Unassociated Document
PROSPECTUS
SUPPLEMENT
|
Filed
Pursuant to Rule 497(e)
|
(To
prospectus dated September 21, 2009)
|
Registration
No. 333-160781
|
4,250,000 Shares
Common
Stock
Pursuant
to this prospectus supplement and the accompanying prospectus, we are
offering 4,250,000 shares of our Common Stock, par value $0.01 ("Common
Stock"). We have retained Needham & Company, LLC to act as our
underwriter in connection with this offering. See "Underwriting"
beginning on page S-7 of this prospectus supplement for more information
regarding this arrangement.
Our
Common Stock is listed on the Nasdaq Global Market under the symbol
"TINY." On October 5, 2009, the last reported sale price of our
Common Stock on the Nasdaq Global Market was $5.55 per share.
This
prospectus supplement does not constitute an offer to sell or a solicitation of
an offer to buy the shares offered hereby in any jurisdiction where, or to any
person to whom, it is unlawful to make such offer or solicitation.
Investing
in our Common Stock involves significant risks. See "Risk Factors" on page S-3
of this prospectus supplement and "Risk Factors" on page 32 of the accompanying
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus
supplement is truthful or complete. Any representation to the contrary is a
criminal offense.
|
Per Share
|
Total
|
|
|
|
|
|
|
Public
offering price
|
$4.750
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$20,187,500
|
Sales
Load (Underwriting discount)
|
$0.285
|
$1,211,250
|
Proceeds,
before expenses, to the Company
|
$4.465
|
$18,976,250
|
We have
granted the underwriter the right to purchase up to 637,500 additional shares of
Common Stock to cover over-allotments. The underwriter can exercise
this right at any time within 30 days after the date of this prospectus
supplement.
We
estimate the total expenses of this offering that will be payable by us,
excluding the underwriter's discount, will be approximately $327,500 assuming we
sell 4,250,000 shares of Common Stock pursuant to this prospectus supplement and
the accompanying prospectus. We expect that delivery of the Common
Stock being offered pursuant to this prospectus supplement will be made to
purchasers on or about October 9, 2009.
The
date of this prospectus supplement is October 6, 2009.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two
parts. The first part is the prospectus supplement dated October 6,
2009, and the second part is the accompanying prospectus dated September 21,
2009, both of which are part of a registration statement on Form N-2 (File No.
333-160781) we filed with the Securities and Exchange Commission (the "SEC")
using a "shelf" registration process. Under this "shelf" registration
process, we may from time to time sell the shares described in the accompanying
prospectus in one or more offerings up to a total of 7,000,000
shares.
These documents contain important
information you should consider when making your investment
decision. The prospectus supplement describes the specific terms of
the securities we are offering and also adds to and updates information
contained in the accompanying prospectus. The accompanying prospectus
provides more general information. This prospectus supplement may
add, update or change information in the accompanying prospectus. You
should rely only on the information provided in this prospectus supplement and
the accompanying prospectus. To the extent there is a conflict
between the information contained in this prospectus supplement, on the one
hand, and the information contained in the accompanying prospectus, you should
rely on the information in this prospectus supplement. We have not,
and the underwriter has not, authorized anyone to provide you with different or
inconsistent information. If anyone provides you with different or
inconsistent information, you should not rely on it. You should
assume that the information contained in this prospectus supplement and the
accompanying prospectus is accurate only as of the dates of those documents,
regardless of the time of delivery of those documents or of any sale of the
shares. Our business, financial condition, results of operations and
prospects may have changed since the dates of those documents. You
should also read and consider the information in the documents we have referred
you to in the section of the accompanying prospectus entitled "Further
Information."
We are not making an offer to sell
these securities in any jurisdiction where the offer or sale is not
permitted. Persons outside the United States who come into possession
of this prospectus supplement or the accompanying prospectus must inform
themselves about, and observe any restrictions relating to, the offering of the
Common Stock and the distribution of this prospectus supplement and the
accompanying prospectus outside the United States.
TABLE
OF CONTENTS
Prospectus
Supplement
Page
THE
OFFERING
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S-1
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TABLE
OF FEES AND EXPENSES
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S-2
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RISK
FACTORS
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S-3
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FORWARD-LOOKING
INFORMATION
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S-3
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USE
OF PROCEEDS
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S-4
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CAPITALIZATION
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S-4
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PRICE
RANGE OF COMMON STOCK
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S-5
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RECENT
DEVELOPMENTS
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S-5
|
UNDERWRITING
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S-7
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LEGAL
MATTERS
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S-9
|
Prospectus
|
|
Page
|
PROSPECTUS
SUMMARY
|
1
|
AVAILABLE
INFORMATION
|
8
|
TABLE
OF FEES AND EXPENSES
|
8
|
SELECTED
CONDENSED CONSOLIDATED FINANCIAL DATA
|
9
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
11
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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12
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RISK
FACTORS
|
32
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FORWARD-LOOKING
INFORMATION
|
42
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USE
OF PROCEEDS
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43
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PRICE
RANGE OF COMMON STOCK
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43
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BUSINESS
|
44
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GENERAL
DESCRIPTION OF OUR PORTFOLIO COMPANIES
|
55
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DETERMINATION
OF NET ASSET VALUE
|
61
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INVESTMENT
POLICIES
|
64
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MANAGEMENT
OF THE COMPANY
|
68
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BOARD
OF DIRECTORS AND EXECUTIVE OFFICERS
|
68
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EXECUTIVE
COMPENSATION
|
75
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OTHER
INFORMATION
|
91
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BROKERAGE
|
91
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DIVIDENDS
AND DISTRIBUTIONS
|
91
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TAXATION
|
91
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CERTAIN
GOVERNMENT REGULATIONS
|
95
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CAPITALIZATION
|
97
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PLAN
OF DISTRIBUTION
|
97
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LEGAL
MATTERS
|
98
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EXPERTS
|
98
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FURTHER
INFORMATION
|
98
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PRIVACY
POLICY
|
99
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INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-1
|
THE
OFFERING
Common
Stock offered by us
|
4,250,000
shares
|
Over-Allotment
Option
|
4,887,500
shares of Common Stock to be offered by us if the Underwriter exercises
its over-allotment option to purchase 637,500
additional shares of Common Stock in full.
|
Common
Stock to be outstanding after the offering
|
Up
to 30,854,2581
shares (assuming the over-allotment option is exercised in
full by the Underwriter).
|
Risk
Factors
|
See
"Risk Factors" beginning on page S-3 of this prospectus supplement and
page 32 of the accompanying prospectus for a discussion of factors you
should consider carefully when making an investment
decision.
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Use
of proceeds
|
We
estimate that the total net proceeds to us from the sale of the securities
offered pursuant to this prospectus supplement will be approximately
$18,648,750 (after deducting the underwriting discount and all estimated
offering expenses payable by us). We intend to use these net proceeds
as set forth in "Use of Proceeds" below.
|
Nasdaq
Global Market Symbol
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TINY
|
(1)The
number of shares of our Common Stock to be outstanding immediately after this
offering as shown above is based on 25,966,758 shares of Common Stock
outstanding as of October 5, 2009. This number excludes:
|
·
|
options
to purchase approximately 1,345,836 shares of Common Stock at an exercise
price of $10.11 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 1,302,409 shares of Common Stock at an exercise
price of $11.11 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 346,784 shares of Common stock at an exercise
price of $6.18 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 1,163,724 shares of Common Stock at an exercise
price of $6.92 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 222,814 shares of Common Stock at an exercise
price of $3.75 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 200,000 shares of Common Stock at an exercise
price of $4.46 outstanding as of October 5, 2009;
and
|
|
·
|
approximately
3,703 additional shares of Common Stock reserved for issuance under our
equity incentive plans as of October 5,
2009.
|
TABLE
OF FEES AND EXPENSES
The
following tables are intended to assist you in understanding the various costs
and expenses directly or indirectly associated with investing in our Common
Stock. We caution you that some of the percentages indicated in the
table below are estimates and may vary. Amounts are for the current
fiscal year after giving effect to anticipated net proceeds of the offering
of 4,250,000 shares of Common Stock pursuant to this prospectus supplement
and the accompanying prospectus, assuming that we incur the estimated offering
expenses. The price per share used in this calculation was the
offering price of our Common Stock of $4.75.
Shareholder
Transaction Expenses
|
|
Sales
Load(1)
(as a percentage of offering price)
|
6.00%
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Offering
Expenses (as a percentage of offering price)
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1.62%
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Annual Expenses (as a
percentage of net assets attributable to Common Stock)
|
|
Management
Fees(2)
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N/A
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Other
Expenses(3)
|
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Salaries and Benefits(4)
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4.68%
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Administration and
Operations(5)
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1.72%
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Professional Fees
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0.69%
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Total
Annual Expenses(6)
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7.09%
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_______________________________
(1)
|
This
represents the underwriting discount of six percent (6%) of the gross
proceeds of this offering.
|
(2)
|
The
Company has no external management fees, as it is internally
managed.
|
(3)
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"Other
Expenses" are based on projected amounts for the fiscal year ending
December 31, 2009.
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(4)
|
"Salaries
and Benefits" includes projected non-cash, stock-based compensation
expense of $3,077,321 for the year ending December 31,
2009. The Company accounts for stock-based compensation expense
pursuant to SFAS No. 123(R) "Share-Based Payment," which requires that we
determine the fair value of all share-based payments to employees,
including the fair value of grants of employee stock options, and record
these amounts as an expense in the Statement of Operations over the
vesting period with a corresponding increase to our additional paid-in
capital. There is no effect on net asset value from stock-based
compensation expense at the time of grant. If options are
exercised, net asset value per share will be decreased if the net asset
value per share at the time of exercise is higher than the exercise price,
and net asset value per share will be increased if the net asset value per
share at the time of exercise is lower than the exercise
price. Excluding the non-cash, stock-based compensation
expense, projected "Salaries and Benefits" total $2,968,744 or 2.30
percent of net assets attributable to Common Stock for the year ending
December 31, 2009.
|
(5)
|
"Administration
and Operations" includes expenses incurred for administration, operations,
rent, directors’ fees and expenses, depreciation and custodian
fees.
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(6)
|
"Total
Annual Expenses" includes projected non-cash compensation expense of
$3,077,321 for the year ending December 31, 2009. See Footnote
(4) above. Cash-based total annual expenses as a percentage of
net assets attributable to Common Stock are 4.70 percent for the year
ending December 31, 2009.
|
Example
The
following examples illustrate the dollar amount of cumulative expenses that
would be incurred over various periods with respect to a hypothetical investment
in our Common Stock. In calculating these amounts, we have assumed
that we have not incurred any leverage and that our annual operating expenses
remain at the levels set forth in the above table, including the non-cash,
stock-based compensation expenses.
On the
basis of the foregoing, including the non-cash, stock-based compensation
expense, you would pay the following expenses on a $10,000 investment, assuming
a five percent annual return:*
1 Year
|
3 Years
|
5 Years
|
10 Years
|
$1,410
|
$2,666
|
$3,870
|
$6,666
|
|
*
|
This
example includes non-cash, stock-based compensation. Excluding
the non-cash, stock-based compensation, you would pay expenses of $1,197
in one year, $2,071 in three years, $2,951 in five years and $5,172 in 10
years, on a $10,000 investment, assuming a five percent
return.
|
The
foregoing table is to assist you in understanding the various costs and expenses
that an investor in our Common Stock will bear directly or
indirectly. The assumed five percent annual return is required by the
SEC and is not a prediction of, and does not represent, the projected or actual
performance of our Common Stock. The above example should not be
considered a representation of actual or future expenses, and actual expenses
and annual rates of return may be more or less than those assumed for purposes
of the example.
RISK
FACTORS
Investing in our Common Stock involves
significant risks. You should carefully consider the risks and
uncertainties described below and the risk factors beginning on page 32 of the
accompanying prospectus before you purchase any of our Common
Stock. These risks and uncertainties are not the only ones we
face. Unknown additional risks and uncertainties, or ones that we
currently consider immaterial, may also impair our business. If any
of these risks or uncertainties materializes, our business, financial condition
or results of operations could be materially adversely affected. In
this event, the trading price of our Common Stock could decline, and you could
lose all or part of your investment.
Risks
Relating to this Offering
Future
sales of our Common Stock in the public market could cause our stock price to
fall.
Sales of
a substantial number of shares of our Common Stock in the public market, or the
perception that these sales might occur, could depress the market price of our
Common Stock and could impair our ability to raise capital through the sale of
additional equity securities. As of October 5, 2009, we had
25,966,758 shares of Common Stock outstanding, all of which shares,
other than shares held by our directors and certain officers which are subject
to 90-day lock-up agreements in connection with this offering, were eligible for
sale in the public market, subject in some cases to the volume limitations and
manner of sale requirements under Rule 144. In addition, all of
the shares offered under this prospectus supplement and the accompanying
prospectus will be freely tradable without restriction or further registration
upon issuance.
The
price you pay in the offering will be more than the net asset value per share
after giving effect to the offering.
On June
30, 2009, our net asset value per share was $4.27. If we sell
4,250,000 (or 4,887,500 if the over-allotment option is exercised in full)
shares of Common Stock, the net asset value per share after giving effect to the
gross proceeds of the offering will be approximately $4.34 (or $4.35 if
the over-allotment option is exercised in full), which is less than the price
you paid in the offering.
For
additional risk factors, please see "Risk Factors" on page 32 in the
accompanying prospectus.
FORWARD-LOOKING
INFORMATION
This
prospectus supplement may contain "forward-looking statements" based on our
current expectations, assumptions and estimates about us and our
industry. These forward-looking statements involve risks and
uncertainties. Words such as "believe," "anticipate," "estimate,"
"expect," "intend," "plan," "will," "may," "might," "could," "continue" and
other similar expressions identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of several factors
more fully described in "Risk Factors" and elsewhere in this prospectus
supplement. The forward-looking statements made in this prospectus
supplement relate only to events as of the date on which the statements are
made. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
You
should understand that under Section 27A(b)(2)(B) of the Securities Act and
Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 do not apply
to statements made by business development companies.
USE
OF PROCEEDS
We
estimate that the total net proceeds to us from the sale of the securities
offered pursuant to this prospectus supplement will be approximately $18,648,750
(or $21,495,188 if the over-allotment option is exercised in full), after
deducting the underwriting discount and all estimated offering expenses payable
by us.
In the
first half of 2009, we made no new investments in private portfolio companies
because of the disarray in the venture capital markets. We expect to
make both new and follow-on investments in portfolio companies in accordance
with our investment objective with the net proceeds of this
offering. We expect to invest or reserve for potential follow-on
investment the net proceeds of any offering within two years from the completion
of such offering. The net proceeds of this offering invested after
two years will only be used for follow-on investments. Reserves for
follow-on investments in any particular initial investment may be no more than
the greater of twice the investment to-date or five times the initial investment
in the case of seed-stage investments, though we may invest more than the amount
reserved for this purpose in any particular portfolio
holding. Although we intend to make our initial investments
exclusively in companies that we believe are involved significantly in tiny
technology, we may also make follow-on investments in existing portfolio
companies involved in other technologies. Pending investment in
portfolio companies, we intend to invest the net proceeds of any offering of our
Common Stock in time deposits and/or income-producing securities that are issued
or guaranteed by the federal government or an agency of the federal government
or a government-owned corporation,
which we expect will yield less than our operating expense
ratio. We may also use the proceeds of this offering for
operating expenses, including due diligence expenses on potential
investments. Our portfolio companies rarely pay us dividends or
interest, and we do not generate enough income from fixed income investments to
meet all of our operating expenses. If we pay operating expenses from the
proceeds, it will reduce the net proceeds of the offering that we will have
available for investment.
CAPITALIZATION
We are
authorized to issue 45,000,000 shares of Common Stock, par value $0.01 per
share, and 2,000,000 shares of preferred stock, par value $0.10 per
share. Each share within a particular class or series thereof has
equal voting, dividend, distribution and liquidation rights. When
issued, in accordance with the terms thereof, shares of Common Stock will be
fully paid and non-assessable. Shares of Common Stock are not
redeemable and have no preemptive, conversion, or cumulative voting
rights.
The
following table shows the number of shares of (i) capital stock authorized, (ii)
the amount held by us or for our own account, and (iii) capital stock
outstanding for each class of our authorized securities as of October 5,
2009.
|
|
|
|
Number
Held by
Company
or for its
Own
Account
|
|
|
Common
Stock
|
|
45,000,000
|
|
1,828,740
|
|
25,966,758
(1)
|
Preferred
Stock
|
|
2,000,000
|
|
0
|
|
0
|
(1) The
number of shares of our Common Stock outstanding excludes:
|
·
|
options
to purchase approximately 1,345,836 shares of Common Stock at an exercise
price of $10.11 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 1,302,409 shares of Common Stock at an exercise
price of $11.11 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 346,784 shares of Common stock at an exercise
price of $6.18 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 1,163,724 shares of Common Stock at an exercise
price of $6.92 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 222,814 shares of Common Stock at an exercise
price of $3.75 outstanding as of October 5,
2009;
|
|
·
|
options
to purchase approximately 200,000 shares of Common Stock at an exercise
price of $4.46 outstanding as of October 5, 2009;
and
|
|
·
|
approximately
3,703 additional shares of Common Stock reserved for issuance under our
equity incentive plans as of October 5,
2009.
|
PRICE
RANGE OF COMMON STOCK
Our
Common Stock is traded on the Nasdaq Global Market under the symbol
"TINY."
The
following table sets forth for the quarters indicated, the high and low sale
prices on the Nasdaq Global Market per share of our Common Stock and the net
asset value and the premium or discount from net asset value per share at which
the shares of Common Stock were trading, expressed as a percentage of net asset
value, at each of the high and low sale prices provided.
|
|
Net
Asset Value ("NAV") Per Share at End of Period
|
Premium
or (Discount) as a
%
of NAV
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
13.58
|
11.00
|
5.27
|
157.7
|
108.7
|
June
30, 2007
|
14.32
|
11.01
|
5.54
|
158.5
|
98.7
|
September
30, 2007
|
11.79
|
9.51
|
5.69
|
107.2
|
67.1
|
December
31, 2007
|
11.10
|
8.00
|
5.93
|
87.2
|
34.9
|
|
|
|
|
|
|
March
31, 2008
|
8.98
|
5.76
|
5.86
|
53.2
|
(1.7)
|
June
30, 2008
|
8.73
|
6.00
|
5.95
|
46.7
|
0.8
|
September
30, 2008
|
8.50
|
4.97
|
4.68
|
81.6
|
6.2
|
December
31, 2008
|
6.58
|
3.10
|
4.24
|
55.2
|
(26.9)
|
March
31, 2009
|
4.48
|
2.65
|
4.22
|
6.2
|
(37.2)
|
June
30, 2009
|
5.99
|
3.57
|
4.27
|
40.3
|
(16.4)
|
September
30, 2009
|
6.93
|
5.01
|
--
|
--
|
--
|
Through
October 5, 2009
|
6.31
|
5.50
|
--
|
--
|
--
|
Historically,
the shares of our Common Stock have traded at times at a discount and at other
times at a premium to net asset value. The last reported price for
our Common Stock on October 5, 2009 was $5.55 per share. As of
October 5, 2009, we had approximately 138 shareholders of record.
RECENT
DEVELOPMENTS
Portfolio
Companies:
On July
2, 2009, we made a $250,000 follow-on investment in a privately held tiny
technology portfolio company.
On July
17, 2009, we made a $533,239 follow-on investment in a privately held tiny
technology portfolio company.
On July
27, 2009, we made a $125,000 follow-on investment in a privately held tiny
technology portfolio company.
On August
7, 2009, we made a $515,756 follow-on investment in a privately held tiny
technology portfolio company.
On August
7, 2009, we made a $99,624 investment in Orthovita, Inc., a publicly traded
company.
On August
14, 2009, we made a $99,808 investment in Orthovita, Inc., a publicly traded
company.
On August
19, 2009, we made a $1,635,775 follow-on investment in a privately held tiny
technology portfolio company.
On August
26, 2009, we made a $250,124 follow-on investment in a privately held tiny
technology portfolio company.
On August
28, 2009, we made a $374,999 follow-on investment in a privately held tiny
technology portfolio company.
On
September 17, 2009, we made a $200,000 follow-on investment in a privately held
tiny technology portfolio company.
On
October 1, 2009, we made a $721,090 follow-on investment in a privately held
tiny technology portfolio company.
Other:
During the period from July 1, 2009,
through October 5, 2009, a total of 107,185 stock options were exercised for
total proceeds to the Company of $401,944.
On September 22, 2009, the Board of
Directors appointed an Ad Hoc Pricing Committee in connection with this
offering. The Pricing Committee is responsible for determining the
price at which shares of our Common Stock shall be sold in any offering,
determining the exact number of shares to be sold, determining any other terms
with respect to the sale of our Common Stock, and for taking all such further
actions as it may deem necessary or appropriate in connection with the
transactions contemplated by this prospectus supplement and the accompanying
prospectus. The members of the Pricing Committee are Dugald A.
Fletcher, G. Morgan Browne, W. Dillaway Ayres, and Dr. Phillip A.
Bauman.
On September 24, 2009, the Company
entered into a lease agreement with Rosh 1450 Properties LLC (the "Lease") for
approximately 6,900 square feet of office space located at 1450 Broadway, New
York, New York. The lease will commence on the later of January 1,
2010, or when the leasehold improvements are completed. We plan to
use the office space to replace our current offices in New York City, which
serve as our corporate headquarters. The base rent is $36 per
square foot with a 2.5 percent increase per year over the 10 years of the lease,
subject to a full abatement of rent for four months and a rent credit for six
months throughout the Lease term. The Lease expires on December 31,
2019. We have one option to extend the Lease term for a five-year
period, provided that we are not in default under the Lease. Annual
rent during the renewal period will equal 95 percent of the fair market value of
the leased premises, as determined in accordance with the Lease. Upon
an event of default, the Lease provides that the landlord may terminate the
Lease and require us to pay all rent that would have been payable during the
remainder of the Lease or until the date the landlord re-enters the
premises.
