Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
Form
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended June 30, 2008
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from ____________ to _____________
Commission
file number: 0-11576
HARRIS
& HARRIS GROUP, INC.
(Exact
Name of Registrant as Specified in Its Charter)
New
York
|
13-3119827
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation or Organization)
|
|
111
West 57th Street, New York, New York
|
10019
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(212)
582-0900
(Registrant's
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at August 7, 2008
|
Common
Stock, $0.01 par value per share
|
|
25,859,573
shares
|
Harris
& Harris Group, Inc.
Form
10-Q, June 30, 2008
|
Page Number
|
PART I.
FINANCIAL INFORMATION
|
|
|
|
Item
1. Consolidated Financial Statements
|
1
|
|
|
Consolidated
Statements of Assets and Liabilities
|
2
|
|
|
Consolidated
Statements of Operations
|
3
|
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
|
Consolidated
Statements of Changes in Net Assets
|
5
|
|
|
Consolidated
Schedule of Investments
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
21
|
|
|
Financial
Highlights
|
32
|
|
|
Item
2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
|
33
|
|
|
Background
and Overview
|
33
|
|
|
Results
of Operations
|
37
|
|
|
Financial
Condition
|
41
|
|
|
Liquidity
|
42
|
|
|
Capital
Resources
|
43
|
|
|
Critical
Accounting Policies
|
43
|
|
|
Recent
Developments – Portfolio Companies
|
45
|
|
|
Forward-Looking
Statements
|
46
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
46
|
|
|
Item
4. Controls and Procedures
|
47
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1A. Risk Factors
|
49
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
50
|
|
|
Item
6. Exhibits
|
51
|
|
|
Signatures
|
52
|
|
|
|
53
|
PART
I. FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
The
information furnished in the accompanying consolidated financial statements
reflects all adjustments that are, in the opinion of management, necessary
for a
fair statement of the results for the interim period presented.
Harris
& Harris Group, Inc.®
(the
"Company," "us," "our" and "we"), is an internally managed venture capital
company that has elected to operate as a business development company under
the
Investment Company Act of 1940 (the "1940 Act"). Certain information and
disclosures normally included in the consolidated financial statements in
accordance with Generally Accepted Accounting Principles have been condensed
or
omitted as permitted by Regulation S-X and Regulation S-K. The accompanying
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 2007, contained in our Annual Report on Form 10-K for the year ended
December 31, 2007.
On
September 25, 1997, our Board of Directors approved a proposal to seek
qualification as a regulated investment company ("RIC") under Subchapter M
of
the Internal Revenue Code (the "Code"). At that time, we were taxable under
Subchapter C of the Code (a "C Corporation"). We filed for the 1999 tax year
to
elect treatment as a RIC. In order to qualify as a RIC, we must, in general,
(1)
annually, derive at least 90 percent of our gross income from dividends,
interest, gains from the sale of securities and similar sources; (2) quarterly,
meet certain investment diversification requirements; and (3) annually,
distribute at least 90 percent of our investment company taxable income as
a
dividend. In addition to the requirement that we must annually distribute at
least 90 percent of our investment company taxable income, we may either
distribute or retain our taxable net capital gains from investments, but any
net
capital gains not distributed could be subject to corporate level tax. Further,
we could be subject to a four percent excise tax to the extent we fail to
distribute at least 98 percent of our annual investment company taxable income
and would be subject to income tax to the extent we fail to distribute 100
percent of our investment company taxable income.
Because
of the specialized nature of our investment portfolio, we generally can satisfy
the diversification requirements under Subchapter M of the Code if we receive
a
certification from the Securities and Exchange Commission (“SEC”) that we are
"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."
On
May
30, 2008, we received SEC certification for 2007, permitting us to qualify
for
RIC treatment for 2007 (as we had for the years 1999 through 2006) pursuant
to
Section 851(e) of the Code. Although the SEC certification for 2007 was issued,
there can be no assurance that we will qualify for or receive such certification
for subsequent years (to the extent we need additional certification as a result
of changes in our portfolio) or that we will actually qualify for Subchapter
M
treatment in subsequent years. In 2007, we qualified for RIC treatment even
without certification. In addition, under certain circumstances, even if we
qualified for Subchapter M treatment in 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. Because Subchapter M does not permit
deduction of operating expenses against long-term capital gains, it is not
clear
that the Company and its shareholders have paid less taxes since 1999 than
they
would have paid had the Company remained a C Corporation.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments,
in portfolio securities at value (cost: $88,459,760 and $82,677,528,
respectively)
|
|
$
|
92,335,524
|
|
$
|
78,110,384
|
|
Investments,
in U.S. Treasury obligations at value (cost: $60,984,874 and
$59,552,933, respectively)
|
|
|
61,425,025
|
|
|
60,193,593
|
|
Cash
and cash equivalents
|
|
|
688,119
|
|
|
330,009
|
|
Restricted
funds (Note 9)
|
|
|
53,871
|
|
|
2,667,020
|
|
Receivable
from portfolio company
|
|
|
21,500
|
|
|
524
|
|
Interest
receivable
|
|
|
573,686
|
|
|
647,337
|
|
Prepaid
expenses
|
|
|
263,363
|
|
|
488,667
|
|
Other
assets
|
|
|
425,895
|
|
|
455,798
|
|
Total
assets
|
|
$
|
155,786,983
|
|
$
|
142,893,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 9)
|
|
$
|
1,996,853
|
|
$
|
4,515,463
|
|
Deferred
rent
|
|
|
11,290
|
|
|
14,525
|
|
Total
liabilities
|
|
|
2,008,143
|
|
|
4,529,988
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
153,778,840
|
|
$
|
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 6/30/08 and
12/31/07; 27,688,313 issued at 6/30/08 and 25,143,313 issued at
12/31/07
|
|
|
276,884
|
|
|
251,434
|
|
Additional
paid in capital (Note 7)
|
|
|
178,252,063
|
|
|
160,927,691
|
|
Accumulated
net realized loss
|
|
|
(25,660,491
|
)
|
|
(15,483,766
|
)
|
Accumulated
unrealized appreciation (depreciation) of investments
|
|
|
4,315,915
|
|
|
(3,926,484
|
)
|
Treasury
stock, at cost (1,828,740 shares at 6/30/08 and 12/31/07)
|
|
|
(3,405,531
|
)
|
|
(3,405,531
|
)
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
153,778,840
|
|
$
|
138,363,344
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
25,859,573
|
|
|
23,314,573
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$
|
5.95
|
|
$
|
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 June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income
securities
|
|
$
|
464,456
|
|
$
|
637,701
|
|
$
|
1,040,758
|
|
$
|
1,290,199
|
|
Miscellaneous
income
|
|
|
3,169
|
|
|
0
|
|
|
3,169
|
|
|
0
|
|
Total
investment income
|
|
|
467,625
|
|
|
637,701
|
|
|
1,043,927
|
|
|
1,290,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 5)
|
|
|
2,461,802
|
|
|
2,644,284
|
|
|
4,895,097
|
|
|
5,179,050
|
|
Administration
and operations
|
|
|
283,361
|
|
|
357,178
|
|
|
585,216
|
|
|
738,043
|
|
Professional
fees
|
|
|
201,866
|
|
|
335,067
|
|
|
340,098
|
|
|
517,262
|
|
Rent
|
|
|
59,748
|
|
|
58,813
|
|
|
117,602
|
|
|
118,320
|
|
Directors’
fees and expenses
|
|
|
79,169
|
|
|
112,157
|
|
|
184,315
|
|
|
253,353
|
|
Depreciation
|
|
|
13,819
|
|
|
15,908
|
|
|
27,804
|
|
|
31,221
|
|
Custodian
fees
|
|
|
6,143
|
|
|
5,961
|
|
|
12,696
|
|
|
11,735
|
|
Total
expenses
|
|
|
3,105,908
|
|
|
3,529,368
|
|
|
6,162,828
|
|
|
6,848,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(2,638,283
|
)
|
|
(2,891,667
|
)
|
|
(5,118,901
|
)
|
|
(5,558,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gain (loss) from investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (loss) from investments
|
|
|
3,912
|
|
|
(8,213
|
)
|
|
(5,010,958
|
)
|
|
(8,887
|
)
|
Income
tax expense (Note 6)
|
|
|
668
|
|
|
0
|
|
|
46,866
|
|
|
84,905
|
|
Net
realized gain (loss) from investments
|
|
|
3,244
|
|
|
(8,213
|
)
|
|
(5,057,824
|
)
|
|
(93,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in unrealized depreciation on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
0
|
|
|
0
|
|
|
5,014,653
|
|
|
0
|
|
Change
on investments held
|
|
|
3,
989,748
|
|
|
(1,193,764
|
)
|
|
3,227,746
|
|
|
(4,831,227
|
)
|
Net
decrease (increase) in unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation
on investments
|
|
|
3,
989,748
|
|
|
(1,193,764
|
)
|
|
8,242,399
|
|
|
(4,831,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from
operations
|
|
$
|
1,354,709
|
|
$
|
(4,093,644
|
)
|
$
|
(1,934,326
|
)
|
$
|
(10,483,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
average basic and diluted outstanding share
|
|
$
|
0.06
|
|
$
|
(0.19
|
)
|
$
|
(0.08
|
)
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares
|
|
|
23,622,210
|
|
|
