required
under the age discrimination laws and that provided under our existing plans.
For individuals retiring after 2007, the benefit under the plan is paid to
the
qualifying individual in the form of a lump sum, and is paid six months and
one
day after the individual's separation from service with the Company, pursuant
to
certain exceptions. Mr. Harris's projected mandatory benefit will be
approximately $147,302 and paid as a lump sum six months and one day after
his
expected retirement on December 31, 2008.
2007
Non-Qualified Deferred Compensation
The
following table presents information regarding the Company's Amended and
Restated Supplemental Executive Retirement Plan for the fiscal year ended
December 31, 2007. Other than for Mr. Harris, we do not maintain any pension
or
non-qualified pension benefits except as disclosed in "Executive Mandatory
Retirement" above.
Name
|
Executive
Contributions in Last FY
($)
|
Registrant
Contribution in Last FY
($)(1)
|
Aggregate
Earnings
in
Last
FY
($)
|
Aggregate
Withdrawals/
Distributions
($)
|
Aggregate
Balance
at
Last
FYE
($)
|
Charles
E. Harris
|
0
|
306,187
|
210,533
|
0
|
2,667,020
|
|
(1)
|
This
amount is included in the Summary Compensation Table under "All
Other
Compensation."
|
SERP
The
Employment Agreement provides that we adopt a supplemental executive retirement
plan (the "SERP") for the benefit of Mr. Harris. Under the SERP, we will
cause
an amount equal to one-twelfth of Mr. Harris's current annual salary to be
credited each month (a "Monthly Credit") to a special account maintained
on our
books for the benefit of Mr. Harris (the "SERP Account"), provided that Mr.
Harris is employed by us on the last business day of such month. The amounts
credited to the SERP Account are deemed invested or reinvested in such
investments as are requested by Mr. Harris and agreed to by the Company.
The
SERP Account is credited and debited to reflect the deemed investment returns,
losses and expenses attributed to such deemed investments and reinvestments
in
accordance with the terms of the SERP. Mr. Harris's benefit under the SERP
equals the balance in the SERP Account and such benefit will always be 100
percent vested (i.e., not forfeitable).
In
2005,
Mr. Harris received a $125,000 distribution from the SERP Account. The balance
of the SERP Account will be paid in a lump sum on May 30, 2008, and any
subsequent balance attributable to subsequent monthly credits will be paid
on
July 31, 2009.
If
Mr.
Harris dies before the entire benefit under the SERP Account has been paid
to
him, the amount remaining in the SERP Account will be distributed to his
beneficiary in a lump-sum payment on the 90th
day
after the date of his death.
Potential
Payments upon Termination or Change in Control
Other
than Mr. Harris, our Chairman and Chief Executive Officer, none of our executive
officers has a change in control agreement or is entitled to any special
payments solely upon a change in control.
In
the
event of termination without cause or by constructive discharge, Mr. Harris's
Employment Agreement provides for the continuation of certain benefits over
specified periods, as well as severance pay, payable to Mr. Harris (or to
his
estate if he dies before all payments are made), equal to two times his base
salary distributed over a period of two years.
In
addition, Mr. Harris is entitled to receive severance pay pursuant to the
severance compensation agreement that he entered into with us, effective
August
15, 1990, as amended and restated effective as of January 1, 2005. The severance
compensation agreement provides that if, following a change in our control,
as
defined in the agreement, Mr. Harris's employment is terminated by us without
cause or by him within one year of such change in control, he shall be entitled
to receive compensation in a lump sum payment equal to 2.99 times his average
base salary plus other amounts included in Mr. Harris's income as compensation
from the Company (but excluding bonus, incentive, profit-sharing plan and
equity
compensation) as in effect over the most recent five years preceding the
year in
which the change in control occurred. Under the severance compensation
agreement, Mr. Harris is also entitled to receive a lump-sum payment equal
to
any amounts forfeited on account of his termination, under any employee pension
benefit plan, including benefits under the Company's executive mandatory
retirement benefit plan. In addition, he is entitled to receive medical and
health insurance coverage under the Company's retiree medical benefit plan
and
all other benefits he would be eligible to receive in the event of termination
without cause or by constructive discharge, although no duplicate benefits
will
be provided. In the event that Mr. Harris is entitled to receive 2.99 times
his
base salary under the severance compensation agreement, he shall not also
be
paid two times his base salary under the employment agreement.
On
June
30, 1994, we adopted the Medical Benefit Retirement Plan. On February 10,
1997,
we amended this plan to include employees who have seven full years of service
and have attained 58 years of age. On November 3, 2005, we amended this plan
to
reverse the 1997 amendment for future retirees and to remove dependents other
than spouses from the plan. The coverage is secondary to any government or
subsequent employer-provided health-insurance plans. The annual premium cost
to
us with respect to the entitled retiree shall not exceed $12,000, subject
to an
index for inflation. As of December 31, 2007, and 2006, we had liabilities
of
$913,904 and $791,972, respectively, for the plan; there are no plan assets.
The
options of retirees who qualify for the Medical Benefit Retirement Plan will
remain exercisable (to the extent exercisable at the time of the optionee's
termination) post retirement, subject to certain conditions, if such retiree
executes a post-termination non-solicitation agreement, in a form reasonably
acceptable to the Company, until the expiration of its term.
The
following chart sets forth amounts that would have been payable to Mr. Harris
had he realized a qualifying termination of employment under his severance
agreement or Employment Agreement, determined as if the triggering event
had
occurred on December 31, 2007. Other than Mr. Harris, we do not maintain
any
established severance plan for our employees. Due to the number of factors
that
affect the calculations in the table, actual amounts paid or distributed
may be
different.
Termination
Scenarios
Charles
E. Harris
|
Termination
Following Change of Control
($)
|
Termination
Without
Cause
or Constructive Discharge
($)
|
Termination
for Cause
($)
|
Mandatory
Retirement
($)
|
Voluntary
Termination
($)
|
Death
($)
|
Disability
($)
|
|
|
|
|
|
|
|
|
Lump
Sum Salary Payments
|
885,434
|
612,374
|
0
|
0
|
0
|
612,374
|
0
|
Medical
Insurance Benefits
|
194,423
|
194,423
|
0
|
194,423
|
194,423
|
194,423
|
194,423
|
Pension
Benefits
|
147,302
|
0
|
0
|
147,302
|
0
|
0
|
0
|
All
Other Perqs.
|
146,101
|
146,101
|
0
|
0
|
0
|
0
|
373,256
|
SERP
Payments
|
2,667,020
|
2,667,020
|
2,667,020
|
2,667,020
|
2,667,020
|
2,667,020
|
2,667,020
|
Total
|
4,040,280
|
3,619,918
|
2,667,020
|
3,008,745
|
2,861,443
|
3,473,817
|
3,234,699
|
In
addition, pursuant to his stock option agreements, if Mr. Harris voluntarily
terminates his employment and executes a post-termination non-solicitation
agreement and a post-termination three-year non-compete agreement in forms
reasonably acceptable to the Company, his options (to the extent exercisable
at
the time of his termination) will remain exercisable until the expiration
of
their terms. If Mr. Harris’s employment terminates under any of the other
termination scenarios outlined in the table immediately above, his options
will
remain exercisable for periods ranging from zero to one year, depending on
the
type of option and termination scenario. Mr. Harris’s exercisable options as of
December 31, 2007 are reflected in the table “2007 Outstanding Equity Awards at
Fiscal Year-End.”
Remuneration
of Directors
The
following table sets forth the compensation paid by us to our directors for
the
fiscal year ended December 31, 2007. During 2007, we did not grant any stock
option awards or pay or accrue any pension or retirement benefits for our
directors.
2007
Director Compensation
Name
of Director
|
|
Fees
Earned or Paid in
Cash
($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
Independent
Directors:
|
|
|
|
|
|
|
W.
Dillaway Ayres, Jr.
|
|
42,000
|
|
0
|
|
42,000
|
Dr.
C. Wayne Bardin
|
|
42,000
|
|
0
|
|
42,000
|
Dr.
Phillip A. Bauman
|
|
45,000
|
|
0
|
|
45,000
|
G.
Morgan Browne
|
|
45,000
|
|
0
|
|
45,000
|
Dugald
A. Fletcher
|
|
57,000
|
|
0
|
|
57,000
|
Mark
A. Parsells(1)
|
|
18,823
|
|
0
|
|
18,823
|
Charles
E. Ramsey
|
|
42,000
|
|
0
|
|
42,000
|
James
E. Roberts
|
|
47,250
|
|
0
|
|
47,250
|
Richard
P. Shanley
|
|
29,710
|
|
0
|
|
29,710
|
Interested
Directors:
|
|
|
|
|
|
|
Charles
E. Harris(2)
|
|
0
|
|
0
|
|
0
|
Douglas
W. Jamison(2)
|
|
0
|
|
0
|
|
0
|
Kelly
S. Kirkpatrick(3)
|
|
22,500
|
|
7,500(4)
|
|
30,000
|
Lori
D. Pressman
|
|
24,000
|
|
35,938(5)
|
|
59,938
|
——————————
(1)
|
Mark
A. Parsells did not stand for re-election at the Annual Meeting
held on
May 3, 2007.
|
(2)
|
Mr.
Harris and Mr. Jamison do not receive additional compensation as
Directors. Refer to the "2007 Summary Compensation Table" for details
of
Mr. Harris's and Mr. Jamison’s compensation for
2007.
|
(3)
|
Ms.
Kirkpatrick did not stand for re-election at the Annual Meeting
of
Shareholders held on May 1,
2008.
|
(4)
|
Represents
$7,500 for consulting services. Ms. Kirkpatrick may be considered
an
"interested person" because of consulting work performed for
us.
|
(5)
|
Represents
$35,938 for consulting services. Ms. Pressman may be considered
an
"interested person" because of consulting work performed for
us.
|
There
are
no outstanding option awards to directors.
The
directors who are not officers receive $1,500 for each meeting of the Board
of
Directors and $1,500 for each committee meeting they attend, and a monthly
retainer of $750. Each non-employee committee Chairman receives an additional
monthly retainer of $250. The Lead Independent Director receives an additional
monthly retainer of $500. We also reimburse our directors for travel, lodging
and related expenses they incur in attending Board and committee meetings.
The
total compensation and reimbursement for expenses paid or payable to all
directors in 2007 was $468,497.
The
Board
of Directors has adopted a policy that 50 percent of all director fees must
be
used to purchase our common stock. In 2007, the directors collectively bought
26,555 shares in the open market.
OTHER
INFORMATION
We
are
not subject to any material pending or, to our knowledge, threatened legal
proceedings.
Our
custodian is J.P. Morgan Chase Bank, 345 Park Avenue, New York, New York
10154-1002.
Our
transfer and dividend-paying agent is American Stock Transfer & Trust
Company, 59 Maiden Lane, New York, NY 10038.
Our
independent registered public accounting firm is PricewaterhouseCoopers LLP,
300
Madison Avenue, New York, NY 10017. It also provides tax return preparation
services for us.
BROKERAGE
In
2005,
we paid $48,732 in brokerage commissions for the sale of our shares in
NeuroMetrix, Inc. We did not effect any transactions in portfolio securities
in
2007 or 2006 except for the purchase and sale of treasury securities, for
which
we do not pay any brokerage commissions. Brokers are selected on the basis
of
our best judgment as to which brokers are most likely to be in contact with
likely buyers of the thinly traded securities of our portfolio companies.
We
will also consider the competitiveness of such broker’s commission rates. We
might pay a premium for a broker’s knowledge of the potential buyers.
DIVIDENDS
AND DISTRIBUTIONS
As
a
regulated investment company under the Code, we will not be subject to U.S.
federal income tax on our investment company taxable income that we distribute
to shareholders, provided that at least 90 percent of our investment company
taxable income for that taxable year is distributed to our shareholders.
We
currently intend to retain our net capital gains for investment and pay the
associated federal corporate income tax. We may change this policy in the
future.
To
the
extent that we retain any net capital gain, we may pay deemed capital gain
dividends to shareholders. If we do pay a deemed capital gain dividend, you
will
not receive a cash distribution, but instead you will receive a tax credit
equal
to your proportionate share of the tax paid by us. When we declare a deemed
dividend, our dividend-paying agent will send you an IRS Form 2439 which
will
reflect receipt of the deemed dividend income and the tax credit. This tax
credit, which we pay at the applicable corporate rate, is normally at a higher
rate than the rate payable by individual shareholders on the deemed dividend
income. The excess credit can be used by the shareholder to offset other
taxes
due in that year or to generate a tax refund to the shareholder. In addition,
each shareholder’s tax basis in his shares of Common Stock is increased by the
excess of the capital gain on which we paid taxes over the amount of taxes
we
paid. See "Taxation."
We
did
not pay a cash dividend or declare a deemed capital gain dividend for 2007.
TAXATION
Taxation
of the Company
We
have
elected and qualified and intend to continue to qualify to be taxed as a
regulated investment company under Subchapter M of the Code. Accordingly,
we
must, among other things, (a) derive in each taxable year at least 90 percent
of
our gross income (including tax-exempt interest) from dividends, interest,
payments with respect to certain securities loans, and gains from the sale
or
other disposition of stock, securities or foreign currencies, or other income
(including but not limited to gain from options, futures and forward contracts)
derived with respect to our business of investing in stock, securities or
currencies; (b) diversify our holdings so that, at the end of each fiscal
quarter (i) at least 50 percent of the market value of our total assets is
represented by cash and cash items, U.S. government securities, the securities
of other regulated investment companies and other securities, with other
securities limited, in respect of any one issuer, to an amount not greater
than
five percent of the value of our total assets and not more than 10 percent
of
the outstanding voting securities of any issuer (subject to the exception
described below), and (ii) not more than 25 percent of the market value of
our
total assets is invested in the securities of any issuer (other than U.S.
government securities and the securities of other regulated investment
companies) or of any two or more issuers that we control and that are determined
to be engaged in the same business or similar or related trades or businesses,
and (c) annually distribute at least 90 percent of our investment company
taxable income as a dividend.
In
the
case of a regulated investment company which furnishes capital to development
corporations, there is an exception to the rule relating to the diversification
of investments described above. This exception is available only to registered
management investment companies which the SEC determines to be principally
engaged in the furnishing of capital to other corporations which are principally
engaged in the development or exploitation of inventions, technological
improvements, new processes, or products not previously generally available
("SEC Certification"). We have received SEC Certification since 1999, including
for 2006, but it is possible that we may not receive SEC Certification in
future
years. Pursuant to the SEC Certification, we are generally entitled to include,
in the computation of the 50 percent value of our assets (described in (b)(i)
above), the value of any securities of an issuer, whether or not we own more
than 10 percent of the outstanding voting securities of the issuer, if the
basis
of the securities, when added to our basis of any other securities of the
issuer
that we own, does not exceed five percent of the value of our total
assets.
As
a
regulated investment company, in any fiscal year with respect to which we
distribute at least 90 percent of the sum of our (i) investment company taxable
income (which includes, among other items, dividends, interest and the excess
of
any net short-term capital gains over net long-term capital losses and other
taxable income other than any net capital gain reduced by deductible expenses)
determined without regard to the deduction for dividends paid and (ii) net
tax
exempt interest (the excess of its gross tax exempt interest over certain
disallowed deductions), we (but not our shareholders) generally will not
be
subject to U.S. federal income tax on investment company taxable income and
net
capital gains that we distribute to shareholders. To the extent that we retain
our net capital gains for investment, we will be subject to U.S. federal
income
tax. We currently intend to retain our net capital gains for investment and
pay
the associated federal corporate income tax. We may change this policy in
the
future.
Amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible four percent excise
tax
payable by us. To avoid this tax, we must distribute (or be deemed to have
distributed) during each calendar year an amount equal to the sum of:
|
(1)
|
at
least 98 percent of our ordinary income (not taking into account
any
capital gains or losses) for the calendar
year;
|
|
(2)
|
at
least 98 percent of our capital gains in excess of our capital
losses
(adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year (unless an election is
made by a
company with a November or December year-end to use the company’s fiscal
year); and
|
|
(3)
|
any
undistributed amounts from previous years on which we paid no U.S.
federal
income tax.
|
While
we
intend to distribute any income and capital gains in the manner necessary
to
minimize imposition of the four percent excise tax, sufficient amounts of
our
taxable income and capital gains may not be distributed to avoid entirely
the
imposition of the tax. In that event, we will be liable for the tax only
on the
amount by which we do not meet the foregoing distribution
requirement.
If
in any
particular taxable year, we do not qualify as a regulated investment company,
all of our taxable income (including its net capital gains) will be subject
to
tax at regular corporate rates without any deduction for distributions to
shareholders, and distributions will be taxable to the shareholders as ordinary
dividends to the extent of our current and accumulated earnings and
profits.
We
may
decide to be taxed as a corporation even if we would otherwise qualify as
a
regulated investment company.
Company
Investments
We
may
make certain investments which would subject us to special provisions of
the
Code that, among other things, may affect the character of the gains or losses
realized by us and require us to recognize income or gain without receiving
cash
with which to make distributions.
In
the
event we invest in foreign securities, we may be subject to withholding and
other foreign taxes with respect to those securities. We do not expect to
satisfy the requirement to pass through to the shareholders their share of
the
foreign taxes paid by us.
Due
to
our expected investments, in general, distributions will not be eligible
for the
dividends received deduction allowed to corporate shareholders and will not
qualify for the reduced rate of tax for qualified dividend income allowed
to
individuals.
Taxation
of Shareholders
Distributions
we pay to you from our ordinary income or from an excess of net short-term
capital gains over net long-term capital losses (together referred to
hereinafter as "ordinary income dividends") are taxable to you as ordinary
income to the extent of our earnings and profits. Distributions made to you
from
an excess of net long-term capital gains over net short-term capital losses
("capital gain dividends"), including capital gain dividends credited to
you but
retained by us, are taxable to you as long-term capital gains, regardless
of the
length of time you have owned our shares. Distributions in excess of our
earnings and profits will first reduce the adjusted tax basis of your shares
and, after the adjusted tax basis is reduced to zero, will constitute capital
gains to you (assuming the shares are held as a capital asset). Generally,
you
will be provided with a written notice designating the amount of any (i)
ordinary income dividends no later than 30 days after the close of the taxable
year, and (ii) capital gain dividends or other distributions no later than
60
days after the close of the taxable year.
In
the
event that we retain any net capital gains, we may designate the retained
amounts as undistributed capital gains in a notice to our shareholders. If
a
designation is made, shareholders would include in income, as long-term capital
gains, their proportionate share of the undistributed amounts, but would
be
allowed a credit or refund, as the case may be, for their proportionate share
of
the corporate tax paid by us. In addition, the tax basis of shares owned
by a
shareholder would be increased by an amount equal to the difference between
(i)
the amount included in the shareholder’s income as long-term capital gains and
(ii) the shareholder’s proportionate share of the corporate tax paid by us.
Shareholders should consult their tax advisors for further information about
the
impact of a deemed dividend on their state or local taxes.
Dividends
and other taxable distributions are taxable to you even though they are
reinvested in additional shares of our Common Stock. If we pay you a dividend
in
January which was declared in the previous October, November or December
to
shareholders of record on a specified date in one of these months, then the
dividend will be treated for tax purposes as being paid by us and received
by
you on December 31 of the year in which the dividend was declared.
A
shareholder will realize gain or loss on the sale or exchange of our common
shares in an amount equal to the difference between the shareholder’s adjusted
basis in the shares sold or exchanged and the amount realized on their
disposition. Generally, gain recognized by a shareholder on the sale or other
disposition of our common shares will result in capital gain or loss to you,
and
will be a long-term capital gain or loss if the shares have been held for
more
than one year at the time of sale. Any loss upon the sale or exchange of
our
shares held for six months or less will be treated as a long-term capital
loss
to the extent of any capital gain dividends received (including amounts credited
as an undistributed capital gain dividend) by you. A loss realized on a sale
or
exchange of our shares will be disallowed if other substantially identical
shares are acquired (whether through the automatic reinvestment of dividends
or
otherwise) within a 61-day period beginning 30 days before and ending 30
days
after the date that the shares are disposed of. In this case, the basis of
the
shares acquired will be adjusted to reflect the disallowed loss.
In
general, federal withholding taxes at a 30 percent rate (or a lower rate
pursuant to a tax treaty) will apply to distributions to shareholders (except
to
those distributions designated by us as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations (a "non-U.S.
investor"). Different tax consequences may result if a non-U.S. investor
is
engaged in a trade or business in the United States or, in the case of an
individual, is present in the United States for 183 or more days during a
taxable year and certain other conditions are met.
Backup
Withholding
We
are
required in some circumstances to backup withholding on taxable dividends
and
other payments paid to non-corporate holders of our shares who do not furnish
us
with their correct taxpayer identification number and certifications, or
who are
otherwise subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld from payments made to you may be refunded or credited
against your U.S. federal income tax liability, if any, provided that the
required information is furnished to the Internal Revenue Service.
The
foregoing is a general discussion of the provisions of the Code and the Treasury
regulations in effect as they directly govern our taxation and our shareholders.
These provisions are subject to change by legislative or administrative action,
and any change may be retroactive. The discussion does not purport to deal
with
all of the U.S. federal income tax consequences applicable to us, or which
may
be important to particular shareholders in light of their individual investment
circumstances or to some types of shareholders subject to special tax rules,
such as financial institutions, broker-dealers, insurance companies, tax-exempt
organizations, partnerships or other pass-through entities, persons holding
notes in connection with a hedging, straddle, conversion or other integrated
transaction, persons engaged in a trade or business in the United States
or
persons who have ceased to be U.S. citizens or to be taxed as resident aliens.
Shareholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state and local income or other
taxes.
CERTAIN
GOVERNMENT REGULATIONS
A
business development company is regulated by the 1940 Act. A business
development company must be organized in the United States for the purpose
of
investing primarily in companies that are organized in the United States
and
engaged primarily in businesses other than certain financial businesses and
that
either do not have any securities listed on a national securities exchange
or
are controlled by the business development company. In addition, the business
development company must make managerial assistance available to these portfolio
companies. A business development company may use capital provided by public
shareholders and from other sources to invest in what are usually private
investments. A business development company provides shareholders the ability
to
retain the liquidity of a publicly traded stock, while sharing in the possible
benefits, if any, of investing primarily in what are usually privately owned
companies.
As
a
business development company, we may not acquire any assets other than
"qualifying assets" unless, at the time we make the acquisition, the value
of
our qualifying assets represents at least 70 percent of the value of our
total
assets. The principal categories of qualifying assets relevant to our business
are:
|
·
|
securities
purchased in transactions not involving any public offering, the
issuer of
which is an eligible portfolio company;
|
|
·
|
securities
received in exchange for or distributed with respect to securities
described in the bullet above or pursuant to the exercise of options,
warrants or rights relating to the securities; and
|
|
·
|
cash,
cash items, government securities or high quality debt securities
(within
the meaning of the 1940 Act), maturing in one year or less from
the time
of investment.
|
An
eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly
owned
by a business development company) and is not engaged primarily in certain
financial businesses and that:
|
·
|
does
not have a class of securities registered on a national securities
exchange;
|
|
·
|
is
actively controlled by the business development company and has
an
affiliate of a business development company on its Board of Directors;
or
|
|
·
|
meets
other criteria as may be established by the
SEC.
|
Control
under the 1940 Act is presumed to exist where a business development company
beneficially owns more than 25 percent of the outstanding voting securities
of
the portfolio company.
To
include securities described above as qualifying assets for the purpose of
the
70 percent test, a business development company must make available to the
issuer of those securities (whether directly or through cooperating parties)
significant managerial assistance such as providing significant guidance
and
counsel concerning the management, operations or business objectives and
policies of a portfolio company. We offer to provide managerial assistance
to
each of our portfolio companies.
As
a
business development company, we are entitled to issue senior securities
in the
form of stock or indebtedness, including bank borrowings and debt securities,
as
long as our senior securities have an asset coverage of at least 200 percent
immediately after each issuance. See "Risk Factors."
We
may
also be prohibited under the 1940 Act from knowingly participating in certain
transactions with our affiliates without the prior approval of members of
our
Board of Directors who are not interested persons and, in some cases, may
have
to seek prior approval from the SEC.
As
with
other companies regulated by the 1940 Act, a business development company
must
adhere to substantive regulatory requirements. A majority of our directors
must
be persons who are not interested persons, as that term is defined in the
1940
Act. Additionally, 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 us or our
shareholders arising from willful malfeasance, bad faith, gross negligence
or
reckless disregard of the duties involved in the conduct of that person’s
office.
We
maintain a code of ethics under Rule 17j-1 of the 1940 Act that establishes
procedures for personal investment and restricts some transactions by our
personnel. Our code of ethics generally does not permit investment by our
employees in private securities that may be purchased or held by us. The
code of
ethics is filed as an exhibit to our registration statement of which this
Prospectus is a part. 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
operations of the Public Reference Room by calling the SEC at (800) SEC-0330.
In
addition, the code of ethics is available on the EDGAR Database on the
SEC
Internet site at http://www.sec.gov. You may obtain copies of the code
of
ethics, after paying a duplicating fee, by electronic request at the following
email address: [email protected], or by writing to the SEC’s Public Reference
Section, 100 F Street, N.E., Washington, D.C. 20549.
We
may
not change the nature of our business so as to cease to be, or withdraw our
election as, a business development company unless authorized by vote of
a
majority of the outstanding voting securities, voting on the matter at a
meeting
at which a quorum is present.
We
vote
proxies relating to our portfolio securities in what management believes
is in
the best interest of our shareholders. We carefully review on a case by case
basis each proposal submitted to a shareholder 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 a compelling long-term reason to
do
so.
Our
proxy
voting decisions are made by the Managing Directors who are responsible for
monitoring each of our investments. To ensure that our vote is not the product
of a conflict of interest, we required 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.
Shareholders
may obtain information regarding how we voted proxies with respect to our
public
portfolio companies by making a written request for proxy voting information
or
by contacting us by telephone at 1-877-TINY-TECH.
CAPITALIZATION
We
are
authorized to issue 45,000,000 shares of Common Stock, par value $0.01 per
share, and 2,000,000 shares of preferred stock, par value $0.10 per share.
Each
share within a particular class or series thereof has equal voting, dividend,
distribution and liquidation rights. When issued, in accordance with the
terms
thereof, shares of Common Stock will be fully paid and non-assessable. Shares
of
Common Stock are not redeemable and have no preemptive, conversion, or
cumulative voting rights.
The
following table shows the number of shares of (i) capital stock authorized,
(ii)
the amount held by us or for our own account, and (iii) capital stock
outstanding for each class of our authorized securities as of May 28,
2008.