UNDERWRITING
We and
the underwriter named below have entered into an underwriting agreement with
respect to the shares of Common Stock being offered by us in this
offering. Subject to the terms and conditions of the underwriting
agreement, the underwriter named below, as the sole underwriter, has agreed to
purchase from us the number of shares of our Common Stock set forth opposite its
name on the table below at the public offering price, less the underwriting
discounts and commissions, as set forth on the cover page of this prospectus
supplement as follows:
|
|
|
Name
|
|
Number of Shares
|
Needham
& Company, LLC
|
|
4,250,000
|
|
|
|
Total
|
|
4,250,000
|
|
|
|
The
underwriting agreement provides that the obligations of the underwriter to pay
for and accept delivery of the shares of Common Stock offered by this prospectus
supplement are subject to the approval of certain legal matters by its counsel,
including in the event of a material adverse change in economic, political or
financial conditions. The obligations of the underwriter may also be
terminated upon the occurrence of other events specified in the underwriting
agreement. The underwriter is committed to purchase all of the shares of Common
Stock being offered by us if any shares are purchased. However, the
underwriter is not required to take or pay for the shares covered by the
underwriter’s over-allotment option described below.
The
underwriter proposes to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this prospectus
supplement. The underwriter may offer the Common Stock to securities
dealers at the price to the public less a concession not in excess of $.15 per
share. Securities dealers may not re-allow an additional concession
to other dealers. After the shares of Common Stock are released for
sale to the public, the underwriter may vary the offering price and other
selling terms from time to time.
We have
granted to the underwriter an option, exercisable not later than thirty (30)
days after the date of this prospectus supplement, to purchase up to an
aggregate of 637,500 additional shares of Common Stock at the public
offering price set forth on the cover page of the prospectus supplement, less
the underwriting discounts and commissions. The underwriter may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of Common Stock offered
hereby.
The
following table summarizes the public offering price, underwriting discount and
proceeds before expenses to us. The information assumes either no exercise or
full exercise by the underwriter of its over-allotment option.
|
|
|
|
|
Total
|
|
|
|
Per Share
|
|
|
Without
Over-Allotment
|
|
|
With
Over-Allotment
|
|
Public
offering price
|
|
$ |
4.750 |
|
|
$ |
20,187,500 |
|
|
$ |
23,215,625 |
|
Underwriting
discount
|
|
|
0.285 |
|
|
|
1,211,250 |
|
|
|
1,392,938 |
|
Proceeds,
before expenses, to us
|
|
|
4.465 |
|
|
|
18,976,250 |
|
|
|
21,822,687 |
|
We
estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $327,500 assuming we sell
4,250,000 shares of Common Stock pursuant to this prospectus supplement and the
accompanying prospectus.
We have
agreed to indemnify the underwriter against certain civil liabilities, including
liabilities under the Securities Act of 1933, for any inaccuracy in our
representations and warranties contained in the underwriting agreement and for
any failure to perform our contractual and legal obligations in connection with
the offering. We have also agreed to contribute to payments the
underwriter may be required to make in respect of any such
liabilities.
We, along
with our executive officers and directors, have agreed with the underwriter,
subject to certain exceptions, to certain lock-up provisions with regard to
future sales of our Common Stock for a period of 90 days following the date of
this prospectus supplement, as set forth in the underwriting
agreement.
In order
to facilitate the offering of the Common Stock, the underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the underwriter may sell more shares than it is
obligated to purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no greater
than the number of shares available for purchase by the underwriter under the
over-allotment option. The underwriter can close out a covered short
sale by exercising the over-allotment option or purchasing shares in the open
market. In determining the source of shares to close out a covered
short sale, the underwriter will consider, among other things, the open market
price of shares compared to the price available under the over-allotment option.
The underwriter may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriter must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriter is concerned that there may be downward
pressure on the price of the Common Stock in the open market after pricing that
could adversely affect investors who purchased in this offering. As an
additional means of facilitating this offering, the underwriter may bid for, and
purchase, shares of our Common Stock in the open market to stabilize the price
of the Common Stock. These activities may raise or maintain the market price of
our Common Stock above independent market levels or prevent or slow a decline in
the market price of our Common Stock. The underwriter is not required to engage
in these activities, and may end any of these activities at any
time.
Our
Common Stock is listed on the NASDAQ Global Market under the symbol
“TINY.”
The
underwriting agreement and any selling group agreement to be entered into
between the underwriter and any other selling agent will be included as an
exhibit to a post-effective amendment to the registration statement of which
this prospectus supplement and the accompanying prospectus are a
part.
The
transfer agent for our Common Stock to be issued in this offering is American
Stock Transfer & Trust Company.
United
Kingdom
This
document is only being distributed to and is only directed at (i) persons who
are outside the United Kingdom or (ii) to investment professionals falling
within Article 19(5) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other
persons to whom it may lawfully be communicated, falling within Article 49(2)(a)
to (e) of the Order (all such persons together being referred to as “relevant
persons”). The shares of Common Stock are only available to, and any invitation,
offer or agreement to subscribe, purchase or otherwise acquire such Common Stock
will be engaged in only with, relevant persons. Any person who is not a relevant
person should not act or rely on this document or any of its
contents.
The
underwriter has represented and agreed that:
(a) it
has only communicated or caused to be communicated and will only communicate or
cause to be communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the Financial Services and Markets
Act 2000 or FSMA) received by it in connection with the issue or sale of the
shares in circumstances in which Section 21(1) of the FSMA does not apply to us,
and
(b) it
has complied with, and will comply with all applicable provisions of FSMA with
respect to anything done by it in relation to the shares in, from or otherwise
involving the United Kingdom.
European
Economic Area
To the
extent that the offer of the Common Stock is made in any Member State of the
European Economic Area that has implemented the Prospectus Directive before the
date of publication of a prospectus in relation to the Common Stock which has
been approved by the competent authority in the Member State in accordance with
the Prospectus Directive (or, where appropriate, published in accordance with
the Prospectus Directive and notified to the competent authority in the Member
State in accordance with the Prospectus Directive), the offer (including any
offer pursuant to this document) is only addressed to qualified investors in
that Member State within the meaning of the Prospectus Directive or has been or
will be made otherwise in circumstances that do not require us to publish a
prospectus pursuant to the Prospectus Directive.
In
relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a “Relevant Member State”), the
underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the “Relevant Implementation Date”) it has not made and will not make an
offer of shares to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has been approved by
the competent authority in that Relevant Member State or, where appropriate,
approved in another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the Prospectus
Directive, except that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in that Relevant
Member State at any time:
(a) to
legal entities which are authorized or regulated to operate in the financial
markets or, if not so authorized or regulated, whose corporate purpose is solely
to invest in securities,
(b) to
any legal entity which has two or more of (1) an average of at least 250
employees during the last financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in
its last annual or consolidated accounts, or
(c) in
any other circumstances which do not require the publication by us of a
prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes
of this provision, the expression an “offer of shares to the public” in relation
to any shares in any Relevant Member State means the communication in any form
and by any means of sufficient information on the terms of the offer and the
shares to be offered so as to enable an investor to decide to purchase or
subscribe the shares, as the same may be varied in that Relevant Member State by
any measure implementing the Prospectus Directive in that Relevant Member State
and the expression “Prospectus Directive” means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant Member
State.
The EEA
selling restriction is in addition to any other selling restrictions. In
relation to each Relevant Member State, each purchaser of shares of Common Stock
(other than the underwriter) will be deemed to have represented, acknowledged
and agreed that it will not make an offer of shares of Common Stock to the
public in any Relevant Member State, except that it may, with effect from and
including the date on which the Prospectus Directive is implemented in the
Relevant Member State, make an offer of shares of Common Stock to the public in
that Relevant Member State at any time in any circumstances which do not require
the publication by us of a prospectus pursuant to Article 3 of the Prospectus
Directive, provided that such purchaser agrees that it has not and will not make
an offer of any shares of Common Stock in reliance or purported reliance on
Article 3(2)(b) of the Prospectus Directive. For the purposes of this provision,
the expression an “offer of Shares to the public” in relation to any shares of
Common Stock in any Relevant Member State has the same meaning as in the
preceding paragraph.
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, our special counsel in connection with the offering of
Common Stock. Certain legal matters in connection with this offering
will be passed upon for the underwriter by Proskauer Rose LLP, New York, New
York.
7,000,000
Shares
Common
Stock
Harris
& Harris Group, Inc.®,
is a venture capital company that specializes in nanotechnology and
microsystems. We operate as a non-diversified business development
company ("BDC") under the Investment Company Act of 1940. We may
offer, from time to time, shares of our Common Stock, $0.01 par value per share
("Common Stock"), in one or more delayed offerings. The Common Stock
may be offered at prices and on terms to be set forth in one or more supplements
to this Prospectus (each a "Prospectus Supplement"). The offering
price per share of our Common Stock will not be less than the net asset value
per share of our Common Stock at the time we make the offering exclusive of any
underwriting commissions or discounts, unless we have shareholder
approval. You should read this Prospectus and the applicable
Prospectus Supplement carefully before you invest in our Common Stock.
Our
Common Stock may be offered directly to one or more purchasers through agents
designated from time to time by us, or to or through underwriters or
dealers. The Prospectus Supplement relating to the offering will
identify any agents or underwriters involved in the sale of our Common Stock,
and will set forth any applicable purchase price, fee, commission or discount
arrangement between us and our agents or underwriters, or among our
underwriters, or the basis upon which such amount may be
calculated. We may not sell any of our Common Stock through agents,
underwriters or dealers without delivery of a Prospectus Supplement describing
the method and terms of the particular offering of our Common
Stock. Our Common Stock is listed on the Nasdaq Global Market under
the symbol "TINY." On September 17, 2009, the last reported sale
price of our Common Stock was $6.36.
An Investment in the Securities
Offered in this Prospectus Involves a High Degree of Risk. You Should
Consider Investing in Us Only if You Are Capable of Sustaining the Loss of Your
Entire Investment. See
"Risk Factors" beginning on page 32.
This
Prospectus sets forth concisely the information about us that a prospective
investor should know before investing. You should read this
Prospectus, before deciding whether to invest in our Common Stock, and retain it
for future reference. You may obtain our annual reports, request
other information about us and make shareholder inquiries by calling toll free
1-877-846-9832. Additional information about us has been filed with
the Securities and Exchange Commission ("SEC") and is available upon written or
oral request and without charge. We also make available our annual
reports, free of charge, on our website at www.HHVC.com. Information
on our website is not part of this Prospectus and should not be considered as
such when making your investment decision. Material incorporated by
reference and other information about us can be obtained from the SEC's website
(http://www.sec.gov).
Neither
the SEC nor any state securities commission has approved or disapproved these
securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date
of the Prospectus is September 21, 2009.
[This
Page Intentionally Left Blank]
You
should rely only on the information contained or incorporated by reference in
this Prospectus or any prospectus supplements. We have not authorized
any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any
jurisdiction in which the offer or sale is not permitted. Prospective
investors should assume that the information appearing in this Prospectus or any
prospectus supplements is accurate only as of the dates on their
covers. Our business, financial condition, results of operations and
prospects may have changed since that date. The Prospectus and any
prospectus supplements will be updated to reflect any material changes.
In this
Prospectus, unless otherwise indicated, "Harris & Harris Group," "Company,"
"us," "our" and "we" refer to Harris & Harris Group, Inc.®
"Harris & Harris Group, Inc." is a registered service
mark. "Nanotech for Cleantech," "Nanotech for Healthcare" and
"Nanotech for Electronics" are service marks. This Prospectus also
includes trademarks owned by other persons.
___________________
TABLE OF
CONTENTS
Page
PROSPECTUS
SUMMARY
|
1
|
AVAILABLE
INFORMATION
|
8
|
TABLE
OF FEES AND EXPENSES
|
8
|
SELECTED
CONDENSED CONSOLIDATED FINANCIAL DATA
|
9
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
11
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
12
|
RISK
FACTORS
|
32
|
FORWARD-LOOKING
INFORMATION
|
42
|
USE
OF PROCEEDS
|
43
|
PRICE
RANGE OF COMMON STOCK
|
43
|
BUSINESS
|
44
|
GENERAL
DESCRIPTION OF OUR PORTFOLIO COMPANIES
|
55
|
DETERMINATION
OF NET ASSET VALUE
|
61
|
INVESTMENT
POLICIES
|
64
|
MANAGEMENT
OF THE COMPANY
|
68
|
BOARD
OF DIRECTORS AND EXECUTIVE OFFICERS
|
68
|
EXECUTIVE
COMPENSATION
|
75
|
OTHER
INFORMATION
|
91
|
BROKERAGE
|
91
|
DIVIDENDS
AND DISTRIBUTIONS
|
91
|
TAXATION
|
91
|
CERTAIN
GOVERNMENT REGULATIONS
|
95
|
CAPITALIZATION
|
97
|
PLAN
OF DISTRIBUTION
|
97
|
LEGAL
MATTERS
|
98
|
EXPERTS
|
98
|
FURTHER
INFORMATION
|
98
|
PRIVACY
POLICY
|
99
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-1
|
[This
Page Intentionally Left Blank]
PROSPECTUS
SUMMARY
This
summary highlights information that is described more fully elsewhere in this
Prospectus and in the documents to which we have referred. It may not
contain all of the information that is important to you. To
understand the offering fully, you should read the entire document carefully,
including the risk factors beginning on page 32.
Harris
& Harris Group, Inc., is a venture capital company that specializes in
making investments in companies commercializing and integrating products enabled
by nanotechnology and microsystems. We sometimes use "tiny
technology" to describe both of these disciplines. We operate as a
business development company under the Investment Company Act of 1940, which we
refer to as the 1940 Act. For tax purposes, we operate as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
which we refer to as the Code. We are an internally managed,
non-diversified investment company; that is, our officers and employees, rather
than an investment adviser, manage our operations under the general supervision
of our Board of Directors. Our investment objective is to achieve
long-term capital appreciation, rather than current income, by making venture
capital investments. We define venture capital investments as the money and
resources made available to privately held start-up firms and privately held and
publicly traded small businesses with exceptional growth
potential. Our approach includes patient examination of available
venture investment opportunities, thorough due diligence and close involvement
with management.
We
believe that we are the only publicly traded business development company making
venture capital investments exclusively in nanotechnology and
microsystems. We believe we provide three core benefits to our
shareholders. First, we are an established firm with a track record
of investing in venture capital-backed companies. Second, we provide
shareholders with access to emerging companies that commercialize and integrate
products enabled by nanotechnology and microsystems that are generally privately
owned. Third, we provide access to a vehicle that has historically
provided returns comparable to the median of those of the private venture
capital industry and, unlike private venture capital firms, is both transparent
and liquid. We seek to provide our shareholders with a specific
focus on nanotechnology and microsystems through a portfolio of venture capital
investments that addresses a variety of markets and products. Our
tiny technology investment policy is not a "fundamental policy" under the 1940
Act and, accordingly, may be changed without shareholder approval, although we
will give shareholders at least 60 days prior written notice of any
change.
As a
venture capital company, we make it possible for our investors to participate at
an early stage in this emerging field, particularly while many companies
commercializing and integrating products enabled by nanotechnology and
microsystems are still private. By making investments in companies
that control intellectual property relevant to nanotechnology and microsystems,
we are building a portfolio that we believe will be difficult to replicate in
the future. We typically invest as part of a syndicate of venture
capital firms. However, we may provide seed capital before forming a syndicate
with other investors and we may invest in small public companies with large
growth potential. We may maintain our investment in an investee
company after it goes public, even after our co-investors sell or distribute
their shares.
To the
investor, we offer:
|
·
|
a
portfolio consisting of investments that are generally available only to a
small, highly specialized group of professional venture capital firms as
investors;
|
|
·
|
a
team of professionals to evaluate and monitor investments, comprising five
full-time members of management, including four Managing Directors,
Douglas W. Jamison, Alexei A. Andreev, Michael A. Janse and Daniel B.
Wolfe, and a Vice President, Misti Ushio. One of our directors,
Lori D. Pressman, is also a consultant to us. These six
professionals collectively have expertise in venture capital investing,
intellectual property and nanotechnology and microsystems;
|
|
·
|
the
opportunity to benefit from our experience in a new field expected to
permeate a variety of industries;
|
|
·
|
through
the ownership of our publicly traded shares, a measure of liquidity not
typically available in underlying venture capital portfolio investments;
and
|
|
·
|
transparency
resulting from requirements to make certain public disclosures about our
investments.
|
We make
venture capital investments exclusively in companies commercializing and
integrating products enabled by nanotechnology or
microsystems. Nanotechnology is measured in nanometers, which are
units of measurement in billionths of a meter. Microsystems,
including microelectromechanical systems ("MEMS") are measured in micrometers,
which are units of measurement in millionths of a meter. We consider
a company to fit our investment thesis if the company employs or intends to
employ technology that we consider to be at the microscale or smaller and if the
employment of that technology is material to its business plan. At
June 30, 2009, 57.9 percent of our net assets and 100 percent of our venture
capital portfolio were invested in companies commercializing and integrating
products enabled by nanotechnology or microsystems. We may also make follow-on
investments in any of our portfolio companies. The balance of our
funds is currently invested in U.S. treasury securities.
Nanotechnology
is multidisciplinary and widely applicable, and it incorporates technology that
was not previously in widespread use. Products enabled by
nanotechnology are found in many industries, including instrumentation,
computing, electronics, photonics, pharmaceuticals, medical devices, textiles,
sporting goods, aerospace, automotive and cleantech, which includes
alternative-energy and energy-saving products. Our nanotechnology
investments have developed around three main industry clusters: cleantech (47
percent of our venture capital portfolio on June 30, 2009); electronics,
including semiconductors (33 percent of our venture capital portfolio on June
30, 2009); and healthcare (10 percent of our venture capital portfolio on June
30, 2009). We call these three areas "Nanotech for CleantechSM,"
"Nanotech for ElectronicsSM," and
"Nanotech for HealthcareSM,"
respectively. We have and may continue to make investments outside
these industry areas, and we may not maintain these industry clusters or the
weightings within these clusters. The use of nanotechnology-enabled
advanced materials for cleantech, in particular, is an area of increasing global
interest, and these types of materials are the cornerstones of new generations
of photovoltaics, batteries, solid-state lighting, fuel cells, biofuels and
other energy-related applications that are the focus of a number of recently
funded early-stage companies.
The
number of investment opportunities in nanotechnology and microsystems available
to us has continued to increase in recent years, through both new opportunities
and opportunities for follow-on investments in our existing portfolio
companies. We believe that our expertise and record of prior
investments in nanotechnology and microsystems are likely to lead us to
additional such investment opportunities in the future.
We identify investment opportunities
primarily through five channels:
|
·
|
our
involvement in the field of nanotechnology and
microsystems;
|
|
·
|
research
institutions, universities, and corporations that seek to transfer their
scientific discoveries to the private
sector;
|
|
·
|
other
venture capital companies seeking co-investors or referring deals to
us;
|
|
·
|
referrals
from our portfolio companies; and
|
|
·
|
direct
calls and business plan submissions by companies, business incubators and
individuals seeking venture
capital.
|
We review
approximately 300 business opportunities per year, of which:
|
·
|
about
30 percent will qualify for an initial
presentation;
|
|
·
|
about
10 percent will become the subject of formal due diligence;
and
|
|
·
|
less
than 3 percent, generally, will be voted upon by our investment team.
|
We intend
to use the net proceeds of this offering to:
|
·
|
increase
our capital in order to take advantage of new investment opportunities and
follow-on investment opportunities in our existing portfolio
companies;
|
|
·
|
increase
our operating efficiency, as our costs are primarily fixed and will
represent a smaller percentage of our total assets after giving effect to
this offering; and
|
|
·
|
pay
operating expenses, including due diligence expenses on potential
investments.
|
Nanotechnology
and Microsystems
Nanotechnology
refers to materials, devices and processes with critical dimensions below 0.1
micron, equal to 100 nanometers. A nanometer is 0.000000001 meter, or
one billionth of a meter. It is at the scale below 100 nanometers,
the nanoscale, that quantum effects begin to dominate classical macroscale
physics. At the nanoscale, size- and shape-dependent properties of
materials allow previously unattainable material and device
performance. Microsystems refers to materials, devices and processes
that are on a micrometer size scale. A micrometer, which is also
referred to as a micron, is 0.000001 meter, or one millionth of a
meter. In practice, any device, or device enabled by components, in a
size range from 100 microns down to 0.1 micron may be considered
"micro."
In our
view, nanotechnology is neither an industry nor a single technology, but a
variety of enabling technologies with critical dimensions below 100
nanometers. Nanotechnology manifests itself in tools, materials,
systems and devices that address broad markets, including instrumentation,
cleantech, electronics, photonics, computing, medical devices, pharmaceutical
manufacturing, drug delivery and drug discovery. Historically, many
significant transitions in the properties and capabilities of products were
enabled by the ability to study and manipulate matter on increasingly smaller
scales. We believe the ability to study and manipulate matter on the
nanoscale, in particular, will be a key enabling component of the next wave of
product innovation in many large, diverse and important markets. We
believe the benefits of nanotechnology are a result primarily of five key
attributes: 1) new tools that enable the study and manipulation of
matter at the nanoscale; 2) new properties that emerge from materials with
nanoscale dimensions; 3) the ability to manipulate and use the power of biology
for applications ranging from the development of new therapeutic treatments to
the production of renewable fuels and chemicals; 4) the ability to manufacture
products through additive processes that are more cost efficient and less
wasteful than standard subtractive methods; and 5) the opportunity to solve
problems using tools and knowledge from the convergence of traditionally
disparate scientific disciplines. This concept of convergence is
particularly unique to nanotechnology as it often requires the integration of
multiple disciplines, including biology, physics, chemistry, materials science,
computer science and the engineering sciences.
Examples
of nanotechnology-enabled products currently on the market are quite
diverse. They include sensors, semiconductor chips, batteries,
cosmetics, nanoclays and other nanomaterial-based fillers, textiles, fast acting
painkillers and certain pharmaceutical therapeutics.