21,721,591
|
|
|
23,468,392
|
|
|
21,500,810
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
$
|
(1,934,326
|
)
|
$
|
(10,483,804
|
)
|
Adjustments
to reconcile net decrease in net assets resulting from operations
to
net cash used in operating activities:
|
|
|
|
|
|
|
|
Net
realized and unrealized (gain) loss on investments
|
|
|
(3,231,441
|
)
|
|
4,840,114
|
|
Depreciation
of fixed assets and amortization of premium
|
|
|
|
|
|
|
|
or
discount on U.S. government securities
|
|
|
82,877
|
|
|
89,891
|
|
Stock-based
compensation expense
|
|
|
2,966,325
|
|
|
3,422,637
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
2,613,149
|
|
|
(175,533
|
)
|
Receivable
from portfolio company
|
|
|
(20,976
|
)
|
|
0
|
|
Receivable
from broker
|
|
|
0
|
|
|
668,340
|
|
Interest
receivable
|
|
|
73,651
|
|
|
40,216
|
|
Prepaid
expenses
|
|
|
225,304
|
|
|
(294,798
|
)
|
Other
assets
|
|
|
3,894
|
|
|
20,647
|
|
Accounts
payable and accrued liabilities
|
|
|
(2,518,610
|
)
|
|
228,888
|
|
Accrued
profit sharing
|
|
|
0
|
|
|
(261,661
|
)
|
Deferred
rent
|
|
|
(3,235
|
)
|
|
(3,401
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,743,388
|
)
|
|
(1,908,464
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of short and long-term investments and marketable
securities
|
|
|
(66,940,804
|
)
|
|
(27,600,155
|
)
|
Sale
of short and long-term investments and
|
|
|
|
|
|
|
|
marketable
securities
|
|
|
65,395,679
|
|
|
18,353,983
|
|
Investment
in private placements and loans
|
|
|
(10,847,095
|
)
|
|
(10,043,027
|
)
|
Proceeds
from sale of investments
|
|
|
112,234
|
|
|
0
|
|
Purchase
of fixed assets
|
|
|
(2,013
|
)
|
|
(13,804
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(12,281,999
|
)
|
|
(19,303,003
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from stock option exercises (Note 5)
|
|
|
0
|
|
|
8,360,029
|
|
Proceeds
from stock offering (Note 7)
|
|
|
14,383,497
|
|
|
12,993,168
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
14,383,497
|
|
|
21,353,197
|
|
|
|
|
|
|
|
|
|
Net
increase (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
|
|
|
688,119
|
|
|
2,213,518
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
358,110
|
|
$
|
141,730
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
46,325
|
|
$
|
84,706
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET
ASSETS
|
|
|
Six Months Ended
|
|
Year Ended
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(5,118,901
|
)
|
$
|
(11,827,543
|
)
|
Net
realized (loss) gain on investments
|
|
|
(5,057,824
|
)
|
|
30,162
|
|
Net
decrease in unrealized depreciation on investments sold
|
|
|
5,014,653
|
|
|
0
|
|
Net
decrease in unrealized depreciation on investments held
|
|
|
3,227,746
|
|
|
5,080,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
|
(1,934,326
|
)
|
|
(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
|
|
|
25,450
|
|
|
13,000
|
|
Additional
paid-in capital on common stock issued
|
|
|
14,358,047
|
|
|
23,075,683
|
|
Stock-based
compensation expense
|
|
|
2,966,325
|
|
|
8,050,807
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from capital stock
transactions
|
|
|
17,349,822
|
|
|
31,149,486
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets
|
|
|
15,415,496
|
|
|
24,433,041
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
138,363,344
|
|
|
113,930,303
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
153,778,840
|
|
$
|
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 JUNE 30, 2008
(Unaudited)
|
|
|
Method of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 13.18% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 13.18% 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
|
|
|
2,173,333
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,250,000
|
|
|
2,037,500
|
|
Warrants
at $2.00 expiring 12/31/11
|
|
|
(
I
)
|
|
|
125,000
|
|
|
117,250
|
|
|
|
|
|
|
|
|
|
|
4,328,083
|
|
|
|
|
|
|
|
|
|
|
|
|
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 JUNE
30, 2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2) (3) – 13.18% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 13.18% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NeoPhotonics
Corporation (4)(5) — Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
716,195
|
|
$
|
93,106
|
|
Series
1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
1,831,256
|
|
|
919,989
|
|
Series
2 Convertible Preferred Stock
|
|
|
(M)
|
|
|
741,898
|
|
|
456,710
|
|
Series
3 Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,750,000
|
|
|
2,750,000
|
|
Series
X Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,000
|
|
|
400,000
|
|
Warrants
at $0.15 expiring 01/26/10
|
|
|
(
I )
|
|
|
16,364
|
|
|
785
|
|
Warrants
at $0.15 expiring 12/05/10
|
|
|
(
I )
|
|
|
14,063
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
4,621,265
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
90,000
|
|
Series
A-1 Convertible Preferred Stock
|
|
|
(M)
|
|
|
600,000
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
690,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost: $21,879,892)
|
|
|
|
|
|
|
|
$
|
20,279,118
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $21,879,892)
|
|
|
|
|
|
|
|
$
|
20,279,118
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2) (10) – 42.69%
of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid)
– 42.69% 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)
|
|
|
1,663,808
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
137,774
|
|
Warrants
at $0.7136 expiring 04/26/17
|
|
|
(
I )
|
|
|
65,560
|
|
|
92,177
|
|
|
|
|
|
|
|
|
|
|
7,218,258
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 42.69% of net assets
at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 42.69% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
9,276
|
|
Warrants
at $0.78 expiring 05/12/13
|
|
|
(I)
|
|
|
2,350
|
|
|
1,431
|
|
Warrants
at $0.78 expiring 08/08/13
|
|
|
(I)
|
|
|
4,396
|
|
|
2,717
|
|
|
|
|
|
|
|
|
|
|
1,333,143
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
1,516,673
|
|
|
1,550,619
|
|
|
|
|
|
|
|
|
|
|
4,982,178
|
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (4)(5)(6)(14) — Developing high- performance quantum
computing systems
|
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,179,676
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
678,264
|
|
|
739,198
|
|
|
|
|
|
|
|
|
|
|
2,918,874
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 42.69% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 42.69% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
90,371
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
109,309
|
|
|
|
|
|
|
|
|
|
|
1,979,211
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
291,739
|
|
|
|
|
|
|
|
|
|
|
2,763,488
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 42.69% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 42.69% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nanomix,
Inc. (4)(5)(6) — Producing nanoelectronic sensors that integrate carbon
nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
(M)
|
|
|
977,917
|
|
$
|
235,683
|
|
Series
D Convertible Preferred Stock
|
|
|
(M)
|
|
|
6,802,397
|
|
|
485,457
|
|
|
|
|
|
|
|
|
|
|
721,140
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (including interest)
|
|
|
(M)
|
|
$
|
777,580
|
|
|
783,928
|
|
|
|
|
|
|
|
|
|
|
2,533,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (4)(5) — Manufacturing and marketing proprietary metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(M)
|
|
|
655,454
|
|
|
139,208
|
|
Warrants
at $1.50 expiring 11/19/08
|
|
|
(I)
|
|
|
5,000
|
|
|
0
|
|
Warrants
at $1.50 expiring 11/19/09
|
|
|
(I)
|
|
|
5,000
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
139,278
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
4,994,383
|
|
Series
B Convertible Preferred Stock
|
|
|
(M)
|
|
|
495,246
|
|
|
2,502,973
|
|
Unsecured
Convertible Bridge Note (including interest)
|
|
|
(M)
|
|
$
|
2,000,000
|
|
|
2,245,685
|
|
|
|
|
|
|
|
|
|
|
9,743,041
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30,
2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 42.69% of net assets
at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 42.69% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$57,591,270)
|
|
|
|
|
|
|
|
$
|
65,648,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$57,591,270)
|
|
|
|
|
|
|
|
$
|
65,648,192
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30,
2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(17) – 4.17% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 4.17% 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Laser
Light Engines, Inc. (4)(5)(6)(9) — Manufacturing solid-state light sources
for digital cinema and large venue projection displays
|
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
|
|
(M)
|
|
|
7,499,062
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
100,000
|
|
|
103,588
|
|
|
|
|
|
|
|
|
|
|
103,598
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
$8,988,598)
|
|
|
|
|
|
|
|
$
|
6,408,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$8,988,598)
|
|
|
|
|
|
|
|
$
|
6,408,214
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $88,459,760)
|
|
|
|
|
|
|
|
$
|
92,335,524
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30,
2008
(Unaudited)
|
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation
(1)
|
|
Principal
|
|
Value
|
|
|
|
|
|
|
|
|
|
U.S.