Title
of Class
|
|
Amount
Authorized
|
|
Amount
Held by Company or for its Own Account
|
|
Amount
Outstanding
|
|
Common
Stock
|
|
|
45,000,000
|
|
|
1,828,740
|
|
|
23,314,573
|
|
Preferred
Stock
|
|
|
2,000,000
|
|
|
0
|
|
|
0
|
|
Issuance
of Preferred Stock
Our
Board
of Directors is authorized by our articles of incorporation to issue up to
2,000,000 shares of preferred stock having a par value of $0.10 per share.
The
Board of Directors is authorized to divide the preferred stock into one or
more
series and to determine the terms of each series, including, but not limited
to,
the voting rights, redemption provisions, dividend rate and liquidation
preference. Any terms must be consistent with the requirements of the 1940
Act.
The 1940 Act currently prohibits us from issuing any preferred stock if after
giving effect to the issuance the value of our total assets, less all
liabilities and indebtedness other than senior securities, would be less
than
200 percent of the aggregate amount of senior securities representing
indebtedness plus the aggregate involuntary liquidation value of our preferred
stock (other than up to 5 percent borrowings for temporary purposes). Leveraging
with preferred stock raises the same general potential for loss or gain and
other risks as does leveraging with borrowings described above.
Options
and Warrants
We
have
no warrants outstanding. As of May 28, 2008, we had 4,315,776 options
outstanding, which were granted pursuant to our Equity Incentive Plan described
herein. Under the 1940 Act, we cannot issue options and/or warrants for
more
than 25 percent of our outstanding voting securities.
PLAN
OF DISTRIBUTION
We
may
sell our Common Stock through underwriters or dealers, directly to one or
more
purchasers through agents or through a combination of any such methods of
sale.
Any underwriter or agent involved in the offer and sale of our Common Stock
will
be named in the applicable Prospectus Supplement.
The
distribution of our Common Stock may be effected from time to time in one
or
more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided, however, that
the
offering price per share must equal or exceed the net asset value per share
of
our Common Stock exclusive of any underwriting commissions or
discounts.
In
connection with the sale of our Common Stock, underwriters or agents may
receive
compensation from us in the form of discounts, concessions or commissions.
Underwriters may sell our Common Stock to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions or commissions
from the underwriters and/or commissions from the purchasers for whom they
may
act as agents. Underwriters, dealers and agents that participate in the
distribution of our Common Stock may be deemed to be underwriters under the
Securities Act of 1933, and any discounts and commissions they receive from
us
and any profit realized by them on the resale of our Common Stock may be
deemed
to be underwriting discounts and commissions under the Securities Act of
1933.
Any such underwriter or agent will be identified and any such compensation
received from us will be described in the applicable Prospectus Supplement.
The
maximum commission or discount to be received by any NASD member or independent
broker-dealer will not exceed eight percent. We will not pay any compensation
to
any underwriter or agent in the form of warrants, options, consulting or
structuring fees or similar arrangements.
Any
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
Nasdaq Global Market.
Under
agreements into which we may enter, underwriters, dealers and agents who
participate in the distribution of our Common Stock may be entitled to
indemnification by us against certain liabilities, including liabilities
under
the Securities Act of 1933. Underwriters, dealers and agents may engage in
transactions with us, or perform services for us, in the ordinary course
of
business.
If
so
indicated in the applicable Prospectus Supplement, we will authorize
underwriters or other persons acting as our agents to solicit offers by certain
institutions to purchase our Common Stock from us pursuant to contracts
providing for payment and delivery on a future date. Institutions with which
such contacts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others, but in all cases such institutions must be approved
by
us. The obligations of any purchaser under any such contract will be subject
to
the condition that the purchase of the Common Stock shall not at the time
of
delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject. The underwriters and such other agents will not have
any
responsibility in respect of the validity or performance of such contracts.
Such
contracts will be subject only to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts.
In
order
to comply with the securities laws of certain states, if applicable, our
Common
Stock offered hereby will be sold in such jurisdictions only through registered
or licensed brokers or dealers.
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, our special counsel in connection with the offering of
Common Stock.
EXPERTS
Our
audited financial statements as of December 31, 2007 and 2006 and for each
of
the three years in the period ended December 31, 2007 are included in this
Registration Statement in reliance on the report of PricewaterhouseCoopers
LLP,
independent registered public accounting firm, given on the authority of
that
firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
is
located at 300 Madison Avenue, New York, New York 10017.
We
will
furnish, without charge, a copy of such financial statements upon request
by
writing to 111 West 57th Street, Suite 1100, New York, New York 10019,
Attention: Investor Relations, or calling 1-800-TINY-TECH.
FURTHER
INFORMATION
We
are
subject to the informational requirements of the 1934 Act and in accordance
therewith file reports, proxy statements and other information with the
SEC. The
reports, proxy statements and other information filed by us can be inspected
and
copied at public reference facilities maintained by the SEC at 100 F
Street,
N.E., Washington, D.C. 20549, its New York Regional Office, 3 World Financial
Center, Suite 400, New York, New York 10281 and its Chicago Regional
Office, 175
West Jackson Boulevard, Suite 900, Chicago, Illinois 60604. You can obtain
information on the operation of the Public Reference room by calling
the SEC at
(800) SEC-0330. The SEC also maintains a website that contains reports,
proxy
statements, and other information. The address of the SEC’s website is
http://www.sec.gov. Copies of this material may also be obtained from
the Public
Reference Branch, Office of Consumer Affairs and Information Services
of the SEC
at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.
PRIVACY
POLICY
We
are
committed to maintaining the privacy of our shareholders and to 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 some cases, we may share information with select
other
parties.
Generally,
we do not receive any non-public personal information relating to our
shareholders, although some non-public personal information of our shareholders
may become available to us. We do not disclose any non-public personal
information about our shareholders or former shareholders to anyone, except
as
permitted by law or as is necessary in order to service shareholder accounts
(for example, to a transfer agent or third party administrator).
We
restrict access to non-public personal information about our shareholders
to our
employees and to employees of our service providers and their affiliates
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 shareholders.
CONSOLIDATED
FINANCIAL STATEMENTS
HARRIS
& HARRIS GROUP, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Documents
|
|
|
|
Page
|
|
|
|
|
Management's
Report on Internal Control Over Financial Reporting
|
F-2
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
|
Audited
Consolidated Financial Statements
|
|
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of December 31, 2007,
and
2006
|
F-4
|
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007,
2006,
2005
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007,
2006, and
2005
|
F-6
|
|
|
|
|
Consolidated
Statements of Changes in Net Assets for the years ended December
31, 2007,
2006, and 2005
|
F-7
|
|
|
|
|
Consolidated
Schedule of Investments as of December 31, 2007
|
F-8
|
|
|
|
|
Consolidated
Schedule of Investments as of December 31, 2006
|
F-15
|
|
|
|
|
Footnote
to Consolidated Schedule of Investments
|
F-20
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-24
|
|
|
|
|
Financial
Highlights for the years ended December 31, 2007, 2006 and
2005
|
F-38
|
|
|
|
Unaudited
Consolidated Financial Statements
|
|
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of March 31, 2008, and
December
31, 2007
|
F-39
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended March 31,
2008 and
2007
|
F-40
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31,
2008 and
2007
|
F-41
|
|
|
|
|
Consolidated
Statements of Changes in Net Assets for the three months ended
March 31,
2008 and
|
|
|
year
ended December 31, 2007
|
F-42
|
|
|
|
|
Consolidated
Schedule of Investments as of March 31, 2008
|
F-43
|
|
|
|
|
Footnote
to Consolidated Schedule of Investments
|
F-51
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-54
|
|
|
|
|
Financial
Highlights for the three months ended March 31, 2008 and
2007
|
F-61
|
Management's
Report on Internal Control Over Financial
Reporting
Management
of the Company is responsible for establishing and maintaining adequate
internal
control over financial reporting. Internal control over financial reporting
is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of
1934 as a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers and effected by
the
Company's Board of Directors, management and other personnel 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 and includes those policies
and
procedures that:
|
•
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets
of the
Company;
|
|
•
|
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
|
|
•
|
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 of internal control over financial reporting 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
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2007. In making its assessment, management used the
criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework. Based on the
results
of this assessment, management (including our Chief Executive Officer and
Chief
Financial Officer) has concluded that, as of December 31, 2007, the Company's
internal control over financial reporting was effective.
The
effectiveness of the Company's internal control over financial reporting
has
been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on page F-3 of
this
Registration Statement.
Report
of
Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareholders of Harris & Harris Group,
Inc.:
In
our
opinion, the accompanying consolidated statements of assets and liabilities
including the consolidated schedules of investments, and the related
consolidated
statements of operations, changes in net assets, cash flows, and the financial
highlights present
fairly, in all material respects, the financial position of Harris & Harris
Group, Inc. and its subsidiaries ("the Company") at
December 31, 2007 and December 31, 2006, and the results of
their operations,
their cash flows, the changes in their net assets, and the financial highlights
for each of the three years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United States of America.
Also
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based
on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company's management is responsible for these financial statements, 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 on page 52 of the 2007 Annual Report to Shareholders. Our
responsibility is to express opinions on these financial statements 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. We believe that our audits
provide
a reasonable basis for our opinions.
As
more
fully disclosed in Note 2 of the Notes to Consolidated Financial Statements,
the
financial statements include investments valued at $78,110,384 (56.5% of
net
assets) at December 31, 2007, the fair values of which have been estimated
by
the Board of Directors in the absence of readily ascertainable market values.
These estimated values may differ significantly from the values that would
have
been used had a ready market for the investments existed, and the differences
could be material.
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
New
York,
New York
March
12,
2008
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
ASSETS
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Investments,
at value (Cost: $142,230,461 at 12/31/07, $121,331,398 at
12/31/06)
|
|
$
|
138,303,977
|
|
$
|
112,323,978
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
330,009
|
|
|
2,071,788
|
|
Restricted
funds (Note 7)
|
|
|
2,667,020
|
|
|
2,149,785
|
|
Receivable
from portfolio company
|
|
|
524
|
|
|
0
|
|
Receivable
from broker (Note 4)
|
|
|
0
|
|
|
819,905
|
|
Interest
receivable
|
|
|
647,337
|
|
|
625,372
|
|
Prepaid
expenses
|
|
|
488,667
|
|
|
10,945
|
|
Other
assets
|
|
|
455,798
|
|
|
326,817
|
|
Total
assets
|
|
$
|
142,893,332
|
|
$
|
118,328,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 7)
|
|
$
|
4,515,463
|
|
$
|
4,115,300
|
|
Accrued
profit sharing (Note 5)
|
|
|
0
|
|
|
261,661
|
|
Deferred
rent
|
|
|
14,525
|
|
|
21,326
|
|
Total
liabilities
|
|
|
4,529,988
|
|
|
4,398,287
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
138,363,344
|
|
$
|
113,930,303
|
|
|
|
|
|
|
|
|
|
Net
assets are comprised of:
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value,
|
|
|
|
|
|
|
|
2,000,000
shares authorized; none issued
|
|
$
|
0
|
|
$
|
0
|
|
Common
stock, $0.01 par value, 45,000,000 shares authorized at
|
|
|
|
|
|
|
|
12/31/07
and 12/31/06; 25,143,313 issued at
|
|
|
|
|
|
|
|
12/31/07
and 22,843,757 issued at 12/31/06
|
|
|
251,434
|
|
|
228,438
|
|
Additional
paid in capital (Note 10)
|
|
|
160,927,691
|
|
|
129,801,201
|
|
Accumulated
net realized loss
|
|
|
(15,483,766
|
)
|
|
(3,686,385
|
)
|
Accumulated
unrealized depreciation of investments
|
|
|
(3,926,484
|
)
|
|
(9,007,420
|
)
|
Treasury
stock, at cost (1,828,740 shares at 12/31/07 and 12/31/06)
|
|
|
(3,405,531
|
)
|
|
(3,405,531
|
)
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
138,363,344
|
|
$
|
113,930,303
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
23,314,573
|
|
|
21,015,017
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$
|
5.93
|
|
$
|
5.42
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Investment
income:
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
Fixed-income
securities
|
|
$
|
2,705,597
|
|
$
|
2,991,261
|
|
$
|
1,409,273
|
|
Portfolio
companies
|
|
|
0
|
|
|
0
|
|
|
65,620
|
|
Miscellaneous
income
|
|
|
39
|
|
|
37,500
|
|
|
65,969
|
|
Total
investment income
|
|
|
2,705,636
|
|
|
3,028,761
|
|
|
1,540,862
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 4)
|
|
|
11,435,329
|
|
|
7,933,276
|
|
|
2,459,033
|
|
Administration
and operations
|
|
|
1,432,653
|
|
|
1,250,080
|
|
|
1,319,354
|
|
Profit-sharing
provision (Note 5)
|
|
|
0
|
|
|
50,875
|
|
|
1,796,264
|
|
Professional
fees
|
|
|
902,911
|
|
|
737,828
|
|
|
830,062
|
|
Rent
|
|
|
235,998
|
|
|
239,846
|
|
|
211,582
|
|
Directors'
fees and expenses
|
|
|
435,060
|
|
|
340,750
|
|
|
308,874
|
|
Depreciation
|
|
|
63,113
|
|
|
64,916
|
|
|
64,713
|
|
Custodian
fees
|
|
|
28,115
|
|
|
24,125
|
|
|
16,741
|
|
Total
expenses
|
|
|
14,533,179
|
|
|
10,641,696
|
|
|
7,006,623
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(11,827,543
|
)
|
|
(7,612,935
|
)
|
|
(5,465,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain from investments:
|
|
|
|
|
|
|
|
|
|
|
Realized
gain from investments
|
|
|
118,137
|
|
|
31,338
|
|
|
23,862,037
|
|
Income
tax expense (benefit) (Note 8)
|
|
|
87,975
|
|
|
(227,355
|
)
|
|
9,653,248
|
|
Net
realized gain from investments
|
|
|
30,162
|
|
|
258,693
|
|
|
14,208,789
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments:
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
0
|
|
|
0
|
|
|
(23,181,420
|
)
|
Change
on investments held
|
|
|
5,080,936
|
|
|
(4,418,870
|
)
|
|
19,790,298
|
|
Change
in unrealized depreciation on investments
|
|
|
5,080,936
|
|
|
(4,418,870
|
)
|
|
(3,391,122
|
)
|
Income
tax (benefit) (Note 8)
|
|
|
0
|
|
|
0
|
|
|
(1,364,470
|
)
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments
|
|
|
5,080,936
|
|
|
(4,418,870
|
)
|
|
(2,026,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets
|
|
|
|
|
|
|
|
|
|
|
resulting
from operations:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(6,716,445
|
)
|
$
|
(11,773,112
|
)
|
$
|
6,716,376
|
|
Per
average basic and diluted outstanding share
|
|
$
|
(0.30
|
)
|
$
|
(0.57
|
)
|
$
|
0.36
|
|
Average
outstanding shares
|
|
|
22,393,030
|
|
|
20,759,547
|
|
|
18,471,770
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets
|
|
|
|
|
|
|
|
resulting
from operations
|
|
$
|
(6,716,445
|
)
|
$
|
(11,773,112
|
)
|
$
|
6,716,376
|
|
Adjustments
to reconcile net increase (decrease) in net assets
|
|
|
|
|
|
|
|
|
|
|
resulting
from operations to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
realized and unrealized (gain) loss on investments
|
|
|
(5,199,073
|
)
|
|
4,420,619
|
|
|
(20,470,915
|
)
|
Deferred
income taxes
|
|
|
0
|
|
|
0
|
|
|
(1,364,470
|
)
|
Depreciation
and amortization
|
|
|
(60,009
|
)
|
|
(426,168
|
)
|
|
346,019
|
|
Taxes
payable on behalf of shareholders on deemed dividend
|
|
|
0
|
|
|
0
|
|
|
8,122,367
|
|
Stock-based
compensation expense
|
|
|
8,050,807
|
|
|
5,038,956
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
(517,235
|
)
|
|
(419,351
|
)
|
|
(138,463
|
)
|
Receivable
from portfolio company
|
|
|
(524
|
)
|
|
75,000
|
|
|
(65,000
|
)
|
Interest
receivable
|
|
|
(21,965
|
)
|
|
(376,808
|
)
|
|
(189,603
|
)
|
Income
tax receivable
|
|
|
0
|
|
|
0
|
|
|
(7,023
|
)
|
Prepaid
expenses
|
|
|
(477,722
|
)
|
|
(7,951
|
)
|
|
539,496
|
|
Other
receivables
|
|
|
819,905
|
|
|
(819,905
|
)
|
|
0
|
|
Other
assets
|
|
|
(152,012
|
)
|
|
(176,325
|
)
|
|
11,599
|
|
Accounts
payable and accrued liabilities
|
|
|
400,163
|
|
|
1,002,643
|
|
|
268,525
|
|
Accrued
profit sharing
|
|
|
(261,661
|
)
|
|
(1,846,197
|
)
|
|
1,796,264
|
|
Deferred
rent
|
|
|
(6,801
|
)
|
|
(9,677
|
)
|
|
(3,927
|
)
|
Current
income tax liability
|
|
|
0
|
|
|
(9,637,026
|
)
|
|
1,524,470
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(4,142,572
|
)
|
|
(14,955,302
|
)
|
|
(2,914,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(purchase) sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
and
marketable securities
|
|
|
(235,754
|
)
|
|
37,593,589
|
|
|
(52,144,482
|
)
|
Investment
in private placements and loans
|
|
|
(20,595,161
|
)
|
|
(24,408,187
|
)
|
|
(16,251,339
|
)
|
Proceeds
from sale of investments
|
|
|
174,669
|
|
|
28,295
|
|
|
35,392,200
|
|
Purchase
of fixed assets
|
|
|
(41,640
|
)
|
|
(15,086
|
)
|
|
(45,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(20,697,886
|
)
|
|
13,198,611
|
|
|
(33,049,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from public offering, net (Note 10)
|
|
|
12,993,168
|
|
|
0
|
|
|
36,526,567
|
|
Proceeds
from stock option exercises (Note 4)
|
|
|
10,105,511
|
|
|
2,615,190
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
23,098,679
|
|
|
2,615,190
|
|
|
36,526,567
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the year
|
|
|
2,071,788
|
|
|
1,213,289
|
|
|
650,332
|
|
Cash
and cash equivalents at end of the year
|
|
|
330,009
|
|
|
2,071,788
|
|
|
1,213,289
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
$
|
(1,741,779
|
)
|
$
|
858,499
|
|
$
|
562,957
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
80,236
|
|
$
|
9,425,922
|
|
$
|
0
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(11,827,543
|
)
|
$
|
(7,612,935
|
)
|
$
|
(5,465,761
|
)
|
Net
realized gain on investments
|
|
|
30,162
|
|
|
258,693
|
|
|
14,208,789
|
|
Net
(increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments as a
|
|
|
|
|
|
|
|
|
|
|
result
of sales
|
|
|
0
|
|
|
0
|
|
|
(23,181,420
|
)
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments held
|
|
|
5,080,936
|
|
|
(4,418,870
|
)
|
|
19,790,298
|
|
Net
change in deferred taxes
|
|
|
0
|
|
|
0
|
|
|
1,364,470
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting
|
|
|
|
|
|
|
|
|
|
|
from
operations
|
|
|
(6,716,445
|
)
|
|
(11,773,112
|
)
|
|
6,716,376
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from
|
|
|
|
|
|
|
|
|
|
|
capital
stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon the
|
|
|
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
9,996
|
|
|
2,587
|
|
|
0
|
|
Issuance
of common stock on offering
|
|
|
13,000
|
|
|
0
|
|
|
35,075
|
|
Additional
paid in capital on common
|
|
|
|
|
|
|
|
|
|
|
stock
issued
|
|
|
23,075,683
|
|
|
2,612,603
|
|
|
36,491,492
|
|
Stock-based
compensation expense
|
|
|
8,050,807
|
|
|
5,038,956
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting
|
|
|
|
|
|
|
|
|
|
|
from
capital stock transactions
|
|
|
31,149,486
|
|
|
7,654,146
|
|
|
36,526,567
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from adoption
|
|
|
|
|
|
|
|
|
|
|
of
SFAS No. 158
|
|
|
0
|
|
|
61,527
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets
|
|
|
24,433,041
|
|
|
(4,057,439
|
)
|
|
43,242,943
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the year
|
|
|
113,930,303
|
|
|
117,987,742
|
|
|
74,744,799
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of the year
|
|
$
|
138,363,344
|
|
$
|
113,930,303
|
|
$
|
117,987,742
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) - 15.25% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) - 15.25% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (4)(5)(6)(7)(8) - Developing novel biologics for
treatment of
cancer and infectious disease
|
|
|
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,799,552
|
|
$
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Exponential
Business Development Company (4)(5) -- Venture capital partnership
focused
on early stage companies
|
|
|
|
|
|
|
|
|
|
|
Limited
Partnership Interest
|
|
|
(B)
|
|
|
1
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (4)(5) -- Manufacturing nanoimprint lithography
capital
equipment
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,333,333
|
|
|
2,000,000
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,250,000
|
|
|
2,389,250
|
|
Warrants
at $2.00 expiring 12/31/11
|
|
|
(B)
|
|
|
125,000
|
|
|
110,750
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
Nanosys,
Inc. (4)(5)(7) -- Developing zero and one-dimensional inorganic
nanometer-scale materials and devices
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
803,428
|
|
|
2,370,113
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,016,950
|
|
|
3,000,003
|
|
|
|
|
|
|
|
|
|
|
5,370,116
|
|
Nantero,
Inc. (4)(5)(7) -- Developing a high-density, nonvolatile, random
access
memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
345,070
|
|
|
1,046,908
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
207,051
|
|
|
628,172
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
188,315
|
|
|
571,329
|
|
|
|
|
|
|
|
|
|
|
2,246,409
|
|
NeoPhotonics
Corporation (4)(5) -- Developing and manufacturing optical devices
and
components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(B)
|
|
|
716,195
|
|
|
133,141
|
|
Series
1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,831,256
|
|
|
1,831,256
|
|
Series
2 Convertible Preferred Stock
|
|
|
(B)
|
|
|
741,898
|
|
|
741,898
|
|
Series
3 Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,750,000
|
|
|
2,750,000
|
|
Warrants
at $0.15 expiring 01/26/10
|
|
|
(B)
|
|
|
16,364
|
|
|
1,325
|
|
Warrants
at $0.15 expiring 12/05/10
|
|
|
(B)
|
|
|
14,063
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
5,458,759
|
|
Polatis,
Inc. (4)(5)(7)(9) -- Developing MEMS-based optical networking
components
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
16,775
|
|
|
0
|
|
Series
A-2 Convertible Preferred Stock
|
|
|
(B)
|
|
|
71,611
|
|
|
132,653
|
|
Series
A-4 Convertible Preferred Stock
|
|
|
(B)
|
|
|
4,774
|
|
|
8,768
|
|
Series
A-5 Convertible Preferred Stock
|
|
|
(B)
|
|
|
16,438
|
|
|
135,105
|
|
|
|
|
|
|
|
|
|
|
276,526
|
|
Starfire
Systems, Inc. (4)(5)(7) -- Producing ceramic-forming polymers
Common
Stock
|
|
|
(B)
|
|
|
375,000
|
|
|
150,000
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$21,435,392)
|
|
|
|
|
|
|
|
$
|
21,103,836
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost:
$21,435,392)
|
|
|
|
|
|
|
|
$
|
21,103,836
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 38.06% of net
assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 38.06% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation (4)(5)(6)(7) -- Developing
semiconductor-related products enabled at the nanoscale
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
3,416,149
|
|
$
|
1,147,826
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc. (4)(5)(6)(7) - Developing synthetic carbohydrates
for pharmaceutical markets and for internal drug development
programs
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
909,091
|
|
|
639,062
|
|
Warrants
at $1.06 expiring 05/01/08
|
|
|
(B)
|
|
|
754,717
|
|
|
60,377
|
|
|
|
|
|
|
|
|
|
|
699,439
|
|
BridgeLux,
Inc. (4)(5)(11) -- Manufacturing high-power light emitting
diodes
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,861,504
|
|
|
2,792,256
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,130,699
|
|
|
3,196,050
|
|
Warrants
at $0.7136 expiring 02/02/2017
|
|
|
(B)
|
|
|
98,340
|
|
|
138,856
|
|
Warrants
at $0.7136 expiring 04/26/2017
|
|
|
(B)
|
|
|
65,560
|
|
|
92,833
|
|
|
|
|
|
|
|
|
|
|
6,219,995
|
|
Cambrios
Technologies Corporation (4)(5)(7) -- Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,294,025
|
|
|
1,294,025
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,300,000
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
2,594,025
|
|
Chlorogen,
Inc. (4)(5)(12) -- Developed patented chloroplast technology
to produce
plant-made proteins
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
4,478,038
|
|
|
0
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,077,930
|
|
|
0
|
|
Secured
Convertible Bridge Note (including interest)
|
|
|
(B)
|
|
$
|
176,811
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Crystal
IS, Inc. (4)(5)(7) -- Developing single-crystal aluminum nitride
substrates for optoelectronic devices
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
391,571
|
|
|
305,425
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,300,376
|
|
|
1,014,294
|
|
Warrants
at $0.78 expiring 05/05/2013
|
|
|
(B)
|
|
|
15,231
|
|
|
9,550
|
|
Warrants
at $0.78 expiring 05/12/2013
|
|
|
(B)
|
|
|
2,350
|
|
|
1,473
|
|
Warrants
at $0.78 expiring 08/08/2013
|
|
|
(B)
|
|
|
4,396
|
|
|
2,796
|
|
|
|
|
|
|
|
|
|
|
1,333,538
|
|
CSwitch,
Inc. (4)(5)(7)(13) -- Developing next-generation, system-on-
a-chip
solutions for communications-based platforms
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
6,863,118
|
|
|
3,431,559
|
|
Secured
Convertible Bridge Note (including interest)
|
|
|
(B)
|
|
$
|
529,852
|
|
|
541,581
|
|
|
|
|
|
|
|
|
|
|
3,973,140
|
|
D-Wave
Systems, Inc. (4)(5)(7)(14) -- Developing high- performance quantum
computing systems
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,000,000
|
|
|
2,226,488
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 38.06% of net
assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 38.06% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ensemble
Discovery Corporation (4)(5)(6)(7) - Developing
DNA Programmed Chemistry for the discovery of new classes of
therapeutics
and bioassays
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,449,275
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (4)(5)(7) - Developing renewable energy products enabled
by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
16,666,666
|
|
|
5,718,216
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
5,810,577
|
|
|
1,993,568
|
|
|
|
|
|
|
|
|
|
|
7,711,784
|
|
Kereos,
Inc. (4)(5)(7) -- Developing emulsion-based imaging agents and
targeted
therapeutics to image and treat cancer and cardiovascular
disease
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
545,456
|
|
|
159,743
|
|
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (4)(5)(7) -- Developing semiconductor products using printed
electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,500,000
|
|
|
3,125,000
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
800,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
4,125,000
|
|
Lifco,
Inc. (4)(5)(6)(7)(15) -- Developing
energy solutions using nanostructured materials
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,208,262
|
|
|
946,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Mersana
Therapeutics, Inc. (4)(5)(7)(16) -- Developing advanced polymers
for drug
delivery
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
68,451
|
|
|
136,902
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
866,500
|
|
|
1,733,000
|
|
Warrants
at $2.00 expiring 10/21/10
|
|
|
(B)
|
|
|
91,625
|
|
|
118,380
|
|
|
|
|
|
|
|
|
|
|
1,988,282
|
|
Metabolon,
Inc. (4)(5)(7) - Discovering biomarkers through the use of
metabolomics
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,173,913
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (4)(5)(7) -- Developing a broad suite of intellectual
property
utilizing nanoscale materials
|
|
|
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
|
|
(B)
|
|
|
63,210
|
|
|
124,524
|
|
Series
II Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,250,904
|
|
|
2,464,281
|
|
Series
III Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,242,144
|
|
|
2,447,024
|
|
Series
IV Convertible Preferred Stock
|
|
|
(B)
|
|
|
432,179
|
|
|
851,393
|
|
|
|
|
|
|
|
|
|
|
5,887,222
|
|
Nanomix,
Inc. (4)(5)(7) -- Producing nanoelectronic sensors that integrate
carbon
nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
977,917
|
|
|
330,228
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
6,802,397
|
|
|
680,240
|
|
|
|
|
|
|
|
|
|
|
1,010,468
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 38.06% of
net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 38.06% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoOpto
Corporation (4)(5)(17) -- Manufactured discrete and integrated
optical
communications sub-components on a chip by utilizing nano manufacturing
and nano coating technology
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
267,857
|
|
$
|
0
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
3,819,935
|
|
|
0
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,932,789
|
|
|
0
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,397,218
|
|
|
0
|
|
Warrants
at $0.4359 expiring 03/15/10
|
|
|
(B)
|
|
|
193,279
|
|
|
0
|
|
Secured
Convertible Bridge Note (including interest)
|
|
|
(B)
|
|
$
|
268,654
|
|
|
105,714
|
|
|
|
|
|
|
|
|
|
|
105,714
|
|
Nextreme
Thermal Solutions, Inc. (4)(5)(7) -- Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,750,000
|
|
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (4)(5) -- Manufacturing and marketing proprietary
metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(B)
|
|
|
655,454
|
|
|
589,259
|
|
Warrants
at $1.50 expiring 11/19/08
|
|
|
(B)
|
|
|
5,000
|
|
|
1,085
|
|
Warrants
at $1.50 expiring 11/19/09
|
|
|
(B)
|
|
|
5,000
|
|
|
1,910
|
|
|
|
|
|
|
|
|
|
|
592,254
|
|
Siluria
Technologies, Inc. (4)(5)(6)(7) - Developing new-generation
nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
|
|
(B)
|
|
|
482,218
|
|
|
160,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Solazyme,
Inc. (4)(5)(7) -- Developing energy-harvesting machinery of
photosynthetic
microbes to produce industrial and pharmaceutical
molecules
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
988,204
|
|
|
997,691
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
495,246
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
1,497,691
|
|
Xradia,
Inc. (4)(5) - Designing, manufacturing and selling ultra high
resolution
3D x-ray microscopes and fluorescence imaging systems
|
|
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
3,121,099
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Zia
Laser, Inc. (4)(5)(18) -- Developed quantum dot semiconductor
lasers
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,500,000
|
|
|
21,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$54,306,393)
|
|
|
|
|
|
|
|
$
|
52,651,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$54,306,393)
|
|
|
|
|
|
|
|
$
|
52,651,189
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(19) - 3.15% of net assets
at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 3.15% of net
assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evolved
Nanomaterial Sciences, Inc. (4)(5)(20) -- Developed nanoscale-enhanced
approaches for the resolution of chiral molecules
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
5,870,021
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix
Molecular Corporation (4)(5)(6)(7) - Developing technology to
enable the
separation of difficult-to-separate materials.