We
currently have 17 companies in our portfolio that generate commercial revenue
from the sale of products or services enabled by nanotechnology and
microsystems. These companies offer a range of products including
components for optical networking, high-brightness light-emitting diodes (LEDs),
imaging devices for security and surveillance, printable electronics,
nano-imprint lithography equipment for the manufacturing of semiconductor
devices, X-ray imaging equipment, optical switches, solid-state cooling,
metabolomic profiling services for diagnosis of states of disease, synthetic
carbohydrates for vaccines and decorative tiles.
Although
the practical application of nanotechnology and microsystems requires great
expertise to implement in manufacturing processes, we believe that their broad
applicability presents significant and diverse market
opportunities.
Set forth
below is a summary of certain risks that you should carefully consider before
investing in our Common Stock. See "Risk Factors" beginning on page
32 for a more detailed discussion of the risks of investing in our Common Stock.
Risks
related to the companies in our portfolio.
|
·
|
The
recent financial crisis could increase the non-performance risk for our
portfolio companies.
|
|
·
|
A
continuing lack of initial public offering opportunities and a decrease in
merger and acquisition transactions may cause companies to stay in our
portfolio longer, leading to lower returns, write-downs and
write-offs.
|
|
·
|
Investing
in small, private companies involves a high degree of risk and is highly
speculative.
|
|
·
|
We
may invest in companies working with technologies or intellectual property
that currently have few or no proven commercial
applications.
|
|
·
|
Our
portfolio companies may not successfully develop, manufacture or market
their products.
|
|
·
|
Our
portfolio companies working with nanotechnology and microsystems may be
particularly susceptible to intellectual property
litigation.
|
|
·
|
The
value of our portfolio could be adversely affected if the technologies
utilized by our portfolio companies are found, or even rumored or feared,
to cause health or environmental risks, or if legislation is passed that
limits the commercialization of any of these
technologies.
|
|
·
|
Our
Nanotech for CleantechSM
and Nanotech for ElectronicsSM
portfolios are currently the largest portions of our venture capital
portfolio, and, therefore, fluctuations in the value of the companies in
these portfolios may adversely affect our net asset value per share to a
greater degree than other sectors of our
portfolio.
|
|
·
|
Our
Nanotech for HealthcareSM
portfolio companies are subject to several risks which may adversely
affect the value of our Nanotech for HealthcareSM
portfolio.
|
|
·
|
The
three main industry clusters around which our nanotechnology investments
have developed are all capital intensive.
|
|
·
|
Our
portfolio companies may generate revenues from the sale of products that
are not enabled by nanotechnology.
|
|
·
|
Our
portfolio companies may incur debt that ranks senior to our investments in
such companies.
|
Risks
related to the illiquidity of our investments.
|
·
|
We
invest in illiquid securities and may not be able to dispose of them when
it is advantageous to do so, or
ever.
|
|
·
|
Unfavorable
regulatory changes could impair our ability to exit investments in our
portfolio companies.
|
|
·
|
Even
if some of our portfolio companies complete initial public offerings, the
returns on our investments in those companies would be
uncertain.
|
Risks
related to our Company.
|
·
|
Our
business may be adversely affected by the recent financial crisis and our
ability to access the capital
markets.
|
|
·
|
Because
there is generally no established market in which to value our
investments, our Valuation Committee's value determinations may differ
materially from the values that a ready market or third party would
attribute to these investments.
|
|
·
|
Changes
in valuations of our privately held, early stage companies tend to be more
volatile than changes in prices of publicly traded
securities.
|
|
·
|
We
may continue to experience material write-downs of securities of portfolio
companies.
|
|
·
|
Because
we do not choose investments based on a strategy of diversification, nor
do we rebalance the portfolio should one or more investments increase in
value substantially relative to the rest of the portfolio, the value of
our portfolio is subject to greater volatility than the value of companies
with more broadly diversified
investments.
|
|
·
|
We
are dependent upon key management personnel for future success and may not
be able to retain them.
|
|
·
|
The
market for venture capital investments, including nanotechnology
investments, is highly competitive.
|
|
·
|
In
addition to the difficulty of finding attractive investment opportunities,
our status as a regulated business development company may hinder our
ability to participate in investment opportunities or to protect the value
of existing investments.
|
|
·
|
Our
failure to make follow-on investments in our portfolio companies could
impair the value of our portfolio.
|
|
·
|
Bank
borrowing or the issuance of debt securities or preferred stock by us, to
fund investments in portfolio companies or to fund our operating expenses,
would make our total return to common shareholders more
volatile.
|
|
·
|
We
are authorized to issue preferred stock, which would convey special rights
and privileges to its owners senior to those of Common Stock
shareholders.
|
|
·
|
Loss
of status as a regulated investment company could reduce our net asset
value and distributable income.
|
|
·
|
We
operate in a heavily regulated environment, and changes to, or
non-compliance with, regulations and laws could harm our
business.
|
|
·
|
Market
prices of our Common Stock will continue to be
volatile.
|
|
·
|
Quarterly
results fluctuate and are not indicative of future quarterly
performance.
|
|
·
|
To
the extent that we do not realize income or choose not to retain after-tax
realized capital gains, we will have a greater need for additional capital
to fund our investments and operating
expenses.
|
|
·
|
Investment
in foreign securities could result in additional
risks.
|
Risks
related to this offering.
|
·
|
Investing
in our stock is highly speculative and an investor could lose some or all
of the amount invested.
|
|
·
|
We
will have discretion over the use of proceeds of this
offering.
|
|
·
|
Our
shares might trade at discounts from net asset value or at premiums that
are unsustainable over the long
term.
|
|
·
|
The
Board of Directors intends to grant stock options to our employees
pursuant to the Company's Equity Incentive Plan. When
exercised, these options may have a dilutive effect on existing
shareholders.
|
|
·
|
You
have no right to require us to repurchase your
shares.
|
Other
Information
Our
website is www.HHVC.com and is not incorporated by reference into this
Prospectus. We make available free of charge through our website the
following materials (which are not incorporated by reference unless specifically
stated in this Prospectus) as soon as reasonably practicable after filing or
furnishing them to the SEC:
|
·
|
our
annual report on Form 10-K;
|
|
·
|
our
quarterly reports on Form 10-Q;
|
|
·
|
our
current reports on Form 8-K; and
|
|
·
|
amendments
to those reports.
|
The
Offering
Common
Stock offered
|
We
may offer, from time to time, up to a total of 7,000,000 shares of our
Common Stock available under this Prospectus on terms to be determined at
the time of the offering. Our Common Stock may be offered at prices and on
terms to be set forth in one or more Prospectus
Supplements. The offering price per share of our Common Stock
will not be less than the net asset value per share of our Common Stock at
the time we make the offering exclusive of any underwriting commissions or
discounts, unless we have shareholder approval.
|
|
|
Use
of proceeds
|
We
estimate the total net proceeds of the offering to be up to $41,529,300
based on the last reported price for our Common Stock on September 17,
2009, of $6.36.
In
the first half of 2009, we made no new investments because of the disarray
in the venture capital markets. We expect to make both new and
follow-on investments with the proceeds of this offering. We
expect to invest or reserve for potential follow-on investment the net
proceeds of any offering within two years from the completion of such
offering. The net proceeds of this offering invested after two
years will only be used for follow-on investments. Pending
investment in portfolio companies, we intend to invest the net proceeds of
any offering of our Common Stock in time deposits and/or income-producing
securities that are issued or guaranteed by the federal government or an
agency of the federal government or a government-owned corporation, which
may yield less than our operating expense ratio. We may also
use the proceeds of this offering for operating expenses, including due
diligence expenses on potential investments. Our portfolio
companies rarely pay us dividends or interest, and we do not generate
enough income from fixed income investments to meet all of our operating
expenses. If we pay operating expenses from the proceeds, it
will reduce the net proceeds of the offering that we will have available
for investment.
|
|
|
Dividends
and distributions
|
To
the extent that we retain any net capital gain, we may make deemed capital
gain distributions. If we do make a deemed capital gain
distribution, you will not receive a cash distribution, but instead you
will receive a tax credit and increase in basis equal to your
proportionate share of the tax paid by us on your behalf. We
currently intend to retain our net capital gains for investment and pay
the associated federal corporate income tax. We may change this
policy in the future. See "Taxation."
|
|
|
Nasdaq
Global Market symbol
|
TINY
|
|
|
Offering
methods
|
Our
Common Stock may be offered directly to one or more purchasers, through
agents designated from time to time by us, including in transactions that
are deemed to be "at the market" as defined in Rule 415 under the
Securities Act of 1933, to or through underwriters or dealers or through a
combination of any such methods of sale. See "Plan of
Distribution."
|
AVAILABLE
INFORMATION
We file annual, quarterly and current
reports, proxy statements and other information with the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"). You can inspect
any materials we file with the SEC, without charge, at the SEC's Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC
at 202-942-8090 for further information on the Public Reference
Room. The SEC maintains a website that contains reports, proxy
statements and other information regarding registrants, including us, that file
such information electronically with the SEC. The address of the
SEC's website is www.sec.gov. Information contained on the SEC's
website about us is not incorporated into this Prospectus and you should not
consider information contained on the SEC's website to be part of this
Prospectus.
You may
obtain our annual reports, request other information about us and make
shareholder inquiries by calling toll free 1-877-846-9832. We also
make available our annual reports, free of charge, on our website at
www.HHVC.com. Information on our website is not part of this
Prospectus and should not be considered as such when making your investment
decision.
TABLE
OF FEES AND EXPENSES
The
following tables are intended to assist you in understanding the various costs
and expenses directly or indirectly associated with investing in our Common
Stock. Amounts are for the current fiscal year after giving effect to
anticipated net proceeds of the offering for the 7,000,000 shares registered
pursuant to this Prospectus, assuming that we incur the estimated offering
expenses. The price per share used in this calculation was the
closing price of our Common Stock on September 17, 2009 of $6.36.
Shareholder
Transaction Expenses
|
|
Sales
Load(1)
(as a percentage of offering price)
|
N/A
|
Offering
Expenses (as a percentage of offering price)
|
0.72%
|
Annual
Expenses (as a percentage of net assets attributable to Common Stock)
|
|
Management
Fees(2)
|
N/A
|
Other
Expenses(3)
|
|
Salaries
and Benefits(4)
|
3.98%
|
Administration
and Operations(5)
|
1.46%
|
Professional
Fees
|
0.58%
|
Total
Annual Expenses(6)
|
6.02%
|
_______________________________
(1)
|
The
actual amounts in connection with any offering will be set forth in the
Prospectus Supplement, if
applicable.
|
(2)
|
The
Company has no external management fees because it is internally
managed.
|
(3)
|
"Other
Expenses" are based on projected amounts for the fiscal year ending
December 31, 2009.
|
(4)
|
"Salaries
and Benefits" includes projected non-cash stock-based compensation expense
of $3,077,321 for the year ending December 31, 2009. The
Company accounts for stock-based compensation expense pursuant to SFAS No.
123(R) "Share-Based Payment," which requires that we determine the fair
value of all share-based payments to employees, including the fair value
of grants of employee stock options, and record these amounts as an
expense in the Statement of Operations over the vesting period with a
corresponding increase to our additional paid-in capital. There
is no effect on net asset value from stock-based compensation expense at
the time of grant. If options are exercised, net asset value
per share will be decreased if the net asset value per share at the time
of exercise is higher than the exercise price and net asset value per
share will be increased if the net asset value per share at the time of
exercise is lower than the exercise price. Excluding the
non-cash, stock-based compensation expense, projected "Salaries and
benefits" totals $2,968,744 or 1.95 percent of net assets attributable to
Common Stock for the year ending December 31, 2009.
|
(5)
|
"Administration
and Operations" includes expenses incurred for administration, operations,
rent, directors' fees and expenses, depreciation and custodian
fees.
|
(6)
|
"Total
Annual Expenses" includes projected non-cash compensation expense of
$3,077,321 for the year ending December 31, 2009. See Footnote
(4) above. Cash-based total annual expenses as a percentage of
net assets attributable to Common Stock are 4.0 percent.
|
Example
The
following examples illustrate the dollar amount of cumulative expenses that
would be incurred over various periods with respect to a hypothetical investment
in our Common Stock. These amounts are based upon payment by us of
expenses at levels set forth in the above table, including the non-cash,
stock-based compensation expenses.
On the
basis of the foregoing, including the non-cash, stock-based compensation
expense, you would pay the following expenses on a $10,000 investment, assuming
a five percent annual return:*
1 Year
|
3 Years
|
5 Years
|
10 Years
|
$667
|
$1,838
|
$2,985
|
$5,753
|
|
*
|
This
example includes non-cash, stock-based compensation. Excluding
the non-cash, stock-based compensation, you would pay expenses of $471 in
1 year, $1,280 in 3 years, $2,106 in 5 years and $4,244 in 10 years, on a
$10,000 investment, assuming a five percent return.
|
The
foregoing table is to assist you in understanding the various costs and expenses
that an investor in our Common Stock will bear directly or
indirectly. The assumed five percent annual return is not a
prediction of, and does not represent, the projected or actual performance of
our Common Stock. The above example should not be
considered a representation of future expenses. Actual expenses and
annual rates of return may be more or less than those assumed for purposes of
the example.
SELECTED
CONDENSED CONSOLIDATED FINANCIAL DATA
The
information below should be read in conjunction with the Consolidated Financial
Statements and Supplementary Data and the notes thereto. Financial
information as of and for the years ended December 31, 2008, 2007, 2006, 2005
and 2004, has been derived from our financial statements that were audited by
PricewaterhouseCoopers LLP. Quarterly financial information is
derived from unaudited financial data, but in the opinion of management,
reflects all adjustments which are necessary to present fairly the results for
such interim periods. Interim results at and for the six months ended
June 30, 2009, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. These historical
results are not necessarily indicative of the results to be expected in the
future.
BALANCE
SHEET DATA
|
June
30, 2009
|
|
(Unaudited)
|
|
|
Total
assets
|
$112,355,847
|
|
|
Total
liabilities
|
$1,942,874
|
|
|
Net
assets
|
$110,412,973
|
|
|
Net
asset value per outstanding share
|
$4.27
|
|
|
Cash
dividends paid
|
$0.00
|
|
|
Cash
dividends paid per outstanding share
|
$0.00
|
|
|
Shares
outstanding, end of period
|
25,859,573
|
Financial
Position as of December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
111,627,601 |
|
|
$ |
142,893,332 |
|
|
$ |
118,328,590 |
|
|
$ |
132,938,120 |
|
|
$ |
79,361,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$ |
2,096,488 |
|
|
$ |
4,529,988 |
|
|
$ |
4,398,287 |
|
|
$ |
14,950,378 |
|
|
$ |
4,616,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
109,531,113 |
|
|
$ |
138,363,344 |
|
|
$ |
113,930,303 |
|
|
$ |
117,987,742 |
|
|
$ |
74,744,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$ |
4.24 |
|
|
$ |
5.93 |
|
|
$ |
5.42 |
|
|
$ |
5.68 |
|
|
$ |
4.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid per outstanding share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding, end of year
|
|
|
25,859,573 |
|
|
|
23,314,573 |
|
|
|
21,015,017 |
|
|
|
20,756,345 |
|
|
|
17,248,845 |
|
Operating
Data for Year Ended December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
1,987,347 |
|
|
$ |
2,705,636 |
|
|
$ |
3,028,761 |
|
|
$ |
1,540,862 |
|
|
$ |
637,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses1
|
|
$ |
12,674,498 |
|
|
$ |
14,533,179 |
|
|
$ |
10,641,696 |
|
|
$ |
7,006,623 |
|
|
$ |
4,046,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$ |
(10,687,151 |
) |
|
$ |
(11,827,543 |
) |
|
$ |
(7,612,935 |
) |
|
$ |
(5,465,761 |
) |
|
$ |
(3,408,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
tax expense (benefit)2
|
|
$ |
34,121 |
|
|
$ |
87,975 |
|
|
$ |
(227,355 |
) |
|
$ |
8,288,778 |
|
|
$ |
650,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized (loss) income from investments
|
|
$ |
(8,323,634 |
) |
|
$ |
30,162 |
|
|
$ |
258,693 |
|
|
$ |
14,208,789 |
|
|
$ |
858,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in unrealized depreciation on
investments
|
|
$ |
(30,170,712 |
) |
|
$ |
5,080,936 |
|
|
$ |
(4,418,870 |
) |
|
$ |
(2,026,652 |
) |
|
$ |
484,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from
operations
|
|
$ |
(49,181,497 |
) |
|
$ |
(6,716,445 |
) |
|
$ |
(11,773,112 |
) |
|
$ |
6,716,376 |
|
|
$ |
(2,066,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in net assets resulting from operations per average outstanding
share
|
|
$ |
(1.99 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.57 |
) |
|
$ |
0.36 |
|
|
$ |
(0.13 |
) |
1 Included
in total expenses is non-cash, stock-based, compensation expense of $5,965,769
in 2008; $8,050,807 in 2007; and $5,038,956 in 2006. There was no
stock-based compensation expense in 2005 or 2004. Also included in
total expenses are the following profit-sharing expenses: $0 in each
of 2008 and 2007; $50,875 in 2006; $1,796,264 in 2005; and $311,594 in
2004.
2 Included
in total tax expense are the following taxes paid by the Company on behalf of
shareholders: $0 in each of 2008, 2007 and 2006; $8,122,367 in 2005; and $0 in
2004.
SELECTED
QUARTERLY DATA (UNAUDITED)
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
|
|
|
|
|
|
|
|
Total
investment (loss) income
|
|
$
|
(23,561
|
)
|
|
$
|
83,834
|
|
|
Net
operating loss
|
|
$
|
(2,098,879
|
)
|
|
$
|
(1,998,271
|
)
|
|
Net
(decrease) increase in net assets resulting from operations
|
|
$
|
(951,424
|
)
|
|
$
|
421,367
|
|
|
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
|
|
2008
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
576,302 |
|
|
$ |
467,625 |
|
|
$ |
587,918 |
|
|
$ |
355,502 |
|
Net
operating loss
|
|
$ |
(2,480,618 |
) |
|
$ |
(2,638,283 |
) |
|
$ |
(2,196,739 |
) |
|
$ |
(3,371,511 |
) |
Net
(decrease) increase in net assets resulting from
operations
|
|
$ |
(3,289,035 |
) |
|
$ |
1,354,709 |
|
|
$ |
(34,032,747 |
) |
|
$ |
(13,214,424 |
) |
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
|
$ |
(0.14 |
) |
|
$ |
0.06 |
|
|
$ |
(1.32 |
) |
|
$ |
(0.51 |
) |
|
|
2007
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
652,498 |
|
|
$ |
637,701 |
|
|
$ |
743,414 |
|
|
$ |
672,023 |
|
Net
operating loss
|
|
$ |
(2,667,118 |
) |
|
$ |
(2,891,667 |
) |
|
$ |
(3,117,595 |
) |
|
$ |
(3,151,163 |
) |
Net
(decrease) increase in net assets resulting from
operations
|
|
$ |
(6,390,160 |
) |
|
$ |
(4,093,644 |
) |
|
$ |
604,237 |
|
|
$ |
3,163,122 |
|
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
|
$ |
0.03 |
|
|
$ |
0.16 |
|
|
|
2006
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
804,862 |
|
|
$ |
785,265 |
|
|
$ |
719,619 |
|
|
$ |
719,015 |
|
Net
operating loss
|
|
$ |
(767,743 |
) |
|
$ |
(693,887 |
) |
|
$ |
(2,988,790 |
) |
|
$ |
(3,162,515 |
) |
Net
decrease in net assets resulting from operations
|
|
$ |
(1,653,990 |
) |
|
$ |
(1,282,997 |
) |
|
$ |
(2,588,092 |
) |
|
$ |
(6,248,033 |
) |
Net
decrease in net assets resulting from operations per average outstanding
share
|
|
$ |
(0.08 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.31 |
) |
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, 2009 Consolidated Financial Statements and the
Company's audited 2008 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. In 1984, we divested all of our assets except
Otisville BioTech, Inc., 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.
We are a
venture capital company that specializes in making investments in companies
commercializing and integrating products enabled by nanotechnology and
microsystems. Nanotechnology is measured in nanometers, which are
units of measurement in billionths of a meter. Microsystems are
measured in micrometers, which are units of measurement in millionths of a
meter. We sometimes use "tiny technology" to describe both of these
disciplines.
We
consider a company to fit our investment thesis if the company employs or
intends to employ technology that we consider to be at the microscale or smaller
and if the employment of that technology is material to its business
plan. We define venture capital investments as the money and
resources made available to privately held start-up firms and privately held and
publicly traded small businesses with exceptional growth
potential. By making these investments, we seek to provide our
shareholders with a specific focus on nanotechnology and microsystems through a
portfolio of venture capital investments that address a variety of markets and
products.
We
believe that we are the only publicly traded business development company making
venture capital investments exclusively in nanotechnology and
microsystems. We believe we provide three core benefits to our
shareholders. First, we are an established firm with a track record
of investing in venture capital-backed companies. Second, we provide
shareholders with access to emerging companies that commercialize and integrate
products enabled by nanotechnology and microsystems that are generally privately
owned. Third, we provide access to a vehicle that has historically
provided returns comparable to the median of those of the private venture
capital industry and, unlike private venture capital firms, is both transparent
and liquid.
We have
discretion in the investment of our capital. Primarily, we invest in
illiquid equity securities. Generally, these investments take the
form of preferred stock, are subject to restrictions on resale and have no
established trading market. Throughout our corporate history, we have
made primarily early stage venture capital investments in a variety of
industries. These businesses can range in stage from pre-revenue to
cash flow positive. The businesses in which we invest tend to be
thinly capitalized, unproven, small companies that lack management depth, have
little or no history of operations and are developing unproven
technologies. We may also make follow-on investments in any of our
portfolio companies.