Government and Agency Securities (19) - 39.95% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill — due date 07/24/08
|
|
|
(M)
|
|
$
|
7,100,000
|
|
$
|
7,093,184
|
|
U.S.
Treasury Notes — due date 09/15/08, coupon 3.125%
|
|
|
(M)
|
|
|
4,775,000
|
|
|
4,787,702
|
|
U.S.
Treasury Notes — due date 01/15/09, coupon 3.25%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,019,920
|
|
U.S.
Treasury Notes — due date 02/15/09, coupon 4.50%
|
|
|
(M)
|
|
|
5,100,000
|
|
|
5,169,309
|
|
U.S.
Treasury Notes — due date 04/15/09, coupon 3.125%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,018,060
|
|
U.S.
Treasury Notes — due date 07/15/09, coupon 3.625%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,040,080
|
|
U.S.
Treasury Notes — due date 10/15/09, coupon 3.375%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,040,560
|
|
U.S.
Treasury Notes — due date 01/15/10, coupon 3.625%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,056,730
|
|
U.S.
Treasury Notes — due date 04/15/10, coupon 4.00%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,076,410
|
|
U.S.
Treasury Notes — due date 06/30/10, coupon 2.875%
|
|
|
(M)
|
|
|
1,250,000
|
|
|
1,256,150
|
|
U.S.
Treasury Notes — due date 07/15/10, coupon 3.875%
|
|
|
(M)
|
|
|
3,000,000
|
|
|
3,075,480
|
|
U.S.
Treasury Notes — due date 09/15/10, coupon 3.875%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,051,880
|
|
U.S.
Treasury Notes — due date 10/15/10, coupon 4.25%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,070,780
|
|
U.S.
Treasury Notes — due date 12/15/10, coupon 4.375%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,077,040
|
|
U.S.
Treasury Notes — due date 03/31/11, coupon 4.750%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,098,600
|
|
U.S.
Treasury Notes — due date 06/30/11, coupon 5.125%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,125,620
|
|
U.S.
Treasury Notes — due date 09/30/11, coupon 4.500%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,090,320
|
|
U.S.
Treasury Notes — due date 12/31/11, coupon 4.625%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,101,260
|
|
U.S.
Treasury Notes — due date 10/31/12, coupon 3.875%
|
|
|
(M)
|
|
|
2,000,000
|
|
|
2,050,940
|
|
U.S.
Treasury Notes — due date 02/15/13, coupon 3.875%
|
|
|
(M)
|
|
|
5,000,000
|
|
|
5,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government and Agency Securities (cost:
$60,984,874)
|
|
|
|
|
|
|
|
$
|
61,425,025
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $149,444,634)
|
|
|
|
|
|
|
|
$
|
153,760,549
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE
30, 2008
(Unaudited)
|
Notes
to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 17 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 $21,879,892. 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
$3,332,968.
|
(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.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF
JUNE 30, 2008
(Unaudited)
|
(10)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $57,591,270. The gross unrealized
appreciation based on the tax cost for these securities is $17,069,201.
The gross unrealized depreciation based on the tax cost for these
securities is $9,012,279.
|
(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 investments in secured convertible bridge notes issued by CSwitch,
we
received two warrants to purchase a number of shares of the class
of stock
sold in the next financing of CSwitch equal to $529,322 and $985,835,
respectively, the principal of the notes, divided by the lowest price
per
share of the class of stock sold in the next financing of CSwitch.
The ability to exercise these warrants is, therefore, contingent
on
CSwitch completing successfully a subsequent round of financing. The
warrants will expire five years from the date of the close of the
next
round of financing. The cost basis of these warrants is $529 and
$986, respectively.
|
(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."
|
(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., in exchange for shares of Innolume, Inc. On July 1,
2008,
Innolume repurchased these shares for $122,000. The Company received
its
pro rata portion of this amount, which was
$21,500.
|
(17)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $8,988,598. 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. On July 9, 2008, the bankruptcy trustee sold the
intellectual property assets of Evolved Nanomaterial Sciences, Inc.,
for a
sum that was substantially less than the liabilities of the company.
Harris & Harris Group, therefore, does not expect to receive any cash
from the proceeds of this sale.
|
(19)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $60,984,874. The gross unrealized appreciation on the
tax
cost for these securities is $657,153. The gross unrealized depreciation
on the tax cost of these securities is
$217,002.
|
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). In effect, SFAS No. 157
applies fair value terminology to all valuations, whereas the 1940 Act applies
market value terminology to readily marketable assets and fair value terminology
to other assets.
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;
|
|
·
|
Long-term
fixed-income securities;
|
|
·
|
Short-term
fixed-income securities;
|
|
·
|
All
other securities; and
|
|
·
|
Investments
in intellectual property, patents, research and development in technology
or product development.
|
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
with
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. 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.
|
C. 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.
D. 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.
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.
E. 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.
|
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 June 30, 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
June 30, 2008, and December 31, 2007, and the reported amounts of revenues
and
expenses for the three months and six months ended June 30, 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 June 30, 2008, our financial statements include private
venture capital investments valued at $92,335,524, 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 Company
would resolve any inconsistencies between Section 2(a)(41) of the 1940 Act
and
SFAS No. 157 in accordance with the requirements of Section 2(a)(41). 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 six months ended June 30, 2008, included in the
net
decrease in unrealized depreciation on investments was a $57,229 loss resulting
from foreign currency translation.
Securities
Transactions.
Securities transactions are accounted for on the date the transaction for the
purchase or sale of the securities is entered into by the Company (i.e., 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 $364,152. 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
June
30, 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
|
|
June 30, 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
|
|
$
|
61,425,025
|
|
$
|
0
|
|
$
|
61,425,025
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Companies
|
|
$
|
92,335,524
|
|
$
|
0
|
|
$
|
0
|
|
$
|
92,335,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,760,549
|
|
$
|
0
|
|
$
|
61,425,025
|
|
$
|
92,335,524
|
|
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the three months ended June 30, 2008.
|
|
Fair Value Measurements
Using Significant
|
|
|
|
Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
Portfolio Companies
|
|
|
|
|
|
Beginning
Balance, April 1, 2008
|
|
$
|
83,097,863
|
|
|
|
|
|
|
Total
realized losses included in changes in net assets
|
|
|
0
|
|
Total
unrealized gains included in changes in net assets
|
|
|
4,791,705
|
|
Purchases
and interest on bridge notes
|
|
|
4,467,456
|
|
Disposals
|
|
|
(21,500
|
)
|
Ending
Balance, June 30, 2008
|
|
$
|
92,335,524
|
|
|
|
|
|
|
The
amount of total gains 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
|
|
$
|
4,791,705
|
|
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the six months ended June 30, 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
|
|
|
8,442,908
|
|
Purchases
and interest on bridge notes
|
|
|
10,924,099
|
|
Disposals
|
|
|
(127,214
|
)
|
Ending
Balance, June 30, 2008
|
|
$
|
92,335,524
|
|
|
|
|
|
|
The
amount of total gains 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
|
|
$
|
3,428,255
|
|
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 Harris & Harris Group, Inc. 2006
Equity Incentive Plan (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 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 June 30, 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 zero 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 options vested
and
pre-vesting forfeitures. 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 and six months ended June 30, 2008, the Company recognized
$1,499,345 and $2,966,325 of compensation expense in the Consolidated Statements
of Operations. As of June 30, 2008, there was approximately $6,264,749 of
unrecognized compensation cost related to unvested stock option awards. This
cost is expected to be recognized over a weighted-average period of
approximately two years.