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(B)
|
|
|
1,000
|
|
|
10
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
|
(B)
|
|
$
|
50,000
|
|
|
50,733
|
|
|
|
|
|
|
|
|
|
|
50,743
|
|
SiOnyx,
Inc. (4)(5)(7) -- Developing silicon-based optoelectronic products
enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(B)
|
|
|
233,499
|
|
|
135,686
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
2,966,667
|
|
|
1,723,930
|
|
Series
A-2 Convertible Preferred Stock
|
|
|
(B)
|
|
|
4,207,537
|
|
|
2,445,000
|
|
|
|
|
|
|
|
|
|
|
4,304,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost:
$6,935,743)
|
|
|
|
|
|
|
|
$
|
4,355,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$6,935,743)
|
|
|
|
|
|
|
|
$
|
4,355,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $82,677,528)
|
|
|
|
|
|
|
|
$
|
78,110,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and Agency Securities - 43.50% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date 02/21/08
|
|
|
(J)
|
|
$
|
2,750,000
|
|
|
2,738,725
|
|
U.S.
Treasury Notes -- due date 02/15/08, coupon 3.375%
|
|
|
(H)
|
|
|
15,005,000
|
|
|
15,006,200
|
|
U.S.
Treasury Notes -- due date 05/15/08, coupon 3.75%
|
|
|
(H)
|
|
|
9,000,000
|
|
|
9,010,530
|
|
U.S.
Treasury Notes -- due date 09/15/08, coupon 3.125%
|
|
|
(H)
|
|
|
5,000,000
|
|
|
4,991,800
|
|
U.S.
Treasury Notes -- due date 01/15/09, coupon 3.25%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,005,160
|
|
U.S.
Treasury Notes -- due date 02/15/09, coupon 4.50%
|
|
|
(H)
|
|
|
5,100,000
|
|
|
5,176,908
|
|
U.S.
Treasury Notes -- due date 04/15/09, coupon 3.125%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,001,410
|
|
U.S.
Treasury Notes -- due date 07/15/09, coupon 3.625%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,023,910
|
|
U.S.
Treasury Notes -- due date 10/15/09, coupon 3.375%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,018,510
|
|
U.S.
Treasury Notes -- due date 01/15/10, coupon 3.625%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,034,680
|
|
U.S.
Treasury Notes -- due date 04/15/10, coupon 4.00%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,060,930
|
|
U.S.
Treasury Notes -- due date 07/15/10, coupon 3.875%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
3,060,930
|
|
U.S.
Treasury Notes -- due date 10/15/10, coupon 4.25%
|
|
|
(H)
|
|
|
2,000,000
|
|
|
2,063,900
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government and Agency Securities (cost:
$59,552,933)
|
|
|
|
|
|
|
|
$
|
60,193,593
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $142,230,461)
|
|
|
|
|
|
|
|
$
|
138,303,977
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
Notes
to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page F-21
for a
description of the Valuation
Procedures.
|
(2)
|
Investments
in unaffiliated companies consist of investments in which we
own less than
five percent of the voting shares of the portfolio company.
Investments in
non-controlled affiliated companies consist of investments
in which we own
five percent or more, but less than 25 percent, of the voting
shares of
the portfolio company, or where we hold one or more seats on
the portfolio
company’s Board of Directors but do not control the company. Investments
in controlled affiliated companies consist of investments in
which we own
25 percent or more of the voting shares of the portfolio company
or
otherwise control the company.
|
(3)
|
The
aggregate cost for federal income tax purposes of investments
in
unaffiliated companies is $21,435,392. The gross unrealized
appreciation
based on the tax cost for these securities is $1,732,194. The
gross
unrealized depreciation based on the tax cost for these securities
is
$2,063,750.
|
(4)
|
Legal
restrictions on sale of investment.
|
(5)
|
Represents
a non-income producing security. Equity investments that have
not paid
dividends within the last 12 months are considered to be non-income
producing.
|
(6)
|
Initial
investment was made during 2007.
|
(7)
|
These
investments are development stage companies. A development
stage company
is defined as a company that is devoting substantially all
of its efforts
to establishing a new business, and either it has not yet commenced
its
planned principal operations, or it has commenced such operations
but has
not realized significant revenue from
them.
|
(8)
|
With
our purchase of Series E Convertible Preferred Stock of BioVex,
we
received a warrant to purchase a number of shares of common
stock of
BioVex as determined by dividing 624,999.99 by the price per
share at
which the common stock is offered and sold to the public in
connection
with the initial public offering. The ability to exercise this
warrant is therefore contingent on BioVex completing successfully
an
initial public offering before the expiration date of the warrant
of
September 27, 2012. The exercise price of this warrant shall
be 110
percent of the initial public offering
price.
|
(9)
|
Continuum
Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
|
(10)
|
The
aggregate cost for federal income tax purposes of investments
in
non-controlled affiliated companies is $54,306,393. The gross
unrealized
appreciation based on the tax cost for these securities is
$10,915,201.
The gross unrealized depreciation based on the tax cost for
these
securities is $12,570,405.
|
(11)
|
BridgeLux,
Inc., was previously named eLite Optoelectronics,
Inc.
|
(12)
|
On
November 30, 2007, Chlorogen filed a Certificate of Dissolution
with the
state of Delaware.
|
(13)
|
With
our investment in a secured convertible bridge note issued
by CSwitch, we
received a warrant to purchase a number of shares of the class
of stock
sold in the next financing of CSwitch equal to $529,322.36,
the principal
of the note, divided by the lowest price per share of the class
of stock
sold in the next financing of CSwitch. The ability to exercise this
warrant is therefore contingent on CSwitch completing successfully
a
subsequent round of financing. The warrant will expire five years
from the date of the close of the next round of financing. The cost
basis of this warrant is $529.32.
|
(14)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We
invested in D-Wave Systems, Inc., through D-Wave USA, a Delaware
company.
Our investment is denominated in Canadian dollars and is subject
to
foreign currency translation. See "Note 2. Summary of Significant
Accounting Policies."
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2007
|
(15)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery, Inc.,
to form CFX
Battery, Inc.
|
(16)
|
Mersana
Therapeutics, Inc., was previously named Nanopharma
Corp.
|
(17)
|
On
July 19, 2007, NanoOpto Corporation sold its assets to API Nanotronics,
Inc.
|
(18)
|
On
November 30, 2006, the assets of Zia Laser, Inc., were acquired
by
Innolume, Inc.
|
(19)
|
The
aggregate cost for federal income tax purposes of investments
in
controlled affiliated companies is $6,935,743. The gross unrealized
appreciation based on the tax cost for these securities is $219,616.
The
gross unrealized depreciation based on the tax cost for these
securities
is $2,800,000.
|
(20)
|
On
September 30, 2007, Evolved Nanomaterial Sciences, Inc., filed
for Chapter
7 bankruptcy.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(3)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (6)(7) - 15.61% of net
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) - 15.61% of net
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AlphaSimplex
Group, LLC (2) -- Investment management company headed by
|
|
|
|
|
|
|
|
|
|
|
Dr.
Andrew W. Lo, holder of the Harris & Harris Group Chair at
MIT
|
|
|
|
|
|
|
|
|
|
|
Limited
Liability Company Interest
|
|
|
(B)
|
|
|
--
|
|
$
|
10,521
|
|
|
|
|
|
|
|
|
|
|
|
|
Exponential
Business Development Company (1)(2) --
|
|
|
|
|
|
|
|
|
|
|
Venture
capital partnership focused on early stage companies
|
|
|
|
|
|
|
|
|
|
|
Limited
Partnership Interest
|
|
|
(B)
|
|
|
--
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (1)(2) -- Manufacturing nanoimprint lithography
|
|
|
|
|
|
|
|
|
|
|
capital
equipment
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
1,333,333
|
|
|
2,000,000
|
|
Series
C Convertible Preferred Stock
|
|
|
(A)
|
|
|
1,250,000
|
|
|
2,500,000
|
|
Warrants
at $2.00 expiring12/31/11
|
|
|
(B)
|
|
|
125,000
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
Nanosys,
Inc. (1)(2)(5) -- Developing zero and one-dimensional
|
|
|
|
|
|
|
|
|
|
|
inorganic
nanometer-scale materials for use in nanotechnology-
|
|
|
|
|
|
|
|
|
|
|
enabled
systems
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(C)
|
|
|
803,428
|
|
|
2,370,113
|
|
Series
D Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,016,950
|
|
|
3,000,003
|
|
|
|
|
|
|
|
|
|
|
5,370,116
|
|
Nantero,
Inc. (1)(2)(5) -- Developing a high-density, nonvolatile, random
|
|
|
|
|
|
|
|
|
|
|
access
memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
345,070
|
|
|
1,046,908
|
|
Series
B Convertible Preferred Stock
|
|
|
(C)
|
|
|
207,051
|
|
|
628,172
|
|
Series
C Convertible Preferred Stock
|
|
|
(C)
|
|
|
188,315
|
|
|
571,329
|
|
|
|
|
|
|
|
|
|
|
2,246,409
|
|
NeoPhotonics
Corporation (1)(2) -- Developing and manufacturing
|
|
|
|
|
|
|
|
|
|
|
planar
optical devices and components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(C)
|
|
|
716,195
|
|
|
133,141
|
|
Series
1 Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,831,256
|
|
|
1,831,256
|
|
Series
2 Convertible Preferred Stock
|
|
|
(C)
|
|
|
741,898
|
|
|
741,898
|
|
Series
3 Convertible Preferred Stock
|
|
|
(C)
|
|
|
2,750,000
|
|
|
2,750,000
|
|
Warrants
at $0.15 expiring 01/26/10
|
|
|
(C)
|
|
|
16,364
|
|
|
164
|
|
Warrants
at $0.15 expiring 12/05/10
|
|
|
(C)
|
|
|
14,063
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
5,456,599
|
|
Polatis,
Inc. (1)(2)(5)(10) -- Developing optical networking
components
|
|
|
|
|
|
|
|
|
|
|
by
merging materials, MEMS and electronics technologies
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
16,775
|
|
|
0
|
|
Series
A-2 Convertible Preferred Stock
|
|
|
(B)
|
|
|
71,611
|
|
|
141,520
|
|
Series
A-4 Convertible Preferred Stock
|
|
|
(B)
|
|
|
4,774
|
|
|
9,435
|
|
Series
A-5 Convertible Preferred Stock
|
|
|
(B)
|
|
|
5,491
|
|
|
45,127
|
|
|
|
|
|
|
|
|
|
|
196,082
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$18,107,124)
|
|
|
|
|
|
|
|
$
|
17,779,727
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost:
$18,107,124)
|
|
|
|
|
|
|
|
$
|
17,779,727
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(3)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (6)(8) -28.20% of net
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 28.20% of net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BridgeLux,
Inc. (1)(2)(11) -- Manufacturing high-power light
|
|
|
|
|
|
|
|
|
|
|
emitting
diodes
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
1,861,504
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambrios
Technologies Corporation (1)(2)(5) -- Developing nanowire-
|
|
|
|
|
|
|
|
|
|
|
enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
1,294,025
|
|
|
1,294,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Chlorogen,
Inc. (1)(2)(5) -- Developing patented chloroplast technology
|
|
|
|
|
|
|
|
|
|
|
to
produce plant-made proteins
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
4,478,038
|
|
|
785,000
|
|
Series
B Convertible Preferred Stock
|
|
|
(C)
|
|
|
2,077,930
|
|
|
364,261
|
|
Secured
Convertible Bridge Note (including interest)
|
|
|
(A)
|
|
$
|
221,438
|
|
|
225,697
|
|
|
|
|
|
|
|
|
|
|
1,374,958
|
|
Crystal
IS, Inc. (1)(2)(5) -- Developing single-crystal
|
|
|
|
|
|
|
|
|
|
|
aluminum
nitride substrates for optoelectronic devices
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
391,571
|
|
|
305,425
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,300,376
|
|
|
1,014,294
|
|
Warrants
at $0.78 expiring 05/05/2013
|
|
|
(B)
|
|
|
15,231
|
|
|
0
|
|
Warrants
at $0.78 expiring 05/12/2013
|
|
|
(B)
|
|
|
2,350
|
|
|
0
|
|
Warrants
at $0.78 expiring 08/08/2013
|
|
|
(B)
|
|
|
4,396
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
1,319,719
|
|
CSwitch,
Inc. (1)(2)(5) -- Developing next-generation,
system-on-a-chip
|
|
|
|
|
|
|
|
|
|
|
solutions
for communications-based platforms
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(C)
|
|
|
6,700,000
|
|
|
3,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (1)(2)(4)(5)(13) -- Developing
high-performance
|
|
|
|
|
|
|
|
|
|
|
quantum
computing systems
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
2,000,000
|
|
|
1,716,444
|
|
Warrants
at $0.85 expiring 10/19/07
|
|
|
(B)
|
|
|
1,800,000
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
1,716,444
|
|
Innovalight,
Inc. (1)(2)(4)(5) - Developing renewable energy products
|
|
|
|
|
|
|
|
|
|
|
enabled
by silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
16,666,666
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Kereos,
Inc. (1)(2)(5) -- Developing emulsion-based imaging
|
|
|
|
|
|
|
|
|
|
|
agents
and targeted therapeutics to image and treat cancer
|
|
|
|
|
|
|
|
|
|
|
and
cardiovascular disease
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
349,092
|
|
|
960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (1)(2)(5) -- Developing semiconductor products
|
|
|
|
|
|
|
|
|
|
|
using
printed electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(A)
|
|
|
2,500,000
|
|
|
3,000,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(3)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (6)(8) - 28.20% of net
assets
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 28.20% of net assets (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mersana
Therapeutics, Inc. (1)(2)(5)(12) -- Developing advanced
|
|
|
|
|
|
|
|
|
|
|
polymers
for drug delivery
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
68,452
|
|
$
|
136,904
|
|
Series
B Convertible Preferred Stock
|
|
|
(C)
|
|
|
616,500
|
|
|
1,233,000
|
|
Warrants
at $2.00 expiring 10/21/10
|
|
|
(B)
|
|
|
91,625
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
1,369,904
|
|
Metabolon,
Inc. (1)(2)(4)(5) - Discovering biomarkers through
|
|
|
|
|
|
|
|
|
|
|
the
use of metabolomics
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(A)
|
|
|
2,173,913
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (1)(2)(5) -- Developing a broad suite of intellectual
|
|
|
|
|
|
|
|
|
|
|
property
utilizing nanotechnology
|
|
|
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
|
|
(C)
|
|
|
63,210
|
|
|
64,259
|
|
Series
II Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,250,904
|
|
|
1,271,670
|
|
Series
III Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,242,144
|
|
|
1,262,764
|
|
|
|
|
|
|
|
|
|
|
2,598,693
|
|
Nanomix,
Inc. (1)(2)(5) -- Producing nanoelectronic sensors that
|
|
|
|
|
|
|
|
|
|
|
integrate
carbon nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
9,779,181
|
|
|
790,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoOpto
Corporation (1)(2)(5) -- Manufacturing discrete and
integrated
|
|
|
|
|
|
|
|
|
|
|
optical
communications sub-components on a chip by utilizing
|
|
|
|
|
|
|
|
|
|
|
nano
manufacturing and nano coating technology
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(B)
|
|
|
267,857
|
|
|
16,400
|
|
Series
B Convertible Preferred Stock
|
|
|
(B)
|
|
|
3,819,935
|
|
|
560,328
|
|
Series
C Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,932,789
|
|
|
425,266
|
|
Series
D Convertible Preferred Stock
|
|
|
(B)
|
|
|
1,397,218
|
|
|
204,951
|
|
Warrants
at $0.4359 expiring 03/15/10
|
|
|
(B)
|
|
|
193,279
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
1,206,945
|
|
Nextreme
Thermal Solutions, Inc. (1)(2)(5) -- Developing thin-film
|
|
|
|
|
|
|
|
|
|
|
thermoelectric
devices
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(A)
|
|
|
1,000,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (1)(2) -- Manufacturing and marketing
|
|
|
|
|
|
|
|
|
|
|
proprietary
metal and stone decorative tiles
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(B)
|
|
|
655,454
|
|
|
996,683
|
|
Warrants
at $1.50 expiring 11/21/07
|
|
|
(B)
|
|
|
3,750
|
|
|
77
|
|
Warrants
at $1.50 expiring 11/19/08
|
|
|
(B)
|
|
|
5,000
|
|
|
103
|
|
Warrants
at $1.50 expiring 11/19/09
|
|
|
(B)
|
|
|
5,000
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
996,966
|
|
Solazyme,
Inc. (1)(2)(5) -- Developing energy-harvesting
|
|
|
|
|
|
|
|
|
|
|
machinery
of photosynthetic microbes to produce industrial
|
|
|
|
|
|
|
|
|
|
|
and
pharmaceutical molecules
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
988,204
|
|
|
385,400
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(3)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (6)(8) - 28.20% of net
assets
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 28.20% of net assets (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Starfire
Systems, Inc. (1)(2)(5) --Producing ceramic-forming polymers
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(A)
|
|
|
375,000
|
|
$
|
150,000
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(C)
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Xradia,
Inc. (1)(2)(4) - Designing, manufacturing and selling ultra
high
|
|
|
|
|
|
|
|
|
|
|
resolution
3D x-ray microscopes and fluorescence imaging systems.
|
|
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
|
(A)
|
|
|
3,121,099
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Zia
Laser, Inc. (1)(2)(5) -- Developing quantum dot semiconductor
lasers
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(C)
|
|
|
1,500,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$39,571,676)
|
|
|
|
|
|
|
|
$
|
32,128,054
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$39,571,676)
|
|
|
|
|
|
|
|
$
|
32,128,054
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(3)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (6)(9) - 3.30% of net
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 3.30% of net assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evolved
Nanomaterial Sciences, Inc. (1)(2)(4)(5) -- Developing
|
|
|
|
|
|
|
|
|
|
|
nanotechnology-enhanced
approaches for the resolution of
|
|
|
|
|
|
|
|
|
|
|
chiral
molecules
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(A)
|
|
|
5,870,021
|
|
$
|
2,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SiOnyx,
Inc. (1)(2)(4)(5) -- Developing silicon-based
|
|
|
|
|
|
|
|
|
|
|
optoelectronic
products enabled by its proprietary, "Black Silicon"
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(C)
|
|
|
233,499
|
|
|
70,050
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(C)
|
|
|
2,966,667
|
|
|
890,000
|
|
|
|
|
|
|
|
|
|
|
960,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost:
$4,440,000)
|
|
|
|
|
|
|
|
$
|
3,760,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$4,440,000)
|
|
|
|
|
|
|
|
$
|
3,760,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and Agency Securities - 51.48% of net
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date 1/18/07
|
|
|
(J)
|
|
|
2,217,000
|
|
|
2,212,677
|
|
U.S.
Treasury Notes -- due date 11/30/07, coupon 4.25%
|
|
|
(H)
|
|
|
6,500,000
|
|
|
6,455,345
|
|
U.S.
Treasury Notes -- due date 02/15/08, coupon 3.375%
|
|
|
(H)
|
|
|
9,000,000
|
|
|
8,842,860
|
|
U.S.
Treasury Notes -- due date 05/15/08, coupon 3.75%
|
|
|
(H)
|
|
|
9,000,000
|
|
|
8,862,210
|
|
U.S.
Treasury Notes -- due date 09/15/08, coupon 3.125%
|
|
|
(H)
|
|
|
5,000,000
|
|
|
4,861,350
|
|
U.S.
Treasury Notes -- due date 01/15/09, coupon 3.25%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,910,930
|
|
U.S.
Treasury Notes -- due date 02/15/09, coupon 4.50%
|
|
|
(H)
|
|
|
5,100,000
|
|
|
5,069,145
|
|
U.S.
Treasury Notes -- due date 04/15/09, coupon 3.125%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,893,830
|
|
U.S.
Treasury Notes -- due date 07/15/09, coupon 3.625%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,920,890
|
|
U.S.
Treasury Notes -- due date 10/15/09, coupon 3.375%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,894,310
|
|
U.S.
Treasury Notes -- due date 01/15/10, coupon 3.625%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,907,420
|
|
U.S.
Treasury Notes -- due date 04/15/10, coupon 4.00%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,935,560
|
|
U.S.
Treasury Notes -- due date 07/15/10, coupon 3.875%
|
|
|
(H)
|
|
|
3,000,000
|
|
|
2,920,560
|
|
U.S.
Treasury Notes -- due date 10/15/10, coupon 4.25%
|
|
|
(H)
|
|
|
2,000,000
|
|
|
1,969,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government and Agency Securities (cost:
$59,212,598)
|
|
|
|
|
|
|
|
$
|
58,656,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $121,331,398)
|
|
|
|
|
|
|
|
$
|
112,323,978
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2006
|
Notes
to
Consolidated Schedule of Investments
(1)
|
Represents
a non-income producing security. Equity investments that have
not paid
dividends within the last 12 months are considered to be non-income
producing.
|
(2)
|
Legal
restrictions on sale of investment.
|
(3)
|
See
Footnote to Schedule of Investments for a description of the
Valuation
Procedures.
|
(4)
|
Initial
investment was made during 2006.
|
(5)
|
These
investments are development stage companies. A development stage
company
is defined as a company that is devoting substantially all of
its efforts
to establishing a new business, and either it has not yet commenced
its
planned principal operations, or it has commenced such operations
but has
not realized significant revenue from
them.
|
(6)
|
Investments
in unaffiliated companies consist of investments in which we
own less than
five percent of the voting shares of the portfolio company. Investments
in
non-controlled affiliated companies consist of investments in
which we own
five percent or more, but less than 25 percent, of the voting
shares of
the portfolio company or where we hold one or more seats on the
portfolio
company’s Board of Directors. Investments in controlled affiliated
companies consist of investments in which we own 25 percent or
more of the
voting shares of the portfolio
company.
|
(7)
|
The
aggregate cost for federal income tax purposes of investments
in
unaffiliated companies is $18,107,124. The gross unrealized appreciation
based on the tax cost for these securities is $1,732,194. The
gross
unrealized depreciation based on the tax cost for these securities
is
$2,059,591.
|
(8)
|
The
aggregate cost for federal income tax purposes of investments
in
non-controlled affiliated companies is $39,571,676. The gross
unrealized
appreciation based on the tax cost for these securities is $333,269.