At June
30, 2009, $63,959,811, or 57.9 percent, of our net assets at fair value
consisted of private venture capital investments, net of unrealized depreciation
of $29,029,756. At December 31, 2008, $56,965,153, or 52.0 percent,
of our net assets at fair value consisted of private venture capital
investments, net of unrealized depreciation of $34,124,848.
Historical
Investment Track Record
Since our investment in Otisville in
1983 through June 30, 2009, we have made a total of 84 venture capital
investments, including four private placement investments in securities of
publicly traded companies. We have exited 52 of these 84 investments,
realizing total proceeds of $143,926,604 on our invested capital of
$62,274,579. As measured from first dollar in to last dollar out, the
average and median holding periods for these 52 investments were 3.88 years and
3.24 years, respectively. As measured by the 177 separate rounds of
investment within these 52 investments, the average and median holding periods
for the 177 separate rounds of investment were 2.93 years and 2.58 years,
respectively.
Nineteen of the 52 investments sold
were profitable. The average and median holding periods, as measured
from first dollar in, of these 19 profitable investments were 4.03 years and
3.35 years, respectively. Of these 19 profitable investments, seven
were profitable sales after initial public offerings ("IPOs"), eight were
profitable merger and acquisition ("M&A") transactions, and four were
profitable sales of PIPES. As measured from first dollar in, the
average holding period for profitable exits after IPOs, M&A transactions and
PIPES was 4.26 years, 4.06 years and 1.07 years, respectively.
Thirty-three of the 52 investments sold
were unprofitable. Thirty-two of these investments were unprofitable
non-IPO disposals, and we sold one investment, in Princeton Video Image, Inc.,
whose IPO resulted in a loss. As measured from the first dollar in,
the average holding period for the 32 unprofitable non-IPO exits was 3.72 years
and the holding period for the unprofitable IPO exit was 7.74 years.
In 1994, we invested in our first
nanotechnology company, Nanophase Technologies
Corporation. Recognizing the potential of nanotechnology, we
continued to monitor developments in the field, and since 2001, we have made
nanotechnology and microsystems the exclusive focus of our initial investment
activity. From August 2001 through June 30, 2009, all 42 of our
initial investments have been in companies commercializing or integrating
products enabled by nanotechnology or microsystems. From August 2001
through June 30, 2009, we have invested a total (before any subsequent
write-ups, write-downs or dispositions) of $107,866,260 in these companies.
We currently have 31 active tiny
technology companies in our portfolio, including one investment made prior to
2001. At June 30, 2009, from first dollar in, the average and median
holding periods for these 31 active tiny technology investments were 4.14 years
and 3.64 years, respectively.
Tiny
Technology Companies in Our Active Portfolio as of June 30, 2009
|
Holding
Period (Years)
|
Adesto
Technologies Corporation
|
2.36
|
Ancora
Pharmaceuticals Inc.
|
2.16
|
BioVex
Group, Inc.
|
1.76
|
BridgeLux,
Inc. (formerly eLite Optoelectronics, Inc.)
|
4.12
|
Cambrios
Technologies Corporation
|
4.64
|
CFX
Battery, Inc. (formerly Lifco, Inc.)
|
2.03
|
Cobalt
Technologies, Inc.
|
0.73
|
Crystal
IS, Inc.
|
4.78
|
D-Wave
Systems, Inc.
|
3.20
|
Ensemble
Discovery Corporation
|
2.07
|
Innovalight,
Inc.
|
3.20
|
Kovio,
Inc.
|
3.64
|
Laser
Light Engines, Inc.
|
1.15
|
Mersana
Therapeutics, Inc. (formerly Nanopharma Corporation)
|
7.38
|
Metabolon,
Inc.
|
3.47
|
Molecular
Imprints, Inc.
|
5.25
|
NanoGram
Corporation
|
6.17
|
Nanomix,
Inc.
|
4.53
|
Nanosys,
Inc.
|
6.24
|
Nantero,
Inc.
|
7.90
|
NeoPhotonics
Corporation 2004
|
5.57
|
Nextreme
Thermal Solutions, Inc.
|
4.56
|
Polatis,
Inc. (formerly Continuum Photonics, Inc.)
|
7.02
|
PolyRemedy,
Inc.
|
1.39
|
Questech
Corporation (formerly Intaglio, Ltd.)
|
15.11
|
Siluria
Technologies, Inc.
|
1.70
|
SiOnyx,
Inc.
|
3.14
|
Tiny
Technology Companies in Our Active Portfolio as of June 30, 2009
|
Holding
Period (Years)
|
Solazyme,
Inc.
|
4.60
|
Starfire
Systems, Inc.
|
5.15
|
TetraVitae
Bioscience, Inc.
|
0.73
|
Xradia,
Inc.
|
2.50
|
Average
|
4.14
|
Median
|
3.64
|
Our cumulative dollars invested in
nanotechnology and microsystems increased from $489,999 for the year ended
December 31, 2001, to $107,866,260 through June 30, 2009.
Current
Venture Capital Portfolio
The following is a summary of our
initial and follow-on investments in nanotechnology from 2005 to June 30,
2009. We consider a "round led" to be a round where we were the new
investor or the leader of a set of investors in an investee
company. Typically, but not always, the lead investor negotiates the
price and terms of a deal with the investee company.
|
2005
|
2006
|
2007
|
2008
|
Six
Months
Ended
June 30, 2009
|
|
|
|
|
|
|
Total
Incremental Investments
|
$16,251,339
|
$24,408,187
|
$20,595,161
|
$17,779,462
|
$3,451,549
|
|
|
|
|
|
|
No.
of New Investments
|
4
|
6
|
7
|
4
|
0
|
|
|
|
|
|
|
No.
of Follow-On Investment Rounds
|
13
|
14
|
20
|
25
|
9
|
|
|
|
|
|
|
No.
of Rounds Led
|
0
|
7
|
3
|
4
|
1
|
|
|
|
|
|
|
Average
Dollar Amount – Initial
|
$1,575,000
|
$2,383,424
|
$1,086,441
|
$683,625
|
$0
|
|
|
|
|
|
|
Average
Dollar Amount – Follow-On
|
$765,488
|
$721,974
|
$649,504
|
$601,799
|
$383,505
|
We value our private venture capital
investments each quarter as determined in good faith by our Valuation Committee,
a committee of all the 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.")
As part of the valuation process, we
consider non-performance risk as the risk that a portfolio company will be: (a)
unable to raise capital, will need to be shut down and will not return our
invested capital; or (b) able to raise capital, but at a valuation significantly
lower than the implied post-money valuation. Our best estimate of the
non-performance risk of our portfolio companies has been quantified and included
in the valuation of the companies as of June 30, 2009. In the future,
as these companies receive terms for additional financings or are unable to
receive additional financing and, therefore, proceed with sales or shutdowns of
the business, we expect the contribution of the discount for non-performance
risk to vary in importance in determining the values of these companies.
In each of the years in the period 2005
through 2008, and for the six months ended June 30, 2009, 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.
|
2005
|
2006
|
2007
|
2008
|
Six
Months
Ended
June 30, 2009
|
|
|
|
|
|
|
Net
Asset Value, BOY
|
$74,744,799
|
$117,987,742
|
$113,930,303
|
$138,363,344
|
$109,531,113
|
|
|
|
|
|
|
Gross
Write-Downs During Year
|
$(3,450,236)
|
$(4,211,323)
|
$(7,810,794)
|
$(39,671,588)
|
$(6,209,125)
|
|
|
|
|
|
|
Gross
Write-Ups During Year
|
$23,485,176
|
$279,363
|
$11,694,618
|
$820,559
|
$9,788,856
|
|
|
|
|
|
|
Gross
Write-Downs as a Percentage of Net Asset Value, BOY
|
-4.62%
|
-3.57%
|
-6.86%
|
-28.67%
|
-5.67%
|
|
|
|
|
|
|
Gross
Write-Ups as a Percentage of Net Asset Value, BOY
|
31.42%
|
0.24%
|
10.26%
|
0.59%
|
8.94%
|
|
|
|
|
|
|
Net
Write-Downs/Write-Ups as a Percentage of Net Asset Value, BOY
|
26.8%
|
-3.33%
|
3.40%
|
-28.08%
|
3.27%
|
For the six months ended June 30, 2009,
we recorded gross write-downs of $6,209,125. These write-downs
primarily reflect our assessment of the non-performance risk associated with our
portfolio companies in the current business environment. This
non-performance risk discount accounted for the majority of the $6,209,125 in
gross write-downs. The remaining write-downs reflected adjustments of
valuations relating to specific fundamental developments unique to particular
portfolio companies.
For the six months ended June 30, 2009,
we recorded gross write-ups of $9,788,856. These write-ups were
primarily owing to adjustments of valuations relating to specific fundamental
developments unique to particular portfolio companies. For Solazyme,
Inc., and Nextreme Thermal Solutions, Inc., the largest two gross write-ups
totaling $7,579,616, fundamental developments, including financing events during
the first and second quarters of 2009, resulted in the removal of the discount
for non-performance risk for both companies.
The increase or decrease in the value
of our venture capital investments does not affect the day-to-day operations of
the Company, as 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 and agency obligations. As of June 30,
2009, we held $46,395,504 in U.S. government obligations.
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.
In previous years, we
have been able to generate substantial amounts of interest income from our
holdings of U.S. treasury securities. As of June 30, 2009, we held
four short-duration U.S. treasury
securities yielding 0.6 percent. As of June 30, 2009, yields
for 3-month, 6-month, and 12-month U.S. treasury securities were 0.19 percent,
0.35 percent and 0.56 percent, respectively. As of June 30, 2008,
yields for 3-month, 6-month, and 12-month U.S. treasury securities were 1.9
percent, 2.17 percent and 2.36 percent, respectively. With yields at
this level, we expect to generate less interest income than in previous fiscal
quarters and years.
Current
Business Environment
We
continually examine our approach to investing activities based on the market
conditions at the time of investment. The banking, global stock
market and commodity price collapses, and the further slowdown in global
economic activities that began with the intensification of the housing and
credit crises during the third quarter of 2008 remained a significant influence
on the value of assets and the economy in general during the second quarter of
2009. Although the value of publicly traded companies, one of the
most observable asset classes, increased broadly during the second quarter of
2009 from lows reached during the first quarter of 2009, these values, including
that of the Company, remain substantially below those before the economic
collapse. The table below compares these changes in value during the
past two quarters and from the 52-week high of each index and of the Company:
|
Q1
2009
|
Q2
2009
|
Change
From 52-Week
High
to 6/30/09
|
|
12/31/08
- 3/31/09
|
3/31/09
- 6/30/09
|
Dow
Jones Industrial Avg.
|
-13.3%
|
11.0%
|
-39.8%
|
Nasdaq
Composite
|
-3.1%
|
20.0%
|
-33.7%
|
S&P
500 Composite
|
-11.7%
|
15.2%
|
-43.8%
|
Russell
2000
|
-15.4%
|
20.2%
|
-48.4%
|
Harris
& Harris Group
|
-6.3%
|
57.6%
|
-44.1%
|
We
continue to view this devaluing process as both a concern and an
opportunity. We have historically not used leverage or debt financing
when making an investment; thus, we continue to finance our new and follow-on
investments from our cash reserves, currently invested in U.S. treasury
obligations. We have considered how the current conditions will
affect our ability to fund our own portfolio given that it may take longer for
us to realize returns on our investments through IPOs of portfolio companies,
M&A transactions involving portfolio companies or other capital raising
transactions, our ability to make new investments, the size and number of our
investments and how we will syndicate with other venture capital investors.
Many of
our portfolio companies are cash flow negative and, therefore, need additional
rounds of financing to continue operations. The availability of
capital has been severely affected by this economic downturn. Many
venture capital firms, including us, are evaluating their investment portfolios
carefully to assess future potential capital needs. In the current
business climate, this evaluation may result in a decrease in the number of
companies we decide to finance going forward or may increase the number of
companies we decide to sell before reaching their full potential. Our
ownership in portfolio companies that we decide to stop funding may be subject
to punitive actions that reduce or eliminate value. Such actions
could result in an unprofitable investment or a complete loss of invested
funds. If we decide to proceed with a follow-on investment, these
rounds of financing may occur at valuations lower than those at which we
invested originally.
From
conversations with venture capitalists, we believe that the continued collapse
in public market asset prices, the growing intensity of the slowdown in global
economic activities, and the quick response being taken by venture capitalists
to adjust their plans for new and follow-on investments has resulted in a
collapse in venture capital financings. This conclusion is supported
by the fact that according to Dow Jones VentureSource, venture capital
investment in the United States during the second quarter of 2009 was down
approximately 37 percent from the second quarter of 2008. The amount of
venture capital invested in the second quarter of 2009 increased by 32 percent
as compared to the first quarter of 2009, which experienced the lowest quarterly
venture capital investment since 1998. Similar to 2008, we expect
that our investment pace for new investments will decrease as compared with
recent years as we monitor the state of the capital markets. During
the first half of 2009, we made no new investments, and we invested $3,451,549
in follow-on investments. This pace compares with two new and 13
follow-on investments totaling $2,244,500 and $8,602,595, respectively, in the
first half of 2008. Although we did not invest in a new portfolio
company during the six months ended June 30, 2009, we intend to continue making
investments in new companies and will continue to evaluate investments in
companies enabled by nanotechnology and microsystems. Our aim is to
preserve our cash and manage our current operating expenses to enable us to make
follow-on investments in current portfolio companies and to look for new
investment opportunities.
For new
and follow-on investments, we generally syndicate with other venture capital
firms and corporate investors. We plan to continue this approach,
while taking into account that the current economic turmoil has affected the
availability of capital to our potential co-investors, particularly firms that
manage a small amount of assets. This fact may reduce the number of
potential co-investors available to us when forming syndicates. The
inability to form a syndicate of investors may decrease the number of
investments made by us in both new and current portfolio
companies.
Even
though the public markets increased in value during the second quarter of 2009,
the global economic recession continues to affect the ability of investors to
exit investments in privately held companies. As of the end of the second
quarter of 2009, published data showed that turmoil in the financial markets has
affected the values of venture capital-backed companies in M&A
transactions. According to data published in by Dow Jones
VentureSource, the median valuation of venture capital-backed companies sold in
M&A transactions during the second quarter of 2009 decreased by 46 percent
from the second quarter of 2008. Also according to Dow Jones
VentureSource, three venture capital-backed companies completed IPOs in the
second quarter of 2009, which followed three successive quarters of no IPOs of
venture capital-backed companies. Even with these IPOs, Dow Jones
VentureSource characterizes the second quarter of 2009 as one of the worst for
liquidity events, such as IPOs and M&A transactions, of venture
capital-backed companies since early 2003. We continue to believe
this lack of liquidity will negatively affect the amount of capital available to
privately held companies from venture capital firms. We also take
these factors into account when considering investments in new and current
portfolio companies. These data support our belief that the changes
in the value of publicly traded companies do not correspond on a one-to-one
basis with the value of privately held companies. As such, we expect that it may
take significantly more time for the liquidity market for venture capital-backed
companies to recover from the current economic turmoil than the public markets.
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 Gain (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.
Three
months ended June 30, 2009, as compared to the three months ended June 30, 2008
In the three months ended June 30,
2009, and June 30, 2008, we had a net increase in net assets resulting from
operations of $421,367 and $1,354,709, respectively.
Investment Income and
Expenses:
We had net operating losses of
$1,998,271 and $2,638,283 for the three months ended June 30, 2009, and June 30,
2008, respectively. The variation in these results is primarily owing
to the changes in investment income and operating expenses, including non-cash
expenses of $776,279 in 2009 and $1,499,345 in 2008 associated with the granting
of stock options. During the three months ended June 30, 2009, and
2008, total investment income was $83,834 and $467,625,
respectively. During the three months ended June 30, 2009, and 2008,
total operating expenses were $2,082,105 and $3,105,908, respectively.
During the three months ended June 30,
2009, as compared with the same period in 2008, investment income decreased,
primarily reflecting a substantial decrease in interest rates, as well as a
decrease in our average holdings of U.S. government securities. The
average yield on our U.S. government securities decreased from 3.47 percent for
the three months ended June 30, 2008, to 0.29 percent for the three months ended
June 30, 2009. During the three months ended June 30, 2009, our
average holdings of such securities were $48,961,646, as compared with
$53,439,644 during the three months ended June 30, 2008.
Operating expenses, including non-cash,
stock-based compensation expense, were $2,082,105 and $3,105,908 for the three
months ended June 30, 2009, and June 30, 2008, respectively. The
decrease in operating expenses for the three months ended June 30, 2009, as
compared to the three months ended June 30, 2008, was primarily owing to
decreases in salaries, benefits and stock-based compensation expense and to
decreases in administration and operations expense and professional fees, offset
by increases in directors' fees and expenses, rent expense and custodian
fees. Salaries,
benefits and stock-based compensation expense decreased by $955,205, or 38.8
percent, through June 30, 2009, as compared to June 30, 2008, primarily as a
result of a decrease in non-cash expense of $723,066 associated with the Stock
Plan and a decrease in salaries and benefits owing primarily to a decrease in
our headcount, including the retirement of Charles E. Harris. At June
30, 2009, we had 11 full-time employees, as compared with 13 full-time employees
at June 30, 2008. While the non-cash, stock-based compensation
expense for the Stock Plan increased our operating expenses by $776,279, 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 $52,200,
or 18.4 percent, through June 30, 2009, as compared to June 30, 2008, primarily
as a result of a decrease in our directors' and officers' liability insurance
expense and decreases in the cost of non-employee related insurance and managing
directors' travel-related expenses. Professional fees decreased by
$49,575, or 24.6 percent, for the three months ended June 30, 2009, as compared
with the same period in 2008, primarily as a result of a reduction in the amount
and timing of certain legal and accounting fees.
Directors' fees and expenses increased
by $9,931, or 12.5 percent, primarily as a result of additional meetings held
during the three months ended June 30, 2009, as compared with the same period in
2008. Rent expense increased by $19,250, or 32.2 percent, primarily
as a result of the rent associated with our Palo Alto office
lease. We sublet portions of this office and include the rental
income in miscellaneous income. Custodian fees increased by $4,937,
or 80.4 percent, compared to the same period in 2008. This increase
is owing to the higher fees charged by our new custodian.
Realized Income and Losses
from Investments:
During the three months ended June 30,
2009, we realized net losses on investments of $1,511,042, as compared with
realized net gains on investments of $3,912 during the three months ended June
30, 2008.
During the three months ended June 30,
2009, we realized net losses of $1,511,042, consisting of a realized loss of
$11,042 on our investment in Exponential Business Development Company and a
realized loss of $1,500,000 on our investment in Kereos, Inc. Since
the date of our investment of $25,000 in Exponential Business Development
Company in 1995, we periodically received cash distributions totaling $31,208
through the date of the sale.
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.
Net Unrealized Appreciation
and Depreciation of Portfolio Securities:
During the three months ended June 30,
2009, net unrealized depreciation on total investments decreased by $3,932,409,
or 11.9 percent, from net unrealized depreciation of $32,945,748 at March 31,
2009, to net unrealized depreciation of $29,013,339 at June 30,
2009. 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, 2009, net unrealized depreciation on our venture
capital investments decreased by $3,913,035, from net unrealized depreciation of
$32,942,791 at March 31, 2009, to net unrealized depreciation of $29,029,756 at
June 30, 2009, owing primarily to increases in the valuations of the following
investments held:
Investment
|
Amount of Write-Up
|
|
|
Metabolon,
Inc.
|
$
568,029
|
Molecular
Imprints, Inc.
|
1,073,605
|
NeoPhotonics
Corporation
|
630,977
|
Nextreme
Thermal Solutions, Inc.
|
2,202,628
|
Questech
Corporation
|
51,879
|
Siluria
Technologies, Inc.
|
160,723
|
The
write-ups for the three months ended June 30, 2009, were partially offset by
decreases in the valuations of the following investments held:
|
|
|
|
Ancora
Pharmaceuticals Inc.
|
$359,091
|
BioVex
Group, Inc.
|
25,462
|
BridgeLux,
Inc.
|
984
|
Kovio,
Inc.
|
6,762
|
Mersana
Therapeutics, Inc.
|
4,123
|
NanoGram
Corporation
|
735,903
|
Nanomix,
Inc.
|
30,050
|
Nanosys,
Inc.
|
1,342,529
|
PolyRemedy,
Inc.
|
28,384
|
We also
had decreases in the unrealized depreciation of Exponential Business Development
Company and Kereos, Inc., of $12,439 and $1,500,000,
respectively. These decreases were owing to unrealized appreciation
as a result of our disposal of these assets. We had an increase owing
to foreign currency translation of $246,043 on our investment in D-Wave Systems,
Inc. Unrealized depreciation on our U.S. government securities
portfolio decreased from $2,957 at March 31, 2009, to an unrealized appreciation
of $16,417 at June 30, 2009.
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.
Six
months ended June 30, 2009, as compared with the six months ended June 30, 2008
In the six months ended June 30, 2009,
and June 30, 2008, we had net decreases in net assets resulting from operations
of $530,057 and $1,934,326, respectively.
Investment Income and
Expenses:
We had net operating losses of
$4,097,150 and $5,118,901 for the six months ended June 30, 2009, and June 30,
2008, respectively. The variation in these results is primarily owing
to the changes in investment income and operating expenses, including non-cash
expenses of $1,411,917 in 2009 and $2,966,325 in 2008 associated with the
granting of stock options. During the six months ended June 30, 2009,
and 2008, total investment income was $60,273 and $1,043,927,
respectively. During the six months ended June 30, 2009, and 2008,
total operating expenses were $4,157,423 and $6,162,828, respectively.
During the six months ended June 30,
2009, as compared with the same period in 2008, investment income decreased,
reflecting a substantial decrease in interest rates, as well as a decrease in
our average holdings of U.S. government securities. The average yield
on our U.S. government securities decreased from 3.7 percent for the six months
ended June 30, 2008, to 0.30 percent for the six months ended June 30,
2009. During the six months ended June 30, 2009, our average holdings
of such securities were $50,358,585, as compared with $55,727,820 at June 30,
2008.