For
the
three months and six months ended June 30, 2008, no stock options were
exercised.
For
the
three months and six months ended June 30, 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:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Weighted
Average
Remaining
Contractual
Term
(Yrs)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding at January 1, 2008
|
|
3,967,744
|
|
$
10.54
|
|
$
4.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
348,032
|
|
$
6.18
|
|
$
3.45
|
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
0
|
|
$
0
|
|
$
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
|
(451,898).
|
|
$
10.12
|
|
$
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding at June 30, 2008
|
|
3,863,878
|
|
$
10.20
|
|
$
4.90
|
|
5.05
|
|
$
0
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at June 30, 2008
|
|
1,773,733
|
|
$
10.43
|
|
$
5.33
|
|
5.14
|
|
$
0
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable and Expected to be Exercisable at June 30,
2008
|
|
3,793,030
|
|
$
10.19
|
|
$
4.86
|
|
4.99
|
|
$
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 $6.00 on the last
trading day of the second 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 June 30,
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 2007, 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.
For
the
six months ended June 30, 2008, we paid $15,798 in federal, state and local
income taxes. During the second quarter of 2008, we paid $0 in federal, state
and local income taxes. At June 30, 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 June 30, 2008, and 2007, our income tax expense (benefit) for
Harris & Harris Enterprises, Inc., was $668 and $0, respectively. For the
six months ended June 30, 2008, and 2007, our income tax expense (benefit)
for
Harris & Harris Enterprises, Inc., was $31,068 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
June
20, 2008, we completed the sale of 2,545,000 shares of our common stock for
gross proceeds of $15,651,750; net proceeds of this offering, after placement
agent fees and offering costs of $1,268,253, were $14,383,497.
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 and six months
ended June 30, 2008, and June 30, 2007.
|
|
For
the Three Months Ended
June
30
|
|
For
the Six Months Ended
June
30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator
for increase (decrease) in net assets per share
|
|
$
|
1,354,709
|
|
$
|
(4,093,644
|
)
|
$
|
(1,934,326
|
)
|
$
|
(10,483,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted weighted average shares
|
|
|
23,622,210
|
|
|
21,721,591
|
|
|
23,468,392
|
|
|
21,500,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net increase (decrease) in net assets per share resulting
from
operations
|
|
$
|
0.06
|
|
$
|
(0.19
|
)
|
$
|
(0.08
|
)
|
$
|
(0.49
|
)
|
NOTE
9. EMPLOYEE BENEFITS
We
have
established a rabbi trust for the purpose of accumulating funds to satisfy
the
obligations incurred by us under Mr. Harris's Supplemental Executive Retirement
Plan ("SERP"), which amounted to $53,871 and $2,667,020 at June 30, 2008, and
December 31, 2007, respectively, and is included in accounts payable and accrued
liabilities. The restricted funds for the SERP Account totaled $53,871 and
$2,667,020 at June 30, 2008, and December 31, 2007, respectively. Mr. Harris's
rights to benefits pursuant to this SERP will be no greater than those of a
general creditor of us.
During
the three months ended June 30, 2008, Mr. Harris received a $2,889,717
distribution from the SERP Account. Any subsequent balance of the SERP Account
will be paid on July 31, 2009.
NOTE
10. COMMITMENTS AND CONTINGENCIES
We
may
have a contingent liability arising out of a possible violation of Section
5 of
the Securities Act of 1933 (the "Securities Act") in connection with the
distribution of a management presentation to prospective purchasers of our
common stock. After effectiveness of the registration statement with
respect to the shares of common stock sold in the offering that closed on June
20, 2008, our placement agent electronically mailed to certain potential
purchasers of our common stock in the offering a copy of the management
presentation used in connection with the offering. This mailing may have
constituted a prospectus that did not meet the requirements of the Securities
Act, in which case the mailing may have caused us to violate Section 5 of the
Securities Act. If the mailing were held by a court to be in violation of
Section 5 of the Securities Act, we believe that purchasers in the offering
who
received the mailing from the placement agent may have the right, for a period
of one year from the date of their purchase of the common stock, to bring an
action for rescission of their purchase of common stock. We cannot assure
you, however, that this right would be limited to those purchasers. If
successful in such action, such investors could require us to repurchase the
shares sold to purchasers in this offering at the original purchase price,
plus
statutory interest from the date of purchase. The placement agent has agreed
to
indemnify us for losses that we may incur as a result of the electronic mailing
of the management presentation used in connection with the offering to potential
purchasers in the offering.
NOTE
11. SUBSEQUENT EVENTS
On
July
25, 2008, we made an $800,000 follow-on investment in Nextreme Thermal
Solutions, Inc.
On
July
31, 2008, we made a $1,000,000 follow-on investment in a privately held tiny
technology portfolio company.
On
August
5, 2008, we made a $200,000 follow-on investment in a privately held tiny
technology portfolio company.
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
(Unaudited)
|
|
|
Three
Months Ended June 30
|
|
Six
Months Ended June 30
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of period
|
|
$
|
5.86
|
|
$
|
5.27
|
|
$
|
5.93
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating (loss)*
|
|
|
(0.13
|
)
|
|
(0.13
|
)
|
|
(0.23
|
)
|
|
(0.26
|
)
|
Net
realized income (loss) on investments*
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
(0.22
|
)
|
|
(0.00
|
)
|
Net
(increase) decrease in unrealized depreciation as a result of sales*
|
|
|
(0.00
|
)
|
|
(0.00
|
)
|
|
0.21
|
|
|
(0.00
|
)
|
Net
(increase) decrease in unrealized depreciation on investments
held*
|
|
|
0.17
|
|
|
(0.06
|
)
|
|
0.14
|
|
|
(0.23
|
)
|
Total
from investment operations*
|
|
|
0.04
|
|
|
(0.19
|
)
|
|
(0.10
|
)
|
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock-based compensation expense
|
|
|
0.06
|
|
|
0.08
|
|
|
0.13
|
|
|
0.16
|
|
Net
increase as a result of net proceeds of stock offering, after
expenses
|
|
|
(0.01
|
)
|
|
0.26
|
|
|
(0.01
|
)
|
|
0.26
|
|
Net
increase as a result of proceeds from exercise of options
|
|
|
0.00
|
|
|
0.12
|
|
|
0.00
|
|
|
0.19
|
|
Total
increase from capital stock transactions
|
|
|
0.05
|
|
|
0.46
|
|
|
0.12
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of period
|
|
$
|
5.95
|
|
$
|
5.54
|
|
$
|
5.95
|
|
$
|
5.54
|
|
Stock
price per share, end of period
|
|
$
|
6.00
|
|
$
|
11.20
|
|
$
|
6.00
|
|
$
|
11.20
|
|
Total
return based on stock price (1)
|
|
|
(15.85
|
)%
|
|
(13.31
|
)%
|
|
(31.74
|
)%
|
|
(7.36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of period
|
|
$
|
153,778,840
|
|
$
|
128,222,333
|
|
$
|
153,778,840
|
|
$
|
128,222,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets (1)
|
|
|
2.1
|
%
|
|
2.9
|
%
|
|
4.3
|
%
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net operating (loss) to average net assets
(1)
|
|
|
(1.8
|
)%
|
|
(2.4
|
)%
|
|
(3.6
|
)%
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend paid per share
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed
dividend per share
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares outstanding, end of period
|
|
|
25,859,573
|
|
|
23,141,924
|
|
|
25,859,573
|
|
|
23,141,924
|
|
*Based
on
Average Shares Outstanding
(1)
Not
annualized
The
accompanying notes are an integral part of this schedule.