The
gross unrealized depreciation based on the tax cost for these
securities
is $7,776,891.
|
(9)
|
The
aggregate cost for federal income tax purposes of investments
in
controlled affiliated companies is $4,400,000. The gross unrealized
appreciation based on the tax cost for these securities is $0.
The gross
unrealized depreciation based on the tax cost for these securities
is
$679,950.
|
(10)
|
Continuum
Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
|
(11)
|
BridgeLux,
Inc., was previously named eLite Optoelectronics,
Inc.
|
(12)
|
Mersana
Therapeutics, Inc., was previously named Nanopharma
Corp.
|
(13)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We
invested in D-Wave Systems, Inc., through D-Wave USA, a Delaware
company.
Our investment is denominated in Canadian dollars and is subject
to
foreign currency translation. Refer to “Note 2. Summary of Significant
Accounting Policies.”
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
FOOTNOTE
TO CONSOLIDATED SCHEDULE OF
INVESTMENTS
|
VALUATION
PROCEDURES
Our
investments can be classified into five broad categories for valuation
purposes:
Equity-Related
Securities;
Investments
in Intellectual Property or Patents or Research and Development in Technology
or
Product Development;
Long-Term
Fixed-Income Securities;
Short-Term
Fixed-Income Securities; and
All
Other Securities.
The
1940
Act requires periodic valuation of each investment in our portfolio to
determine
net asset value. Under the 1940 Act, unrestricted securities with readily
available market quotations are to be valued at the current market value;
all
other assets must be valued at "fair value" as determined in good faith
by or
under the direction of the Board of Directors.
Our
Board
of Directors is responsible for (1) determining overall valuation guidelines
and
(2) ensuring the valuation of investments within the prescribed
guidelines.
Our
Valuation Committee, comprised of all of our independent Board members,
is
responsible for reviewing and approving the valuation of our assets within
the
guidelines established by the Board of Directors.
Fair
value is generally defined as the amount that an investment could be sold
for in
an orderly disposition over a reasonable time. Generally, to increase
objectivity in valuing our assets, external measures of value, such as
public
markets or third-party transactions, are utilized whenever possible. Valuation
is not based on long-term work-out value, nor immediate liquidation value,
nor
incremental value for potential changes that may take place in the
future.
The
values assigned to these investments are based on available information
and do
not necessarily represent amounts that might ultimately be realized, as
these
amounts depend on future circumstances and cannot reasonably be determined
until
the individual investments are actually liquidated or become
marketable.
Our
valuation policy with respect to the five broad investment categories is
as
follows:
Equity-Related
Securities
Equity-related
securities, including warrants, are valued using one or more of the following
basic methods of valuation:
A.
Cost. This
method may be used in the early stages of a company’s development until
significant positive or negative events occur subsequent to the date of
the
original investment that dictate a change to another valuation method.
B.
Analytical Method. The
analytical method is generally used to value an investment position when
there
is no established public or private market in the company’s securities. This
valuation method is inherently imprecise and ultimately the result of
reconciling the judgments of our Valuation Committee members, based on
the data
available to them. The resulting valuation, although stated as a precise
number,
is necessarily within a range of values that vary depending upon the
significance attributed to the various factors being considered.
The
analytical method considers the following factors:
|
·
|
The
cost of the Company’s investment;
|
|
·
|
Transactions
in a company's securities or unconditional firm offers by responsible
parties as a factor in determining
valuation;
|
|
·
|
The
financial condition and operating results of the
company;
|
|
·
|
The
long-term potential of the business and technology of the
company;
|
|
·
|
The
values of similar securities issued by companies in similar
businesses;
|
|
·
|
Multiples
to revenue, net income or EBITDA that similar securities issued
by
companies in similar businesses receive;
|
|
·
|
The
proportion of the company's securities we own and the nature
of any rights
to require the company to register restricted securities under
applicable
securities laws; and
|
|
·
|
The
rights and preferences of the class of securities we own as compared
to
other classes of securities the portfolio company has issued.
|
When
the
analytical method is used to value warrants, the Company utilizes the
Black-Scholes model.
C.
Private Market. The
private market method uses actual, executed, historical transactions in
a
company’s securities by responsible third parties as a basis for valuation. The
private market method may also use, where applicable, unconditional firm
offers
by responsible third parties as a basis for valuation.
D.
Public Market. The
public market method is used when there is an established public market
for the
class of the company’s securities held by us or into which our securities are
convertible. We discount market value for securities that are subject to
significant legal and contractual restrictions. Other securities, for which
market quotations are readily available, are carried at market value as
of the
time of valuation. Market value for securities traded on securities exchanges
or
on the Nasdaq Global Market is the last reported sales price on the day
of
valuation. For other securities traded in the over-the-counter market and
listed
securities for which no sale was reported on that day, market value is
the mean
of the closing bid price and asked price on that day. This method is the
preferred method of valuation when there is an established public market
for a
company’s securities, as that market provides the most objective basis for
valuation. If for any reason, the Valuation Committee determines that market
quotations are not reliable, such securities shall be fair valued by the
Valuation Committee in accordance with these Valuation Procedures.
Investments
in Intellectual Property or Patents or Research and Development in Technology
or
Product Development
These
investments are carried at fair value using the following basic methods
of
valuation:
E.
Cost. This
method may be used in the early stages of commercializing or developing
intellectual property or patents or research and development in technology
or
product development until significant positive or adverse events occur
subsequent to the date of the original investment that dictate a change
to
another valuation method.
F.
Analytical Method. The
analytical method is used to value an investment after analysis of the
best
available outside information where the factual information available to
us
dictates that an investment should no longer be valued under either the
cost or
private market method. This valuation method is inherently imprecise and
ultimately the result of reconciling the judgments of our Valuation Committee
members. The resulting valuation, although stated as a precise number,
is
necessarily within a range of values that vary depending upon the significance
attributed to the various factors being considered. Some of the factors
considered may include the results of research and development, product
development progress, commercial prospects, term of patent and projected
markets.
The
analytical method considers the following factors:
|
·
|
The
cost of the investment;
|
|
·
|
Investments
in the same or substantially similar intellectual property or
patents or
research and development in technology or product development
or offers by
responsible third parties;
|
|
·
|
The
results of research and
development;
|
|
·
|
Product
development progress;
|
|
·
|
Other
subjective factors.
|
G.
Private Market. The
private market method uses actual third-party investments in intellectual
property or patents or research and development in technology or product
development as a basis for valuation, using actual executed historical
transactions by responsible third parties. The private market method may
also
use, where applicable, unconditional firm offers by responsible third parties
as
a basis for valuation.
As
of
December 31, 2007, and December 31, 2006, we do not have any investments
in
intellectual property or patents or research and development in technologies
or
products.
Long-Term
Fixed-Income Securities
H.
Readily Marketable.
Long-term, fixed-income securities for which market quotations are readily
available are carried at market value as of the time of valuation using
the most
recent bid quotations when available.
I.
Not Readily Marketable.
Long-term, fixed-income securities for which market quotations are not
readily
available are carried at fair value as determined in good faith by the
Valuation
Committee on the basis of available data, which may include credit quality
and
interest rate analysis, as well as quotations from dealers and brokers.
Where
such quotations are not available, fair value is determined using prices
from
independent pricing services that the Board believes are reasonably reliable
and
based on reasonable price discovery procedures and data from other sources.
Short-Term
Fixed-Income Securities
J.
Short-Term Fixed-Income Securities
are
valued in the same manner as long-term fixed-income securities until the
remaining maturity is 60 days or less, after which time such securities
may be
valued at amortized cost if there is no concern over payment at
maturity.
All
Other Securities
K.
All Other Securities
are
reported at fair value as determined in good faith by the Valuation Committee.
As of December 31, 2007, and December 31, 2006, we did not have any of
these
investments.
For
all
other securities, the reported values shall reflect the Valuation Committee's
judgment of fair values as of the valuation date using the outlined basic
methods of valuation or any other method of valuation within the prescribed
guidelines that the Valuation Committee determines after review and analysis
is
more appropriate for the particular kind of investment. They do not necessarily
represent an amount of money that would be realized if we had to sell such
assets in an immediate liquidation. Thus, valuations as of any particular
date
are not necessarily indicative of amounts that we may ultimately realize
as a
result of future sales or other dispositions of investments we
hold.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
NOTE
1. THE COMPANY
Harris
& Harris Group, Inc. (the
"Company," "us," "our" and "we"), is a venture capital company operating
as a
business development company ("BDC") under the Investment Company Act of
1940
("1940 Act"). We operate as an internally managed company whereby our officers
and employees, under the general supervision of our Board of Directors,
conduct
our operations.
We
elected to become a BDC on July 26, 1995, after receiving the necessary
shareholder approvals. From September 30, 1992, until the election of BDC
status, we operated as a closed-end, non-diversified investment company
under
the 1940 Act. Upon commencement of operations as an investment company,
we
revalued all of our assets and liabilities in accordance with the 1940
Act.
Prior to September 30, 1992, we were registered and filed under the reporting
requirements of the Securities Exchange Act of 1934 (the "1934 Act") as
an
operating company and, while an operating company, operated directly and
through
subsidiaries.
Harris
& Harris Enterprises, Inc.,SM
is a 100
percent wholly owned subsidiary of the Company. Harris & Harris Enterprises,
Inc., is a partner in Harris Partners I, L.P.,SM
and is
taxed under Subchapter C of the Code (a “C Corporation”). Harris Partners I,
L.P, is a limited partnership and owned our interest in AlphaSimplex Group,
LLC.
The partners of Harris Partners I, L.P., are Harris & Harris Enterprises,
Inc., (sole general partner) and Harris & Harris Group, Inc., (sole limited
partner). Harris & Harris Enterprises, Inc., pays taxes on any non-passive
investment income generated by Harris Partners I, L.P. The Company consolidates
the results of its subsidiaries for financial reporting purposes.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements:
Principles
of Consolidation.
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for
investment companies and include the accounts of the Company and its wholly
owned subsidiaries. All significant inter-company accounts and transactions
have
been eliminated in consolidation.
Use
of
Estimates.
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and contingent assets and liabilities
as of
December 31, 2007, and December 31, 2006, and the reported amounts of revenues
and expenses for the twelve months ended December 31, 2007, 2006, and 2005.
Actual results could differ from these estimates, and the differences could
be
material. The most significant estimates relate to the fair valuations
of
certain of our investments. At December 31, 2007, and 2006, 54.6 percent
and
45.4 percent, respectively, of the Company’s total assets represented portfolio
investments whose fair values have been determined by the Board of Directors
in
good faith in the absence of readily available market values.
Cash
and Cash Equivalents.
Cash and
cash equivalents includes demand deposits and money market instruments
with
maturities of less than three months. Cash and cash equivalents are carried
at
cost which approximates fair value.
Portfolio
Investment Valuations.
Investments are stated at "value" as defined in the 1940 Act and in the
applicable regulations of the SEC. 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) the fair value as determined in
good
faith by, or under the direction of, the Board of Directors for all other
assets. (See "Valuation Procedures" in the "Footnote to Consolidated Schedule
of
Investments.") At December 31, 2007, and 2006, our financial statements
include
private venture capital investments valued at $78,110,384 and $53,667,831,
respectively, the fair values of which were determined in good faith by,
or
under the direction, of the Board of Directors. Upon sale of investments,
the
values that are ultimately realized may be different from what is presently
estimated. The difference could be material.
Foreign
Currency Translation.
The
accounting records of the Company are maintained in U.S. dollars. All assets
and
liabilities denominated in foreign currencies are translated into U.S.
dollars
based on the rate of exchange of such currencies against U.S. dollars on
the
date of valuation. For the year ended December 31, 2007, included in the
net
decrease in unrealized depreciation on investments was a $307,636 gain
resulting
from foreign currency translation.
Securities
Transactions.
Securities transactions are accounted for on the date the securities are
purchased or sold (trade date).
Interest
Income Recognition. Interest
income, adjusted for amortization of premium and accretion of discount,
is
recorded on accrual basis. The Company ceases accruing interest when securities
are determined to be non-income producing and writes off any previously
accrued
interest.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio
Investments. Realized
gain or loss is recognized when an investment is disposed of and is computed
as
the difference between the Company’s cost basis in the investment at the
disposition date and the net proceeds received from such disposition. Realized
gains and losses on investment transactions are determined by specific
identification. Unrealized appreciation or depreciation is computed as
the
difference between the fair value of the investment and the cost basis
of such
investment.
Stock-Based
Compensation.
The
Company has a stock-based employee compensation plan. The Company accounts
for
the plan in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Share-Based Payment." See “Note 4. Stock-Based
Compensation” for further discussion.
Income
Taxes.
As we
intend to qualify as a RIC under Subchapter M of the Internal Revenue Code,
the
Company does not provide for income taxes. Our taxes are accounted for
in
accordance with SFAS No. 109,
"Accounting for Income Taxes."
However,
we pay federal, state and local income taxes on behalf of our wholly owned
subsidiary, Harris & Harris Enterprises, Inc., which is a C corporation. See
“Note 8. Income Taxes."
In
June
2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in
Income
Taxes" (“FIN 48”),
an interpretation of SFAS No. 109. FIN 48 clarifies the accounting and
reporting for income taxes where interpretation of the law is uncertain.
FIN 48 prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of income tax
uncertainties with respect to positions taken or expected to be taken in
income
tax returns. The Company adopted FIN 48 on January 1, 2007, which had no
effect on the Company's financial statements. The Company recognizes interest
and penalties in income tax expense. See “Note
8.
Income Taxes”
for
further discussion.
Restricted
Funds.
The
Company maintains a rabbi trust for the purposes of accumulating funds
to
satisfy the obligations incurred by us for the Supplemental Executive Retirement
Plan ("SERP") under the employment agreement with Charles E.
Harris.
Property
and Equipment.
Property
and equipment are included in "Other Assets" and are carried at cost, less
accumulated depreciation of $336,877. Depreciation is provided using the
straight-line method over the estimated useful lives of the premises and
equipment.
Concentration
of Credit Risk.
The
Company places its cash and cash equivalents with financial institutions
and, at
times, cash held in checking accounts may exceed the Federal Deposit Insurance
Corporation insured limit.
Recent
Accounting Pronouncements.
In
September 2006, FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair
value
and expands disclosures about fair value measurements. SFAS No. 157 is
effective for us on January 1, 2008. The adoption of SFAS No. 157 will
not have a material impact on our consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities" (“SFAS No. 159”).
SFAS No. 159 would allow the Company an irrevocable election to measure
certain financial assets and liabilities at fair value, with unrealized
gains
and losses on the elected items recognized in earnings at each reporting
period.
The fair value option may only be elected at the time of initial recognition
of
a financial asset or financial liability or upon the occurrence of certain
specified events. The election is applied on an instrument-by-instrument
basis,
with a few exceptions, and is applied only to entire instruments and not
to
portions of instruments. SFAS No. 159 also provides expanded disclosure
requirements regarding the effects of electing the fair value option on
the
financial statements. SFAS No. 159 is effective prospectively for fiscal
years beginning after November 15, 2007. The Company is currently
evaluating this Statement. However, as investments are carried at fair
value,
the Company does not anticipate that this Statement will have a significant
impact on the consolidated financial statements.
NOTE
3. INVESTMENTS
The
private placement portfolio at fair value consisted of the following geographic
regions at December 31, 2007, and 2006:
December
31, 2007
|
|
|
|
|
|
|
|
|
|
Geographic
Region
|
|
Fair
Value
|
|
Percentage
of Total Private Placement Portfolio
|
|
Percentage
of
Net Assets
|
|
|
|
|
|
|
|
|
|
West
|
|
$
|
50,124,606
|
|
|
64.2
|
%
|
|
36.2
|
%
|
Northeast
|
|
$
|
16,849,547
|
|
|
21.6
|
%
|
|
12.2
|
%
|
Midwest
|
|
$
|
4,659,743
|
|
|
6.0
|
%
|
|
3.4
|
%
|
Southeast
|
|
$
|
4,250,000
|
|
|
5.4
|
%
|
|
3.1
|
%
|
Outside
U.S.
|
|
$
|
2,226,488
|
|
|
2.8
|
%
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,110,384
|
|
|
100.0
|
%
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
Geographic
Region
|
|
Fair
Value
|
|
Percentage
of Total Private Placement Portfolio
|
|
Percentage
of
Net Assets
|
|
|
|
|
|
|
|
|
|
West
|
|
$
|
29,759,833
|
|
|
55.5
|
%
|
|
26.1
|
%
|
Northeast
|
|
$
|
11,856,596
|
|
|
22.1
|
%
|
|
10.4
|
%
|
Midwest
|
|
$
|
6,834,958
|
|
|
12.7
|
%
|
|
6.0
|
%
|
Southeast
|
|
$
|
3,500,000
|
|
|
6.5
|
%
|
|
3.1
|
%
|
Outside
U.S.
|
|
$
|
1,716,444
|
|
|
3.2
|
%
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,667,831
|
|
|
100.0
|
%
|
|
|
|
NOTE
4. STOCK-BASED COMPENSATION
On
March
23, 2006, the Board of Directors of the Company voted to terminate the
Employee
Profit-Sharing Plan and to establish the Stock Plan, subject to shareholder
approval. This proposal was approved at the May 4, 2006, Annual Meeting
of
Shareholders. The Stock Plan provides for the grant of equity-based awards
of
stock options to our officers, employees and directors (subject to receipt
of an
exemptive order described below) and restricted stock (subject to receipt
of an
exemptive order described below) to our officers and employees who are
selected
by our Compensation Committee for participation in the plan and subject
to
compliance with the 1940 Act.
On
July
11, 2006, the Company filed an application with the SEC regarding certain
provisions of the Stock Plan, and on June 29, 2007, the Company responded
to
comments from the SEC on the application. In the event that the SEC provides
the
exemptive relief requested by the application, and we receive any additional
stockholder approval required by the SEC, the Compensation Committee may,
in the
future, authorize awards of stock options under the Stock Plan to non-employee
directors of the Company and authorize grants of restricted stock to
employees.
A
maximum
of 20 percent of our total shares of our common stock issued and outstanding
are
available for awards under the Stock Plan. Under the Stock Plan, no more
than 25
percent of the shares of stock reserved for the grant of the awards under
the
Stock Plan may be restricted stock awards at any time during the term of
the
Stock Plan. If any shares of restricted stock are awarded, such awards
will
reduce on a percentage basis the total number of shares of stock for which
options may be awarded. If the Company does not receive exemptive relief
from
the SEC to issue restricted stock, all shares granted under the Stock Plan
may
be subject to stock options. No more than 1,000,000 shares of our common
stock
may be made subject to awards under the Stock Plan to any individual in
any
year.
On
June
26, 2006, the Compensation Committee of the Board of Directors of the Company
approved individual stock option awards for certain officers and employees
of
the Company. Both non-qualified stock options ("NQSOs") and incentive stock
options ("ISOs"), subject to the limitations of Section 422 of the Internal
Revenue Code, were awarded under the Stock Plan. The terms and conditions
of the
stock options granted were determined by the Compensation Committee and
set
forth in award agreements between the Company and each award recipient.
Options
to purchase a total of 3,958,283 shares of stock were granted with vesting
periods ranging from December 2006 to June 2014 and with an exercise price
of
$10.11. Upon exercise, the shares will be issued from our previously authorized
shares. The full Board of Directors ratified and approved the grants on
August
3, 2006, on which date the Company's common stock price fluctuated between
$9.76
and $10.00.
On
June
27, 2007, the Compensation Committee of the Board of Directors and the
full
Board of Directors of the Company approved a new grant of individual NQSO
awards
for certain officers and employees of the Company. The terms and conditions
of
the stock options granted were set forth in award agreements between the
Company
and each award recipient entered into on that date. Options to purchase
a total
of 1,700,609 shares of stock were granted with vesting periods ranging
from
December 2007 to June 2014 and with an exercise price of $11.11, which
was the
closing volume weighted average price of our shares of common stock on
June 27,
2007. Upon exercise, the shares would be issued from our previously authorized
but unissued shares.
The
Company accounts for the Stock Plan in accordance with the provisions of
SFAS
No. 123(R), “Share-Based Payment,” which requires that we determine the fair
value of all share-based payments to employees, including the fair value
of
grants of employee stock options, and record these amounts as an expense
in the
Statement of Operations over the vesting period with a corresponding increase
to
our additional paid-in capital. At December 31, 2007, the increase to our
operating expenses was offset by the increase to our additional paid-in
capital,
resulting in no net impact to our net asset value. Additionally, the Company
does not record the tax benefits associated with the expensing of stock
options,
because the Company currently intends to qualify as a RIC under Subchapter
M of
the Code.
An
option's expected term is the estimated period between the grant date and
the
exercise date of the option. As the expected term period increases, the
fair
value of the option and the non-cash compensation cost will also increase.
The
expected term assumption is generally calculated using historical stock
option
exercise data. The Company does not have historical exercise data to develop
such an assumption. In cases where companies do not have historical data
and
where the options meet certain criteria, SEC Staff Accounting Bulletin
107 ("SAB
107") provides the use of a simplified expected term calculation. Accordingly,
the Company calculated the expected terms using the SAB 107 simplified
method.
Expected
volatility is the measure of how the stock's price is expected to fluctuate
over
a period of time. An increase in the expected volatility assumption yields
a
higher fair value of the stock option. Expected volatility factors for
the stock
options were based on the historical fluctuations in the Company’s stock price
over a period commensurate with the expected term of the option, adjusted
for
stock splits and dividends.
The
expected dividend yield assumption is traditionally calculated based on
a
company's historical dividend yield. An increase to the expected dividend
yield
results in a decrease in the fair value of option and resulting compensation
cost. Although the Company has declared deemed dividends in previous years,
most
recently in 2005, the amounts and timing of any future dividends cannot
be
reasonably estimated. Therefore, for purposes of calculating fair value,
the
Company has assumed an expected dividend yield of 0 percent.
The
risk-free interest rate assumptions are based on the annual yield on the
measurement date of a zero-coupon U.S. Treasury bond the maturity of which
equals the option’s expected term. Higher assumed interest rates yield higher
fair values.
The
amount of non-cash, stock-based compensation expense recognized in the
Consolidated Statements of Operations is based on the fair value of the
awards
the Company expects to vest, recognized over the vesting period on a
straight-line basis for each award, and adjusted for actual forfeitures
that
occur before vesting. The forfeiture rate is estimated at the time of grant
and
revised, if necessary, in subsequent periods if the actual forfeiture rate
differs from the estimated rate and is accounted for in the current period
and
prospectively.
The
fair
value of each stock option award is estimated on the date of grant using
the
Black-Scholes option pricing model as permitted by SFAS No. 123(R). The
stock
options granted on June 26, 2006, were awarded in five different grant
types,
each with different contractual terms. The assumptions used in the calculation
of fair value of the stock options granted on June 26, 2006, using the
Black-Scholes model for each contract term were as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|
|
of
Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
Type
of Award
|
Term
|
Granted
|
in
Yrs
|
Factor
|
Yield
|
Rates
|
Per
Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
1
Year
|
1,001,017
|
0.75
|
37.4%
|
0%
|
5.16%
|
$1.48
|
Non-qualified
stock options
|
2
Years
|
815,000
|
1.625
|
45.2%
|
0%
|
5.12%
|
$2.63
|
Non-qualified
stock options
|
3
Years
|
659,460
|
2.42
|
55.7%
|
0%
|
5.09%
|
$3.81
|
Non-qualified
stock options
|
10
Years
|
690,000
|
5.75
|
75.6%
|
0%
|
5.08%
|
$6.94
|
Incentive
stock options
|
10
Years
|
792,806
|
7.03
|
75.6%
|
0%
|
5.08%
|
$7.46
|
|
|
|
|
|
|
|
|
Total
|
|
3,958,283
|
|
|
|
|
$4.25
|
The
stock
options granted on June 27, 2007, were awarded in four different grant
types,
each with different contractual terms. The assumptions used in the calculation
of fair value of the stock options granted on June 27, 2007, using the
Black-Scholes model for each contract term were as follows:
|
|
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|
Contractual
|
of
Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
Type
of Award
|
Term
|
Granted
|
in
Yrs
|
Factor
|
Yield
|
Rates
|
Per
Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
1.5
Years
|
380,000
|
1
|
42.6%
|
0%
|
4.93%
|
$2.11
|
Non-qualified
stock options
|
2.5
Years
|
600,540
|
2
|
40.1%
|
0%
|
4.91%
|
$2.92
|
Non-qualified
stock options
|
3.5
Years
|
338,403
|
3
|
44.7%
|
0%
|
4.93%
|
$3.94
|
Non-qualified
stock options
|
9
Years
|
381,666
|
Ranging
from 4.75- 6.28
|
Ranging
from 57.8% to 59.9%
|
0%
|
Ranging
from 4.97% to 5.01%
|
Ranging
from $5.92 to $6.85
|
|
|
|
|
|
|
|
|
Total
|
|
1,700,609
|
|
|
|
|
|
For
the
years ended December 31, 2007, and December 31, 2006, the Company recognized
$8,050,807 and $5,038,956 of compensation expense in the Consolidated Statements
of Operations, respectively. As of December 31, 2007, there was approximately
$7,810,508 of unrecognized compensation cost related to unvested stock
option
awards. This cost is expected to be recognized over a weighted-average
period of
approximately 1.7 years.
For
the
year ended December 31, 2007, a total of 999,556 options were exercised
for
total proceeds to the Company of $10,105,511. For the year ended December
31,
2006, a total of 258,672 shares were exercised for total proceeds to the
Company
of $2,615,190. At December 31, 2006, the Company had a broker receivable
totaling $819,905 for proceeds from stock option exercises transacted on
December 29, 2006. The Company received these proceeds on January 3,
2007.
The
grant
date fair value of options vested during the years ended December 31, 2007,
and
December 31, 2006, was $6,851,874 and $3,781,681, respectively.
For
the
years ended December 31, 2007, and December 31, 2006, the calculation of
the net
decrease in net assets resulting from operations per share excludes the
stock
options because such options were anti-dilutive. The options may be dilutive
in
future periods in which there is a net increase in net assets resulting
from
operations, in the event that there is a significant increase in the average
stock price in the stock market or significant decreases in the amount
of
unrecognized compensation cost.