Operating expenses, including non-cash,
stock-based compensation expense, were $4,157,423 and $6,162,828 for the six
months ended June 30, 2009, and June 30, 2008, respectively. The
decrease in operating expenses for the six months ended June 30, 2009, as
compared with the six months ended June 30, 2008, was
primarily owing to decreases in salaries, benefits and stock-based compensation
expense and to decreases in administration and operations expense and directors'
fees and expenses, offset by increases in professional fees, rent expense and
custodian fees. Salaries, benefits and
stock-based compensation expense decreased by $2,001,160, or 40.9 percent,
through June 30, 2009, as compared to June 30, 2008, primarily as a result of a
decrease in non-cash expense of $1,554,408 associated with the Stock Plan and a
decrease in salaries and benefits owing primarily to a decrease in our
headcount, including the retirement of Charles E. Harris. At June 30,
2009, we had 11 full-time employees, as compared with 13 full-time employees at
June 30, 2008. While the non-cash, stock-based compensation expense
for the Stock Plan increased our operating expenses by $1,411,917, 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 $63,620, or 10.9 percent, through June 30, 2009,
as compared to June 30, 2008, primarily as a result of a decrease in our
directors' and officers' liability insurance expense and decreases in the cost
of non-employee related insurance and managing directors' travel-related
expenses. Professional fees increased by $27,443, or 8.1 percent, for
the six months ended June 30, 2009, as compared with the same period in 2008,
primarily as a result of an increase in certain accounting and legal fees,
offset by a reduction in the cost of our annual compliance program audit and a
reduction in certain consulting fees.
Rent expense increased by $39,459, or
33.6 percent, primarily as a result of the rent associated with our Palo Alto
office lease. We sublet portions of this office and include the
rental income in miscellaneous income. Custodian fees increased by
$5,246, or 41.3 percent, compared to the same period in 2008. This
increase is owing to the higher fees charged by our new custodian.
Realized Income and Losses
from Investments:
During the six months ended June 30,
2009, we realized net losses on investments of $1,514,655, as compared with
realized net losses on investments of $5,010,958 during the six months ended
June 30, 2008.
During the six months ended June 30,
2009, we realized net losses of $1,514,655, consisting primarily of a realized
loss of $14,330 on our investment in Exponential Business Development Company
and a realized loss of $1,500,000 on our investment in Kereos,
Inc. Since the date of our investment of $25,000 in Exponential
Business Development Company in 1995, we periodically received cash
distributions totaling $31,208 through the date of the sale.
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.
Net Unrealized Appreciation
and Depreciation of Portfolio Securities:
During the six months ended June 30,
2009, net
unrealized depreciation on total investments decreased by $5,083,857, or 14.9
percent, from net unrealized depreciation of $34,097,196 at December 31, 2008,
to net unrealized depreciation of $29,013,339 at June 30,
2009. 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, 2009, net unrealized depreciation on our venture
capital investments decreased by $5,095,092, from net unrealized depreciation of
$34,124,848 at December 31, 2008, to net unrealized depreciation of $29,029,756
at June 30, 2009, owing primarily to increases
in the valuations of the following investments held:
Investment
|
Amount of Write-Up
|
|
|
Metabolon,
Inc.
|
$205,198
|
Molecular
Imprints, Inc.
|
1,069,605
|
NeoPhotonics
Corporation
|
572,326
|
Nextreme
Thermal Solutions, Inc.
|
2,202,628
|
Questech
Corporation
|
22,690
|
Siluria
Technologies, Inc.
|
160,723
|
Solazyme,
Inc.
|
5,376,988
|
These
write-ups for the six months ended June 30, 2009, were partially offset by the
following write-downs:
Investment
|
Amount of Write-Down
|
|
|
Ancora
Pharmaceuticals Inc.
|
$759,091
|
BioVex
Group, Inc.
|
19,621
|
BridgeLux,
Inc.
|
1,967
|
Crystal
IS, Inc.
|
332,238
|
CSwitch,
Inc.
|
20,286
|
Kovio,
Inc.
|
12,491
|
Laser
Light Engines, Inc.
|
500,000
|
Mersana
Therapeutics, Inc.
|
7,880
|
NanoGram
Corporation
|
735,903
|
Nanomix,
Inc.
|
30,050
|
Nanosys,
Inc.
|
2,685,059
|
PolyRemedy,
Inc.
|
28,384
|
SiOnyx,
Inc.
|
1,076,155
|
We also
had decreases to unrealized depreciation for Exponential Business Development
Company and Kereos, Inc., of $15,361 and $1,500,000, respectively, owing to the
disposal of their securities and changes in the capital account balance of
Exponential Business Development Company prior to its sale.
We had an
increase owing to foreign currency translation of $178,698 on our investment in
D-Wave Systems, Inc. Unrealized appreciation on our U.S. government
securities portfolio decreased from $27,652 at December 31, 2008, to $16,417 at
June 30, 2009.
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.
Years
Ended December 31, 2008, 2007 and 2006
During the years ended December 31,
2008, 2007 and 2006, we had net decreases in net assets resulting from
operations of $49,181,497, $6,716,445, and $11,773,112,
respectively.
Investment Income and
Expenses:
During the years ended December 31,
2008, 2007 and 2006, we had net operating losses of $10,687,151, $11,827,543,
and $7,612,935, respectively. The variation in these results is
primarily owing to the changes in investment income and operating expenses,
including non-cash expense of $5,965,769 in 2008, $8,050,807 in 2007, and
$5,038,956 in 2006 associated with the granting of stock
options. During the years ended December 31, 2008, 2007 and 2006,
total investment income was $1,987,347, $2,705,636, and $3,028,761,
respectively. During the years ended December 31, 2008, 2007 and
2006, total operating expenses were $12,674,498, $14,533,179, and $10,641,696,
respectively.
During 2008, as compared with 2007,
investment income decreased from $2,705,636 to $1,987,347, reflecting a decrease
in our average holdings of U.S. government securities throughout the period and
a decrease in interest rates. During the twelve months ended December
31, 2008, our average holdings of such securities were $55,978,372, as compared
with $62,184,565 during the year ended December 31, 2007.
Operating expenses, including non-cash,
stock-based compensation expenses, were $12,674,498 and $14,533,179 for the
twelve months ended December 31, 2008, and December 31, 2007,
respectively. The decrease in operating expenses for the twelve
months ended December 31, 2008, as compared to the twelve months ended December
31, 2007, was primarily owing to decreases in salaries, benefits and stock-based
compensation expenses and to decreases in administration and operations expense,
professional fees and directors' fees and expenses. Salaries,
benefits and non-cash, stock-based compensation expense decreased by $1,344,671,
or 11.8 percent, through December 31, 2008, as compared to December 31, 2007,
primarily as a result of a decrease in non-cash expense of $2,085,038 through
December 31, 2008, associated with the Stock Plan, offset by an increase in
salaries and benefits owing to bonus payments and increased health insurance
costs. While the non-cash, stock-based, compensation expense for the
Stock Plan increased our operating expenses by $5,965,769, 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 $272,628, or 19.0 percent, for the twelve months
ended December 31, 2008, as compared with the same period in 2007, primarily as
a result of a decrease in our directors' and officers' liability insurance
expense, decreases in the cost of the annual report and proxy-related expenses,
and decreases in fees associated with the exercise of stock
options. Professional fees decreased by $208,904, or 23.1 percent,
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. Directors' fees and expenses decreased by $67,677, or 15.6
percent, primarily as a result of fewer meetings held during the year ended
December 31, 2008, as compared with the same period through December 31,
2007.
During 2007, as compared with 2006,
investment income decreased from $3,028,761 to $2,705,636, reflecting a decrease
in our average holdings of U.S. government securities throughout the
period. During the twelve months ended December 31, 2007, our average
holdings of such securities were $62,184,565, as compared with $69,506,136 at
December 31, 2006.
Operating expenses, including non-cash,
stock-based compensation expenses, were $14,533,179 and $10,641,696 for the
twelve months ended December 31, 2007, and December 31, 2006,
respectively. The increase in operating expenses for the twelve
months ended December 31, 2007, as compared to the twelve months ended December
31, 2006, was primarily owing to increases in salaries, benefits and stock-based
compensation expenses and to increases in administration and operations expense,
professional fees and directors' fees and expenses. Salaries,
benefits and non-cash, stock-based compensation expense increased by $3,502,053,
or 44.1 percent, through December 31, 2007, as compared to December 31, 2006,
primarily as a result of an increase in non-cash expense of $3,011,851 through
December 31, 2007, associated with the Stock Plan. While the
non-cash, stock-based, compensation expense for the Stock Plan increased our
operating expenses by $8,050,807, this increase was offset by a corresponding
increase to our additional paid-in capital, resulting in no net impact to our
net asset value. The non-cash, stock-based, compensation expense and
corresponding increase to our additional paid-in capital may increase in future
quarters. Salaries and benefits also increased for the twelve months ended
December 31, 2007, owing to an increase in our headcount as compared with that
of the same period in 2006. At December 31, 2007, we had 13 full-time
employees, as compared with 10 full-time employees and one part-time employee at
December 31, 2006. Administration and operations expense increased by
$182,573, or 14.6 percent, for the twelve months ended December 31, 2007, as
compared with the same period in 2006, owing to an increase in Nasdaq Global
Market fees related to the increase in our number of outstanding shares and
increased office-related and travel expenses related to the increase
in headcount. Professional fees increased by $165,083, or 22.4
percent, primarily as a result of an increase in legal fees, an increase in
audit fees and corporate consulting costs for the audit of our compliance
program. Directors' fees and expenses increased by $94,310, or 27.7
percent, primarily as a result of additional meetings held in the period ended
December 31, 2007, as compared with the period ended December 31, 2006, as well
as an increase in the monthly retainers paid to committee chairs and to the Lead
Independent Director.
During 2006, investment income
increased, reflecting an increase in our average holdings of U.S. government
securities, as our average holdings increased from $50,620,881 at December 31,
2005, to $69,506,136 at December 31, 2006, and as a result of an increase in
interest rates during the year. During 2005, investment income
increased, reflecting an increase in our income on U.S. government securities,
as our holdings increased from $44,622,722 at December 31, 2004 to $96,250,864
at December 31, 2005, and as a result of an increase in interest rates during
the year.
The increase in operating expenses for
the year ended December 31, 2006, was primarily owing to increases in salaries,
benefits and stock-based compensation expense, and directors' fees and expenses,
offset by decreases in administrative and operations expenses, profit-sharing
expense and professional fees. Salaries, benefits and stock-based
compensation expense increased by $5,474,243, or 222.6 percent, for the year
ended December 31, 2006, as compared with December 31, 2005, primarily as a
result of non-cash expense of $5,038,956 associated with the Stock Plan adopted
during the second quarter of 2006 and secondarily as a result of an increase in
the number of full-time employees. The increase in salaries, benefits
and stock-based compensation expense reflects expenses associated with ten
full-time employees and one part-time employee during the year ended December
31, 2006, as compared with an average of nine full-time employees during the
year ended December 31, 2005. Salaries, benefits and stock-based
compensation include $5,038,956 of non-cash expense associated with the Stock
Plan, versus no such charge in 2005. Directors' fees and expenses
increased by $31,876, or 10.3 percent, as a result of additional meetings held
in 2006 related to the adoption of the Stock Plan. Administrative and
operations expense decreased by $69,274, or 5.3 percent, primarily as a result
of a decrease in our directors' and officers' liability insurance expense and
decreases in the cost of proxy-related expenses. Profit-sharing
expense for the year ended December 31, 2006, was $50,875, as compared with
$1,796,264 for December 31, 2005, owing to the termination of the profit-sharing
plan effective May 4, 2006. We recorded $50,875 of profit-sharing
expense toward the remainder of the 2005 profit-sharing payment in the year
ended December 31, 2006, because of updated estimates of our ultimate tax
liability for 2005. Professional fees decreased by $92,234, or 11.1
percent, for the year ended December 31, 2006, as compared with December 31,
2005. Professional fees were lower for the year ended December 31,
2006, as compared with December 31, 2005, primarily as a result of the
elimination of consulting costs incurred for a temporary Senior Controller in
2005 and the reduction of some of our Sarbanes-Oxley-related compliance costs
incurred in 2005.
Realized Gains and Losses
from Investments:
During the year ended December 31,
2008, we realized net losses on investments of $8,323,634. During the
years ended December 31, 2007, and 2006, we had net realized income from
investments of $30,162, and $258,693, respectively. The variation in
these results is primarily owing to variations in gross realized gains and
losses from investments and income taxes in each of the three
years. For the years ended December 31, 2008, 2007, and 2006, we
realized (losses) gains from investments, before taxes, of $(8,289,513),
$118,137, and $31,338, respectively. Income tax expense (benefit) for
the years ended December 31, 2008, 2007, and 2006 was $34,121, $87,975, and
$(227,355), respectively.
During the year ended December 31,
2008, we realized net losses of $8,289,513, consisting primarily of realized
losses on our investments in Chlorogen, Inc., of $1,326,072, on Evolved
Nanomaterial Sciences, Inc., of $2,800,000, on NanoOpto Corporation of
$3,688,581, on Phoenix Molecular Corporation of $93,487, on Questech Corporation
of $16,253 and on Zia Laser of $1,478,500, offset by realized gains of
$1,110,821 on the sale of U.S. government securities. During the
first quarter of 2008, we received a payment of $105,714 from the NanoOpto
Corporation bridge note.
During the year ended December 31,
2007, we realized net gains of $118,137, consisting primarily of proceeds
received from the sale of our interest in AlphaSimplex Group, LLC, and income
from our investment in Exponential Business Development
Company. During the year ended December 31, 2007, we recognized tax
expense of $87,975, consisting of $74,454 of interest and penalties related to
our 2005 tax returns and $13,521 in current year expense.
During the year ended December 31,
2006, we realized net gains of $31,338, consisting primarily of proceeds
received from the liquidation of Optiva, Inc., proceeds received from
Exponential Business Development Company, and net losses realized on our
investment in AlphaSimplex Group, LLC. During 2005, we deemed the
securities we held in Optiva, Inc., worthless and recorded the proceeds received
and due to us on the liquidation of our bridge notes, realizing a loss of
$1,619,245. At December 31, 2005, we recorded a $75,000 receivable
for estimated proceeds from the final payment on the Optiva, Inc., bridge
notes. During the first quarter of 2006, we received payment of
$95,688 from these bridge notes, resulting in the realized gain of $20,688 on
Optiva, Inc. During the year ended December 31, 2006, we realized tax benefits
of $227,355 for 2005 taxes that had been refunded.
Net Unrealized Appreciation and
Depreciation of Portfolio Securities:
During the year ended December 31,
2008, net unrealized depreciation on total investments increased by
$30,170,712.
During the year ended December 31,
2007, net unrealized depreciation on total investments decreased by
$5,080,936.
During the year ended December 31,
2006, net unrealized depreciation on total investments increased by
$4,418,870.
During
the year ended December 31, 2008, net unrealized depreciation on our venture
capital investments increased by $29,557,704, or 647.2 percent, from net
unrealized depreciation of $4,567,144 at December 31, 2007, to net unrealized
depreciation of $34,124,848 at December 31, 2008, owing primarily to decreases
in the valuations of the following investments held:
Investment
|
Amount of Write-Down
|
|
|
Adesto
Technologies Corporation
|
$1,100,000
|
Ancora
Pharmaceuticals, Inc.
|
299,439
|
BioVex
Group, Inc.
|
2,439,250
|
BridgeLux,
Inc.
|
3,624,553
|
Cambrios
Technologies Corporation
|
1,297,012
|
Cobalt
Technologies, Inc.
|
187,499
|
Crystal
IS, Inc.
|
1,001,300
|
CSwitch
Corporation
|
5,177,946
|
D-Wave
Systems, Inc.
|
22,670
|
Ensemble
Discovery Corporation
|
1,000,000
|
Innovalight,
Inc.
|
1,927,946
|
Kereos,
Inc.
|
159,743
|
Kovio,
Inc.
|
761,497
|
Mersana
Therapeutics, Inc.
|
1,019,613
|
Metabolon,
Inc.
|
2,136,734
|
Molecular
Imprints, Inc.
|
2,365,417
|
NanoGram
Corporation
|
4,415,417
|
Nanomix,
Inc.
|
980,418
|
NeoPhotonics
Corporation
|
4,024,305
|
Nextreme
Thermal Solutions, Inc.
|
2,182,133
|
Polatis,
Inc.
|
276,526
|
PolyRemedy,
Inc.
|
122,250
|
Questech
Corporation
|
463,968
|
Siluria
Technologies, Inc.
|
160,723
|
SiOnyx,
Inc.
|
1,076,153
|
Starfire
Systems, Inc.
|
750,000
|
TetraVitae
Bioscience, Inc.
|
125,000
|
We also
had decreases in unrealized depreciation attributable to the reversal of
depreciation owing to net realized losses on Chlorogen, Inc., of $1,326,072, on
Evolved Nanomaterial Sciences, Inc., of $2,800,000, on NanoOpto Corporation of
$3,688,581, on Questech Corporation of $16,253 owing to a realized loss on an
unexercised warrant that expired on November 19, 2008, and on Zia Laser, Inc.,
of $1,478,672. For
the twelve months ended December 31, 2008, we had increases in the valuations of
our investments in Exponential Business Development Company of $25 and Solazyme,
Inc., of $820,534. We had a decrease owing to foreign currency
translation of $590,329 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 $27,652 at December 31, 2008.
During
the year ended December 31, 2007, net unrealized depreciation on our venture
capital investments decreased by $3,883,825, or 46.0 percent, from $8,450,969 to
$4,567,144, owing primarily to increases in the valuations of our investments in
BridgeLux, Inc., of $3,699,529, Crystal IS, Inc., of $13,819, CSwitch
Corporation, of $48,935, D-Wave Systems, Inc., of $202,408, Exponential Business
Development Company of $2,026, Innovalight, Inc., of $3,218,216, Kovio, Inc., of
$125,000, Mersana Therapeutics, Inc., of $118,378, NanoGram Corporation of
$2,437,136, NeoPhotonics Corporation of $2,160, SiOnyx, Inc., of $899,566,
Solazyme, Inc., of $612,291 and Zia Laser, Inc., of $6,329, offset by decreases
in the valuations of our investments in Ancora Pharmaceuticals, Inc., of
$100,561, Chlorogen, Inc., of $1,326,073, Evolved Nanomaterial
Sciences, Inc., of $2,800,000, Kereos, Inc., of $1,340,257, Nanomix, Inc., of
$459,772, NanoOpto Corporation of $1,369,885, Polatis, Inc., of $9,534 and
Questech Corporation of $404,712. We also had an increase owing to
foreign currency translation of $307,636 on our investment in D-Wave Systems,
Inc. Unrealized depreciation on our U.S. government securities
portfolio decreased from $556,451 at December 31, 2006, to unrealized
appreciation of $640,660 at December 31, 2007.
The net
increase in unrealized depreciation on our venture capital investments in 2006
was owing primarily to decreases in the valuations of our investments in
Nanomix, Inc., of $1,710,000, NanoOpto Corporation of $1,211,259, NeoPhotonics
Corporation of $254,238, Polatis, Inc., of $145,228, SiOnyx, Inc., of $679,950
and Zia Laser, Inc., of $172,500, and to increases in the valuations of our
investments in Crystal IS of $19,735 and Questech Corporation of
$259,628. We also had a decrease, owing to foreign currency
translation, of $34,103 on our investment in D-Wave Systems,
Inc. Unrealized depreciation on our U.S. government securities
portfolio increased from $69,541 at December 31, 2005, to $556,451 at December
31, 2006.
Financial
Condition
At June 30, 2009, our total assets and
net assets were $112,355,847 and $110,412,973, respectively. At
December 31, 2008, they were $111,627,601 and $109,531,113, respectively.
At June 30, 2009, net asset value per
share was $4.27, as compared with $4.24 at December 31, 2008. At June
30, 2009, and December 31, 2008, our shares outstanding were 25,859,573.
Significant developments in the six
months ended June 30, 2009, included an increase in
the holdings of our venture capital investments of $6,994,658 and a decrease in
our holdings in U.S. government obligations of $6,588,436. The
increase in the value of our venture capital investments from $56,965,153 at
December 31, 2008, to $63,959,811 at June 30, 2009, resulted primarily from an
increase in the net value of our venture capital investments of $5,095,092 and
from nine follow-on investments of $3,451,549. The decrease in the
value of our U.S. government obligations from $52,983,940 at December 31, 2008,
to $46,395,504 at June 30, 2009, is primarily owing to the payment of cash basis
operating expenses of $2,632,992 and to follow-on venture capital investments
totaling $3,451,549.
The following table is a summary of
additions to our portfolio of venture capital investments made during the six
months ended June 30, 2009:
Follow-On Investments
|
|
|
|
|
|
|
|
Adesto
Technologies Corp.
|
|
$
|
550,000
|
|
BioVex
Group, Inc.
|
|
$
|
111,111
|
|
BioVex
Group, Inc.
|
|
$
|
166,667
|
|
CFX
Battery, Inc.
|
|
$
|
3,492
|
|
Crystal
IS, Inc.
|
|
$
|
408,573
|
|
Laser
Light Engines, Inc.
|
|
$
|
890,000
|
|
Mersana
Therapeutics, Inc.
|
|
$
|
200,000
|
|
Metabolon,
Inc.
|
|
$
|
1,000,000
|
|
PolyRemedy,
Inc.
|
|
$
|
121,706 |
|
|
|
|
|
|
Total
|
|
$
|
3,451,549 |
|
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, 2009, and December 31,
2008:
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Venture
capital investments, at cost
|
|
$
|
92,989,567
|
|
|
$
|
91,090,001
|
|
Net
unrealized depreciation(1)
|
|
|
29,029,756 |
|
|
|
34,124,848 |
|
Venture
capital investments, at value
|
|
$
|
63,959,811 |
|
|
$
|
56,965,153 |
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
U.S.
government obligations, at cost
|
|
$
|
46,379,087
|
|
|
$
|
52,956,288
|
|
Net
unrealized appreciation(1)
|
|
|
16,417 |
|
|
|
27,652 |
|
U.S.
government obligations, at value
|
|
$
|
46,395,504 |
|
|
$
|
52,983,940 |
|
(1)At June
30, 2009, and December 31, 2008, the net accumulated unrealized depreciation on
investments was $29,013,339 and $34,097,196, respectively.