Item
2. Management's
Discussion and Analysis of Financial Condition
and
Results of Operations
The
information contained in this section should be read in conjunction with the
Company's unaudited June 30, 2008 Consolidated Financial Statements and the
Company's audited 2007 Consolidated Financial Statements and notes
thereto.
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 June 30, 2008, $92,335,524, or 60.04 percent, of our net assets
at fair value consisted of private venture capital investments, net of
unrealized appreciation of $3,875,764. 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 June 30, 2008, we have made a total
of
82 venture capital investments, including four private placement investments
in
securities of publicly traded companies. We have exited 47 of these 82
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.
In
1994,
we made our first tiny technology investment. From August 2001 through June
30,
2008, all 40 of our initial investments have been in tiny technology. From
August 2001 through June 30, 2008, we have invested a total (before any
subsequent write-ups, write-downs or dispositions) of $97,482,345 in tiny
technology.
We
currently have 32 active tiny technology companies in our portfolio, including
one tiny technology investment made prior to 2001. At June 30, 2008, from first
dollar in, the average and median holding periods for these 32 active tiny
technology investments were 3.30 years and 3.12 years,
respectively.
In
our
Form 10-Q for the quarter ended March 31, 2008, we stated, "Two of our portfolio
companies have been considering with their advisors the possibility of filing
for initial public offerings (IPOs) in 2008. There can be no assurance that
either of them will file for an IPO in 2008, and a variety of factors, including
stock market and general business conditions, could lead either or both of
them
to terminate such considerations." In the quarter ended June 30, 2008, there
were no venture capital-backed IPOs in the United States. Until stock market
conditions for IPOs improve, we believe the likelihood of any of our portfolio
companies filing for
IPOs has
been
reduced substantially.
![](chart.jpg)
The
following is a summary of our initial and follow-on investments in tiny
technology from 2001 to the present. We consider a "round led" to be a round
where we issued the term sheet, were the new investor or led a set of new
investors in an investee company. Typically, but not always, the lead investor
negotiates the price and terms of a deal with the investee
company.
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
YTD
6/30/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Incremental Investments
|
|
$
|
489,999
|
|
$
|
6,240,118
|
|
$
|
3,812,600
|
|
$
|
14,837,846
|
|
$
|
16,251,339
|
|
$
|
24,408,187
|
|
$
|
20,595,161
|
|
$
|
10,847,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of New Investments
|
|
|
1
|
|
|
7
|
|
|
5
|
|
|
8
|
|
|
4
|
|
|
6
|
|
|
7
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of Follow-On Investment Rounds
|
|
|
0
|
|
|
1
|
|
|
5
|
|
|
21
|
|
|
13
|
|
|
14
|
|
|
20
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of Rounds Led
|
|
|
0
|
|
|
1
|
|
|
0
|
|
|
2
|
|
|
0
|
|
|
7
|
|
|
3
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Dollar Amount – Initial
|
|
$
|
489,999
|
|
$
|
784,303
|
|
$
|
437,156
|
|
$
|
911,625
|
|
$
|
1,575,000
|
|
$
|
2,383,424
|
|
$
|
1,086,441
|
|
$
|
1,122,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Dollar Amount – Follow-On
|
|
|
N/A
|
|
$
|
750,000
|
|
$
|
325,364
|
|
$
|
359,278
|
|
$
|
765,488
|
|
$
|
721,974
|
|
$
|
649,504
|
|
$
|
661,738
|
|
We
value
our private venture capital investments each quarter as determined in good
faith
by our Valuation Committee, a committee of independent directors, within
guidelines established by our Board of Directors in accordance with the 1940
Act. (See "Footnote to Consolidated Schedule of Investments" contained in
"Consolidated Financial Statements.")
In
the
years 2001 through June 30, 2008, the Company recorded the following gross
write-ups in privately held securities as a percentage of net assets at the
beginning of the year ("BOY"), gross write-downs in privately held securities
as
a percentage of net assets at the beginning of the year, and net
write-ups/(write-downs) in privately held securities as a percentage of net
assets at the beginning of the year.
During
the six months ended June 30, 2008, the Company also recorded a reversal of
unrealized depreciation related to net realized losses of $1,326,072 and
$3,688,581 on our investments in Chlorogen, Inc., and NanoOpto Corporation,
respectively.
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
YTD
6/30/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
$
|
(2,872,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Write-Ups During Year
|
|
$
|
1,528,866
|
|
$
|
285
|
|
$
|
847,578
|
|
$
|
6,288,397
|
|
$
|
23,485,176
|
|
$
|
279,363
|
|
$
|
11,694,618
|
|
$
|
6,300,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
-2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
4.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
2.48
|
%
|
The
increase or decrease in the value of our venture capital investments does not
affect the day-to-day operations of the Company because we have no debt and
fund
our venture capital investments and daily operating expenses from interest
earned and proceeds from the sales of our investments in U.S. government
securities.
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.
Results
of Operations
Three
months ended June 30, 2008, as compared with the three months ended June 30,
2007
In
the
three months ended June 30, 2008, and June 30, 2007, we had a net increase
(decrease) in net assets resulting from operations of $1,354,709 and
$(4,093,644), respectively.
Investment
Income and Expenses:
We
had
net operating losses of $2,638,283 and $2,891,667 for the three months ended
June 30, 2008, and June 30, 2007, respectively. The variation in these results
is primarily owing to the changes in investment income and operating expenses,
including non-cash expenses of $1,499,345 in 2008 and $1,732,456 in 2007
associated with the granting of stock options. During the three months ended
June 30, 2008, and 2007, total investment income was $467,625 and $637,701,
respectively. During the three months ended June 30, 2008, and 2007, total
operating expenses were $3,105,908 and $3,529,368,
respectively.
During
the three months ended June 30, 2008, as compared with the same period in 2007,
investment income decreased owing to a decrease in our average holdings of
U.S.
government securities. During the three months ended June 30, 2008, our average
holdings of such securities were $53,439,644, as compared with $60,364,885
during the three months ended June 30, 2007.
Operating
expenses, including non-cash, stock-based compensation expense, were $3,105,908
and $3,529,368 for the three months ended June 30, 2008, and June 30, 2007,
respectively. The decrease in operating expenses for the three months ended
June
30, 2008, as compared with the three months ended June 30, 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 $182,482, or 6.9 percent, through June 30, 2008, as
compared with June 30, 2007, primarily as a result of a decrease in non-cash
expense of $233,111 associated with 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. While the non-cash, stock-based compensation
expense for the Stock Plan increased our operating expenses by $1,499,345,
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 $73,817, or 20.7 percent, through June 30, 2008, as
compared with June 30, 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
$133,201, or 39.8 percent, for the three months ended June 30, 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 legal,
accounting and consulting fees.
Realized
Income and Losses From Investments:
During
the three months ended June 30, 2008, we realized net gains on investments
of
$3,912, as compared with realized net losses on investments of $8,213 during
the
three months ended June 30, 2007.
During
the three months ended June 30, 2008, we realized net gains of $3,912,
consisting primarily of income from our investment in Exponential Business
Development Company and realized gains on the sale of U.S. government
securities.
During
the three months ended June 30, 2007, we realized net losses of $8,213,
consisting primarily of realized losses on the sale of U.S. government
securities.
Net
Unrealized Appreciation and Depreciation of Portfolio
Securities:
During
the three months ended June 30, 2008, net unrealized appreciation on total
investments increased by $3,989,748, or 1,223.2 percent, from net unrealized
appreciation of $326,167 at March 31, 2008, to net unrealized appreciation
of
$4,315,915 at June 30, 2008. During the three months ended June 30, 2007, net
unrealized depreciation on total investments increased by $1,193,764, or 9.44
percent, from net unrealized depreciation of $12,644,883 at March 31, 2007,
to
net unrealized depreciation of $13,838,647 at June 30, 2007.