A
summary
of the changes in outstanding stock options is as follows:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Weighted
|
Average
|
|
|
|
|
Average
|
Average
|
Remaining
|
Aggregate
|
|
|
Exercise
|
Grant
Date
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
|
Fair
Value
|
Term
(Yrs)
|
Value
|
|
|
|
|
|
|
Options
Outstanding at
December
31, 2006
|
3,699,611
|
$
10.11
|
$
4.43
|
|
|
Granted
|
1,700,609
|
$
11.11
|
$
3.68
|
3.43
|
|
Exercised
|
(999,556)
|
$
10.11
|
$
1.97
|
|
|
Forfeited
or Expired
|
(432,920)
|
|
$
3.99
|
|
|
Options
Outstanding at
December
31, 2007
|
3,967,744
|
$
10.54
|
$
4.77
|
4.58
|
$0
|
Options
Exercisable at
December
31, 2007
|
1,717,125
|
$
10.43
|
$
4.45
|
4.18
|
$0
|
Options
Exercisable and Expected to be
Exercisable
at December 31, 2007
|
3,858,226
|
$
10.55
|
$
4.70
|
4.47
|
$0
|
The
aggregate intrinsic value in the table above with respect to options
outstanding, exercisable and expected to be exercisable, is calculated
as the
difference between the Company's closing stock price of $8.79 on the last
trading day of 2007 and the exercise price, multiplied by the number of
in-the-money options. This calculation represents the total pre-tax intrinsic
value that would have been received by the option holders had all options
been
fully vested and all option holders exercised their awards on December
31,
2007.
For
the
twelve months ended December 31, 2007, the aggregate intrinsic value of
the
999,556 options exercised was $1,700,552. For the twelve months ended December
31, 2006, the aggregate intrinsic value for the 258,672 options exercised
was
$512,171.
Unless
earlier terminated by our Board of Directors, the Stock Plan will expire
on May
4, 2016. The expiration of the Stock Plan will not by itself adversely
affect
the rights of plan participants under awards that are outstanding at the
time
the Stock Plan expires. Our Board of Directors may terminate, modify or
suspend
the plan at any time, provided that no modification of the plan will be
effective unless and until any required shareholder approval has been obtained.
The Compensation Committee may terminate, modify or amend any outstanding
award
under the Stock Plan at any time, provided that in such event, the award
holder
may exercise any vested options prior to such termination of the Stock
Plan or
award.
NOTE
5. EMPLOYEE PROFIT-SHARING PLAN
Prior
to
the adoption of the Stock Plan, the Company operated the Amended and Restated
Harris & Harris Group, Inc. Employee Profit-Sharing Plan (the "2002 Plan").
Effective May 4, 2006, the 2002 Plan was terminated.
The
2002
Plan (and its predecessor) provided for profit sharing by our officers
and
employees equal to 20 percent of our "qualifying income" for that plan
year.
As
soon
as practicable following the year-end, the Compensation Committee determined
whether, and if so how much, qualifying income existed for a plan year.
Approximately 90 percent of the amount determined by the Compensation Committee
was then paid out to plan participants pursuant to the distribution percentages
set forth in the 2002 Plan. The remaining payment was paid out after we
finalized our tax returns for that plan year.
At
December 31, 2006, we accrued $261,661 for profit sharing related to the
2005
plan year. On March 1, 2006, the Company paid $1,897,072 to plan participants
(employees and former employees), which represented approximately 90 percent
of
the total estimated profit-sharing payment for 2005. The balance of $261,661
related to the 2005 plan year was paid on January 31, 2007, upon finalization
of
our tax returns.
NOTE
6. DISTRIBUTABLE EARNINGS
As
of
December 31, 2007, December 31, 2006, and December 31, 2005, there were
no
distributable earnings. The difference between the book basis and tax basis
components of distributable earnings is primarily nondeductible deferred
compensation and net operating losses.
On
December 20, 2005, the Company declared a designated undistributed capital
gain
dividend ("deemed dividend") for shareholders of record as of December
31, 2005.
The deemed dividend for 2005 was $23,206,763. See “Note 8. Income Taxes.” The
Company did not declare dividends for the years ended December 31, 2007,
or
December 31, 2006.
NOTE
7. EMPLOYEE BENEFITS
Employment
Agreement with CEO
Pursuant
to his employment agreement, as most recently amended as of August 2, 2007 (the
"Employment Agreement"), during the period of employment, Charles E. Harris
is
to receive compensation in the form of base salary, with automatic yearly
adjustments to reflect inflation, which amounted to a minimum required
base
salary of $246,651 for 2006. In addition, the Board may increase such salary,
and subsequently decrease it, but not below the level provided for by the
automatic adjustments described above. Mr. Harris's base salary for 2006
was
increased to $300,000 (thereby also increasing his SERP benefit as described
below) in part in recognition of a 74 percent decrease in Mr. Harris's
profit-sharing allocation in recent years in order to provide additional
profit
sharing to other employees. This was the first salary increase for Mr.
Harris,
other than cost-of-living adjustments, since 1994. Mr. Harris's base salary
for
2007 and 2008 was increased to $306,187 and $314,623, respectively, based
on
cost-of-living adjustments.
Under
his
employment agreement, Mr. Harris is entitled to participate in all compensation
and employee benefit plans or programs, and to receive all benefits,
perquisites, and emoluments for which salaried employees are eligible.
Under the
Employment Agreement, we furnish Mr. Harris with certain perquisites, which
include a company car, health-club membership, membership in certain social
or
country clubs, a reimbursement for an annual physical examination and up
to a
$5,000 annual reimbursement, adjusted for inflation, over the period of
the
agreement, for personal financial or tax advice.
The
Employment Agreement also provides Mr. Harris with life insurance for the
benefit of his designated beneficiary in the amount of at least $2,000,000;
provides reimbursement for uninsured medical expenses, not to exceed $10,000
per
annum, adjusted for inflation, over the period of the agreement; provides
Mr.
Harris and his spouse with long-term care insurance; and provides Mr. Harris
with disability insurance providing for continuation of 100 percent of
his base
salary for a specified period. These benefits are for the term of the Employment
Agreement. The Employment Agreement provides that the term of Mr. Harris's
employment may not be extended beyond December 31, 2008, unless a committee
of
the Board consisting of non-interested Directors extends the date by one
year
pursuant to the Executive Mandatory Retirement Benefit Plan, and Mr. Harris
agrees to serve beyond December 31, 2008.
Mr.
Harris's Employment Agreement also provides for a supplemental executive
retirement plan (the "SERP") and a severance compensation agreement for
his
benefit as discussed below.
In
the
event of termination without cause or by constructive discharge, Mr. Harris’s
Employment Agreement provides for the continuation of certain benefits
over
specified periods, as well as severance pay, payable to Mr. Harris (or
to his
estate if he dies before all payments are made), equal to two times his
base
salary distributed over a period of two years.
Other
than Mr. Harris, our Chairman and Chief Executive Officer, none of our
executive
officers has a change in control agreement. None of our executive officers
is
entitled to any special payments solely upon a change in control.
In
addition, Mr. Harris is entitled to receive severance pay pursuant to the
severance compensation agreement that he entered into with us, effective
August
15, 1990, and amended and restated effective as of January 1, 2005. The
severance compensation agreement provides that if, following a change in
our
control, as defined in the agreement, Mr. Harris’s employment is terminated by
us without cause or by him within one year of such change in control, he
shall
be entitled to receive compensation in a lump sum payment equal to 2.99
times
his average base salary plus other amounts included in Mr. Harris’s income as
compensation from the Company (but excluding bonus, incentive, profit sharing
plan and equity compensation) as in effect over the most recent five years
preceding the year in which the change in control occurred. Under the severance
compensation agreement, Mr. Harris is also entitled to receive a lump sum
payment equal to any amounts forfeited on account of his termination, under
any
employee pension benefit plan, including benefits under the Company’s executive
mandatory retirement benefit plan. In addition, he is entitled to receive
medical and health insurance coverage under the Company’s retiree medical
benefit plan and all other benefits he would be eligible to receive in
the event
of termination without cause or by constructive discharge, although no
duplicate
benefits will be provided. In the event that Mr. Harris is entitled to
receive
2.99 times his base salary under the severance compensation agreement,
he shall
not also be paid two times his base salary under the employment
agreement.
SERP
The
Employment Agreement provides that we adopt a supplemental executive retirement
plan (the "SERP") for the benefit of Mr. Harris. Under the SERP, we will
cause
an amount equal to one-twelfth of Mr. Harris's current annual salary to
be
credited each month to a special account maintained on our books for the
benefit
of Mr. Harris, provided that Mr. Harris is employed by us on the last business
day of such month. The amounts credited to the SERP Account are deemed
invested
or reinvested in such investments as are requested by Mr. Harris and agreed
to
by the Company. The SERP Account is credited and debited to reflect the
deemed
investment returns, losses and expenses attributed to such deemed investments
and reinvestments in accordance with the terms of the SERP. Mr. Harris's
benefit
under the SERP equals the balance in the SERP Account and such benefit
will
always be 100 percent vested (i.e., not forfeitable).
In
2005,
Mr. Harris received a $125,000 distribution from the SERP Account. The
balance
of the SERP Account will be paid in a lump sum on May 30, 2008, and any
subsequent balance will be paid on July 31, 2009.
If
Mr.
Harris dies before the entire benefit under the SERP Account has been paid
to
him, the amount remaining in the SERP Account will be distributed to his
beneficiary in a lump-sum payment on the 90th
day
after the date of his death.
We
have
established a rabbi trust for the purpose of accumulating funds to satisfy
the
obligations incurred by us under the SERP, which amounted to $2,667,020
and
$2,149,785 at December 31, 2007, and 2006, respectively, and is included
in
accounts payable and accrued liabilities. The restricted funds for the
SERP
Account totaled $2,667,020 and $2,149,785 at December 31, 2007, and 2006,
respectively. Mr. Harris's rights to benefits pursuant to this SERP will
be no
greater than those of a general creditor of us.
401(k)
Plan
We
adopted a 401(k) Plan covering substantially all of our employees. Matching
contributions to the plan are at the discretion of the Compensation Committee.
For the year ended December 31, 2007, the Compensation Committee approved
a 100
percent match which amounted to $176,873. The 401(k) Company match for
the years
ended December 31, 2006 and 2005 was $155,000 and $119,360,
respectively.
Medical
Benefit Retirement Plan
On
June
30, 1994, we adopted a plan to provide medical and dental insurance for
retirees, their spouses and dependents who, at the time of their retirement,
have ten years of service with us and have attained 50 years of age or
have
attained 45 years of age and have 15 years of service with us. On February
10,
1997, we amended this plan to include employees who have seven full years
of
service and have attained 58 years of age. On November 3, 2005, we amended
this
plan to reverse the 1997 amendment for future retirees and to remove dependents
other than spouses from the plan. The coverage is secondary to any government
or
subsequent employer provided health insurance plans. The annual premium
cost to
us with respect to the entitled retiree shall not exceed $12,000, subject
to an
index for inflation. On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") was signed into law.
The
Act introduces a prescription drug benefit under Medicare (Medicare Part
D) as
well as a federal subsidy to sponsors of retiree health care benefit plans
that
provide a benefit that is at least actuarially equivalent to Medicare Part
D.
The Act, which went into effect January 1, 2006, provides a 28 percent
subsidy
for post-65 prescription drug benefits. Our liability assumes our plan
is
actuarially equivalent under the Act.
The
stock
options of retirees who qualify for the Medical Benefit Retirement Plan
will
remain exercisable (to the extent exercisable at the time of the optionee’s
termination) post retirement, if such retiree executes a post-termination
non-solicitation agreement in a form reasonably acceptable to the Company,
until
the expiration of its term.
The
plan
is unfunded and has no assets. The following disclosures about changes
in the
benefit obligation under our plan to provide medical and dental insurance
for
retirees are as of the measurement date of December 31:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit
|
|
|
|
|
|
Obligation
at Beginning of Year
|
|
$
|
696,827
|
|
$
|
675,334
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
|
|
102,676
|
|
|
79,381
|
|
|
|
|
|
|
|
|
|
Interest
Cost
|
|
|
33,935
|
|
|
33,786
|
|
|
|
|
|
|
|
|
|
Actuarial
(Gain)/Loss
|
|
|
(196,248
|
)
|
|
(84,879
|
)
|
|
|
|
|
|
|
|
|
Benefits
Paid
|
|
|
(8,445
|
)
|
|
(6,795
|
)
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement
|
|
|
|
|
|
|
|
Benefit
Obligation at End of Year
|
|
$
|
628,745
|
|
$
|
696,827
|
|
In
accounting for the plan, the assumption made for the discount rate was
6.55
percent and 5.75 percent for the years ended December 31, 2007, and 2006,
respectively. The assumed health care cost trend rates in 2007 were 9 percent
grading to 6 percent over three years for medical and 5 percent per year
for
dental. The assumed health care cost trend rates in 2006 were 9 percent
grading
to 6 percent over three years for medical and 3 percent per year for dental.
The
effect on disclosure information of a one percentage point change in the
assumed
health care cost trend rate for each future year is shown
below.
|
|
1%
Decrease
|
|
Assumed
|
|
1%
Increase
|
|
|
|
in
Rates
|
|
Rates
|
|
in
Rates
|
|
|
|
|
|
|
|
|
|
Aggregated
Service and Interest Cost
|
|
$
|
105,317
|
|
$
|
136,611
|
|
$
|
179,692
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation
|
|
$
|
606,717
|
|
$
|
628,745
|
|
$
|
883,758
|
|
The
net
periodic postretirement benefit cost for the year is determined as the
sum of
service cost for the year, interest on the accumulated postretirement benefit
obligation and amortization of the transition obligation (asset) less previously
accrued expenses over the average remaining service period of employees
expected
to receive plan benefits. The following is the net periodic postretirement
benefit cost for the years ended December 31, 2007, 2006, and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
|
$
|
102,676
|
|
$
|
79,381
|
|
$
|
49,990
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Cost on Accumulated Postretirement
|
|
|
|
|
|
|
|
|
|
|
Benefit
Obligation
|
|
|
33,935
|
|
|
33,786
|
|
|
32,573
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Transition Obligation
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Net (Gain)/Loss
|
|
|
(6,234
|
)
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Periodic Post Retirement Benefit Cost
|
|
$
|
130,377
|
|
$
|
113,167
|
|
$
|
82,563
|
|
The
Company estimates the following benefits to be paid in each of the following
years:
|
2008
|
$
18,489
|
|
2009
|
$
23,639
|
|
2010
|
$
25,584
|
|
2011
|
$
20,213
|
|
2012
|
$
21,663
|
|
2013
through 2017
|
$135,078
|
The
contribution payable for 2008 is estimated to be $18,489.
On
December 31, 2006, the Company adopted the recognition and disclosure provisions
of SFAS No. 158. SFAS No. 158 required the Company to recognize the funded
status of its retirement benefit plans in the December 31, 2006 statement
of
assets and liabilities with a corresponding adjustment to net assets. The
adjustment to net assets at adoption of $61,527 represents the net unrecognized
actuarial gains of $95,145 applicable to the healthcare benefit plan net
of
$33,618 of unrecognized actuarial losses applicable to the Executive Mandatory
Retirement Benefit Plan. Such amounts previously were reflected as a net
increase of the plan's funded status in the Company's statement of assets
and
liabilities pursuant to the provisions of SFAS Nos. 106 and 187. These
amounts
will be subsequently recognized as net periodic benefit cost pursuant to
the
Company's historical accounting policy for amortizing such amounts. Further,
actuarial gains and losses that arise in subsequent periods and are not
recognized as net periodic benefit cost in the same periods will be recognized
as a component of net assets. Those amounts will be subsequently recognized
as a
component of net periodic benefit cost on the same basis as the amounts
recognized at adoption of SFAS No. 158.
For
the
year ended December 31, 2007, net unrecognized actuarial gains, which resulted
from the increase in the discount rate referred to above, increased by
$190,014,
which represents $196,248 of actuarial gains arising during the year, net
of a
$6,234 reclassification adjustment which reduced the net periodic benefit
cost
for the year.
Executive
Mandatory Retirement Benefit Plan
On
March
20, 2003, in order to begin planning for eventual management succession,
the
Board of Directors voted to establish the Executive Mandatory Retirement
Benefit
Plan for individuals who are employed by us in a bona fide executive or
high
policy-making position. The plan was amended and restated effective January
1,
2005, to comply with certain provisions of the Internal Revenue Code. There
are
currently four individuals that qualify under the plan: Charles E. Harris,
the
Chairman and Chief Executive Officer, Douglas W. Jamison, the President
and
Chief Operating Officer, Daniel B. Wolfe, the Chief Financial Officer,
and Mel
P. Melsheimer, the former President, Chief Operating Officer and Chief
Financial
Officer. Under this plan, mandatory retirement takes place effective December
31
of the year in which the eligible individuals attain the age of 65. On
an annual
basis beginning in the year in which the designated individual attains
the age
of 65, a committee of the Board consisting of non-interested directors
may
determine for our benefit to postpone the mandatory retirement date for
that
individual for one additional year.
Under
applicable law prohibiting discrimination in employment on the basis of
age, we
can impose a mandatory retirement age of 65 for our executives or employees
in
high policy-making positions only if each employee subject to the mandatory
retirement age is entitled to an immediate retirement benefit at retirement
age
of at least $44,000 per year. The benefits payable at retirement to Mr.
Harris
and Mr. Melsheimer under our existing 401(k) plan do not equal this threshold.
The plan was established to provide the difference between the benefit
required
under the age discrimination laws and that provided under our existing
plans.
For individuals retiring after 2007, the benefit under the plan is paid
to the
qualifying individual in the form of a lump sum, and is paid six months
and one
day after the individual’s separation from service with the Company, pursuant to
certain exceptions.
At
December 31, 2007, and 2006, we had accrued $382,932 and $347,075, respectively,
for benefits under this plan. At December 31, 2007, $235,630 was accrued
for Mr.
Melsheimer and $147,302 was accrued for Mr. Harris. Currently, there is
no
accrual for Mr. Jamison or Mr. Wolfe. This benefit will be unfunded, and
the
expense as it relates to Mr. Melsheimer and Mr. Harris is being amortized
over
the fiscal periods through the years ended December 31, 2004, and 2008,
respectively. On December 31, 2004, Mr. Melsheimer retired pursuant to
the
Executive Mandatory Retirement Benefit Plan. His annual benefit under the
plan
is $22,915. Mr. Harris's projected mandatory benefit will be approximately
$147,302 and paid as a lump sum six months and one day after his
retirement.
NOTE
8. INCOME TAXES
We
filed
for the 1999 tax year to elect treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986 (the "Code")
and
qualified for the same treatment for the years 2000 through 2007. However,
there
can be no assurance that we will qualify as a RIC for 2008 or subsequent
years.
In
the
case of a RIC, which furnishes capital to development corporations, there
is an
exception to the rule relating to the diversification of investments required
to
qualify for RIC treatment. This exception is available only to registered
management investment companies which the SEC determines to be principally
engaged in the furnishing of capital to other corporations which are principally
engaged in the development or exploitation of inventions, technological
improvements, new processes, or products not previously generally available
("SEC Certification"). We have received SEC Certification since 1999, including
for 2006, but it is possible that we may not receive SEC Certification
in future
years.
In
addition, under certain circumstances, even if we qualified for Subchapter
M
treatment for a given year, we might take action in a subsequent year to
ensure
that we would be taxed in that subsequent year as a C Corporation, rather
than
as a RIC. As a RIC, we must, among other things, distribute at least 90
percent
of our investment company taxable income and may either distribute or retain
our
realized net capital gains on investments.
Provided
that a proper election is made, a corporation taxable under Subchapter
C of the
Code or a C Corporation that elects to qualify as a RIC continues to be
taxable
as a C Corporation on any gains realized within 10 years of its qualification
as
a RIC (the "Inclusion Period") from sales of assets that were held by the
corporation on the effective date of the RIC election ("C Corporation Assets"),
to the extent of any gain built into the assets on such date ("Built-In
Gain").
If the corporation fails to make a proper election, it is taxable on its
Built-In Gain as of the effective date of its RIC election. We had Built-In
Gains at the time of our qualification as a RIC and made the election to
be
taxed on any Built-In Gain realized during the Inclusion Period.
To
the
extent that we retain capital gains and declare a deemed dividend to
shareholders, the dividend is taxable to the shareholders. We would pay
tax on
behalf of shareholders, at the corporate rate, on the distribution, and
the
shareholders would receive a tax credit equal to their proportionate share
of
the tax paid. We took advantage of this rule for 2005. Included in net
realized
income from investments for the year ended December 31, 2005, were net
realized
gains before taxes of $23,862,037, which consisted primarily of a net realized
long term capital gain on the sale of our investment in NeuroMetrix, Inc.,
offset by realized net long term capital losses on the sales of Agile Materials
& Technologies, Inc., Experion Systems, Inc., Nanotechnologies, Inc., and
Optiva, Inc. We applied $140,751 of our capital loss carryforwards and
$501,640
of our pre-1999 loss carryforwards on Built-In Gains to these
gains.
In
December 2005, we declared a deemed dividend on net taxable realized long-term
capital gains of $23,206,763. The Company recorded a tax payable on its
Consolidated Statements of Assets and Liabilities of $8,122,367 for taxes
payable on behalf of its shareholders. This distribution of $8,122,367
was also
recorded as an income tax expense on the Consolidated Statements of Operations
for the year ended December 31, 2005. Shareholders of record at December
31,
2005, received a tax credit of $0.39131971 per share. The balance of $15,084,396
was retained by the Company. The Company paid $8,122,367 of taxes on behalf
of
its shareholders on January 30, 2006. At December 31, 2005, we had $1,514,967
accrued for federal and state income taxes payable upon filing of our 2005
tax
returns.
For
federal tax purposes, the Company’s 2004 through 2007 tax years remain open for
examination by the tax authorities under the normal three year statute
of
limitations. Generally, for state tax purposes, the Company’s 2004 through 2007
tax years remain open for examination by the tax authorities under a four
year
statute of limitations.
For
the
twelve months ended December 31, 2007, we paid $74,454 in interest and
penalties
related to the federal income tax on Built-In Gains recognized in the Company's
2005 tax year, which is included in income tax expense. During 2007, we
paid
$10,290 in federal, state and local income taxes. At December 31, 2007,
we had
$0 accrued for federal, state and local taxes payable by the
Company.
We
pay
federal, state and local taxes on behalf of our wholly owned subsidiary,
Harris
& Harris Enterprises, Inc., which is taxed as a C Corporation. For the years
ended December 31, 2007, 2006, and 2005, our income tax expense (benefit)
for
Harris & Harris Enterprises, Inc., was $3,231, $9,475 and ($6,411),
respectively.
For
the
years ended December 31, 2007, 2006, and 2005, the Company's income tax
(benefit) expense was allocated as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Investment
operations
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
income on investments
|
|
|
87,975
|
|
|
(227,355
|
)
|
|
1,530,881
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
paid on behalf of shareholders
|
|
|
0
|
|
|
0
|
|
|
8,122,367
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in unrealized
|
|
|
|
|
|
|
|
|
|
|
appreciation
on investments
|
|
|
0
|
|
|
(0
|
)
|
|
(1,364,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax (benefit) expense
|
|
$
|
87,975
|
|
$
|
(227,355
|
)
|
$
|
8,288,778
|
|
The
above
tax expense consists of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
87,975
|
|
$
|
(227,355
|
)
|
$
|
9,653,248
|
|
Deferred
-- Federal
|
|
|
__0
|
|
|
0
|
|
|
(1,364,470
|
)
|
Total
income tax (benefit) expense
|
|
$
|
87,975
|
|
$
|
(227,355
|
)
|
$
|
8,288,778
|
|
Continued
qualification as a RIC requires us to satisfy certain investment asset
diversification requirements in future years. Our ability to satisfy those
requirements may not be controllable by us. There can be no assurance that
we
will qualify as a RIC in subsequent years.
NOTE
9. COMMITMENTS & GUARANTEES
On
April
17, 2003, we signed a seven-year sublease for office space at 111 West
57th
Street
in New York City. On December 17, 2004, we signed a sublease for additional
office space at our current location. The subleases expire on April 29,
2010.
Total rent expense for our office space in New York City was $178,167 in
2007,
$174,625 in 2006 and $171,171 in 2005. Future minimum sublease payments
in each
of the following years are: 2008 -- $193,083; 2009 -- $197,700; and thereafter,
for the remaining term -- $65,969.
In
the
ordinary course of business, we indemnify our officers and directors, subject
to
certain regulatory limitations, for loss or liability related to their
service
on behalf of the Company, including serving on the Boards of Directors
or as
officers of portfolio companies. At December 31, 2007, and 2006, we believe
our
estimated exposure is minimal, and accordingly we have no liability
recorded.
NOTE
10. CAPITAL TRANSACTIONS
On
November 29, 2006, we filed a registration statement with the SEC on Form
N-2 to
register 4,000,000 shares of our common stock. On December 11, 2006, and
on
April 23, 2007, we filed amended registration statements with the SEC.
On May
11, 2007, the SEC declared the registration statement effective. The common
stock may be sold at prices and on terms to be set forth in one or more
supplements to the prospectus from time to time.
On
June
25, 2007, we completed the sale of 1,300,000 shares of our common stock
for
gross proceeds of $14,027,000; net proceeds of this offering, after placement
agent fees and offering costs of $1,033,832, were $12,993,168.
NOTE
11. CHANGE IN NET ASSETS PER SHARE
The
following table sets forth the computation of basic and diluted per share
net
increases in net assets resulting from operations for the twelve months
ended
December 31, 2007, 2006, and 2005.
|
|
2007
|
|
2006
|
|
2005
|
|
Numerator
for (decrease) increase in net assets per share
|
|
$
|
(6,716,445
|
)
|
$
|
(11,773,112
|
)
|
$
|
6,716,376
|
|
Denominator
for basic and diluted weighted average shares
|
|
|
22,393,030
|
|
|
20,759,547
|
|
|
18,471,770
|
|
Basic
and diluted net (decrease) increase in net assets per share resulting
from
operations
|
|
$
|
(0.30
|
)
|
$
|
(0.57
|
)
|
$
|
0.36
|
|
NOTE
12. SUBSEQUENT EVENTS
On
January 16, 2008, we made a $736,019 follow-on investment that has not
yet been
announced in a privately held tiny technology portfolio company.
On
January 31, 2008, we made a $377,580 follow-on investment that has not
yet been
announced in a privately held tiny technology portfolio company.
On
February 1, 2008, we made a $25,000 follow-on investment that has not yet
been
announced in a privately held tiny technology portfolio company.
On
February 8, 2008, we made a $244,500 new investment in PolyRemedy,
Inc.