December
31, 2008
At December 31, 2008, our total assets
and net assets were $111,627,601 and $109,531,113, respectively. Our
net asset value per share at that date was $4.24, and our shares outstanding
increased to 25,859,573 at December 31, 2008.
Significant developments in the twelve
months ended December 31, 2008, included a decrease in
the value of our venture capital investments of $21,145,231 and a decrease in
our holdings in U.S. government obligations of $7,209,653. The
decrease in the value of our venture capital investments from $78,110,384 at
December 31, 2007, to $56,965,153 at December 31, 2008, resulted primarily from
a decrease in the net value of our venture capital investments of $29,557,704,
offset by four new and 25 follow-on investments of $17,779,462. The
decrease in the net value of our venture capital investments is primarily owing
to the non-performance risk associated with our portfolio companies in the
current economic environment and secondarily to adjustments of valuation to
reflect specific fundamental developments unique to particular portfolio
companies. The decrease in the value of our U.S. government
obligations from $60,193,593 at December 31, 2007, to $52,983,940 at December
31, 2008, is primarily owing to the payment of cash basis operating expenses of
$6,397,424 and to new and follow-on venture capital investments totaling
$17,779,462, offset by investment of net proceeds of $14,383,497 received
through the registered direct stock offering.
The following table is a summary of
additions to our portfolio of venture capital investments made during the twelve
months ended December 31, 2008:
New Investments
|
|
Amount
|
|
|
|
|
|
Cobalt
Technologies, Inc.
|
|
$ |
240,000 |
|
Laser
Light Engines, Inc.
|
|
$ |
2,000,000 |
|
PolyRemedy,
Inc.
|
|
$ |
244,500 |
|
TetraVitae
Bioscience, Inc.
|
|
$ |
250,000 |
|
|
|
|
|
|
Follow-on Investments
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation
|
|
$ |
1,052,174 |
|
Ancora
Pharmaceuticals Inc.
|
|
$ |
800,000 |
|
BioVex
Group, Inc.
|
|
$ |
200,000 |
|
BridgeLux,
Inc.
|
|
$ |
1,000,001 |
|
Cobalt
Technologies, Inc.
|
|
$ |
134,999 |
|
CFX
Battery, Inc.
|
|
$ |
526,736 |
|
CSwitch
Corporation
|
|
$ |
986,821 |
|
CSwitch
Corporation
|
|
$ |
250,000 |
|
D-Wave
Systems, Inc.
|
|
$ |
736,019 |
|
D-Wave
Systems, Inc.
|
|
$ |
487,804 |
|
Ensemble
Discovery Corporation
|
|
$ |
250,286 |
|
Kovio,
Inc.
|
|
$ |
1,500,000 |
|
Mersana
Therapeutics, Inc.
|
|
$ |
200,000 |
|
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 |
|
Nextreme
Thermal Solutions, Inc.
|
|
$ |
800,000 |
|
Nextreme
Thermal Solutions, Inc.
|
|
$ |
1,050,000 |
|
Phoenix
Molecular Corporation
|
|
$ |
25,000 |
|
Phoenix
Molecular Corporation
|
|
$ |
25,000 |
|
Siluria
Technologies, Inc.
|
|
$ |
42,542 |
|
Solazyme,
Inc.
|
|
$ |
2,000,000 |
|
Solazyme,
Inc.
|
|
$ |
1,000,000 |
|
|
|
|
|
|
Total
|
|
$ |
17,779,462 |
|
The following tables summarize the
values of our portfolios of venture capital investments and U.S. government
obligations, as compared with their cost, at December 31, 2008, and December 31,
2007:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Venture
capital investments, at cost
|
|
$ |
91,090,001 |
|
|
$ |
82,677,528 |
|
Net
unrealized depreciation (1)
|
|
|
34,124,848 |
|
|
|
4,567,144 |
|
Venture
capital investments, at value
|
|
$ |
56,965,153 |
|
|
$ |
78,110,384 |
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
U.S.
government obligations, at cost
|
|
$ |
52,956,288 |
|
|
$ |
59,552,933 |
|
Net
unrealized appreciation(1)
|
|
|
27,652 |
|
|
|
640,660 |
|
U.S.
government obligations, at value
|
|
$ |
52,983,940 |
|
|
$ |
60,193,593 |
|
(1)At
December 31, 2008, and December 31, 2007, the net accumulated unrealized
depreciation on investments was $34,097,196 and $3,926,484,
respectively.
December
31, 2007
At December 31, 2007, our total assets
and net assets were $142,893,332 and $138,363,344, respectively. Our
net asset value per share at that date was $5.93, and our shares outstanding
increased to 23,314,573 at December 31, 2007.
During the twelve months ended December
31, 2007, significant developments included an increase in the value of our
venture capital investments of $24,442,553 and an increase in the value of our
investment in U.S. government obligations of $1,537,446. The increase
in the value of our venture capital investments, from $53,667,831 at December
31, 2006, to $78,110,384 at December 31, 2007, resulted primarily from seven new
and 20 follow-on investments and by a net increase of $3,883,825 in the net
value of our venture capital investments. The increase in the value
of our U.S. government obligations, from $58,656,147 at December 31, 2006, to
$60,193,593 at December 31, 2007, is primarily owing to the use of net proceeds
of $12,993,168 received through a registered stock offering and proceeds
received from stock option exercises of $10,105,511, offset by a payment of
$80,236 for federal tax and interest and penalties, profit sharing payments of
$261,661, net operating expenses and by new and follow-on venture capital
investments totaling $20,595,161.
For the year ended December 31, 2007,
the Company issued 999,556 shares and received proceeds of $10,105,511 as a
result of employee stock option exercises.
The following table is a summary of
additions to our portfolio of venture capital investments made during the twelve
months ended December 31, 2007:
New Investments
|
|
Amount
|
|
|
|
|
|
Adesto
Technologies Corporation
|
|
$ |
1,147,826 |
|
Ancora
Pharmaceuticals, Inc.
|
|
$ |
800,000 |
|
BioVex
Group, Inc.
|
|
$ |
2,500,000 |
|
Ensemble
Discovery Corporation
|
|
$ |
2,000,000 |
|
Lifco,
Inc.
|
|
$ |
946,528 |
|
Phoenix
Molecular Corporation
|
|
$ |
50,010 |
|
Siluria
Technologies, Inc.
|
|
$ |
160,723 |
|
|
|
|
|
|
Follow-on Investments
|
|
|
|
|
|
|
|
|
|
BridgeLux,
Inc.
|
|
$ |
350,877 |
|
BridgeLux,
Inc.
|
|
$ |
233,918 |
|
BridgeLux,
Inc.
|
|
$ |
916,928 |
|
Cambrios
Technologies Corporation
|
|
$ |
1,300,000 |
|
Chlorogen,
Inc.
|
|
$ |
7,042 |
|
CSwitch
Corporation
|
|
$ |
32,624 |
|
CSwitch
Corporation
|
|
$ |
529,852 |
|
Innovalight,
Inc.
|
|
$ |
1,993,568 |
|
Kereos,
Inc.
|
|
$ |
540,000 |
|
Kovio,
Inc.
|
|
$ |
1,000,000 |
|
NanoGram
Corporation
|
|
$ |
851,393 |
|
Mersana
Therapeutics, Inc.
|
|
$ |
500,000 |
|
Nanomix,
Inc.
|
|
$ |
680,240 |
|
NanoOpto
Corporation
|
|
$ |
268,654 |
|
Nextreme
Thermal Solutions, Inc.
|
|
$ |
750,000 |
|
Polatis,
Inc.
|
|
$ |
17,942 |
|
Polatis,
Inc.
|
|
$ |
13,454 |
|
Polatis,
Inc.
|
|
$ |
58,582 |
|
SiOnyx,
Inc.
|
|
$ |
2,445,000 |
|
Solazyme,
Inc.
|
|
$ |
500,000 |
|
|
|
|
|
|
Total
|
|
$ |
20,595,161 |
|
Cash
Flow
Year
Ended December 31, 2008
Net cash used in operating activities
for the year ended December 31, 2008, was $4,155,439, primarily owing to the
payment of operating expenses.
Cash used in investing activities for
the year ended December 31, 2008, was $9,865,758, primarily reflecting a net
decrease in our investment in U.S. government securities of $7,798,836 and
investments in private placements of $17,779,462, less proceeds from the sale of
venture capital investments of $136,837.
Cash provided by financing activities
for the year ended December 31, 2008, was $14,383,497, resulting
from the issuance of 2,545,000 new shares of our Common Stock on June 20, 2008,
in a registered direct stock offering.
Year
Ended December 31, 2007
Net cash used in operating activities
for the year ended December 31, 2007, was $4,142,572, primarily owing to the
payment of operating expenses.
Cash used in investing activities for
the year ended December 31, 2007, was $20,697,886, primarily reflecting a net
increase in our investment in U.S. government obligations of $235,754
and investments in private placements of $20,595,161, less proceeds from the
sale of venture capital investments of $174,669.
Cash provided by financing activities
for the year ended December 31, 2007, was $23,098,679, reflecting
the issuance of shares in connection with the Stock Plan and the net proceeds
from the issuance of 1,300,000 new shares of our Common Stock on June 25, 2007,
in a registered direct follow-on offering.
Year
Ended December 31, 2006
Net cash used in operating activities
for the year ended December 31, 2006, was $14,955,302, primarily owing both to
the payment of various federal, state and local taxes, including the tax paid on
behalf of shareholders for the deemed dividend, and to the payment of operating
expenses.
Cash provided by investing activities
for the year ended December 31, 2006, was $13,198,611, primarily reflecting net
proceeds from the sale of U.S. government obligations of $37,593,589, less
investments in private placements of $24,408,187.
Cash provided by financing activities
for the year ended December 31, 2006, was $2,615,190, reflecting
the issuance of shares in connection with the Stock Plan.
Liquidity
and Capital Resources
June
30, 2009
Our liquidity and capital resources
are generated and generally available through our cash holdings, interest earned
on our investments on U.S. government securities, cash flows from the sales of
U.S. government securities, proceeds from periodic follow-on equity offerings
and realized capital gains retained for reinvestment.
We fund
our day-to-day operations using interest earned and proceeds from the sales of
our investments in U.S. government securities. The increase or
decrease in the valuations of our portfolio companies does not impact our daily
liquidity. At June 30, 2009, and December 31, 2008, we had no
investments in money market mutual funds. We have no debt
outstanding, and, therefore, are not subject to credit agency downgrades.
At June 30, 2009, and December 31,
2008, our total net primary liquidity was $47,714,871 and $53,701,819,
respectively. The decrease in our primary liquidity from December 31,
2008, to June 30, 2009, is primarily owing to the use of funds for investments
and payment of net operating expenses.
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 have used all of
the net proceeds of this offering to make new investments in nanotechnology, as
well as for follow-on investments in our existing venture capital investments
and for working capital.
We
believe that the market disruption that continued during the second quarter of
2009 may continue to adversely affect financial services companies with respect
to the valuation of their investment portfolios, tighter lending standards and
reduced access to capital. In addition, the economies of the United
States and many other countries are in recession. These conditions
may lead to a further decline in net asset value and/or decline in valuations of
our portfolio companies. Although we cannot predict future market
conditions, we continue to believe that our current cash and U.S. government
security holdings and our ability to adjust our investment pace will provide us
with adequate liquidity to execute our current business strategy.
Except
for a rights offering, we are also generally not able to issue and sell our
common stock at a price below our net asset value per share, exclusive of any
distributing commission or discount, without shareholder approval. As
of June 30, 2009, our net asset value was $4.27 per share and our closing market
price was $5.83 per share. We do not currently have shareholder
approval to issue or sell shares below our net asset value per share.
December
31, 2008
At December 31, 2008, and December 31,
2007, our total net primary liquidity was $53,701,819 and $61,183,136,
respectively.
Our net primary sources of liquidity,
which consist of cash, U.S. government obligations and receivables, are adequate
to cover our gross cash operating expenses. Our gross cash operating
expenses for 2008 and 2007 totaled $6,397,424 and $6,263,510,
respectively.
The decrease in our primary liquidity
from December 31, 2007, to December 31, 2008, is primarily owing to the use of
funds for investments and payment of net operating expenses, partially offset by
the proceeds received through the registered direct stock offering.
On June 25, 2007, we completed the sale
of 1,300,000 shares of our Common Stock from the 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 nanotechnology, as well as for follow-on investments in our
existing venture capital investments and for working capital. Through
December 31, 2008, we have used all of the net proceeds from this offering for
these purposes.
On April
17, 2003, we signed a seven-year sublease for office space at 111 West 57th Street
in New York City. On December 17, 2004, we signed a sublease for
additional office space at our current location. The subleases expire
on April 29, 2010. Total rent expense for our office space in New
York City was $186,698 in 2008, $178,167 in 2007, and $174,625 in
2006. The minimum sublease payments in 2009 will be $197,700
and $65,969 thereafter for the remaining term.
On July 1, 2008, we signed a five-year
lease for office space at 420 Florence Street, Suite 200, Palo Alto, California,
commencing on August 1, 2008, and expiring on August 31, 2013. Total
rent expense for our office space in Palo Alto was $51,525 in
2008. Future minimum lease payments in each of the following years
are: 2009 - $125,206; 2010 - $128,962; 2011 - $132,831; 2012 - $136,816 and 2013
- $93,135.
December
31, 2007
At December 31, 2007, and December 31,
2006, our total net primary liquidity was $61,183,136 and $61,323,306,
respectively.
Our gross cash operating expenses for
2007 and 2006 totaled $6,263,510 and $5,285,448, respectively.
The increase in our primary liquidity
from December 31, 2006, to December 31, 2007, is primarily owing to the proceeds
received through a registered direct stock offering from a shelf registration
statement and proceeds received from stock option exercises, offset by the use
of funds for investments and payment of net operating expenses.
RISK
FACTORS
Investing
in our Common Stock involves significant risks relating to our business and
investment objective. You should carefully consider the risks and
uncertainties described below before you purchase any of our Common
Stock. These risks and uncertainties are not the only ones we
face. Unknown additional risks and uncertainties, or ones that we
currently consider immaterial, may also impair our business. If any
of these risks or uncertainties materializes, our business, financial condition
or results of operations could be materially adversely affected. In
this event, the trading price of our Common Stock could decline, and you could
lose all or part of your investment.
Risks
related to the companies in our portfolio.
The
recent financial crisis could increase the non-performance risk for our
portfolio companies.
The
global financial markets are in turmoil, and the economies of the U.S. and many
other countries are in recession, which may be severe and
prolonged. This status results in severely diminished opportunities
for liquidity and credit availability, declines in consumer confidence, declines
in economic growth, increases in unemployment rates, and uncertainty about
overall economic stability, and there can be no assurance against further
decline. These conditions adversely affect the availability of
capital to meet the funding needs of our portfolio companies as the majority of
our portfolio companies, and venture-backed companies in general, have negative
cash flows, and thus require follow-on financings to continue
operations. A substantial decrease in the availability of this
necessary capital would dramatically increase the risk of these
companies. We define non-performance as the risk that a portfolio
company will be unable to raise additional capital. In these
circumstances, the portfolio company could be recapitalized at a valuation
significantly lower than the post-money valuation implied by our valuation
method, sold at a loss to our investment or shut down.
A
continuing lack of initial public offering opportunities and a decrease in
merger and acquisition transactions 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. Now that some of our companies are becoming
more mature, a continuing lack of IPO opportunities and decrease in the number
and size of M&A transactions for venture capital-backed companies could lead
to companies staying longer in our portfolio as private entities that may
require additional funding. In the best case, such stagnation would dampen
returns, and in the worst case, could lead to write-downs and write-offs as some
companies run short of cash and have to accept lower valuations in private
financings or are not able to access additional capital at all. A
continuing lack of IPO opportunities and the decrease in the number and size of
M&A transactions for venture capital-backed companies are also causing some
venture capital firms to change their strategies. Accordingly, some
venture capital firms are reducing funding of their portfolio companies, making
it more difficult for such companies to access capital and to fulfill their
potential. In some cases this leads to write-downs and write-offs of
such companies by other venture capital firms, such as ourselves, who are
co-investors in such companies.
Investing
in small, private companies involves a high degree of risk and is highly
speculative.
We have
invested a substantial portion of our assets in privately held development stage
or start-up companies, the securities of which are inherently
illiquid. These businesses tend to lack management depth, to have
limited or no history of operations and to have not attained
profitability. Companies commercializing products enabled by
nanotechnology or microsystems are especially risky, involving scientific,
technological and commercialization risks. Because of the speculative
nature of these investments, these securities have a significantly greater risk
of loss than traditional investment securities. Some of our venture
capital investments are likely to be complete losses or unprofitable, and some
will never realize their potential. We have been and will continue to
be risk seeking rather than risk averse in our approach to venture capital and
other investments. Neither our investments nor an investment in our
Common Stock is intended to constitute a balanced investment
program.
We
may invest in companies working with technologies or intellectual property that
currently have few or no proven commercial applications.
Nanotechnology,
in particular, is a developing area of technology, of which much of the future
commercial value is unknown, difficult to estimate and subject to widely varying
interpretations. It is sets of enabling technologies that are
applicable to a diverse set of industries. As such,
nanotechnology-enabled products must compete against existing products or enable
a completely new product in a given industry. There are as of yet
relatively few nanotechnology-enabled products commercially
available. The timing of additional future commercially available
nanotechnology-enabled products and the industries on which nanotechnology will
have the most significant impact is highly uncertain.
Our portfolio companies may not
successfully develop, manufacture or market their products.
The
technology of our portfolio companies is new and in many cases
unproven. Their potential products require significant and lengthy
product development, manufacturing and marketing efforts. To date,
some of our portfolio companies have not developed any commercially available
products. In addition, our portfolio companies may not be able to
manufacture successfully or to market their products in order to achieve
commercial success. Further, the products may never gain commercial
acceptance. If our portfolio companies are not able to develop,
manufacture or market successful nanotechnology-enabled products, they will be
unable to generate product revenue or build sustainable or profitable
businesses. Adverse conditions in the target markets of our portfolio
companies may limit or prevent commercial success regardless of the contribution
of nanotechnology to these products.
Our
portfolio companies working with nanotechnology and microsystems may be
particularly susceptible to intellectual property litigation.
Research
and commercialization efforts in nanotechnology and microsystems are being
undertaken by a wide variety of government, academic and private corporate
entities. As additional commercially viable applications of
nanotechnology emerge, ownership of intellectual property on which these
products are based may be contested. From time to time, our portfolio
companies are or have been involved in intellectual property disputes and
litigation. Any litigation over the ownership of, or rights to, any
of our portfolio companies' technologies or products could have a material
adverse effect on those companies' values.
The
value of our portfolio could be adversely affected if the technologies utilized
by our portfolio companies are found, or even rumored or feared, to cause health
or environmental risks, or if legislation is passed that limits the
commercialization of any of these technologies.
Nanotechnology
has received both positive and negative publicity and is the subject
increasingly of public discussion and debate. For example, debate
regarding the production of materials that could cause harm to the environment
or the health of individuals could raise concerns in the public's perception of
nanotechnology, not all of which might be rational or scientifically
based. Nanotechnology in particular is currently the subject of
health and environmental impact research. If health or environmental
concerns about nanotechnology or microsystems were to arise, whether or not they
had any basis in fact, our portfolio companies might incur additional research,
legal and regulatory expenses, and might have difficulty raising capital or
marketing their products. Government authorities could, for social or
other purposes, prohibit or regulate the use of
nanotechnology. Legislation could be passed that could circumscribe
the commercialization of any of these technologies.
Our
Nanotech for CleantechSM
and Nanotech for ElectronicsSM
portfolios are currently the largest portion of our venture capital portfolio,
and, therefore, fluctuations in the value of the companies in these portfolios
may adversely affect our net asset value per share to a greater degree than
other sectors of our portfolio.
The two
largest portions of our portfolio are our Nanotech for CleantechSM and
Nanotech for ElectronicsSM
portfolios. Our Nanotech for CleantechSM
portfolio consists of companies commercializing nanotechnology-enabled products
targeted at cleantech-related markets. There are risks in investing in
companies that target cleantech-related markets, including the rapid and
sometimes dramatic price fluctuations of commodities, particularly oil and
public equities, the reliance on the capital and debt markets to finance large
capital outlays and the dependence on government subsidies to be
cost-competitive with non-cleantech solutions. For example, the
attractiveness of alternative methods for the production of biobutanol and
biodiesel can be adversely affected by a decrease in the demand or price of
oil. The demand for solar cells is driven partly by government subsidies
and the availability of credit to finance the purchase and installation of the
system. Adverse developments in any of these sectors may
significantly affect the value of our Nanotech for CleantechSM
portfolio, and thus our venture capital portfolio as a
whole. Additionally, companies with alternative energy (cleantech)
platforms are currently in favor with the media and
investors. Cleantech companies in general may have a harder time
accessing capital in the future if this level of interest subsides.
Our
Nanotech for ElectronicsSM
portfolio consists of companies commercializing and integrating
nanotechnology-enabled products targeted at electronics-related
markets. There are risks in investing in companies that target
electronics-related markets, including rapid and sometimes dramatic price
erosion of products, the reliance on capital and debt markets to finance large
capital outlays, including fabrication facilities and inherent cyclicality of
the electronics market in general. Additionally, electronics-related
companies are currently out of favor with many venture capital
firms. Therefore, access to capital may be difficult or impossible
for companies in our portfolio that are pursuing these markets.
Our
Nanotech for HealthcareSM
portfolio companies are subject to several risks which may adversely affect the
value of our Nanotech for HealthcareSM
portfolio.