During
the three months ended June 30, 2008, net unrealized depreciation on our venture
capital investments decreased by $4,791,705, from net unrealized depreciation
of
$915,941 at March 31, 2008, to net unrealized appreciation of $3,875,764 at
June
30, 2008, owing primarily to increases in the valuations of our investments
in
Ancora Pharmaceuticals, Inc., of $152,636, D-Wave Systems, Inc., of $1,892,
Nextreme Thermal Solutions, Inc., of $100, Questech Corporation of $9,461,
Solazyme, Inc., of $6,199,665 and Zia Laser, Inc., of $170, offset by decreases
in the valuations of our investments in BridgeLux, Inc., of $394, Crystal-IS,
Inc., of $112, Kereos, Inc., of $30,479, Mersana Therapeutics, Inc., of $3,665,
Metabolon, Inc., of $2,047, Molecular Imprints, Inc., of $171,917, Nanomix,
Inc., of $289,328, NeoPhotonics Corporation of $1,037,951 and Starfire Systems,
Inc., of $60,000. We also had an increase owing to foreign currency translation
of $23,674 on our investment in D-Wave Systems, Inc. Unrealized appreciation
on
our U.S. government securities portfolio decreased from $1,242,108 at March
31,
2008, to $440,151 at June 30, 2008.
During
the three months ended June 30, 2007, net unrealized depreciation on our venture
capital investments increased by $1,036,500, from $12,284,021 to $13,320,521,
owing primarily to decreases in the valuations of our investments in Evolved
Nanomaterial Sciences, Inc., of $1,133,677, NanoOpto Corporation of $523,190,
Polatis, Inc., of $15,890 and Questech Corporation of $72,623, partially offset
by increases in the valuation of our investments in BridgeLux, Inc., of
$369,974, Chlorogen, Inc., of $67,748 and Kovio, Inc., of $125,000. We also
had
an increase owing to foreign currency translation of $146,160 on our investment
in D-Wave Systems, Inc. Unrealized depreciation on our U.S. government
securities portfolio increased from $360,862 at March 31, 2007, to $518,126
at
June 30, 2007.
Six
months ended June 30, 2008, as compared with the six months ended June 30,
2007
In
the
six months ended June 30, 2008, and June 30, 2007, we had net decreases in
net
assets resulting from operations of $1,934,326 and $10,483,804,
respectively.
Investment
Income and Expenses:
We
had
net operating losses of $5,118,901 and $5,558,785 for the six months ended
June
30, 2008, and June 30, 2007, respectively. The variation in these results is
primarily owing to the changes in investment income and operating expenses,
including non-cash expenses of $2,966,325 in 2008 and $3,422,637 in 2007
associated with the granting of stock options. During the six months ended
June
30, 2008, and 2007, total investment income was $1,043,927 and $1,290,199,
respectively. During the six months ended June 30, 2008, and 2007, total
operating expenses were $6,162,828 and $6,848,984, respectively.
During
the six months ended June 30, 2008, as compared with the same period in 2007,
investment income decreased owing to a decrease in our average holdings
throughout the period of U.S. government securities. During the six months
ended
June 30, 2008, our average holdings of such securities were $55,727,820, as
compared with $60,379,179 at June 30, 2007.
Operating
expenses, including non-cash, stock-based compensation expense, were $6,162,828
and $6,848,984 for the six months ended June 30, 2008, and June 30, 2007,
respectively. The decrease in operating expenses for the six months ended June
30, 2008, as compared with the six months ended June 30, 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 $283,953, or 5.5 percent, through June 30,
2008, as compared with June 30, 2007, primarily as a result of a decrease in
non-cash expense of $456,312 associated with 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. While the non-cash, stock-based
compensation expense for the Stock Plan increased our operating expenses by
$2,966,325, 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 $152,827, or 20.7 percent, through June 30,
2008, as compared with June 30, 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
$177,164, or 34.3 percent, for the six months ended June 30, 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 legal and
accounting fees.
Realized
Income and Losses from Investments:
During
the six months ended June 30, 2008, we realized net losses on investments of
$5,010,958, as compared with realized net losses on investments of $8,887 during
the six months ended June 30, 2007.
During
the six months ended June 30, 2008, we realized net losses of $5,010,958,
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 six months ended June 30, 2008, we received a payment
of
$105,714 from the NanoOpto Corporation bridge note.
During
the six months ended June 30, 2007, we realized net losses of $8,887, consisting
primarily of realized losses on the sale of U.S. government and agency
securities and losses on our investment in Exponential Business Development
Company, offset by income from our investment in AlphaSimplex Group,
LLC.
Net
Unrealized Appreciation and Depreciation of Portfolio Securities:
During
the six months ended June 30, 2008,
net
unrealized depreciation on total investments decreased by $8,242,399, or 209.9
percent, from net unrealized depreciation of $3,926,484 at December 31, 2007,
to
net unrealized appreciation of $4,315,915 at June 30, 2008. During the six
months ended June 30, 2007,
net
unrealized depreciation on total investments increased by $4,831,227, or 53.64
percent, from net unrealized depreciation of $9,007,420 at December 31, 2006,
to
net unrealized depreciation of $13,838,647 at June 30, 2007.
During
the six months ended June 30, 2008, net unrealized depreciation on our venture
capital investments decreased by $8,442,908, from net unrealized depreciation
of
$4,567,144 at December 31, 2007, to net unrealized appreciation of $3,875,764
at
June 30, 2008, owing primarily to reversal of unrealized depreciation related
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 Ancora Pharmaceuticals, Inc., of $100,562,
D-Wave Systems, Inc., of $13,596, Exponential Business Development Company
of
$193, Nextreme Thermal Solutions, Inc., of $100, Solazyme, Inc., of $6,199,665,
and Zia Laser, Inc., $171, offset by decreases in the valuations of our
investments in BridgeLux, Inc., of $1,738, Crystal-IS, Inc., of $395, Kereos,
Inc., of $69,372, Mersana Therapeutics, Inc., of $9,071, Metabolon, Inc., of
$736,512, Molecular Imprints, Inc., of $171,917, Nanomix, Inc., of $289,328,
NeoPhotonics Corporation of $1,037,494, Questech Corporation of $452,976 and
Starfire Systems, Inc., of $60,000. We also had a decrease owing to foreign
currency translation of $57,229 on our investment in D-Wave Systems, Inc.
Unrealized appreciation on our U.S. government securities portfolio decreased
from $640,660 at December 31, 2007, to $440,151 at June 30, 2008.
During
the six months ended June 30, 2007, net unrealized depreciation on our venture
capital investments increased by $4,869,552, from $8,450,969 to $13,320,521,
owing primarily to decreases in the valuations of our investments in Chlorogen,
Inc., of $1,302,951, Evolved Nanomaterial Sciences, Inc., of $2,361,958,
Nanomix, Inc., of $459,772, NanoOpto Corporation of $1,415,599 and Questech
Corporation of $164,539, offset partially by increases in the valuation of
our
investments in BridgeLux, Inc., of $369,974, Polatis, Inc., of $174,790 and
Kovio, Inc., of $125,000. We also had an increase owing to foreign currency
translation of $164,316 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 $518,126 at June 30, 2007.
Financial
Condition
June
30, 2008
At
June
30, 2008, our total assets and net assets were $155,786,983 and $153,778,840,
respectively. At December 31, 2007, they were $142,893,332 and $138,363,344,
respectively.
At
June
30, 2008, net asset value per share ("NAV") was $5.95, as compared with $5.93
at
December 31, 2007. At June 30, 2008, our shares outstanding increased to
25,859,573, from 23,314,573 at December 31, 2007.
Significant
developments in the six months ended June 30, 2008, included
an increase in the value of our venture capital investments of $14,225,140
and
an increase in the value of our investment in U.S. government obligations of
$1,231,432. The increase in the value of our venture capital investments, from
$78,110,384 at December 31, 2007, to $92,335,524 at June 30, 2008, resulted
primarily from two new and 13 follow-on investments and by a net increase of
$8,442,908 in the net value of our previous venture capital investments. The
increase in the value of our U.S. government obligations, from $60,193,593
at
December 31, 2007, to $61,425,025 at June 30, 2008, is primarily owing to the
investment of net proceeds of $14,383,497 received through the registered direct
stock offering, offset by net operating expenses and by new and follow-on
venture capital investments totaling $10,847,095.