On
February 21, 2008, we made a $1,052,174 follow-on investment that has not
yet
been announced in a privately held tiny technology portfolio
company.
On
February 25, 2008, we made a $1,000,001 follow-on investment that has not
yet
been announced in a privately held tiny technology portfolio
company.
On
March
7, 2008, we made a $2,000,000 follow-on investment that has not yet been
announced in a privately held tiny technology portfolio company.
NOTE
13. SELECTED QUARTERLY DATA (UNAUDITED)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$
|
652,498
|
|
$
|
637,701
|
|
$
|
743,414
|
|
$
|
672,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(2,667,118
|
)
|
$
|
(2,891,667
|
)
|
$
|
(3,117,595
|
)
|
$
|
(3,151,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
resulting from operations
|
|
$
|
(6,390,160
|
)
|
$
|
(4,093,644
|
)
|
$
|
604,237
|
|
$
|
3,163,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
average outstanding share
|
|
$
|
(0.30
|
)
|
$
|
(0.19
|
)
|
$
|
0.03
|
|
$
|
0.16
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$
|
804,862
|
|
$
|
785,265
|
|
$
|
719,619
|
|
$
|
719,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(767,743
|
)
|
$
|
(693,887
|
)
|
$
|
(2,988,790
|
)
|
$
|
(3,162,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
resulting from operations
|
|
$
|
(1,653,990
|
)
|
$
|
(1,282,997
|
)
|
$
|
(2,588,092
|
)
|
$
|
(6,248,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets
resulting from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
average outstanding share
|
|
$
|
(0.08
|
)
|
$
|
(0.06
|
)
|
$
|
(0.12
|
)
|
$
|
(0.31
|
)
|
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
|
|
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of year
|
|
$
|
5.42
|
|
$
|
5.68
|
|
$
|
4.33
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating (loss) income*
|
|
|
(0.53
|
)
|
|
(0.37
|
)
|
|
(0.30
|
)
|
Net
realized income on investments*
|
|
|
0.00
|
|
|
0.01
|
|
|
0.77
|
|
Net
increase (decrease) in unrealized
|
|
|
|
|
|
|
|
|
|
|
appreciation
(depreciation) as a
|
|
|
|
|
|
|
|
|
|
|
result
of sales*
|
|
|
0.00
|
|
|
0.00
|
|
|
(1.18
|
)
|
Net
increase (decrease) in unrealized
|
|
|
|
|
|
|
|
|
|
|
appreciation
(depreciation) on
|
|
|
|
|
|
|
|
|
|
|
investments
held*
|
|
|
0.23
|
|
|
(0.21
|
)
|
|
1.07
|
|
Total
from investment operations*
|
|
|
(0.30
|
)
|
|
(0.57
|
)
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock-
|
|
|
|
|
|
|
|
|
|
|
based
compensation expense*
|
|
|
0.36
|
|
|
0.24
|
|
|
0.00
|
|
Net
increase as a result of proceeds
|
|
|
|
|
|
|
|
|
|
|
from
exercise of options
|
|
|
0.19
|
|
|
0.07
|
|
|
0.00
|
|
Net
increase as a result of stock
|
|
|
|
|
|
|
|
|
|
|
offering
|
|
|
0.26
|
|
|
0.00
|
|
|
0.99
|
|
Total
increase from capital
|
|
|
|
|
|
|
|
|
|
|
stock
transactions
|
|
|
0.81
|
|
|
0.31
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of year
|
|
$
|
5.93
|
|
$
|
5.42
|
|
$
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price per share, end of year
|
|
$
|
8.79
|
|
$
|
12.09
|
|
$
|
13.90
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
return based on stock price
|
|
|
(27.3
|
)%
|
|
(13.0
|
)%
|
|
(15.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of year
|
|
$
|
138,363,344
|
|
$
|
113,930,303
|
|
$
|
117,987,742
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets
|
|
|
11.6
|
%
|
|
9.2
|
%
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net operating loss to average net assets
|
|
|
(9.5
|
)%
|
|
(6.6
|
)%
|
|
(5.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid per share
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
payable on behalf of shareholders
|
|
|
|
|
|
|
|
|
|
|
on
the deemed dividend per share
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares outstanding, end of year
|
|
|
23,314,573
|
|
|
21,015,017
|
|
|
20,756,345
|
|
*Based
on
average shares outstanding.
The
accompanying notes are an integral part of this schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
ASSETS
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Investments,
in portfolio securities at value
|
|
|
|
|
|
(cost:
$84,013,804 and $82,677,528, respectively)
|
|
$
|
83,097,863
|
|
$
|
78,110,384
|
|
Investments,
in U.S. Treasury obligations at value
|
|
|
|
|
|
|
|
(cost:
$52,346,992 and $59,552,933, respectively)
|
|
|
53,589,100
|
|
|
60,193,593
|
|
Cash
and cash equivalents
|
|
|
210,154
|
|
|
330,009
|
|
Restricted
funds
|
|
|
2,520,310
|
|
|
2,667,020
|
|
Receivable
from portfolio company
|
|
|
0
|
|
|
524
|
|
Interest
receivable
|
|
|
497,488
|
|
|
647,337
|
|
Prepaid
expenses
|
|
|
412,589
|
|
|
488,667
|
|
Other
assets
|
|
|
445,135
|
|
|
455,798
|
|
Total
assets
|
|
$
|
140,772,639
|
|
$
|
142,893,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
4,218,484
|
|
$
|
4,515,463
|
|
Deferred
rent
|
|
|
12,866
|
|
|
14,525
|
|
Total
liabilities
|
|
|
4,231,350
|
|
|
4,529,988
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
136,541,289
|
|
$
|
138,363,344
|
|
|
|
|
|
|
|
|
|
Net
assets are comprised of:
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value,
|
|
|
|
|
|
|
|
2,000,000
shares authorized; none issued
|
|
$
|
0
|
|
$
|
0
|
|
Common
stock, $0.01 par value, 45,000,000 shares authorized at
|
|
|
|
|
|
|
|
3/31/08
and 12/31/07; 25,143,313 issued at
|
|
|
|
|
|
|
|
3/31/08
and 12/31/07
|
|
|
251,434
|
|
|
251,434
|
|
Additional
paid in capital (Note 5)
|
|
|
162,394,671
|
|
|
160,927,691
|
|
Accumulated
net realized loss
|
|
|
(23,025,452
|
)
|
|
(15,483,766
|
)
|
Accumulated
unrealized appreciation (depreciation)
|
|
|
|
|
|
|
|
of
investments
|
|
|
326,167
|
|
|
(3,926,484
|
)
|
Treasury
stock, at cost (1,828,740 shares at 3/31/08 and
|
|
|
|
|
|
|
|
12/31/07)
|
|
|
(3,405,531
|
)
|
|
(3,405,531
|
)
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
136,541,289
|
|
$
|
138,363,344
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
23,314,573
|
|
|
23,314,573
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$
|
5.86
|
|
$
|
5.93
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
|
|
March
31, 2008
|
|
March
31, 2007
|
|
|
|
|
|
|
|
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
|
|
|
Fixed
income securities
|
|
|
|
|
$
|
576,302
|
|
$
|
652,498
|
|
Total
investment income
|
|
|
|
|
|
|
|
|
652,498
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 5)
|
|
|
|
|
|
2,433,295
|
|
|
2,534,766
|
|
Administration
and operations
|
|
|
|
|
|
301,855
|
|
|
380,865
|
|
Professional
fees
|
|
|
|
|
|
138,232
|
|
|
182,195
|
|
Rent
|
|
|
|
|
|
57,854
|
|
|
59,507
|
|
Directors'
fees and expenses
|
|
|
|
|
|
105,146
|
|
|
141,196
|
|
Depreciation
|
|
|
|
|
|
13,985
|
|
|
15,313
|
|
Custodian
fees
|
|
|
|
|
|
6,553
|
|
|
5,774
|
|
Total
expenses
|
|
|
|
|
|
3,056,920
|
|
|
3,319,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
|
|
|
|
|
|
(2,667,118
|
) |
|
|
|
|
|
|
|
|
|
|
|
Net
realized loss from investments:
|
|
|
|
|
|
|
|
|
|
|
Realized
(loss) from investments
|
|
|
|
|
|
(5,014,870
|
)
|
|
(674
|
)
|
Income
tax expense (Note 6)
|
|
|
|
|
|
46,198
|
|
|
84,905
|
|
Net
realized (loss) from investments
|
|
|
|
|
|
(5,061,068
|
)
|
|
(85,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments:
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
|
|
|
5,014,653
|
|
|
0
|
|
Change
on investments held
|
|
|
|
|
|
(762,002
|
)
|
|
(3,637,463
|
)
|
Change
in unrealized depreciation on investments
|
|
|
|
|
|
4,252,651
|
|
|
(3,637,463
|
)
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments
|
|
|
|
|
|
4,252,651
|
|
|
(3,637,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
(3,289,035
|
)
|
$
|
(6,390,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Per
average basic and diluted outstanding share
|
|
|
|
|
$
|
(0.14
|
)
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares
|
|
|
|
|
|
23,314,573
|
|
|
21,277,576
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31, 2008
|
|
March
31, 2007
|
|
|
|
|
|
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
$
|
(3,289,035
|
)
|
$
|
(6,390,160
|
)
|
Adjustments
to reconcile net decrease in net assets
|
|
|
|
|
|
|
|
resulting
from operations to net cash used in
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Net
realized and unrealized loss on investments
|
|
|
762,219
|
|
|
3,638,137
|
|
Depreciation
and amortization
|
|
|
(454,332
|
)
|
|
(65,730
|
)
|
Stock-based
compensation expense
|
|
|
1,466,980
|
|
|
1,690,181
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
146,710
|
|
|
(108,880
|
)
|
Receivable
from portfolio company
|
|
|
524
|
|
|
0
|
|
Interest
receivable
|
|
|
149,849
|
|
|
61,997
|
|
Receivable
from broker
|
|
|
0
|
|
|
819,905
|
|
Prepaid
expenses
|
|
|
76,078
|
|
|
(416,635
|
)
|
Other
assets
|
|
|
(2,492
|
)
|
|
(10,191
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(296,978
|
)
|
|
(209,292
|
)
|
Accrued
profit sharing
|
|
|
0
|
|
|
(261,661
|
)
|
Deferred
rent
|
|
|
(1,659
|
)
|
|
(1,700
|
)
|
Current
income tax liability
|
|
|
541
|
|
|
80,795
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,441,595
|
)
|
|
(1,173,234
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of short-term investments and marketable securities
|
|
|
(21,230,754
|
)
|
|
(10,952,109
|
)
|
Sale
of short-term investments and marketable securities
|
|
|
28,883,642
|
|
|
12,165,656
|
|
Investment
in private placements and loans
|
|
|
(6,435,274
|
)
|
|
(4,857,357
|
)
|
Proceeds
from sale of investments
|
|
|
105,714
|
|
|
0
|
|
Purchase
of fixed assets
|
|
|
(1,588
|
)
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,321,740
|
|
|
(3,644,080
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises (Note 5)
|
|
|
0
|
|
|
3,295,978
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
0
|
|
|
3,295,978
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents:
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
|
|
330,009
|
|
|
2,071,788
|
|
Cash
and cash equivalents at end of the period
|
|
|
210,154
|
|
|
550,452
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(119,855
|
)
|
$
|
(1,521,336
|
)
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
45,657
|
|
$
|
10,252
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET ASSETS
|
|
|
Three
Months Ended
|
|
Year
Ended
|
|
|
|
March
31,
2008
|
|
December
31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(2,480,618
|
)
|
$
|
(11,827,543
|
)
|
Net
realized (loss) gain on investments
|
|
|
(5,061,068
|
)
|
|
30,162
|
|
Net
decrease in unrealized
|
|
|
|
|
|
|
|
depreciation
on investments sold
|
|
|
5,014,653
|
|
|
0
|
|
Net
(increase) decrease in unrealized
|
|
|
|
|
|
|
|
depreciation
on investments held
|
|
|
(762,002
|
)
|
|
5,080,936
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting
|
|
|
|
|
|
|
|
from
operations
|
|
|
(3,289,035
|
)
|
|
(6,716,445
|
)
|
|
|
|
|
|
|
|
|
Changes
in net assets from capital
|
|
|
|
|
|
|
|
stock
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon the
|
|
|
|
|
|
|
|
exercise
of stock options
|
|
|
0
|
|
|
9,996
|
|
Issuance
of common stock on offering
|
|
|
0
|
|
|
13,000
|
|
Additional
paid-in capital on common
|
|
|
|
|
|
|
|
stock
issued
|
|
|
0
|
|
|
23,075,683
|
|
Stock-based
compensation expense
|
|
|
1,466,980
|
|
|
8,050,807
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from
|
|
|
|
|
|
|
|
capital
stock transactions
|
|
|
1,466,980
|
|
|
31,149,486
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets
|
|
|
(1,822,055
|
)
|
|
24,433,041
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
138,363,344
|
|
|
113,930,303
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
136,541,289
|
|
$
|
138,363,344
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) - 15.64% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) - 15.64% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (4)(5)(6)(7) -- Developing novel biologics
|
|
|
|
|
|
|
|
|
|
|
for
treatment of cancer and infectious disease
|
|
|
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,799,552
|
|
$
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exponential
Business Development Company (4)(5) -- Venture
|
|
|
|
|
|
|
|
|
|
|
capital
partnership focused on early stage companies
|
|
|
|
|
|
|
|
|
|
|
Limited
Partnership Interest
|
|
|
(M)
|
|
|
1
|
|
|
2,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (4)(5) -- Manufacturing nanoimprint
|
|
|
|
|
|
|
|
|
|
|
lithography
capital equipment
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,333,333
|
|
|
2,000,000
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,250,000
|
|
|
2,399,875
|
|
Warrants
at $2.00 expiring 12/31/11
|
|
|
(
I )
|
|
|
125,000
|
|
|
100,125
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanosys,
Inc. (4)(5)(6) -- Developing zero and one-dimensional
|
|
|
|
|
|
|
|
|
|
|
inorganic
nanometer-scale materials and devices
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
803,428
|
|
|
2,370,113
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,016,950
|
|
|
3,000,003
|
|
|
|
|
|
|
|
|
|
|
5,370,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Nantero,
Inc. (4)(5)(6) -- Developing a high-density, nonvolatile,
|
|
|
|
|
|
|
|
|
|
|
random
access memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
345,070
|
|
|
1,046,908
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
207,051
|
|
|
628,172
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
188,315
|
|
|
571,329
|
|
|
|
|
|
|
|
|
|
|
2,246,409
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH
31, 2008 (Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) - 15.64% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) - 15.64% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NeoPhotonics
Corporation (4)(5) -- Developing and manufacturing
|
|
|
|
|
|
|
|
|
|
|
optical
devices and components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
716,195
|
|
$
|
133,141
|
|
Series
1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,831,256
|
|
|
1,831,256
|
|
Series
2 Convertible Preferred Stock
|
|
|
(M)
|
|
|
741,898
|
|
|
741,898
|
|
Series
3 Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,750,000
|
|
|
2,750,000
|
|
Warrants
at $0.15 expiring 01/26/10
|
|
|
(
I )
|
|
|
16,364
|
|
|
1,571
|
|
Warrants
at $0.15 expiring 12/05/10
|
|
|
(
I )
|
|
|
14,063
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
5,459,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Polatis,
Inc. (4)(5)(6)(8) -- Developing MEMS-based optical
|
|
|
|
|
|
|
|
|
|
|
networking
components
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
16,775
|
|
|
0
|
|
Series
A-2 Convertible Preferred Stock
|
|
|
(M)
|
|
|
71,611
|
|
|
132,653
|
|
Series
A-4 Convertible Preferred Stock
|
|
|
(M)
|
|
|
4,774
|
|
|
8,768
|
|
Series
A-5 Convertible Preferred Stock
|
|
|
(M)
|
|
|
16,438
|
|
|
135,105
|
|
|
|
|
|
|
|
|
|
|
276,526
|
|
|
|
|
|
|
|
|
|
|
|
|
PolyRemedy,
Inc. (4)(5)(6)(9) --Developing a robotic
|
|
|
|
|
|
|
|
|
|
|
manufacturing
platform for wound treatment patches
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
287,647
|
|
|
244,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Starfire
Systems, Inc. (4)(5)(6) -- Producing ceramic-forming polymers
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
375,000
|
|
|
150,000
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$21,679,892)
|
|
|
|
|
|
|
|
$
|
21,348,986
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost:
$21,679,892)
|
|
|
|
|
|
|
|
$
|
21,348,986
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 42.01% of net
assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 42.01% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation (4)(5)(6) -- Developing
|
|
|
|
|
|
|
|
|
|
|
semiconductor-related
products enabled at the nanoscale
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
6,547,619
|
|
$
|
2,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals, Inc. (4)(5)(6) -- Developing synthetic
|
|
|
|
|
|
|
|
|
|
|
carbohydrates
for pharmaceutical applications
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
909,091
|
|
|
639,062
|
|
Warrants
at $1.06 expiring 05/01/08
|
|
|
(
I )
|
|
|
754,717
|
|
|
8,302
|
|
|
|
|
|
|
|
|
|
|
647,364
|
|
BridgeLux,
Inc. (4)(5)(11) -- Manufacturing high-power light
|
|
|
|
|
|
|
|
|
|
|
emitting
diodes
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,861,504
|
|
|
2,792,256
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,130,699
|
|
|
3,196,050
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
666,667
|
|
|
1,000,001
|
|
Warrants
at $0.7136 expiring 02/02/17
|
|
|
(
I )
|
|
|
98,340
|
|
|
137,971
|
|
Warrants
at $0.7136 expiring 04/26/17
|
|
|
(
I )
|
|
|
65,560
|
|
|
92,374
|
|
|
|
|
|
|
|
|
|
|
7,218,652
|
|
Cambrios
Technologies Corporation (4)(5)(6) -- Developing
|
|
|
|
|
|
|
|
|
|
|
nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,294,025
|
|
|
1,294,025
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,300,000
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
2,594,025
|
|
CFX
Battery, Inc. (4)(5)(6)(12) -- Developing
batteries using
|
|
|
|
|
|
|
|
|
|
|
nanostructured
materials
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,208,262
|
|
|
946,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Crystal
IS, Inc. (4)(5)(6) -- Developing single-crystal
|
|
|
|
|
|
|
|
|
|
|
aluminum
nitride substrates for optoelectronic devices
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
391,571
|
|
|
305,425
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,300,376
|
|
|
1,014,294
|
|
Warrants
at $0.78 expiring 05/05/13
|
|
|
(
I )
|
|
|
15,231
|
|
|
9,352
|
|
Warrants
at $0.78 expiring 05/12/13
|
|
|
(
I )
|
|
|
2,350
|
|
|
1,445
|
|
Warrants
at $0.78 expiring 08/08/13
|
|
|
(
I )
|
|
|
4,396
|
|
|
2,739
|
|
|
|
|
|
|
|
|
|
|
1,333,255
|
|
CSwitch
Corporation (4)(5)(6)(13) -- Developing next-generation,
system-
|
|
|
|
|
|
|
|
|
|
|
on-a-chip
solutions for communications-based platforms
|
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
6,863,118
|
|
|
3,431,559
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
|
(M)
|
|
$
|
529,852
|
|
|
552,149
|
|
|
|
|
|
|
|
|
|
|
3,983,708
|
|
D-Wave
Systems, Inc. (4)(5)(6)(14) -- Developing high-
|
|
|
|
|
|
|
|
|
|
|
performance
quantum computing systems
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,160,584
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
678,264
|
|
|
732,724
|
|
|
|
|
|
|
|
|
|
|
2,893,308
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 42.01% of net
assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 42.01% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ensemble
Discovery Corporation (4)(5)(6) -- Developing
DNA
|
|
|
|
|
|
|
|
|
|
|
Programmed
Chemistry for the discovery of new classes of
|
|
|
|
|
|
|
|
|
|
|
therapeutics
and bioassays
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,449,275
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (4)(5)(6) -- Developing solar power
|
|
|
|
|
|
|
|
|
|
|
products
enabled by silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
16,666,666
|
|
|
5,718,216
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
5,810,577
|
|
|
1,993,568
|
|
|
|
|
|
|
|
|
|
|
7,711,784
|
|
Kereos,
Inc. (4)(5)(6) -- Developing emulsion-based imaging
|
|
|
|
|
|
|
|
|
|
|
agents
and targeted therapeutics to image and treat cancer
|
|
|
|
|
|
|
|
|
|
|
and
cardiovascular disease
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
545,456
|
|
|
120,850
|
|
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (4)(5)(6) -- Developing semiconductor products
|
|
|
|
|
|
|
|
|
|
|
using
printed electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,500,000
|
|
|
3,125,000
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
800,000
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
4,125,000
|
|
Mersana
Therapeutics, Inc. (4)(5)(6)(15) -- Developing advanced
|
|
|
|
|
|
|
|
|
|
|
polymers
for drug delivery
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
68,451
|
|
|
136,902
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
866,500
|
|
|
1,733,000
|
|
Warrants
at $2.00 expiring 10/21/10
|
|
|
(
I )
|
|
|
91,625
|
|
|
112,974
|
|
|
|
|
|
|
|
|
|
|
1,982,876
|
|
Metabolon,
Inc. (4)(5)(6) -- Discovering biomarkers through
|
|
|
|
|
|
|
|
|
|
|
the
use of metabolomics
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,173,913
|
|
|
1,765,535
|
|
Series
B-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
869,565
|
|
|
706,214
|
|
Warrants
at $1.15 expiring 3/25/15
|
|
|
(
I )
|
|
|
434,783
|
|
|
293,786
|
|
|
|
|
|
|
|
|
|
|
2,765,535
|
|
NanoGram
Corporation (4)(5)(6) -- Developing a broad suite of intellectual
|
|
|
|
|
|
|
|
|
|
|
property
utilizing nanoscale materials
|
|
|
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
|
|
(M)
|
|
|
63,210
|
|
|
124,524
|
|
Series
II Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,250,904
|
|
|
2,464,281
|
|
Series
III Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,242,144
|
|
|
2,447,024
|
|
Series
IV Convertible Preferred Stock
|
|
|
(M)
|
|
|
432,179
|
|
|
851,393
|
|
|
|
|
|
|
|
|
|
|
5,887,222
|
|
Nanomix,
Inc. (4)(5)(6) -- Producing nanoelectronic sensors that
|
|
|
|
|
|
|
|
|
|
|
integrate
carbon nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
977,917
|
|
|
330,228
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
6,802,397
|
|
|
680,240
|
|
|
|
|
|
|
|
|
|
|
1,010,468
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) - 42.01% of net
assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 42.01% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextreme
Thermal Solutions, Inc. (4)(5)(6) -- Developing thin-film
|
|
|
|
|
|
|
|
|
|
|
thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,750,000
|
|
$
|
1,750,000
|
|
Unsecured
Convertible Bridge Note
|
|
|
(M)
|
|
$
|
377,580
|
|
|
377,580
|
|
|
|
|
|
|
|
|
|
|
2,127,580
|
|
Questech
Corporation (4)(5) -- Manufacturing and marketing
|
|
|
|
|
|
|
|
|
|
|
proprietary
metal and stone decorative tiles
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
655,454
|
|
|
129,717
|
|
Warrants
at $1.50 expiring 11/19/08
|
|
|
(
I )
|
|
|
5,000
|
|
|
5
|
|
Warrants
at $1.50 expiring 11/19/09
|
|
|
(
I )
|
|
|
5,000
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
129,817
|
|
Siluria
Technologies, Inc. (4)(5)(6) -- Developing next-generation
|
|
|
|
|
|
|
|
|
|
|
nanomaterials
|
|
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
|
|
(M)
|
|
|
482,218
|
|
|
160,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Solazyme,
Inc. (4)(5)(6) -- Developing algal biodiesel, industrial
|
|
|
|
|
|
|
|
|
|
|
chemicals
and special ingredients based on synthetic biology
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
988,204
|
|
|
997,691
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
495,246
|
|
|
500,000
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
|
(M)
|
|
$
|
2,000,000
|
|
|
2,009,534
|
|
|
|
|
|
|
|
|
|
|
3,507,225
|
|
|
|
|
|
|
|
|
|
|
|
|
Xradia,
Inc. (4)(5) -- Designing, manufacturing and selling
ultra-high
|
|
|
|
|
|
|
|
|
|
|
resolution
3D x-ray microscopes and fluorescence imaging systems
|
|
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
3,121,099
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Zia
Laser, Inc. (4)(5)(16) -- Developed quantum dot semiconductor
lasers
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,500,000
|
|
|
21,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$55,371,901)
|
|
|
|
|
|
|
|
$
|
57,367,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$55,371,901)
|
|
|
|
|
|
|
|
$
|
57,367,250
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(17) - 3.21% of net assets
at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
- 3.21% of net
assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evolved
Nanomaterial Sciences, Inc. (4)(5)(18) -- Developed
|
|
|
|
|
|
|
|
|
|
|
nanoscale-enhanced
approaches for the resolution of
|
|
|
|
|
|
|
|
|
|
|
chiral
molecules
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
5,870,021
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix
Molecular Corporation (4)(5)(6) -- Developing technology
to
|
|
|
|
|
|
|
|
|
|
|
enable
the separation of difficult-to-separate materials.
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
1,000
|
|
|
10
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
|
(M)
|
|
$
|
75,000
|
|
|
77,001
|
|
|
|
|
|
|
|
|
|
|
77,011
|
|
SiOnyx,
Inc. (4)(5)(6) -- Developing silicon-based optoelectronic
|
|
|
|
|
|
|
|
|
|
|
products
enabled by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
233,499
|
|
|
135,686
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,966,667
|
|
|
1,723,930
|
|
Series
A-2 Convertible Preferred Stock
|
|
|
(M)
|
|
|
4,207,537
|
|
|
2,445,000
|
|
|
|
|
|
|
|
|
|
|
4,304,616
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost:
$6,962,011)
|
|
|
|
|
|
|
|
$
|
4,381,627
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$6,962,011)
|
|
|
|
|
|
|
|
$
|
4,381,627
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $84,013,804)
|
|
|
|
|
|
|
|
$
|
83,097,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and Agency Securities - 39.25% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date 04/17/08
|
|
|
(M)
|
|
$
|
3,050,000
|
|
$
|
3,048,384
|
|
U.S.
Treasury Notes -- due date 05/15/08, coupon 3.75%
|
|
|
(M)
|
|
|
9,000,000
|
|
|
9,026,010
|
|
U.S.