Our
Nanotech for HealthcareSM
portfolio consists of companies that commercialize and integrate products
enabled by nanotechnology and microsystems in healthcare-related industries,
including biotechnology, pharmaceuticals, diagnostics and medical
devices. There are risks in investing in companies that target
healthcare-related industries, including but not limited to the uncertainty of
timing and results of clinical trials to demonstrate the safety and efficacy of
products; failure to obtain any required regulatory approval of products;
failure to develop manufacturing processes that meet regulatory
standards; competition, in particular from companies that develop rival
products; and the ability to protect proprietary technology. Adverse
developments in any of these areas at our Nanotech for HealthcareSM
portfolio companies may adversely affect the value of our Nanotech for
HealthcareSM
portfolio.
The
three main industry clusters around which our nanotechnology investments have
developed are all capital intensive.
The
industry clusters where nanotechnology and microsystems are gaining the greatest
traction, cleantech, electronics and healthcare, are all capital
intensive. In some successful companies, we believe we may need to
invest more than we currently have planned to invest in these
companies. There can be no assurance that we will have the capital
necessary to make such investments. In addition, investing greater
than planned amounts in our portfolio companies could limit our ability to
pursue new investments and fund follow-on investments. Both of these
situations could cause us to miss investment opportunities or limit our ability
to protect existing investments from dilution or other actions or events that
would decrease the value and potential return from these investments.
Our
portfolio companies may generate revenues from the sale of products that are not
enabled by nanotechnology.
We
consider a company to be enabled by nanotechnology or microsystems if a product
or products, or intellectual property covering a product or products, that we
consider to be at the microscale or smaller is material to its business
plan. The core business of some of these companies may not be
nanotechnology-enabled products, and therefore their success or failure may not
be dependent upon the nanotechnology aspects of their business. In
addition to developing products that we consider nanotechnology, some of these
companies may also develop products that we do not consider enabled by
nanotechnology. Some of these companies will generate revenues from
the sale of non-nanotechnology-enabled products. Additionally, it is
possible that a portfolio company may decide to change its business focus after
our initial investment and decide to develop and commercialize
non-nanotechnology-enabled products.
Our portfolio companies may incur debt
that ranks senior to our investments in such companies.
We sometimes make investments in our
portfolio companies in the form of bridge notes that typically convert into
preferred stock issued in the next round of financing of that portfolio
company. The portfolio companies usually have, or may be permitted to
incur, other debt that ranks senior to the debt securities in which we
invest. By their terms, debt instruments may provide that the holders are
entitled to receive payment of interest and principal on or before the dates on
which we are entitled to receive payments in respect of the debt securities in
which we invest. Also, in the case of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio company, holders of
debt instruments ranking senior to our investment in that portfolio company
would typically be entitled to receive payment in full before we receive any
distribution in respect of our investment. After repaying such senior
creditors, such portfolio company may not have any remaining assets to use for
repaying its obligations to us. In addition, in companies where we have
made investments in the form of bridge notes, we may also have investments in
equity in the form of preferred shares. In such a case, a bankruptcy court may
subordinate our bridge notes to debt holders that do not have equity in the
portfolio company.
Risks
related to the illiquidity of our investments.
We
invest in illiquid securities and may not be able to dispose of them when it is
advantageous to do so, or ever.
Most of
our investments are or will be equity or equity-linked securities acquired
directly from small companies. These equity securities are generally
subject to restrictions on resale or otherwise have no established trading
market. The illiquidity of most of our portfolio of equity securities
may adversely affect our ability to dispose of these securities at times when it
may be advantageous for us to liquidate these investments. We may
never be able to dispose of these securities.
Unfavorable
regulatory changes could impair our ability to exit investments in our portfolio
companies.
Recent
government reforms affecting publicly traded companies, stock markets,
investment banks and securities research practices have made it more difficult
for privately held companies to complete successful initial public offerings of
their equity securities, and such reforms have increased the expense and legal
exposure of being a public company. Slowdowns in initial public
offerings may also be having an adverse effect on the frequency and prices of
acquisitions of privately held companies. A lack of merger and/or
acquisition opportunities for privately held companies also may be having an
adverse effect on the ability of these companies to raise capital from private
sources. Public equity market response to companies offering
nanotechnology-enabled products is uncertain. An inability to exit
investments in our portfolio companies could negatively affect our liquidity,
our reinvestment rate in new and follow-on investments and the value of our
portfolio.
Even
if some of our portfolio companies complete initial public offerings, the
returns on our investments in those companies would be uncertain.
When
companies in which we have invested as private entities complete initial public
offerings of their securities, these newly issued securities are by definition
unseasoned issues. Unseasoned issues tend to be highly volatile and
have uncertain liquidity, which may negatively affect their price. In
addition, we are typically subject to lock-up provisions that prohibit us from
selling our investments into the public market for specified periods of time
after initial public offerings. The market price of securities that
we hold may decline substantially before we are able to sell these
securities. Most initial public offerings of technology companies in
the United States are listed on the Nasdaq Global Market. Government
reforms of the Nasdaq Global Market have made market-making by broker-dealers
less profitable, which has caused broker-dealers to reduce their market-making
activities, thereby making the market for unseasoned stocks less liquid than
they might be otherwise.
Risks
related to our Company.
Our
business may be adversely affected by the recent financial crisis and our
ability to access the capital markets.
The
global financial markets are in turmoil, and the economies of the United States
and many other countries are in recession, which may be severe and
prolonged. This status results in severely diminished opportunities
for liquidity and credit availability, declines in consumer confidence, declines
in economic growth, increases in unemployment rates, and uncertainty about
overall economic stability, and there can be no assurance against further
decline. We are unable to predict the likely duration and severity of
this global financial turmoil, and if the current uncertainty continues or
economic conditions further deteriorate, our business and the business of our
portfolio companies could be materially and adversely affected.
Our
business and results of operations could be impacted adversely by a number of
follow-on effects of the financial crisis, including the inability of our
portfolio companies to obtain sufficient financing to continue to operate as a
going concern, an increase in our funding costs or the limitation on our access
to the capital markets. A prolonged period of market illiquidity may
have an adverse effect on our business, financial condition, and results of
operations. Our nonperforming assets are likely to increase, and the
value of our portfolio is likely to decrease during these
periods. These events could limit our investment activity, limit our
ability to grow and negatively impact our operating results.
The
financial crisis and changes in regulations of the financial industry have
adversely affected coverage of us by financial analysts. A number of
analysts that have covered us in the past are no longer able to continue to do
so owing to changes in employment, to restrictions on the size of companies they
are allowed to cover and/or their firms have shut down operations. An
inability to attract analyst coverage may adversely affect our ability to raise
capital from investors, particularly institutional investors. Our
inability to access the capital markets on favorable terms, or at all, may
adversely affect our future financial performance. The inability to
obtain adequate financing capital sources could force us to seek debt financing,
self-fund strategic initiatives or even forgo certain opportunities, which in
turn could potentially harm our current and future performance.
Because
there is generally no established market in which to value our investments, our
Valuation Committee's value determinations may differ materially from the values
that a ready market or third party would attribute to these
investments.
There is
generally no public market for the private equity securities in which we
invest. Pursuant to the requirements of the 1940 Act, we value all of
the private equity securities in our portfolio at fair value as determined in
good faith by a committee of independent members of our Board of Directors,
which we call the Valuation Committee, pursuant to Valuation Procedures
established by the Board of Directors. Determining fair value
requires that judgment be applied to the specific facts and circumstances of
each portfolio investment pursuant to specified valuation principles and
processes. We are required by the 1940 Act to value specifically each
individual investment on a quarterly basis and record unrealized depreciation
for an investment that we believe has become impaired. Conversely, we
must record unrealized appreciation if we believe that a security has
appreciated in value. Our valuations, although stated as a precise
number, are necessarily within a range of values that vary depending on the
significance attributed to the various factors being considered.
We use
the Black-Scholes-Merton option pricing model to determine the fair value of
warrants held in our portfolio. Option pricing models, including the
Black-Scholes-Merton model, require the use of subjective input assumptions,
including expected volatility, expected life, expected dividend rate, and
expected risk-free rate of return. In the Black-Scholes-Merton model,
variations in the expected volatility or expected term assumptions have a
significant impact on fair value. Because the securities underlying
the warrants in our portfolio are not publicly traded, many of the required
input assumptions are more difficult to estimate than they would be if a public
market for the underlying securities existed.
Without a
readily ascertainable market value and because of the inherent uncertainty of
valuation, the fair value that we assign to our investments may differ from the
values that would have been used had an efficient market existed for the
investments, and the difference could be material. Any changes in
fair value are recorded in our consolidated statements of operations as a change
in the "Net (decrease) increase in unrealized appreciation on
investments."
In the venture capital industry, even
when a portfolio of early-stage, high-technology venture capital investments
proves to be profitable over the portfolio's lifetime, it is common for the
portfolio's value to undergo a so-called "J-curve" valuation
pattern. This means that when reflected on a graph, the portfolio's
valuation would appear in the shape of the letter "J," declining from the
initial valuation prior to increasing in valuation. This J-curve
valuation pattern results from write-downs and write-offs of portfolio
investments that appear to be unsuccessful, prior to write-ups for portfolio
investments that prove to be successful. Because early-stage
companies typically have negative cash flow and are by their nature inherently
fragile, a valuation process can more readily substantiate a loss of value than
an increase in value. Even if our venture capital investments prove to be
profitable in the long run, such J-curve valuation patterns could have a
significant adverse effect on our net asset value per share and the value of our
Common Stock in the interim. Over time, as we continue to make
additional nanotechnology investments, this J-curve pattern may be less relevant
for our portfolio as a whole, because the individual J-curves for each
investment, or series of investments, may overlap with previous investments at
different stages of their J-curves.
Changes
in valuations of our privately held, early stage companies tend to be more
volatile than changes in prices of publicly traded securities.
Investments in privately held,
early-stage companies are inherently more volatile than investments in more
mature businesses. Such immature businesses are inherently fragile
and easily affected by both internal and external forces. Our
investee companies can lose much or all of their value suddenly in response to
an internal or external adverse event. Conversely, these immature
businesses can gain suddenly in value in response to an internal or external
positive development. Moreover, because our ownership interests in
such investments are generally valued only at quarterly intervals by our
Valuation Committee, a committee made up of all of 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, in some highly
liquid cases, virtually continuously. 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 the
timeframe of our valuations required by the federal securities laws.
We
may continue to experience material write-downs of securities of portfolio
companies.
Write-downs of securities of our
privately held companies have always been a by-product and risk of our
business. We may continue to experience material write-downs of
securities of privately held portfolio companies. Write-downs of such
companies occur at all stages of their development. Such write-downs
may increase in dollar terms, frequency and as a percentage of our net asset
value as our dollar investment activity in privately held companies continues to
increase, and the number of such holdings in our portfolio continues to
grow. Because the average size of each of our investments in
nanotechnology has increased from year to year and continues to increase, the
average size of our write-downs may also increase.
Because
we do not choose investments based on a strategy of diversification, nor do we
rebalance the portfolio should one or more investments increase in value
substantially relative to the rest of the portfolio, the value of our portfolio
is subject to greater volatility than the value of companies with more broadly
diversified investments.
We do not
choose investments based on a strategy of diversification. We also do
not rebalance the portfolio should one of our portfolio companies increase in
value substantially relative to the rest of the portfolio. Therefore,
the value of our portfolio may be more vulnerable to events affecting a single
sector or industry and, therefore, subject to greater volatility than a company
that follows a diversification strategy. Accordingly, an investment
in our Common Stock may present greater risk to you than an investment in a
diversified company.
We
are dependent upon key management personnel for future success, and may not be
able to retain them.
We are
dependent upon the diligence and skill of our senior management and other key
advisers for the selection, structuring, closing and monitoring of our
investments. We utilize lawyers, and we utilize outside consultants,
including one of our directors, Lori D. Pressman, to assist us in conducting due
diligence when evaluating potential investments. There is generally
no publicly available information about the companies in which we invest, and we
rely significantly on the diligence of our employees and advisers to obtain
information in connection with our investment decisions. Our
future success, to a significant extent, depends on the continued service and
coordination of our senior management team, particularly on Douglas W. Jamison,
our Chairman and Chief Executive Officer and a Managing Director; on Daniel B.
Wolfe, our President, Chief Operating Officer, Chief Financial Officer and a
Managing Director; on Alexei A. Andreev and Michael A. Janse, each an Executive
Vice President and Managing Director; and on Sandra M. Forman, our General
Counsel, Chief Compliance Officer and Director of Human
Resources. The departure of any of our executive officers, key
employees or advisers could materially adversely affect our ability to implement
our business strategy. We do not maintain for our benefit any key-man
life insurance on any of our officers or employees.
The
market for venture capital investments, including nanotechnology investments, is
highly competitive.
We face
substantial competition in our investing activities from many competitors,
including but not limited to: private venture capital funds;
investment affiliates of large industrial, technology, service and financial
companies; small business investment companies; hedge funds; wealthy
individuals; and foreign investors. Our most significant competitors
typically have significantly greater financial resources than we
do. Greater financial resources are particularly advantageous in
securing lead investor roles in venture capital syndicates. Lead
investors typically negotiate the terms and conditions of such financings. Many
sources of funding compete for a small number of attractive investment
opportunities. Hence, we face substantial competition in sourcing
good investment opportunities on terms of investment that are commercially
attractive.
In
addition to the difficulty of finding attractive investment opportunities, our
status as a regulated business development company may hinder our ability to
participate in investment opportunities or to protect the value of existing
investments.
We are
required to disclose on a quarterly basis the names and business descriptions of
our portfolio companies and the type and value of our portfolio
securities. Most of our competitors are not subject to these
disclosure requirements. Our obligation to disclose this information
could hinder our ability to invest in some portfolio
companies. Additionally, other current and future regulations may
make us less attractive as a potential investor than a competitor not subject to
the same regulations.
Our failure to make follow-on
investments in our portfolio companies could impair the value of our
portfolio.
Following
an initial investment in a portfolio company, we may make additional investments
in that portfolio company as "follow-on" investments, in order
to: (1) increase or maintain in whole or in part our ownership
percentage; (2) exercise warrants, options or convertible securities that were
acquired in the original or subsequent financing; or (3) attempt to preserve or
enhance the value of our investment.
We may
elect not to make follow-on investments or lack sufficient funds to make such
investments. We have the discretion to make any follow-on
investments, subject to the availability of capital resources. The
failure to make a follow-on investment may, in some circumstances, jeopardize
the continued viability of a portfolio company and our initial investment, or
may result in a missed opportunity for us to increase our participation in a
successful operation, or may cause us to lose some or all preferred rights
pursuant to "pay-to-play" provisions that have become common in venture capital
transactions. These provisions require proportionate investment in
subsequent rounds of financing in order to preserve preferred rights such as
anti-dilution protection, liquidation preferences and preemptive rights to
invest in future rounds of financing. Even if we have sufficient
capital to make a desired follow-on investment, we may elect not to make a
follow-on investment because we may not want to increase our concentration of
risk, because we prefer other opportunities or because we are inhibited by
compliance with business development company requirements or the desire to
maintain our tax status.
Bank
borrowing or the issuance of debt securities or preferred stock by us, to fund
investments in portfolio companies or to fund our operating expenses, would make
our total return to common shareholders more volatile.
Use of
debt or preferred stock as a source of capital entails two primary
risks. The first is the risk of leverage, which is the use of debt to
increase the pool of capital available for investment purposes. The
use of debt leverages our available common equity capital, magnifying the impact
on net asset value of changes in the value of our investment
portfolio. For example, a business development company that uses 33
percent leverage (that is, $50 of leverage per $100 of common equity) will show
a 1.5 percent increase or decline in net asset value for each 1 percent increase
or decline in the value of its total assets. The second risk is that
the cost of debt or preferred stock financing may exceed the return on the
assets the proceeds are used to acquire, thereby diminishing rather than
enhancing the return to common shareholders. If we issue preferred
shares or debt, the common shareholders would bear the cost of this
leverage. To the extent that we utilize debt or preferred stock
financing for any purpose, these two risks would likely make our total return to
common shareholders more volatile. In addition, we might be required
to sell investments, in order to meet dividend, interest or principal payments,
when it might be disadvantageous for us to do so.
As
provided in the 1940 Act and subject to some exceptions, we can issue debt or
preferred stock so long as our total assets immediately after the issuance, less
some ordinary course liabilities, exceed 200 percent of the sum of the debt and
any preferred stock outstanding. The debt or preferred stock may be
convertible in accordance with SEC guidelines, which might permit us to obtain
leverage at more attractive rates. The requirement under the 1940 Act
to pay, in full, dividends on preferred shares or interest on debt before any
dividends may be paid on our Common Stock means that dividends on our Common
Stock from earnings may be reduced or eliminated. An inability to pay
dividends on our Common Stock could conceivably result in our ceasing to qualify
as a regulated investment company under the Code, which would in most
circumstances be materially adverse to the holders of our Common
Stock. As of the date hereof, we do not have any debt or preferred
stock outstanding.
We
are authorized to issue preferred stock, which would convey special rights and
privileges to its owners senior to those of Common Stock
shareholders.
We are
currently authorized to issue up to 2,000,000 shares of preferred stock, under
terms and conditions determined by our Board of Directors. These
shares would have a preference over our Common Stock with respect to dividends
and liquidation. The statutory class voting rights of any preferred
shares we would issue could make it more difficult for us to take some actions
that might, in the future, be proposed by the Board and/or holders of Common
Stock, such as a merger, exchange of securities, liquidation or alteration of
the rights of a class of our securities, if these actions were perceived by the
holders of the preferred shares as not in their best interests. The
issuance of preferred shares convertible into shares of Common Stock might also
reduce the net income and net asset value per share of our Common Stock upon
conversion.
Loss
of status as a regulated investment company could reduce our net asset value and
distributable income.
We have
elected to qualify, qualified and intend to continue to qualify as a regulated
investment company under the Code. As a regulated investment company,
we do not have to pay federal income taxes on our income (including realized
gains) that is distributed to our shareholders. Accordingly, we are
not permitted under accounting rules to establish reserves for taxes on our
unrealized capital gains. If we failed to qualify for regulated
investment company status in 2009 or beyond, we would be taxed in the same manner as
an ordinary corporation
and distributions to our shareholders would not be deductible in computing our
taxable income, which would materially adversely impact the amount of cash
available for distribution to our shareholders. In addition,
to the extent that we had unrealized gains, we would have to establish
reserves for taxes, which would reduce our net asset value,
accordingly. To qualify again to be taxed as a regulated investment
company in a subsequent year, we would be required to distribute to our
shareholders our earnings and profits attributable to non-regulated investment
company years reduced by an interest charge of 50 percent of such earnings and
profits payable by us to the IRS. In addition, if we failed to
qualify as a regulated investment company for a period greater than two taxable
years, then, in order to qualify as a regulated investment company in a
subsequent year, we would be required to elect to recognize and pay tax on any
net built-in gain (the excess of aggregate gain, including items of income, over
aggregate loss that would have been realized if we had sold our property to an
unrelated party for fair market value) or, alternatively, be subject to taxation
on such built-in gain recognized for a period of 10 years. In
addition, if we, as a regulated investment company, were to decide to make a
deemed distribution of realized net capital gains and retain the net realized
capital gains, we would have to establish appropriate reserves for taxes that we
would have to pay on behalf of shareholders. It is possible that
establishing reserves for taxes could have a material adverse effect on the
value of our Common Stock. See "Taxation."
We
operate in a heavily regulated environment, and changes to, or non-compliance
with, regulations and laws could harm our business.
We are subject to substantive SEC
regulations as a BDC. Securities and tax laws and regulations
governing our activities may change in ways adverse to our and our shareholders'
interests, and interpretations of these laws and regulations may change with
unpredictable consequences. Any change in the laws or regulations
that govern our business could have an adverse impact on us or on our
operations. Changing laws, regulations and standards relating to
corporate governance, valuation and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, new federal accounting
standards and Nasdaq Stock Market rules, are creating additional expense and
uncertainty for publicly held companies in general, and for BDCs in
particular. These new or changed laws, regulations and standards are
subject to varying interpretations in many cases because of their lack of
specificity, and as a result, their application in practice may evolve over
time, which may well result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and
governance practices.
We are committed to maintaining high
standards of corporate governance and public disclosure. As a result,
our efforts to comply with evolving laws, regulations and standards have and
will continue to result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities to
compliance activities. In particular, our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations
regarding our required assessment of our internal controls over financial
reporting has required the commitment of significant financial and managerial
resources.
Moreover, even though BDCs are not
mutual funds, they must comply with several of the regulations applicable to
mutual funds, such as the requirement for the implementation of a comprehensive
compliance program and the appointment of a Chief Compliance
Officer. Further, our Board members, Chief Executive Officer and
Chief Financial Officer could face an increased risk of personal liability in
connection with the performance of their duties. As a result, we may
have difficulty attracting and retaining qualified Board members and executive
officers, which could harm our business, and we have significantly increased
both our coverage under, and the related expense for, directors' and officers'
liability insurance. If our efforts to comply with new or changed
laws, regulations and standards differ from the activities intended by
regulatory or governing bodies, our reputation may be harmed. Also, as business
and financial practices continue to evolve, they may render the regulations
under which we operate less appropriate and more burdensome than they were when
originally imposed. This increased regulatory burden is causing us to
incur significant additional expenses and is time consuming for our management,
which could have a material adverse effect on our financial
performance.
Market
prices of our Common Stock will continue to be volatile.
We expect
that the market price of our Common Stock will continue to be
volatile. The price of the Common Stock may be higher or lower than
the price you pay for your shares, depending on many factors, some of which are
beyond our control and may not be directly related to our operating performance.