The
following table is a summary of additions to our portfolio of venture capital
investments made during the six months ended June 30, 2008:
New
Investment
|
|
Amount
|
|
PolyRemedy,
Inc.
|
|
$
|
244,500
|
|
Laser
Light Engines, Inc.
|
|
$
|
2,000,000
|
|
|
|
|
|
|
Follow-on
Investment
|
|
|
|
|
Adesto
Technologies Corporation
|
|
$
|
1,052,174
|
|
Ancora
Pharmaceuticals Inc.
|
|
$
|
800,000
|
|
BridgeLux,
Inc.
|
|
$
|
1,000,001
|
|
CSwitch
Corporation
|
|
$
|
986,821
|
|
D-Wave
Systems, Inc.
|
|
$
|
736,019
|
|
Metabolon,
Inc.
|
|
$
|
1,000,000
|
|
NeoPhotonics
Corporation
|
|
$
|
200,000
|
|
Nextreme
Thermal Solutions, Inc.
|
|
$
|
377,580
|
|
Nextreme
Thermal Solutions, Inc.
|
|
$
|
200,000
|
|
Nextreme
Thermal Solutions, Inc.
|
|
$
|
200,000
|
|
Phoenix
Molecular Corporation
|
|
$
|
25,000
|
|
Phoenix
Molecular Corporation
|
|
$
|
25,000
|
|
Solazyme,
Inc.
|
|
$
|
2,000,000
|
|
|
|
|
|
|
Total
|
|
$
|
10,847,095
|
|
The
following tables summarize the values of our portfolios of venture capital
investments and U.S. government obligations, as compared with their cost, at
June 30, 2008, and December 31, 2007:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Venture
capital investments, at cost
|
|
$
|
88,459,760
|
|
$
|
82,677,528
|
|
Net
unrealized appreciation (depreciation)(1)
|
|
|
3,875,764
|
|
|
(4,567,144
|
)
|
Venture
capital investments, at fair value
|
|
$
|
92,335,524
|
|
$
|
78,110,384
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
U.S.
government obligations, at cost
|
|
$
|
60,984,874
|
|
$
|
59,552,933
|
|
Net
unrealized appreciation(1)
|
|
|
440,151
|
|
|
640,660
|
|
U.S.
government obligations, at value
|
|
$
|
61,425,025
|
|
$
|
60,193,593
|
|
(1)At
June
30, 2008, and December 31, 2007, the net accumulated unrealized appreciation
(depreciation) on investments was $4,315,915 and $(3,926,484),
respectively.
The
following table summarizes the fair value composition of our venture capital
investment portfolio at June 30, 2008, and December 31, 2007.
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tiny
Technology
|
|
|
99.9%
|
|
|
99.9%
|
|
Other
Venture Capital Investments
|
|
|
0.1%
|
|
|
0.1%
|
|
Total
Venture Capital Investments
|
|
|
100.0%
|
|
|
100.0%
|
|
Liquidity
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
June
30, 2008, and December 31, 2007, our total net primary liquidity was $62,720,802
and $61,183,136, respectively, and our secondary liquidity was $0 and $0,
respectively.
The
increase in our primary liquidity from December 31, 2007, to June 30, 2008,
is
primarily owing to the proceeds received through the registered direct stock
offering, offset by the use of funds for investments and payment of net
operating expenses.
Capital
Resources
On
June
20, 2008, we completed the sale of 2,545,000 shares of our common stock, for
total gross proceeds of $15,651,750; net proceeds of this offering, after
placement agent fees and offering costs of $1,268,253, were $14,383,497. We
intend to use, and have been using, 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 June
30,
2008, we have used $1,427,379 of the net proceeds from this offering for these
purposes.
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 June 30, 2008, we have
used
all of the net proceeds from this offering for these purposes.
Critical
Accounting Policies
The
Company's significant accounting policies are described in Note 3 to the
Consolidated Financial Statements and in the Footnote to the Consolidated
Schedule of Investments. Critical accounting policies are those that are both
important to the presentation of our financial condition and results of
operations and those that require management’s most difficult, complex or
subjective judgments. The Company considers the following accounting policies
and related estimates to be critical:
Valuation
of Portfolio Investments
The
most
significant estimate inherent in the preparation of our consolidated financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. As a business development
company, we invest in primarily illiquid securities that generally have no
established trading market.
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 June 30, 2008, our financial statements include private
venture capital investments valued at $92,335,524, the fair values of which
were
determined in good faith by, or under the direction, of the Board of Directors.
At June 30, 2008, approximately 59.3 percent of our total assets represent
investments in portfolio companies valued at fair value by the Board of
Directors.
Determining
fair value requires that judgment be applied to the specific facts and
circumstances of each portfolio investment, although our valuation policy is
intended to provide a consistent basis for determining fair value of the
portfolio investments. Factors that may be considered include, but are not
limited to, readily available public market quotations; the cost of the
Company’s investment; transactions in the portfolio company’s securities or
unconditional firm offers by responsible parties; 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 revenues, 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 the applicable securities laws;
and the rights and preferences of the class of securities we own as compared
with other classes of securities the portfolio has issued.
All
investments recorded at fair value are categorized based upon the level of
judgment associated with the inputs used to measure their fair value.
Hierarchical levels, defined by SFAS No. 157 and directly related to the amount
of subjectivity associated with the inputs to fair valuation of these assets,
are as follows:
|
·
|
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.
|
At
June
30, 2008, all of our private portfolio investments were classified as Level
3 in
the hierarchy, indicating a high level of judgment required in their
valuation.
The
values assigned to our assets 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 be reasonably determined
until
the individual investments are actually liquidated or become readily marketable.
Upon sale of investments, the values that are ultimately realized may be
different from what is presently estimated. This difference could material.
Stock-Based
Compensation
Determining
the appropriate fair-value model and calculating the fair value of share-based
awards at the date of grant requires judgment. We use the Black-Scholes-Merton
option pricing model to estimate the fair value of employee stock options,
consistent with the provisions of SFAS No. 123(R). Management uses the
Black-Scholes-Merton option pricing model because of the lack of the historical
option data that is required for use in other, more complex models. Other models
may yield fair values that are significantly different from those calculated
by
the Black-Scholes-Merton option pricing model.
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. As the volatility
or
expected term assumptions increase, the fair value of the stock option
increases. In the Black-Scholes-Merton model, the expected dividend rate and
expected risk-free rate of return are not as significant to the calculation
of
fair value. A higher assumed dividend rate yields a lower fair value, whereas
higher assumed interest rates yield higher fair values for stock options.
We
use
the simplified calculation of expected life described in the SEC’s Staff
Accounting Bulletin 107 because of the lack of historical information about
option exercise patterns. Future exercise behavior could be materially different
than that which is assumed by the model.
Expected
volatility is based on the historical fluctuations in the Company's stock.
The
Company's stock has historically been volatile, which increases the fair
value.
SFAS
No. 123(R) requires us to develop an estimate of the number of share-based
awards that will be forfeited owing to employee turnover. Quarterly changes
in
the estimated forfeiture rate can have a significant effect on reported
share-based compensation, as the effect of adjusting the rate for all expense
amortization after the grant date is recognized in the period the forfeiture
estimate is changed. If the actual forfeiture rate proves to be higher than
the
estimated forfeiture rate, then an adjustment will be made to increase the
estimated forfeiture rate, which would result in a decrease to the expense
recognized in the financial statements. If the actual forfeiture rate proves
to
be lower than the estimated forfeiture rate, then an adjustment will be made
to
decrease the estimated forfeiture rate, which would result in an increase to
the
expense recognized in the financial statements. Such adjustments would affect
our operating expenses and additional paid-in capital, but would have no effect
on our net asset value.
Pension
and Post-Retirement Benefit Plan Assumptions
The
Company provides a Retiree Medical Benefit Plan for employees who meet certain
eligibility requirements. Several statistical and other factors that attempt
to
anticipate future events are used in calculating the expense and liability
values related to our post-retirement benefit plans. These factors include
assumptions we make about the discount rate, the rate of increase in healthcare
costs, and mortality, among others.
The
discount rate reflects the current rate at which the post-retirement benefit
liabilities could be effectively settled considering the timing of expected
payments for plan participants. In estimating this rate, we consider rates
of
return on high quality fixed-income investments included in published bond
indexes. We consider the Moody’s Aa Corporate Bond Index and the Citigroup
Pension Liability Index in the determination of the appropriate discount rate
assumptions. The weighted average rate we utilized to measure our post
retirement benefit obligation as of December 31, 2007, and to calculate our
2008 expense was 6.55 percent, which is an increase from the 5.75 percent rate
used in determining the 2007 expense.