Treasury Notes -- due date 09/15/08, coupon 3.125%
|
|
|
(M)
|
|
|
5,000,000
|
|
|
5,039,850
|
|
U.S.
Treasury Notes -- due date 01/15/09, coupon 3.25%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,041,490
|
|
U.S.
Treasury Notes -- due date 02/15/09, coupon 4.50%
|
|
|
(M)
|
|
|
5,100,000
|
|
|
5,228,316
|
|
U.S.
Treasury Notes -- due date 04/15/09, coupon 3.125%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,050,160
|
|
U.S.
Treasury Notes -- due date 07/15/09, coupon 3.625%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,079,440
|
|
U.S.
Treasury Notes -- due date 10/15/09, coupon 3.375%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,081,330
|
|
U.S.
Treasury Notes -- due date 01/15/10, coupon 3.625%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,105,690
|
|
U.S.
Treasury Notes -- due date 04/15/10, coupon 4.00%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,142,020
|
|
U.S.
Treasury Notes -- due date 07/15/10, coupon 3.875%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,155,160
|
|
U.S.
Treasury Notes -- due date 10/15/10, coupon 4.25%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,130,000
|
|
U.S.
Treasury Notes -- due date 10/31/12, coupon 3.875%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,126,100
|
|
U.S.
Treasury Notes -- due date 02/15/13, coupon 3.875%
|
|
|
(M)
|
|
|
5,000,000
|
|
|
5,335,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government and Agency Securities (cost:
$52,346,992)
|
|
|
|
|
|
|
|
$
|
53,589,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $136,360,796)
|
|
|
|
|
|
|
|
$
|
136,686,963
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
Notes
to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page F-51
for a
description of the Valuation
Procedures.
|
(2)
|
Investments
in unaffiliated companies consist of investments in which we
own less than
five percent of the voting shares of the portfolio company. Investments
in
non-controlled affiliated companies consist of investments in
which we own
five percent or more, but less than 25 percent, of the voting
shares of
the portfolio company, or where we hold one or more seats on
the portfolio
company’s Board of Directors but do not control the company. Investments
in controlled affiliated companies consist of investments in
which we own
25 percent or more of the voting shares of the portfolio company
or
otherwise control the company.
|
(3)
|
The
aggregate cost for federal income tax purposes of investments
in
unaffiliated companies is $21,679,892. The gross unrealized appreciation
based on the tax cost for these securities is $1,732,194. The
gross
unrealized depreciation based on the tax cost for these securities
is
$2,063,100.
|
(4)
|
Legal
restrictions on sale of investment.
|
(5)
|
Represents
a non-income producing security. Equity investments that have
not paid
dividends within the last 12 months are considered to be non-income
producing.
|
(6)
|
These
investments are development stage companies. A development stage
company
is defined as a company that is devoting substantially all of
its efforts
to establishing a new business, and either it has not yet commenced
its
planned principal operations, or it has commenced such operations
but has
not realized significant revenue from
them.
|
(7)
|
With
our purchase of Series E Convertible Preferred Stock of BioVex,
we
received a warrant to purchase a number of shares of common stock
of
BioVex as determined by dividing 624,999.99 by the price per
share at
which the common stock is offered and sold to the public in connection
with the initial public offering. The ability to exercise this
warrant is therefore contingent on BioVex completing successfully
an
initial public offering before the expiration date of the warrant
on
September 27, 2012. The exercise price of this warrant shall
be 110
percent of the initial public offering
price.
|
(8)
|
Continuum
Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
|
(9)
|
Initial
investment was made during 2008.
|
(10)
|
The
aggregate cost for federal income tax purposes of investments
in
non-controlled affiliated companies is $55,371,901. The gross
unrealized
appreciation based on the tax cost for these securities is $10,844,376.
The gross unrealized depreciation based on the tax cost for these
securities is $8,849,027.
|
(11)
|
BridgeLux,
Inc., was previously named eLite Optoelectronics,
Inc.
|
(12) On
February 28, 2008,
Lifco, Inc., merged with CFX Battery, Inc. The surviving entity is CFX
Battery,
Inc.
(13)
|
With
our investment in a secured convertible bridge note issued by
CSwitch, we
received a warrant to purchase a number of shares of the class
of stock
sold in the next financing of CSwitch equal to $529,322, the
principal of
the note, divided by the lowest price per share of the class
of stock sold
in the next financing of CSwitch. The ability to exercise this
warrant is therefore contingent on CSwitch completing successfully
a
subsequent round of financing. The warrant will expire five years
from the date of the close of the next round of financing. The cost
basis of this warrant is $529.
|
(14)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We
invested in D-Wave Systems, Inc., through D-Wave USA, a Delaware
company.
Our investment is denominated in Canadian dollars and is subject
to
foreign currency translation. See "Note 3. Summary of Significant
Accounting Policies."
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF MARCH 31,
2008 (Unaudited)
|
(15)
|
Mersana
Therapeutics, Inc., was previously named Nanopharma
Corp.
|
(16)
|
On
November 30, 2006, the assets of Zia Laser, Inc., were acquired
by
Innolume Inc.
|
(17)
|
The
aggregate cost for federal income tax purposes of investments
in
controlled affiliated companies is $6,962,011. The gross unrealized
appreciation based on the tax cost for these securities is $219,616.
The
gross unrealized depreciation based on the tax cost for these
securities
is $2,800,000.
|
(18)
|
On
September 30, 2007, Evolved Nanomaterial Sciences, Inc., filed
for Chapter
7 bankruptcy.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
FOOTNOTE
TO CONSOLIDATED SCHEDULE OF INVESTMENTS
(Unaudited)
|
VALUATION
PROCEDURES
I. Determination
of Net Asset Value
The
1940
Act requires periodic valuation of each investment in the portfolio of
the
Company to determine its net asset value. Under the 1940 Act, unrestricted
securities with readily available market quotations are to be valued at
the
current market value; all other assets must be valued at fair value as
determined in good faith by or under the direction of the Board of
Directors.
The
Board
of Directors is responsible for (1) determining overall valuation guidelines
and
(2) ensuring that the investments of the Company are valued within the
prescribed guidelines.
The
Valuation Committee, comprised of all of the independent Board members,
is
responsible for reviewing and approving the valuation of the Company’s assets
within the guidelines established by the Board of Directors. The Valuation
Committee receives information and recommendations from management.
The
values assigned to these investments are based on available information
and do
not necessarily represent amounts that might ultimately be realized, as
such
amounts depend on future circumstances and cannot reasonably be determined
until
the individual investments are actually liquidated or become readily
marketable.
II. Approaches
to Determining Fair Value
Statement
of Financial Accounting Standards No. 157, "Fair Value Measurements," ("SFAS
No.
157") defines fair value as the price that would be received to sell an
asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price).
The
main
approaches to measuring fair value utilized are the market approach and
the
income approach.
|
·
|
Market
Approach (M):
The market approach uses prices and other relevant information
generated
by market transactions involving identical or comparable assets
or
liabilities. For example, the market approach often uses market
multiples
derived from a set of comparables. Multiples might lie in ranges
with a
different multiple for each comparable. The selection of where
within the
range each appropriate multiple falls requires judgment considering
factors specific to the measurement (qualitative and quantitative).
|
|
·
|
Income
Approach (I):
The income approach uses valuation techniques to convert future
amounts
(for example, cash flows or earnings) to a single present value
amount
(discounted). The measurement is based on the value indicated
by current
market expectations about those future amounts. Those valuation
techniques
include present value techniques; option-pricing models, such
as the
Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a
lattice model), which incorporate present value techniques; and
the
multi-period excess earnings method, which is used to measure
the fair
value of certain assets.
|
SFAS
No.
157 classifies the inputs used to measure fair value by these approaches
into
the following hierarchy:
|
·
|
Level
1:
Unadjusted quoted prices in active markets for identical assets
or
liabilities.
|
|
·
|
Level
2:
Quoted prices in active markets for similar assets or liabilities,
or
quoted prices for identical or similar assets or liabilities
in markets
that are not active, or inputs other than quoted prices that
are
observable for the asset or liability.
|
|
·
|
Level
3:
Unobservable inputs for the asset or
liability.
|
Financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value
measurement.
III. Investment
Categories
The
Company’s investments can be classified into five broad categories for valuation
purposes:
|
·
|
Equity-related
securities;
|
|
·
|
Investments
in intellectual property, patents, research and development in
technology
or product development;
|
|
·
|
Long-term
fixed-income securities;
|
|
·
|
Short-term
fixed-income securities; and
|
The
Company applies the methods for determining fair value discussed above
to the
valuation of investments in each of these five broad categories as
follows:
A. EQUITY-RELATED
SECURITIES
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market approach
is
used to fair value these types of securities:
|
·
|
Readily
available public market quotations;
|
|
·
|
The
cost of the Company’s investment;
|
|
·
|
Transactions
in a company's securities or unconditional firm offers by responsible
parties as a factor in determining
valuation;
|
|
·
|
The
financial condition and operating results of the company;
|
|
·
|
The
long-term potential of the business and technology of the
company;
|
|
·
|
The
values of similar securities issued by companies in similar businesses;
|
|
·
|
Multiples
to revenue, net income or EBITDA that similar securities issued
by
companies in similar businesses receive;
|
|
·
|
The
proportion of the company's securities we own and the nature
of any rights
to require the company to register restricted securities under
applicable
securities laws; and
|
|
·
|
The
rights and preferences of the class of securities we own as compared
to
other classes of securities the portfolio company has issued.
|
|
|
When
the income approach is used to value warrants, the Company uses
the
Black-Scholes-Merton formula.
|
B. INVESTMENTS
IN INTELLECTUAL PROPERTY, PATENTS, RESEARCH AND DEVELOPMENT IN TECHNOLOGY
OR
PRODUCT DEVELOPMENT
Such
investments are fair valued using the market approach. The Company may
consider
factors specific to these types of investments when using the market approach
including:
|
·
|
The
cost of the Company’s investment;
|
|
·
|
Investments
in the same or substantially similar intellectual property or
patents or
research and development in technology or product development
or offers by
responsible third parties;
|
|
·
|
The
results of research and
development;
|
|
·
|
Product
development progress;
|
|
·
|
Other
subjective factors.
|
|
C.
|
LONG-TERM
FIXED-INCOME SECURITIES
|
1. Readily
Marketable: Long-term
fixed-income securities for which market quotations are readily available
are
valued using the most recent bid quotations when available.
2. Not
Readily Marketable: Long-term
fixed-income securities for which market quotations are not readily available
are fair valued using the market approach. The factors that may be considered
when valuing these types of securities by the market approach
include:
|
·
|
Interest
rate analysis;
|
|
·
|
Quotations
from broker-dealers;
|
|
·
|
Prices
from independent pricing services that the Board believes are
reasonably
reliable; and
|
|
·
|
Reasonable
price discovery procedures and data from other
sources.
|
D. SHORT-TERM
FIXED-INCOME SECURITIES
Short-term
fixed-income securities are valued using the market approach in the same
manner
as long-term fixed-income securities until the remaining maturity is 60
days or
less, after which time such securities may be valued at amortized cost
if there
is no concern over payment at maturity.
All
other
securities are reported at fair value as determined in good faith by the
Valuation Committee using the approaches for determining valuation as described
above.
For
all
other securities, the reported values shall reflect the Valuation Committee's
judgment of fair values as of the valuation date using the outlined basic
approaches of valuation discussed in Section II. They do not necessarily
represent an amount of money that would be realized if we had to sell such
assets in an immediate liquidation. Thus, valuations as of any particular
date
are not necessarily indicative of amounts that we may ultimately realize
as a
result of future sales or other dispositions of investments we
hold.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
NOTE
1. THE COMPANY
Harris
& Harris Group, Inc. (the
"Company," "us," "our" and "we"), is a venture capital company operating
as a
business development company ("BDC") under the Investment Company Act of
1940
("1940 Act"). We operate as an internally managed company whereby our officers
and employees, under the general supervision of our Board of Directors,
conduct
our operations.
We
elected to become a BDC on July 26, 1995, after receiving the necessary
shareholder approvals. From September 30, 1992, until the election of BDC
status, we operated as a closed-end, non-diversified investment company
under
the 1940 Act. Upon commencement of operations as an investment company,
we
revalued all of our assets and liabilities in accordance with the 1940
Act.
Prior to September 30, 1992, we were registered and filed under the reporting
requirements of the Securities Exchange Act of 1934 (the "1934 Act") as
an
operating company and, while an operating company, operated directly and
through
subsidiaries.
Harris
& Harris Enterprises, Inc.,SM
is a 100
percent wholly owned subsidiary of the Company. Harris & Harris Enterprises,
Inc., is a partner in Harris Partners I, L.P.,SM
and is
taxed under Subchapter C of the Code (a “C Corporation”). Harris Partners I,
L.P, is a limited partnership and is used to hold certain interests in
portfolio
companies. The partners of Harris Partners I, L.P., are Harris & Harris
Enterprises, Inc., (sole general partner) and Harris & Harris Group, Inc.,
(sole limited partner). Harris & Harris Enterprises, Inc., pays taxes on any
non-passive investment income generated by Harris Partners I, L.P. For
the
period ended March 31, 2008, there was no non-passive investment income.
The
Company consolidates the results of its subsidiaries for financial reporting
purposes.
NOTE
2. INTERIM FINANCIAL STATEMENTS
Our
interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X and in conformity
with generally accepted accounting principles applicable to interim financial
information. Accordingly, they do not include all information and disclosures
necessary for a presentation of our financial position, results of operations
and cash flows in conformity with generally accepted accounting principles
in
the United States of America. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of our financial position,
results
of operations and cash flows for such periods. The results of operations
for any
interim period are not necessarily indicative of the results for the full
year.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in our Annual Report on Form 10-K
for the
fiscal year ended December 31, 2007.
NOTE
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
following is a summary of significant accounting policies followed in the
preparation of the consolidated financial statements:
Principles
of Consolidation.
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for
investment companies and include the accounts of the Company and its wholly
owned subsidiaries. All significant inter-company accounts and transactions
have
been eliminated in consolidation.
Use
of
Estimates.
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and contingent assets and liabilities
as of
March 31, 2008, and December 31, 2007, and the reported amounts of revenues
and
expenses for the three months ended March 31, 2008, and 2007. Actual results
could differ from these estimates, and the differences could be material.
The
most significant estimates relate to the fair valuations of certain of
our
investments.
Cash
and Cash Equivalents.
Cash and
cash equivalents includes demand deposits and money market instruments
with
maturities of less than three months. Cash and cash equivalents are carried
at
cost which approximates value.
Portfolio
Investment Valuations.
Investments are stated at "value" as defined in the 1940 Act and in the
applicable regulations of the SEC. 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) the fair value as determined in
good
faith by, or under the direction of, the Board of Directors for all other
assets. (See "Valuation Procedures" in the "Footnote to Consolidated Schedule
of
Investments.") At March 31, 2008, our financial statements include private
venture capital investments valued at $83,097,863, the fair values of which
were
determined in good faith by, or under the direction, of the Board of Directors.
Upon sale of investments, the values that are ultimately realized may be
different from what is presently estimated. The difference could be material.
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements," which defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. The adoption
of SFAS No. 157 did not have a material impact on the fair value measurements
of
the Company's investments.
Foreign
Currency Translation.
The
accounting records of the Company are maintained in U.S. dollars. All assets
and
liabilities denominated in foreign currencies are translated into U.S.
dollars
based on the rate of exchange of such currencies against U.S. dollars on
the
date of valuation. For the three months ended March 31, 2008, included
in the
net decrease in unrealized depreciation on investments was an $80,903 loss
resulting from foreign currency translation.
Securities
Transactions.
Securities transactions are accounted for on the date the securities are
purchased or sold (trade date).
Interest
Income Recognition. Interest
income, adjusted for amortization of premium and accretion of discount,
is
recorded on accrual basis. The Company ceases accruing interest when securities
are determined to be non-income producing and writes off any previously
accrued
interest.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio
Investments. Realized
gain or loss is recognized when an investment is disposed of and is computed
as
the difference between the Company’s cost basis in the investment at the
disposition date and the net proceeds received from such disposition. Realized
gains and losses on investment transactions are determined by specific
identification. Unrealized appreciation or depreciation is computed as
the
difference between the fair value of the investment and the cost basis
of such
investment.
Stock-Based
Compensation.
The
Company has a stock-based employee compensation plan. The Company accounts
for
the plan in accordance with the provisions of Statement of Financial Accounting
Standards No. 123(R), "Share-Based Payment," ("SFAS No. 123(R)"). See “Note 5.
Stock-Based Compensation” for further discussion.
Income
Taxes.
As we
intend to qualify as a RIC under Subchapter M of the Internal Revenue Code,
the
Company does not provide for income taxes. Our taxes are accounted for
in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," and FIN 48, "Accounting for Uncertainty
in Income
Taxes." The Company recognizes interest and penalties in income tax
expense.
We
pay
federal, state and local income taxes on behalf of our wholly owned subsidiary,
Harris & Harris Enterprises, Inc., which is a C corporation. See “Note 6.
Income Taxes."
Restricted
Funds.
The
Company maintains a rabbi trust for the purposes of accumulating funds
to
satisfy the obligations incurred by us for the Supplemental Executive Retirement
Plan ("SERP") under the employment agreement with Charles E.
Harris.
Property
and Equipment.
Property
and equipment are included in "Other Assets" and are carried at cost, less
accumulated depreciation of $350,333. Depreciation is provided using the
straight-line method over the estimated useful lives of the premises and
equipment.
Concentration
of Credit Risk.
The
Company places its cash and cash equivalents with financial institutions
and, at
times, cash held in checking accounts may exceed the Federal Deposit Insurance
Corporation insured limit.
NOTE
4. FAIR VALUE MEASUREMENTS
At
March
31, 2008, our financial assets were categorized as follows in the fair
value
hierarchy for SFAS No. 157 purposes:
Fair
Value Measurement at Reporting Date Using:
Description
|
|
March
31, 2008
|
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
|
Significant
Other Observable Inputs (Level 2)
|
|
Significant
Unobservable Inputs (Level 3)
|
|
U.S.
Government Securities
|
|
$
|
53,589,100
|
|
$
|
53,589,100
|
|
$
|
0
|
|
$
|
0
|
|
Portfolio
Companies |
|
$ |
83,097,863 |
|
$ |
0 |
|
$ |
0 |
|
$ |
83,097,863 |
|
Total
|
|
$
|
136,686,963
|
|
$
|
53,589,100
|
|
$
|
0
|
|
$
|
83,097,863
|
|
The
Company recognized no gain or loss at January 1, 2008 as a result of the
adoption of SFAS No. 157. The following chart shows the components of change
in
the financial assets categorized as Level 3, for the three months ended
March
31, 2008.
|
|
Fair
Value Measurements Using Significant
|
|
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
Portfolio
Companies
|
|
|
|
|
|
Beginning
Balance, January 1, 2008
|
|
$
|
78,110,384
|
|
|
|
|
|
|
Total
realized losses included in changes in net assets
|
|
|
(5,014,653
|
)
|
Total
unrealized gains included in changes in net assets
|
|
|
3,651,203
|
|
Purchases
and interest on bridge notes
|
|
|
6,456,643
|
|
Disposals
|
|
|
(105,714
|
)
|
Ending
Balance, March 31, 2008
|
|
$
|
83,097,863
|
|
|
|
|
|
|
The
amount of total losses for the period
|
|
|
|
|
included
in changes in net assets attributable to the
|
|
|
|
|
change
in unrealized gains or losses relating to
|
|
|
|
|
assets
still held at the reporting date
|
|
$
|
1,363,452
|
|
NOTE
5. STOCK-BASED COMPENSATION
On
March
23, 2006, the Board of Directors of the Company voted to terminate the
Employee
Profit-Sharing Plan and to establish the Stock Plan, subject to shareholder
approval. This proposal was approved at the May 4, 2006, Annual Meeting
of
Shareholders. The Stock Plan provides for the grant of equity-based awards
of
stock options to our officers, employees and directors (subject to receipt
of an
exemptive order described below) and restricted stock (subject to receipt
of an
exemptive order described below) to our officers and employees who are
selected
by our Compensation Committee for participation in the plan and subject
to
compliance with the 1940 Act.
On
July
11, 2006, the Company filed an application with the SEC regarding certain
provisions of the Stock Plan, and on June 29, 2007, the Company responded
to
comments from the SEC on the application. In the event that the SEC provides
the
exemptive relief requested by the application, and we receive any additional
stockholder approval required by the SEC, the Compensation Committee may,
in the
future, authorize awards of stock options under the Stock Plan to non-employee
directors of the Company and authorize grants of restricted stock to
employees.
A
maximum
of 20 percent of our total shares of our common stock issued and outstanding
are
available for awards under the Stock Plan. Under the Stock Plan, no more
than 25
percent of the shares of stock reserved for the grant of the awards under
the
Stock Plan may be restricted stock awards at any time during the term of
the
Stock Plan. If any shares of restricted stock are awarded, such awards
will
reduce on a percentage basis the total number of shares of stock for which
options may be awarded. If the Company does not receive exemptive relief
from
the SEC to issue restricted stock, all shares granted under the Stock Plan
may
be subject to stock options. No more than 1,000,000 shares of our common
stock
may be made subject to awards under the Stock Plan to any individual in
any
year.
On
March
19, 2008, the Compensation Committee of the Board of Directors and the
full
Board of Directors of the Company approved a new grant of individual
Non-Qualified Stock Option ("NQSO") awards for certain officers and employees
of
the Company. The terms and conditions of the stock options granted were
set
forth in award agreements between the Company and each award recipient
entered
into on that date. Options to purchase a total of 348,032 shares of stock
were
granted with vesting periods ranging from March 2009 to March 2012 and
with an
exercise price of $6.18, which was the closing volume weighted average
price of
our shares of common stock on March 19, 2008. Upon exercise, the shares
would be
issued from our previously authorized but unissued shares.
The
Company accounts for the Stock Plan in accordance with the provisions of
SFAS
No. 123(R), which requires that we determine the fair value of all share-based
payments to employees, including the fair value of grants of employee stock
options, and record these amounts as an expense in the Statement of Operations
over the vesting period with a corresponding increase to our additional
paid-in
capital. At March 31, 2008 and December 31, 2007, the increase to our operating
expenses was offset by the increase to our additional paid-in capital,
resulting
in no net impact to our net asset value. Additionally, the Company does
not
record the tax benefits associated with the expensing of stock options,
because
the Company currently intends to qualify as a RIC under Subchapter M of
the
Code.
An
option's expected term is the estimated period between the grant date and
the
exercise date of the option. As the expected term period increases, the
fair
value of the option and the non-cash compensation cost will also increase.
The
expected term assumption is generally calculated using historical stock
option
exercise data. The Company does not have historical exercise data to develop
such an assumption. In cases where companies do not have historical data
and
where the options meet certain criteria, SEC Staff Accounting Bulletin
107 ("SAB
107") provides the use of a simplified expected term calculation. Accordingly,
the Company calculated the expected terms using the SAB 107 simplified
method.
Expected
volatility is the measure of how the stock's price is expected to fluctuate
over
a period of time. An increase in the expected volatility assumption yields
a
higher fair value of the stock option. Expected volatility factors for
the stock
options were based on the historical fluctuations in the Company’s stock price
over a period commensurate with the expected term of the option, adjusted
for
stock splits and dividends.
The
expected dividend yield assumption is traditionally calculated based on
a
company's historical dividend yield. An increase to the expected dividend
yield
results in a decrease in the fair value of option and resulting compensation
cost. Although the Company has declared deemed dividends in previous years,
most
recently in 2005, the amounts and timing of any future dividends cannot
be
reasonably estimated. Therefore, for purposes of calculating fair value,
the
Company has assumed an expected dividend yield of 0 percent.
The
risk-free interest rate assumptions are based on the annual yield on the
measurement date of a zero-coupon U.S. Treasury bond the maturity of which
equals the option’s expected term. Higher assumed interest rates yield higher
fair values.
The
amount of non-cash, stock-based compensation expense recognized in the
Consolidated Statements of Operations is based on the fair value of the
awards
the Company expects to vest, recognized over the vesting period on a
straight-line basis for each award, and adjusted for actual forfeitures
that
occur before vesting. The forfeiture rate is estimated at the time of grant
and
revised, if necessary, in subsequent periods if the actual forfeiture rate
differs from the estimated rate and is accounted for in the current period
and
prospectively.
The
fair
value of each stock option award is estimated on the date of grant using
the
Black-Scholes-Merton option pricing model as permitted by SFAS No. 123(R).
The
assumptions used in the calculation of fair value of the stock options
granted
on March 19, 2008, using the Black-Scholes-Merton model for the contract
term
was as follows:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|
|
of
Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
Type
of Award
|
Term
|
Granted
|
in
Yrs
|
Factor
|
Yield
|
Rates
|
Per
Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
9.78
Years
|
348,032
|
6.14
|
57.1%
|
0%
|
2.62%
|
$3.45
|
|
|
|
|
|
|
|
|
Total
|
|
348,032
|
|
|
|
|
$3.45
|
For
the
three months ended March 31, 2008, the Company recognized $1,466,980 of
compensation expense in the Consolidated Statements of Operations. As of
March
31, 2008, there was approximately $7,852,320 of unrecognized compensation
cost
related to unvested stock option awards. This cost is expected to be recognized
over a weighted-average period of approximately 1.9 years.
For
the
three months ended March 31, 2008, no stock options were exercised.
For
the
three months ended March 31, 2008, the calculation of the net decrease
in net
assets resulting from operations per share excludes the stock options because
such options were anti-dilutive. The options may be dilutive in future
periods
in which there is a net increase in net assets resulting from operations,
in the
event that there is a significant increase in the average stock price in
the
stock market or in the event of significant decreases in the amount of
unrecognized compensation cost.
A
summary
of the changes in outstanding stock options is as follows:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
Weighted
|
Average
|
|
|
|
|
Average
|
Average
|
Remaining
|
Aggregate
|
|
|
Exercise
|
Grant
Date
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
|
Fair
Value
|
Term
(Yrs)
|
Value
|
|
|
|
|
|
|
Options
Outstanding at
January
1, 2008
|
3,967,744
|
$
10.54
|
$
4.77
|
|
|
Granted
|
348,032
|
$
6.18
|
$
3.45
|
9.75
|
|
Exercised
|
0
|
$0
|
$0
|
|
|
Forfeited
or Expired
|
-
.
|
|
|
|
|
Options
Outstanding at
March
31, 2008
|
4,315,776
|
$
10.19
|
$
4.67
|
4.77
|
$330,630
|
Options
Exercisable at
March
31, 2008
|
1,717,125
|
$
10.43
|
$
4.45
|
3.93
|
$0
|
Options
Exercisable and Expected to be
Exercisable
at March 31, 2008
|
4,233,180
|
$
10.19
|
$
4.61
|
4.70
|
$330,630
|
The
aggregate intrinsic value in the table above with respect to options
outstanding, exercisable and expected to be exercisable, is calculated
as the
difference between the Company's closing stock price of $7.13 on the last
trading day of the first quarter of 2008 and the exercise price, multiplied
by
the number of in-the-money options. This represents the total pre-tax intrinsic
value that would have been received by the option holders had all options
been
fully vested and all option holders exercised their awards on March 31,
2008.