Recent
Developments — Portfolio Companies
On
July
25, 2008, we made an $800,000 follow-on investment in Nextreme Thermal
Solutions, Inc.
On
July
31, 2008, we made a $1,000,000 follow-on investment in a privately held tiny
technology portfolio company.
On
August
5, 2008, we made a $200,000 follow-on investment in a privately held tiny
technology portfolio company.
Forward-Looking
Statements
The
information contained herein 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
Form 10-Q, and in our Form 10-K for the year ended December 31, 2007. The
forward-looking statements made in this Form 10-Q 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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Our
business activities contain elements of risk. We consider the principal types
of
market risk to be valuation risk and the risk associated with fluctuations
in
interest rates. Although we are risk-seeking rather than risk-averse in our
investments, we consider the management of risk to be essential to our business.
Value,
as
defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those
securities for which market quotations are readily available and (ii) fair
value
as determined in good faith by, or under the direction of, the Board of
Directors for all other assets. (See the "Valuation Procedures" in the "Footnote
to Consolidated Schedule of Investments" contained in "Item 1. Consolidated
Financial Statements.")
Neither
our investments nor an investment in us is intended to constitute a balanced
investment program.
We
have
invested a substantial portion of our assets in private development stage or
start-up companies. These private businesses tend to be based on new technology
and to be thinly capitalized, unproven, small companies that lack management
depth and have not attained profitability or have no history of operations.
Because of the speculative nature and the lack of a public market for these
investments, there is significantly greater risk of loss than is the case with
traditional investment securities. We expect that some of our venture capital
investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential.
Even
when our private equity investments complete initial public offerings (IPOs),
we
are normally subject to lock-up agreements for a period of time, and thereafter,
the market for the unseasoned publicly traded securities may be relatively
illiquid.
Because
there is typically no public market for our interests in the small privately
held companies in which we invest, the valuation of the equity interests in
that
portion of our portfolio is determined in good faith by our Valuation Committee,
comprised of the independent members of our Board of Directors, in accordance
with our Valuation Procedures. In the absence of a readily ascertainable market
value, the determined value of our portfolio of equity interests may differ
significantly from the values that would be placed on the portfolio if a ready
market for the equity interests existed. Any changes in valuation are recorded
in our consolidated statements of operations as "Net increase (decrease) in
unrealized appreciation on investments." Changes in valuation of any of our
investments in privately held companies from one period to another may be
volatile.
We
also
invest in short-term money market instruments, and both short and long-term
U.S.
government and agency securities. To the extent that we invest in short and
long-term U.S. government and agency securities, changes in interest rates
result in changes in the value of these obligations which result in an increase
or decrease of our net asset value. The level of interest rate risk exposure
at
any given point in time depends on the market environment, the expectations
of
future price and market movements, and the quantity and duration of long-term
U.S. government and agency securities held by the Company, and it will vary
from
period to period. If the average interest rate on U.S. government securities
at
June 30, 2008, were to increase by 25, 75 and 150 basis points, the weighted
average value of these securities held by us at June 30, 2008, would decrease
by
approximately $261,638, $784,915 and $1,569,829, respectively, and our net
asset
value would decrease correspondingly.
Most
of
our investments are denominated in U.S. dollars. We currently have one
investment denominated in Canadian dollars. We are exposed to foreign currency
risk related to potential changes in foreign currency exchange rates. The
potential loss in fair value on this investment resulting from a 10 percent
adverse change in quoted foreign currency exchange rates is $270,287 at June
30,
2008.
In
addition, in the future, we may from time to time opt to borrow money to make
investments. Our net investment income will be dependent upon the difference
between the rate at which we borrow funds and the rate at which we invest such
funds. As a result, there can be no assurance that a significant change in
market interest rates will not have a material adverse effect on our net
investment income in the event we choose to borrow funds for investing
purposes.
Item
4. Controls and Procedures
(a)
Disclosure
Controls and Procedures. As
of the
end of the period covered by this report, the Company’s management, under the
supervision and with the participation of our chief executive officer and chief
financial officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as required by Rules
13a-15 of the 1934 Act). Disclosure controls and procedures means controls
and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within
time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the issuer's management, as appropriate, to
allow timely decisions regarding required disclosures. As of June 30, 2008,
based upon this evaluation of our disclosure controls and procedures, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were effective.
(b)
Changes
in Internal Control Over Financial Reporting. There
have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the second quarter of 2008 to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1A. 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 in our Annual Report on Form 10-K for the year ended December 31,
2007, before you purchase any of our common stock. The risks described in our
Annual Report on Form 10-K are not the only risks facing our Company. 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. In
addition to the risks described in our Annual Report on Form 10-K, you should
consider the following risks:
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. Given the current credit environment, there can be no assurance
that 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.
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, and for the first time in a quarter since 1978, no venture
capital-backed companies completed IPOs in the quarter ended June 30,
2008. Moreover, in 2007, according to the National Venture Capital
Association, the venture capital-backed companies that completed IPOs had a
median age of about 8.6 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. This situation may
adversely affect the amount of available funding for early-stage companies
in
particular as, in general, venture-capital firms are being forced to provide
additional financing to late-stage companies that cannot IPO. 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, leading some of them to reduce funding of their portfolio
companies and making it more difficult for such companies to access capital
and
to fulfill their potential, which can result in write-downs and write-offs
of
such companies by other venture capital firms, such as ourselves, who are
co-investors in such companies.
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. These events and
their effect on valuation may not be measurable until they occur.
Moreover, because our ownership interests in such investments are
generally valued only at quarterly intervals by our Valuation Committee, a
committee made up of all the 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. Information pertinent to our portfolio
companies is not always known immediately by us, and, therefore, its
availability for use in determining value may not always coincide with our
filings.
Item
4. Submission
of Matters to a Vote of Security Holders
On
May 1,
2008, we held our Annual Meeting of Shareholders to (1) elect 11 directors
of
the Company and (2) approve the selection of PricewaterhouseCoopers LLP as
the
independent registered public accountant.
At
the
close of business on the record date, March 10, 2008, an aggregate of 23,314,573
shares of common stock were issued and outstanding.
All
of
the nominees at the May 1, 2008, Annual Meeting were elected as
directors:
Nominees
|
|
For
|
|
Withheld
|
|
W.
Dillaway Ayres, Jr.
|
|
|
19,897,030
|
|
|
370,102
|
|
Dr.
C. Wayne Bardin
|
|
|
19,985,976
|
|
|
281,160
|
|
Dr.
Phillip A. Bauman
|
|
|
19,651,692
|
|
|
615,444
|
|
G.
Morgan Browne
|
|
|
19,887,784
|
|
|
379,352
|
|
Dugald
A. Fletcher
|
|
|
19,551,768
|
|
|
715,366
|
|
Charles
E. Harris
|
|
|
19,998,532
|
|
|
268,604
|
|
Douglas
W. Jamison
|
|
|
19,968,482
|
|
|
298,654
|
|
Lori
D. Pressman
|
|
|
19,930,524
|
|
|
336,612
|
|
Charles
E. Ramsey
|
|
|
19,652,252
|
|
|
614,684
|
|
James
E. Roberts
|
|
|
19,574,750
|
|
|
692,386
|
|
Richard
P. Shanley
|
|
|
19,901,109
|
|
|
366,027
|
|
With
respect to proposal number two, described as a proposal “to ratify, confirm and
approve the Audit Committee's selection of PricewaterhouseCoopers LLP as the
independent registered public accountant for the fiscal year ending December
31,
2008,” the affirmative votes cast were 20,056,387, the negative votes cast were
109,202, and those abstaining were 101,545. There were no broker non-votes
for
either proposal.
Item
6. Exhibits
31.01*
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.02*
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32*
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
Harris
& Harris Group, Inc.
|
|
|
/s/
Daniel B. Wolfe
|
By:
|
Daniel
B. Wolfe
|
|
Chief
Financial Officer
|
|
|
/s/
Patricia N. Egan
|
By:
|
Patricia
N. Egan
|
|
Chief
Accounting Officer
|
|
and
Vice President
|
Date:
August 7, 2008
EXHIBIT
INDEX
|
|
Description
|
|
|
|
31.01
|
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.02
|
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32
|
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
|