Unless
earlier terminated by our Board of Directors, the Stock Plan will expire
on May
4, 2016. The expiration of the Stock Plan will not by itself adversely
affect
the rights of plan participants under awards that are outstanding at the
time
the Stock Plan expires. Our Board of Directors may terminate, modify or
suspend
the plan at any time, provided that no modification of the plan will be
effective unless and until any required shareholder approval has been obtained.
The Compensation Committee may terminate, modify or amend any outstanding
award
under the Stock Plan at any time, provided that in such event, the award
holder
may exercise any vested options prior to such termination of the Stock
Plan or
award.
NOTE
6. INCOME TAXES
We
filed
for the 1999 tax year to elect treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986 (the "Code")
and
qualified for the same treatment for the years 2000 through 2007. However,
there
can be no assurance that we will qualify as a RIC for 2008 or subsequent
years.
In
the
case of a RIC which furnishes capital to development corporations, there
is an
exception to the rule relating to the diversification of investments required
to
qualify for RIC treatment. This exception is available only to registered
management investment companies which the SEC determines to be principally
engaged in the furnishing of capital to other corporations which are principally
engaged in the development or exploitation of inventions, technological
improvements, new processes, or products not previously generally available
("SEC Certification"). We have received SEC Certification since 1999, including
for 2006, but it is possible that we may not receive SEC Certification
in future
years.
In
addition, under certain circumstances, even if we qualified for Subchapter
M
treatment for a given year, we might take action in a subsequent year to
ensure
that we would be taxed in that subsequent year as a C Corporation, rather
than
as a RIC. As a RIC, we must, among other things, distribute at least 90
percent
of our investment company taxable income and may either distribute or retain
our
realized net capital gains on investments.
Provided
that a proper election is made, a corporation taxable under Subchapter
C of the
Code or a C Corporation that elects to qualify as a RIC continues to be
taxable
as a C Corporation on any gains realized within 10 years of its qualification
as
a RIC (the "Inclusion Period") from sales of assets that were held by the
corporation on the effective date of the RIC election ("C Corporation Assets"),
to the extent of any gain built into the assets on such date ("Built-In
Gain").
If the corporation fails to make a proper election, it is taxable on its
Built-In Gain as of the effective date of its RIC election. We had Built-In
Gains at the time of our qualification as a RIC and made the election to
be
taxed on any Built-In Gain realized during the Inclusion Period.
For
federal tax purposes, the Company’s 2004 through 2007 tax years remain open for
examination by the tax authorities under the normal three year statute
of
limitations. Generally, for state tax purposes, the Company’s 2003 through 2007
tax years remain open for examination by the tax authorities under a four
year
statute of limitations.
During
the first quarter of 2008, we paid $15,798 in federal, state and local
income
taxes. At March 31, 2008, we had $0 accrued for federal, state and local
taxes
payable by the Company.
We
pay
federal, state and local taxes on behalf of our wholly owned subsidiary,
Harris
& Harris Enterprises, Inc., which is taxed as a C Corporation. For the three
months ended March 31, 2008, and 2007, our income tax expense (benefit)
for
Harris & Harris Enterprises, Inc., was $30,400 and $0,
respectively.
Continued
qualification as a RIC requires us to satisfy certain investment asset
diversification requirements in future years. Our ability to satisfy those
requirements may not be controllable by us. There can be no assurance that
we
will qualify as a RIC in subsequent years.
NOTE
7. CAPITAL TRANSACTIONS
On
June
25, 2007, we completed the sale of 1,300,000 shares of our common stock
for
gross proceeds of $14,027,000; net proceeds of this offering, after placement
agent fees and offering costs of $1,033,832, were $12,993,168.
On
April
4, 2008, we filed a Post-Effective Amendment to our registration statement
with
the SEC on Form N-2 to update our existing shelf registration statement
and
register an additional 1,300,000 shares of our common stock. After the
effective
date, the common stock may be sold at prices and on terms to be set forth
in one
or more supplements to the prospectus from time to time.
NOTE
8. CHANGE IN NET ASSETS PER SHARE
The
following table sets forth the computation of basic and diluted per share
net
increases in net assets resulting from operations for the three months
ended
March 31, 2008, and March 31, 2007.
|
For
the Three Months Ended March 31
|
|
2008
|
2007
|
|
|
|
Numerator
for decrease in net assets per share
|
$(3,289,035)
|
$(6,390,160)
|
|
|
|
Denominator
for basic and diluted weighted average shares
|
23,314,573
|
21,277,576
|
|
|
|
Basic
and diluted net decrease in net assets per share resulting from
operations
|
$(0.14)
|
$(0.30)
|
NOTE
9. SUBSEQUENT EVENTS
On
May 1,
2008, we exercised our warrants to purchase shares of Ancora Pharmaceuticals,
Inc., for $800,000.
On
May 6,
2008, we made a $2,000,000 new investment in a privately held tiny technology
portfolio company.
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
(Unaudited)
|
|
|
Three
Months Ended March 31
|
|
|
|
|
|
2008
|
|
2007
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of period
|
|
$
|
5.93
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
Net
operating loss*
|
|
|
(0.11
|
)
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
Net
realized loss on investments*
|
|
|
(0.22
|
)
|
|
0
|
|
|
|
|
|
|
|
|
|
Net
decrease in unrealized
|
|
|
|
|
|
|
|
depreciation
as a result of sales*
|
|
|
0.22
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Net
increase in unrealized
|
|
|
|
|
|
|
|
depreciation
on investments held*
|
|
|
(0.03
|
)
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
Total
from investment operations*
|
|
|
(0.14
|
)
|
|
(.30
|
)
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock-based
|
|
|
|
|
|
|
|
compensation
expense
|
|
|
0.07
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of proceeds from exercise
|
|
|
|
|
|
|
|
of
options
|
|
|
0.00
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Total
increase from capital stock transactions
|
|
|
0.07
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of period
|
|
$
|
5.86
|
|
$
|
5.27
|
|
|
|
|
|
|
|
|
|
Stock
price per share, end of period
|
|
$
|
7.13
|
|
$
|
12.92
|
|
|
|
|
|
|
|
|
|
Total
return based on stock price (1)
|
|
|
(18.89
|
)%
|
|
6.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of period
|
|
$
|
136,541,289
|
|
$
|
112,526,302
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets (1)
|
|
|
2.2
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
Ratio
of net operating loss to average net assets (1)
|
|
|
(1.8
|
)%
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
Cash
dividends paid per share
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Tax
payable on behalf of shareholders on
|
|
|
|
|
|
|
|
the
deemed dividend per share
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Number
of shares outstanding, end of period
|
|
|
23,314,573
|
|
|
21,341,029
|
|
*Based
on
Average Shares Outstanding.
(1)
Not
Annualized
The
accompanying notes are an integral part of this schedule.
HARRIS
& HARRIS GROUP, INC.
2,700,000
Shares
Common
Stock
The
date
of the Prospectus
is
, 2008
__________________
This
Prospectus constitutes a part of a registration statement on Form N-2 (together
with all the exhibits and the appendix thereto, the "Registration Statement")
filed by us with the SEC under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement.
Reference is hereby made to the Registration Statement and related exhibits
for
further information with respect to us and the shares offered hereby. Statements
contained herein concerning the provisions of documents are necessarily
summaries of the material terms of such documents.
No
dealer, salesperson or other person has been authorized to give any information
or to make any representations not contained in this Prospectus. If given
or
made, any information or representation must not be relied upon as having
been
authorized by us. This Prospectus does not constitute an offer to sell or
the
solicitation of an offer to buy any security other than the shares of Common
Stock offered by this Prospectus, nor does it constitute an offer to sell
or the
solicitation of an offer to buy shares of Common Stock by anyone in any
jurisdiction in which such offer or solicitation would be unlawful.
PART
C — OTHER INFORMATION
Item
25. Financial Statements and Exhibits
(1) Financial
Statements
- The
following financial statements and related documents are included in Part
A of
this Registration Statement:
|
(a)
Annual
Report on Form 10-K
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of
December
31, 2007, and 2006
|
|
|
|
|
|
Consolidated
Statements of Operations for the years ended
December
31, 2007, 2006, and 2005
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended
December
31, 2007, 2006, and 2005
|
|
|
|
|
|
Consolidated
Statements of Changes in Net Assets for the
years
ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
Consolidated
Schedule of Investments as of December 31, 2007,
and
2006
|
|
|
|
|
|
Notes
to Consolidated Schedule of Investments
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
Financial
Highlights for the years ended December 31,
2007,
2006, and 2005
|
|
|
|
|
|
(b) Quarterly
Report on Form 10-Q
|
|
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of
March
31, 2008 and December 31, 2007
Consolidated
Statements of Operations for the quarters ended
March
31, 2008 and 2007
Consolidated
Statements of Cash Flows for the quarters ended
March
31, 2008 and 2007
Consolidated
Statements of Changes in Net Assets for the quarter ended March
31, 2008
and the year ended
December
31, 2007
Consolidated
Schedule of Investments as of March 31, 2008
Notes
to Consolidated Schedule of Investments
Notes
to Consolidated Financial Statements
Financial
Highlights for the quarters ended March 31, 2008 and 2007
|
|
Statements,
schedules and historical information other than those listed above have been
omitted since they are either not applicable, or not required or the required
information is shown in the financial statements or notes thereto.
(2) Exhibits:
(a) (1) Restated
Certificate of Incorporation of Harris & Harris Group, Inc., dated September
23, 2005, incorporated by reference as Exhibit 99 to Form 8-K filed on September
27, 2005.
(2) Certificate
of Amendment of the Certificate of Incorporation of Harris & Harris Group,
Inc., dated May 19, 2006, incorporated by reference as Exhibit 3.1 to the
Company's Form 10-Q filed on August 9, 2006.
(b) Restated
By-laws of the Company, incorporated by reference as Exhibit 2(b) to
Pre-Effective Amendment No. 1 to the Company's Registration Statement on
Form
N-2 (File No. 333-112862), filed on March 22, 2004.
(c) Not
applicable.
(d) Form
of
Specimen Certificate of Common Stock.(2)
(e) Not
applicable.
(f) Not
applicable.
(g) Not
applicable.
(h) Not
applicable.
(i) (1) Harris
& Harris Group, Inc. Amended and Restated Employee Profit-Sharing Plan,
incorporated by reference as Exhibit 10.8 to the Company’s Form 10-K for the
year ended December 31, 2007 (File No. 814-00176), filed on March 13,
2008.
(2) Harris
& Harris Group, Inc., 2006 Equity Incentive Plan, incorporated by reference
as Appendix B to the Company's Proxy Statement for the 2006 Annual Meeting
of
Shareholders filed on April 3, 2006.
(3) Form
of
Incentive Stock Option Agreement incorporated by reference as Exhibit 10.1
to
the Company's Form 8-K (File No. 814-00176) filed on June 26, 2006.
(4) Form
of
Non-Qualified Stock Option Agreement, incorporated by reference as Exhibit
10.2
to the Company's Form 8-K (File No. 814-00176) filed on June 26,
2006.
(5) Harris
& Harris Group, Inc. Directors Stock Purchase Plan 2001.(2)
(6) Amended
and Restated Employment Agreement between Harris & Harris Group, Inc. and
Charles E. Harris, dated August 2, 2007, incorporated by reference as Exhibit
10.1 to the Company’s Form 8-K (File No. 814-00176) filed on August 3,
2007.
(7) Amended
and Restated Severance Compensation Agreement, dated August 2, 2007,
incorporated by reference as Exhibit 10.2 to the Company’s Form 8-K (File No.
814-00176) filed on August 3, 2007.
(8) Trust
Under Harris & Harris Group, Inc. Deferred Compensation
Agreement.(2)
(9) Amended
and Restated Harris & Harris Group, Inc. Executive Mandatory Retirement
Benefit Plan, dated August 2, 2007, incorporated by reference as Exhibit
10.4 to
the Company’s Form 8-K (File No. 814-00176) filed on August 3,
2007.
(10) Amended
and Restated Supplemental Executive Retirement Plan, dated August 2, 2007,
incorporated by reference as Exhibit 10.3 to the Company’s Form 8-K (File No.
814-00176) filed on August 3, 2007.
(j) Harris
& Harris Group, Inc. Custodian Agreement with JP Morgan, incorporated by
reference as Exhibit 2(j) to Pre-Effective Amendment No. 1 to the Company's
Registration Statement on Form N-2 (File No. 333-112862) filed on March 22,
2004.
(k) (1) Form
of
Indemnification Agreement which has been established with all directors and
executive officers of the Company, incorporated by reference as Exhibit 2(i)(7)
to Pre-Effective Amendment No. 1 to the Company's Registration Statement
on Form
N-2 (File No. 333-112862) filed on March 22, 2004.
(2) Agreement
of Sub-Sublease, dated April 18, 2003, by and between Prominent USA, Inc.
and
Harris & Harris Group, Inc., incorporated by reference as exhibit 10.17 to
the Company’s Form 10-K for the year ended December 31, 2007 (File No.
814-00176), filed on March 13, 2008.
(3) Amendment
to Agreement of Sub-Sublease, dated May 9, 2003, by and between Prominent
USA,
Inc., and Harris & Harris Group, Inc., incorporated by reference as exhibit
10.18 to the Company’s Form 10-K for the year ended December 31, 2007 (File No.
814-00176), filed on March 13, 2008.
(4) Assignment
and Assumption, Modification and Extension of Sublease Agreement, dated December
17, 2004, by and among the Economist Newspaper Group, Inc., National Academy
of
Television Arts & Sciences, and Harris & Harris Group, Inc.,
incorporated by reference as exhibit 10.19 to the Company’s Form 10-K for the
year ended December 31, 2007 (File No.814-00176) filed on March 13,
2008.
(l) Opinion
letter of Skadden, Arps, Slate, Meagher & Flom, LLP.(3)
(m) Not
applicable.
(n) Consent
of the
Independent Registered Public Accounting Firm.(1)
(o) Not
applicable.
(p) Not
applicable.
(q) Not
applicable.
|
(r)
|
Code
of Ethics Pursuant to Rule 17j-1, incorporated by reference as
Exhibit 14
to the Company's Form 8-K (File No. 814-00176) filed on March 7,
2008.
|
(s) Powers
of
Attorney.(2)(3)
(1) Filed
herewith.
(2) Previously
filed with the Company's Registration Statement on Form N-2 (File No.
333-138996) filed on November 29, 2006.
(3) Previously
filed with Pre-Effective Amendment No. 2 to the Company’s Registration Statement
on Form N-2 (File No. 333-138996) filed on April 23, 2007.
(4) Previously
filed with Post-Effective Amendment No. 3 to the Company’s Registration
Statement on Form N-2 (File No. 333-138996) filed on April 4, 2008.
Item
26. Marketing Arrangements
The
information contained under the heading "Plan of Distribution" of the Prospectus
is incorporated herein by reference, and any information concerning any
underwriters will be contained in the accompanying Prospectus Supplement,
if
any.
Item
27. Other Expenses of Issuance and Distribution
The
following table sets forth the expenses to be incurred in connection with
this
offering described in this Registration Statement:
Registration
fees
|
$
5,000
|
Nasdaq
listing fee
|
$
6,500
|
Printing
(other than stock certificates)
|
$
0
|
Accounting
fees and expenses
|
$
40,000
|
Legal
fees and expenses
|
$115,000
|
Miscellaneous
|
$
83,500
|
Total
|
$250,000
|
Item
28. Persons Controlled by or Under Common Control with Company
At
December 31, 2007
|
Organized
under
laws of
|
Percentage
of voting
securities
owned
by
the Registrant
|
Harris
& Harris Enterprises, Inc.
|
Delaware
|
100%
|
Item
29. Number of Holders of Securities
(as of
May 27, 2008)
Title
of class
|
Number of record holders |
|
|
Common Stock, $.01 par value |
136 |
Item
30. Indemnification
Article
8
("Article 8") of our Certificate of Incorporation, as adopted by our board
of
directors in October 1992, and approved by our shareholders in December 1992
and
restated in September 2005, provides for the indemnification of our directors
and officers to the fullest extent permitted by applicable New York law,
subject
to the applicable provisions of the 1940 Act.
Scope
of Indemnification Under New York Law.
BCL §§
721-726 provide that a director or officer of a New York corporation who
was or
is a party or a threatened party to any threatened, pending or completed
action,
suit or proceeding (i) shall be entitled to indemnification by the corporation
for all expenses of litigation when he is successful
on the
merits, (ii) may be indemnified by the corporation for judgments, fines,
and
amounts paid in settlement of, and reasonable expenses incurred in, litigation
(other than a derivative suit), even if he is not successful on the merits,
if
he acted in good faith and for a purpose he reasonably believed to be in
or not
opposed to the best interest of the corporation (and, in criminal proceedings,
had no reasonable cause to believe that his conduct was unlawful), and (iii)
may
be indemnified by the corporation for amounts paid in settlement and reasonable
expenses incurred in a derivative suit (i.e., a suit by a shareholder alleging
a
breach of a duty owed to the corporation by a director or officer) even if
he is
not successful on the merits, if he acted in good faith, for a purpose which
he
believed to be in, or not opposed to, the best interest of the corporation.
However, no indemnification may be made in accordance with clause (iii) if
he is
adjudged liable to the corporation, unless a court determines that, despite
the
adjudication of liability and in view of all of the circumstances, he is
entitled to indemnification. The indemnification described in clauses (ii)
and
(iii) above and the advancement of litigation expenses, may be made only
upon a
determination by (i) a majority of a quorum of disinterested directors, (ii)
independent legal counsel, or (iii) the shareholders that indemnification
is
proper because the applicable standard of conduct has been met. In addition,
litigation expenses to a director or officer may only be made upon receipt
of an
undertaking by the director or officer to repay the expenses if it is ultimately
determined that he is not entitled to be indemnified. The indemnification
and
advancement of expenses provided for by BCL §§ 721-726 are not deemed
exclusive of any rights the indemnitee may have under any by-law, agreement,
vote of shareholders or disinterested directors, or otherwise. When any action
with respect to indemnification of directors is taken by amendment to the
by-laws, resolution of directors, or agreement, the corporation must mail
a
notice of the action taken to its shareholders of record by the earlier of
(i)
the date of the next annual meeting, or (ii) fifteen months after the date
of
the action taken.
The
foregoing provisions are subject to Section 17(h) of the 1940 Act, which
provides that neither the certificate of incorporation or by-laws
nor any
agreement may protect any director or officer against any liability to the
Company or any of its stockholders to which he would otherwise be subject
by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of his duties.
The
Indemnification Agreements.
Pursuant to the Indemnification Agreement, the Company would indemnify the
indemnified director or officer (the "Indemnitee") to the fullest extent
permitted by New York law as in effect at the time of execution of the
Indemnification Agreement and to such fuller extent as New York law may permit
in the future, subject in each case to the applicable provisions of the 1940
Act. An Indemnitee would be entitled to receive indemnification against all
judgments rendered, fines levied, and other assessments (including amounts
paid
in settlement of any claims, if approved by the Company), plus all reasonable
costs and expenses (including attorneys’ fees) incurred in connection with the
defense of any threatened, pending, or completed action or proceeding, whether
civil, criminal, administrative, or investigative (an "Action"), related
to or
arising from (i) any actual or alleged act or omission of the Indemnitee
at any
time as a director, officer, employee, or agent of the Company or any of
its
affiliates or subsidiaries, or (ii) the Indemnitee’s past, present, or future
status as a director, officer, employee or agent of the Company or any of
its
affiliates or subsidiaries. An Indemnitee would also be entitled to advancement
of all reasonable costs and expenses incurred in the defense of any Action
upon
a finding by a court or an opinion of independent counsel that the Indemnitee
is
more likely than not to prevail. If the Company makes any payment to the
Indemnitee under the Indemnification Agreement and it is ultimately determined
that the Indemnitee was not entitled to be indemnified, the Indemnitee would
be
required to repay the Company for all amounts paid to the Indemnitee under
the
Indemnification agreement. An Indemnitee would not be entitled to
Indemnification or advancement of expenses under the Indemnification Agreement
with respect to any proceeding or claim brought by him against the
Company.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
"Act") may be permitted to directors, officers and controlling persons of
the
Company pursuant to the foregoing provisions, or otherwise, the Company
has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer
or
controlling person of the Company in the successful defense of any action,
suit
or proceeding) is asserted by such director, officer or controlling person
in
connection with the securities being registered, the Company will, unless
in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will
be governed by the final adjudication of such issue.
We
maintain directors’ and officers’
liability insurance.
Item
31. Business and Other Connections of Investment Adviser
Not
applicable because the Company
has no
investment adviser.
Item
32. Location of Accounts and Records
Certain
accounts, books and other documents required to be maintained by Section
31(a)
of the 1940 Act and the Rules promulgated
there
under are maintained at the offices of the Company at 111
West
57th
Street,
Suite 1100,
New
York, New York 10019. Certain accounts, books and other documents pertaining
to
the Company’s subsidiaries are maintained at 111
West
57th
Street,
Suite 1100, New
York,
New York 10019.
Item
33. Management Services
Global
Shares provides stock plan administration services for our Equity Incentive
Plan. The total cost of these services for 2008 is estimated to be
$17,500.
Item
34. Undertakings
1. We
undertake to suspend the offering of shares until we amend our prospectus
if:
|
(1)
|
subsequent
to the effective date of this Registration Statement, the net asset
value
per share declines more than 10 percent from our net asset value
per share
as of the effective date of the Registration Statement;
or
|
|
(2)
|
the
net asset value increases to an amount greater than our net proceeds
as
stated in the Prospectus.
|
2. Not
applicable.
3. Not
applicable.
4. We
hereby
undertake:
|
(a)
|
to
file, during any period in which offers or sales are being made,
a
post-effective amendment to this Registration
Statement:
|
|
(1)
|
to
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
|
|
(2)
|
to
reflect in the prospectus any facts or events after the effective
date of
the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement;
and
|
|
(3)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in the Registration State-ment or any
material
change to such information in the Registra-tion
Statement.
|
|
(b)
|
that
for the purpose of determining any liability under the Securities
Act of
1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be
the initial
bona fide offering thereof;
|
|
(c)
|
to
remove from registration by means of a post-effective amendment
any of the
securities being registered which remain unsold at the termination
of the
offering; and
|
|
(d)
|
that
for the purpose of determining liability under the Securities
Act of 1933
to any purchaser, if the Registrant is subject to Rule 430C:
Each
prospectus filed pursuant to Rule 497(b), (c),(d) or (e) under
the
Securities Act of 1933 as part of a registration statement relating
to an
offering, other than prospectuses filed in reliance on Rule 430A
under the
Securities Act of 1933, shall be deemed to be part of and included
in the
registration statement as of the date it is first used after
effectiveness. Provided,
however,
that no statement made in a registration statement or prospectus
that is
part of the registration statement or made in a document incorporated
or
deemed incorporated by reference into the registration statement
or
prospectus that is part of the registration statement will, as
to a
purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or
made in any such document immediately prior to such date of first
use.
|
|
(e)
|
that
for the purpose of determining our liability under the Securities
Act of
1933 to any purchaser in the initial distribution of
securities:
|
|
|
We
undertake that in a primary offering of our securities pursuant
to this
registration statement, regardless of the underwriting method
used to sell
the securities to the purchaser, if the securities are offered
or sold to
such purchaser by means of any of the following communications,
we will be
a seller to the purchaser and will be considered to offer or
sell such
securities to the purchaser:
|
|
(1)
|
any
preliminary prospectus or prospectus of the undersigned relating
to the
offering required to be filed pursuant to Rule 497 under the
Securities
Act of 1933;
|
|
(2)
|
the
portion of any advertisement pursuant to Rule 482 under the Securities
Act
of 1933 relating to the offering containing material information
about us
or our securities provided by or on our behalf;
and
|
|
(3)
|
any
other communication that is an offer in the offering made by
us to the
purchaser.
|
5. We
hereby
undertake:
|
(a)
|
that
for purposes of determining any liability under the Securities
Act of
1933, the information omitted from the form of Prospectus filed
as part of
this Registration Statement in reliance upon Rule 430A and contained
in a
form of Prospectus filed by the Company pursuant to Rule 497(e)
and Rule
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective;
and
|
|
(b)
|
that
for the purpose of determining any liability under the Securities
Act of
1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to
the
securities offered therein, and the offering of such securities
at that
time shall be deemed to be the initial bona fide offering
thereof.
|
6. Not
Applicable.
7. We
hereby
undertake that we will not sell any shares pursuant to this Shelf Registration
Statement below net asset value.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State
of
New York, on the 29th day of May, 2008.
HARRIS
& HARRIS GROUP, INC.
By:
/s/
Charles E. Harris
Name:Charles
E. Harris
Title:
Chairman
of the Board and Chief Executive Officer
(Principal
Executive Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1933, this Registration
Statement has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Charles E. Harris
Charles
E. Harris
|
|
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
|
May
29, 2008
|
|
|
|
|
|
/s/
Daniel B. Wolfe
Daniel
B. Wolfe
|
|
Chief
Financial Officer
(Principal
Financial Officer)
|
|
May
29, 2008
|
|
|
|
|
|
/s/
Patricia N. Egan
Patricia
N. Egan
|
|
Chief
Accounting Officer, Senior
Controller
and Vice President
|
|
May
29, 2008
|
|
|
|
|
|
*
W.
Dillaway Ayres, Jr.
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Dr.
C. Wayne Bardin
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Dr.
Phillip A. Bauman
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
G.
Morgan Browne
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Dugald
A. Fletcher
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
/s/
Douglas W. Jamison
Douglas
W. Jamison
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Lori
D. Pressman
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Charles
E. Ramsey
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
James
E. Roberts
|
|
Director
|
|
May
29, 2008
|
|
|
|
|
|
*
Richard
P. Shanley
|
|
Director
|
|
May
29, 2008
|
*By:
/s/
Charles E. Harris
Attorney-in-fact
EXHIBITS
|
(n)
|
Consent
of the Independent Registered Public Accounting
Firm.
|