These factors include the following:
|
•
|
stock
market and capital markets
conditions;
|
|
•
|
internal
developments in our Company with respect to our personnel, financial
condition and compliance with all applicable
regulations;
|
|
•
|
announcements
regarding any of our portfolio
companies;
|
|
•
|
announcements
regarding developments in the nanotechnology or cleantech-related fields
in general;
|
|
•
|
environmental
and health concerns regarding nanotechnology, whether real or
perceptual;
|
|
•
|
announcements
regarding government funding and initiatives related to the development of
nanotechnology or cleantech-related
products;
|
|
•
|
general
economic conditions and trends;
and/or
|
|
•
|
additions
or departures of key personnel.
|
We will not have control over many of
these factors, but expect that our stock price may be influenced by
them. As a result, our stock price may be volatile, and you may lose
all or part of your investment.
Quarterly
results fluctuate and are not indicative of future quarterly
performance.
Our
quarterly operating results fluctuate as a result of a number of
factors. These factors include, among others, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree
to which we and our portfolio companies encounter competition in our markets and
general economic and capital markets conditions. As a result of these
factors, results for any one quarter should not be relied upon as being
indicative of performance in future quarters.
To
the extent that we do not realize income or choose not to retain after-tax
realized net capital gains, we will have a greater need for additional capital
to fund our investments and operating expenses.
As a
regulated investment company, we must annually distribute at least 90 percent of
our investment company taxable income as a dividend and may either distribute or
retain our realized net capital gains from investments. As a result,
these earnings may not be available to fund investments. If we fail
to generate realized net capital gains or to obtain funds from outside sources,
it would have a material adverse effect on our financial condition and results
of operations as well as our ability to make follow-on and new
investments. Because of the structure and objectives of our business,
we generally expect to experience net operating losses and rely on proceeds from
sales of investments, rather than on investment income, to defray a significant
portion of our operating expenses. These sales are unpredictable and
may not occur. In addition, as a BDC, in order to pay dividends or
repurchase shares, we are generally required to maintain a ratio of at least 200
percent of total assets to total borrowings and preferred stock, which may
restrict our ability to borrow to fund these requirements. Lack of
capital could curtail our investment activities or impair our working
capital.
Investment
in foreign securities could result in additional risks.
We may
invest in foreign securities, and we currently have one investment in a foreign
security. When we invest in securities of foreign issuers, we may be
subject to risks not usually associated with owning securities of U.S.
issuers. These risks can include fluctuations in foreign currencies,
foreign currency exchange controls, social, political and economic instability,
differences in securities regulation and trading, expropriation or
nationalization of assets and foreign taxation issues. In addition,
changes in government administrations or economic or monetary policies in the
United States or abroad could result in appreciation or depreciation of our
securities and could favorably or unfavorably affect our
operations. It may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by us
must be made in compliance with U.S. and foreign currency restrictions and tax
laws restricting the amounts and types of foreign investments.
Although
most of our investments are denominated in U.S. dollars, our investments that
are denominated in a foreign currency are subject to the risk that the value of
a particular currency may change in relation to the U.S. dollar, in which
currency we maintain financial statements and valuations. Among the
factors that may affect currency values are trade balances, the level of
short-term interest rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and capital
appreciation and political developments.
Risks
related to this offering.
Investing
in our stock is highly speculative and an investor could lose some or all of the
amount invested.
Our
investment objective and strategies result in a high degree of risk in our
investments and may result in losses in the value of our investment
portfolio. Our investments in portfolio companies are highly
speculative and, therefore, an investor in our Common Stock may lose his or her
entire investment. The value of our Common Stock may decline and may
be affected by numerous market conditions, which could result in the loss of
some or all of the amount invested in our Common Stock. The
securities markets frequently experience extreme price and volume fluctuations
that affect market prices for securities of companies in general, and technology
and very small capitalization companies in particular. Because of our
focus on the technology and very small capitalization sectors, and because we
are a very small capitalization company ourselves, our stock price is especially
likely to be affected by these market conditions. General economic
conditions, and general conditions in nanotechnology in particular and in the
semi-conductor and information technology, life sciences, materials science and
other high technology industries, including cleantech, may also affect the price
of our Common Stock.
We
will have discretion over the use of proceeds of this offering.
We will
have flexibility in applying the proceeds of this offering. We may
pay operating expenses, including due diligence expenses on potential new
investments, from the net proceeds. Our ability to achieve our
investment objective may be limited to the extent that the net proceeds of the
offering, pending full investment, are used to pay operating
expenses.
Our
shares might trade at discounts from net asset value or at premiums that are
unsustainable over the long term.
Shares of
BDCs like us may, during some periods, trade at prices higher than their net
asset value and during other periods, as frequently occurs with closed-end
investment companies, trade at prices lower than their net asset
value. The possibility that our shares will trade at discounts from
net asset value or at premiums that are unsustainable over the long term are
risks separate and distinct from the risk that our net asset value per share
will decrease. The risk of purchasing shares of a BDC that might
trade at a discount or unsustainable premium is more pronounced for investors
who wish to sell their shares in a relatively short period of time because, for
those investors, realization of a gain or loss on their investments is likely to
be more dependent upon changes in premium or discount levels than upon increases
or decreases in net asset value per share. Our Common Stock may not
trade at a price higher than or equal to net asset value per
share. On September 17, 2009, our stock closed at $6.36 per share, a
premium of $2.09 to our net asset value per share of $4.27 as of June 30, 2009.
The
Board of Directors intends to grant stock options to our employees pursuant to
the Company's Equity Incentive Plan. When exercised, these options
may have a dilutive effect on existing shareholders.
In
accordance with the Company's Equity Incentive Plan, the Company's Board of
Directors may grant options from time to time for up to 20 percent of the total
shares of stock issued and outstanding. When options are exercised,
net asset value per share will decrease if the net asset value per share at the
time of exercise is higher than the exercise price. Alternatively,
net asset value per share will increase if the net asset value per share at the
time of exercise is lower than the exercise price. Therefore,
existing shareholders will be diluted if the net asset value per share at the
time of exercise is higher than the exercise price of the
options. Even though issuance of shares pursuant to exercises of
options increases the Company's capital, and regardless of whether such issuance
results in increases or decreases in net asset value per share, such issuance
results in existing shareholders owning a smaller percentage of the shares
outstanding.
You
have no right to require us to repurchase your shares.
You do
not have the right to require us to repurchase your shares of Common
Stock.
FORWARD-LOOKING
INFORMATION
This
Prospectus may contain "forward-looking statements" based on our current
expectations, assumptions and estimates about us and our
industry. These forward-looking statements involve risks and
uncertainties. Words such as "believe," "anticipate," "estimate,"
"expect," "intend," "plan," "will," "may," "might," "could," "continue" and
other similar expressions identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of several factors
more fully described in "Risk Factors" and elsewhere in this
Prospectus. The forward-looking statements made in this Prospectus
relate only to events as of the date on which the statements are
made. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
You
should understand that under Sections 27A(b)(2)(B) of the Securities Act of 1933
and Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 do
not apply to statements made by business development companies.
USE
OF PROCEEDS
We
estimate the total net proceeds of the offering to be up to $41,529,300 based on
the last reported price for our Common Stock on September 17, 2009 of $6.36.
In the first half of 2009, we made no new investments
because of the disarray in the venture capital markets. We expect to
make both new and follow-on investments with the proceeds of this
offering. We expect to invest or reserve for potential follow-on
investment the net proceeds of any offering within two years from the completion
of such offering. The net proceeds of this offering invested after
two years will only be used for follow-on investments. Pending
investment in portfolio companies, we intend to invest the net proceeds of any
offering of our Common Stock in time deposits and/or income-producing securities
that are issued or guaranteed by the federal government or an agency of the
federal government or a government-owned corporation, which may yield
less than our operating expense ratio. We may also use the
proceeds of this offering for operating expenses, including due diligence
expenses on potential investments. Our portfolio companies rarely pay
us dividends or interest, and we do not generate enough income from fixed income
investments to meet all of our operating expenses. If we pay operating expenses from the
proceeds, it will reduce the net proceeds of the offering that we will have
available for investment.
PRICE
RANGE OF COMMON STOCK
Our
Common Stock is traded on the Nasdaq Global Market under the symbol
"TINY."
The
following table sets forth for the quarters indicated, the high and low sale
prices on the Nasdaq Global Market per share of our Common Stock and the net
asset value and the premium or discount from net asset value per share at which
the shares of Common Stock were trading, expressed as a percentage of net asset
value, at each of the high and low sale prices provided.
|
|
Market Price
|
|
|
Net
Asset Value
("NAV")
Per Share
|
|
|
Premium or (Discount) as a
% of NAV
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
at End of Period
|
|
|
High
|
|
|
Low
|
|
March
31, 2007
|
|
|
13.58 |
|
|
|
11.00 |
|
|
|
5.27 |
|
|
|
157.7 |
|
|
|
108.7 |
|
June
30, 2007
|
|
|
14.32 |
|
|
|
11.01 |
|
|
|
5.54 |
|
|
|
158.5 |
|
|
|
98.7 |
|
September
30, 2007
|
|
|
11.79 |
|
|
|
9.51 |
|
|
|
5.69 |
|
|
|
107.2 |
|
|
|
67.1 |
|
December
31, 2007
|
|
|
11.10 |
|
|
|
8.00 |
|
|
|
5.93 |
|
|
|
87.2 |
|
|
|
34.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2008
|
|
|
8.98 |
|
|
|
5.76 |
|
|
|
5.86 |
|
|
|
53.2 |
|
|
|
(1.7 |
) |
June
30, 2008
|
|
|
8.73 |
|
|
|
6.00 |
|
|
|
5.95 |
|
|
|
46.7 |
|
|
|
0.8 |
|
September
30, 2008
|
|
|
8.50 |
|
|
|
4.97 |
|
|
|
4.68 |
|
|
|
81.6 |
|
|
|
6.2 |
|
December
31, 2008
|
|
|
6.58 |
|
|
|
3.10 |
|
|
|
4.24 |
|
|
|
55.2 |
|
|
|
(26.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
4.48 |
|
|
|
2.65 |
|
|
|
4.22 |
|
|
|
6.2 |
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|
(37.2 |
) |
June
30, 2009
|
|
|
5.99
|
|
|
|
3.57
|
|
|
|
4.27
|
|
|
|
40.3
|
|
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|
(16.4
|
)
|
Through
September 17, 2009
|
|
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6.93
|
|
|
|
5.01
|
|
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|
--
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--
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--
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Historically,
the shares of our Common Stock have traded at times at a discount and at other
times at a premium to net asset value. The last reported price for
our Common Stock on September 17, 2009 was $6.36 per share. As of
September 17, 2009, we had approximately 138 shareholders of record.
BUSINESS
We are a
venture capital company that specializes in making investments in companies
commercializing and integrating products enabled by nanotechnology and
microsystems. We were incorporated as a New York corporation in
1981. In 1995, we elected to be regulated as a business development
company under the 1940 Act. Our investment objective is to achieve
long-term capital appreciation, rather than current income, by making venture
capital investments. We define venture capital investments as the
money and resources made available to privately held start-up firms and
privately held and publicly traded small businesses with exceptional growth
potential. We make our investments exclusively in companies
commercializing or integrating products enabled by nanotechnology or
microsystems. We sometimes use "tiny technology" to describe both of
these disciplines. By making these investments, we seek to provide
our shareholders with a specific focus on nanotechnology and microsystems
through a portfolio of venture capital investments that address a variety of
markets and products.
We
believe that we are the only publicly traded business development company making
venture capital investments exclusively in nanotechnology and
microsystems. We believe we provide three core benefits to our
shareholders. First, we are an established firm with a track record
of investing in venture capital-backed companies. Second, we provide
shareholders with access to emerging companies that commercialize and integrate
products enabled by nanotechnology and microsystems that are generally privately
owned. Third, we provide access to a vehicle that has historically
provided returns comparable to the median of those of the private venture
capital industry and, unlike private venture capital firms, is both transparent
and liquid. We seek to provide our shareholders with a specific
focus on nanotechnology and microsystems through a portfolio of venture capital
investments that addresses a variety of markets and products.
As a
venture capital company, we make it possible for our investors to participate at
an early stage in this emerging field, particularly while many companies
commercializing and integrating products enabled by nanotechnology and
microsystems are still private. By making investments in companies
that control intellectual property relevant to nanotechnology and microsystems,
we are building a portfolio that we believe will be difficult to replicate in
the future. We typically invest as part of a syndicate of venture
capital firms. However, we may provide seed capital before forming a syndicate
with other investors and we may invest in small public companies with large
growth potential. We may maintain our investment in an investee
company after it goes public, even after our co-investors sell or distribute
their shares.
To the
investor, we offer:
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·
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a
portfolio consisting of investments that are generally available only to a
small, highly specialized group of professional venture capital firms as
investors;
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·
|
a
team of professionals to evaluate and monitor investments, comprising five
full-time members of management, including four Managing Directors,
Douglas W. Jamison, Alexei A. Andreev, Michael A. Janse and Daniel B.
Wolfe, and a Vice President, Misti Ushio. One of our directors,
Lori D. Pressman, is also a consultant to us. These six
professionals collectively have expertise in venture capital investing,
intellectual property and nanotechnology and microsystems;
|
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·
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the
opportunity to benefit from our experience in a new field expected to
permeate a variety of industries;
|
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·
|
through
the ownership of our publicly traded shares, a measure of liquidity not
typically available in underlying venture capital portfolio investments;
and
|
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·
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transparency
resulting from requirements to make certain public disclosures about our
investments.
|
We make
venture capital investments exclusively in companies commercializing or
integrating products enabled by nanotechnology or
microsystems. Nanotechnology is measured in nanometers, which are
units of measurement in billionths of a meter. Microsystems,
including microelectromechanical systems ("MEMS") are measured in micrometers,
which are units of measurement in millionths of a meter. We consider
a company to fit our investment thesis if the company employs or intends to
employ technology that we consider to be at the microscale or smaller and if the
employment of that technology is material to its business plan. At
June 30, 2009, 57.9 percent of our net assets and 100 percent of our venture
capital portfolio were invested in companies commercializing or integrating
products enabled by nanotechnology or microsystems.
Nanotechnology
is multidisciplinary and widely applicable, and it incorporates technology that
was not previously in widespread use. Products enabled by
nanotechnology are found in many industries, including instrumentation,
computing, electronics, photonics, pharmaceuticals, medical devices, textiles,
sporting goods, aerospace, automotive and cleantech, which includes
alternative-energy and energy-saving products. Our nanotechnology
investments have developed around three main industry clusters: cleantech (47
percent of our venture capital portfolio on June 30, 2009); electronics,
including semiconductors (33 percent of our venture capital portfolio on June
30, 2009); and healthcare (10 percent of our venture capital portfolio on June
30, 2009). We call these three areas "Nanotech for CleantechSM,"
"Nanotech for ElectronicsSM," and
"Nanotech for HealthcareSM,"
respectively. We have and may continue to make investments outside
these industry areas, and we may not maintain these industry clusters or the
weightings within these clusters.
The
number of investment opportunities in nanotechnology and microsystems available
to us has continued to increase in recent years, through both new opportunities
and opportunities for follow-on investments in our existing portfolio
companies. The use of nanotechnology-enabled advanced materials for
cleantech, in particular, is an area of increasing global interest, and these
types of materials are the cornerstones of new generations of photovoltaics,
batteries, solid-state lighting, fuel cells, biofuels and other energy-related
applications that are the focus of a number of recently funded early-stage
companies. We believe that our expertise and record of prior
investments in nanotechnology and microsystems are likely to lead us to
additional such investment opportunities in the future.
Currently,
we believe there are four primary reasons to put more capital to
work. First, the time period from investment to exit has lengthened
considerably. The average age of the three venture capital-backed
companies that completed IPOs in the second quarter of 2009 was 10.2
years. Dow Jones VentureSource reported that the average time from
investment to acquisition in the second quarter of 2009 was 4.5
years. These numbers are up from 4.5 years to IPO and 3 years to
acquisition in 1998. The average age of our successful IPOs has been
4.3 years, and the average age of our profitable acquisitions has been 4.1
years. Historically, many venture capital-backed companies are cash
flow negative when they are acquired or complete IPOs. If companies
need to become cash flow positive before seeking an exit through an IPO or
acquisition, we believe companies will remain longer in venture portfolios and
require additional capital.
Second,
as a result of the lengthened time to exit and the current disarray in the
venture capital world, we believe we will need more capital for follow-on
investments than we previously expected. Recently, very few companies
have been successful in bringing new investors into existing venture capital
syndicates, as far fewer venture funds are seeking new investment opportunities
than before the economic downturn. Also, venture capital-backed
companies are struggling to keep existing syndicate partners
together. Some venture funds are out of capital or are under pressure
from their limited partners to decrease capital calls and are not making
follow-on investments. This situation has led to venture financing
terms that can heavily favor the later rounds of investments in a company, while
substantially decreasing the value of previously invested
capital. Although these terms are favorable to those planning to
invest significantly, if one does not have the capital to invest significantly
in these later rounds, investment returns could decrease. We call
this situation the commoditization of early investment rounds. We do
not believe it is in our shareholders interest to face heavy dilution in
companies to which we have provided early rounds of financing and which show
signs of being successful. We will need to be prepared to take
advantage of these later round opportunities when they arise in our best
portfolio companies if we are to maximize our venture returns.
Third,
nanotech investing is capital intensive. The industry clusters where
nanotechnology is gaining the greatest traction, cleantech, electronics and
healthcare are all capital-intensive industries. In some successful
companies, we believe we may need to invest more than $5 to $6 million, which is
what we currently have planned to invest in these companies. The
ability to invest a greater amount may help us increase our investment return on
the best companies in our portfolio and protect our original investments from
significant dilution.
Fourth,
we need to continue making new investments if we are to remain a leader in
investing in nanotechnology and microsystems. Over the past eight
years we have built the Company into a leader in investing in
nanotechnology. Our position is the result of having the opportunity
to invest in potentially some of the best private nanotechnology
companies. This position has provided us with access to better deal
flow. If we were to stop or continue to slow down our investment
pace, we may lose access to the best deals. Additionally, because
venture capital is asymmetric in its returns, meaning that the best deals return
an outsized percentage of the returns to investors, failure to take advantage of
an investment opportunity could hurt our future potential investment
returns. Finally, because there are fewer venture investors with
capital to put to work, valuations have decreased.
We
identify investment opportunities primarily through five channels:
|
·
|
our
involvement in the field of nanotechnology and
microsystems;
|
|
·
|
research
institutions, universities and corporations that seek to transfer their
scientific discoveries to the private
sector;
|
|
·
|
other
venture capital companies seeking co-investors or referring deals to
us;
|
|
·
|
referrals
from our portfolio companies; and
|
|
·
|
direct
calls and business plan submissions by companies, business incubators and
individuals seeking venture
capital.
|
As is
usual in the venture capital industry, our venture capital investments are
generally in convertible preferred stock, which is usually the most senior
security in a portfolio company's equity capital structure until the company has
substantial revenues, and which gives us seniority over the holders of common
stock (usually including the founders) while preserving fully our participation
in the upside potential of the portfolio company through the conversion
feature. Our portfolio investments in some instances include a
dividend right payable in kind (which increases our participation in the
portfolio company) or potentially in cash. In-kind distributions are
primarily made in additional shares of convertible preferred
stock. We expect to continue to invest in convertible
securities.
We have a
long history of investing in venture capital and of business
development. Our approach is traditional, including a patient
examination of available early stage opportunities, thorough due diligence and
close involvement with management. Unlike most private equity and
venture capital funds, we will not be subject to any requirement to return
capital to investors. Such requirements typically stipulate that
these funds can only be invested once and, together with any capital gains on
such investment, must be returned to investors, net of fees and carried interest
in profits, after a pre-agreed time period. These provisions may
cause private equity and venture capital funds to seek investments that are
likely to be able to be sold relatively quickly or to seek returns on their
investments through mergers, public equity offerings or other similar
transactions more quickly than they otherwise might.
We make
investments exclusively in companies that we believe are involved significantly
in nanotechnology and microsystems. We may also make follow-on
investments in any of our portfolio companies. The balance of our
funds is primarily invested in short-term U.S. government and agency
securities. We are an internally managed investment company because
our officers and employees, under the general supervision of our Board of
Directors, control our operations. We have no investment
adviser.
Subject
to our compliance with business development company and tax code requirements,
there are no limitations on the types of securities or other assets, foreign or
domestic, in which we may invest. Investments may include the
following:
|
·
|
equity,
equity-related securities (including warrants) and debt with equity
features from either private or public issuers, whether in corporate,
partnership or other form, including development stage or start-up
entities;
|
|
·
|
debt
obligations of all types having varying terms with respect to security or
credit support, subordination, purchase price, interest payments and
maturity; and
|
|
·
|
to
a limited extent, intellectual property, including patents, research and
development in technology or product development that may lead to patents
or other marketable technology.
|
Unlike
other business development companies that engage primarily in middle market
lending, we believe that we are the only business development company that
invests exclusively in venture capital technology companies. We have
no debt outstanding. Accordingly, we are not subject to credit agency
downgrades or risk of default or failure from these types of loans that could
cause us to fail asset coverage tests or force a fire sale of
assets.
Neither
our investments nor an investment in our securities constitutes a balanced
investment program. We have been and will continue to be risk seeking
rather than risk averse in our investment approach. We reserve the
fullest possible freedom of action regarding the types of investments we make
and our relationship with our portfolio companies, subject to our certificate of
incorporation, applicable law and regulations, and policy statements described
herein. Our tiny technology investment policy is not a "fundamental
policy" under the 1940 Act and, accordingly, may be changed without shareholder
approval, although we will give shareholders at least 60 days prior written
notice of any change.
Our
business is subject to federal regulation under the 1940 Act, under which we
have elected to operate as a business development company. As a
business development company, we are subject to regulatory requirements, the
most significant of which relate to our investments and
borrowings. The 1940 Act provides that we may not make an investment
in non-qualifying assets unless at the time at least 70 percent of the value of
our total assets (measured as of the date of our most recently filed financial
statements) consists of qualifying assets. We must also maintain a
coverage ratio of assets to senior securities (such as debt and preferred stock)
of at least 200 percent immediately after giving effect to the issuance of any
senior securities. We are also required to offer managerial
assistance to our portfolio companies, in addition to our
investment. For tax purposes, we are a regulated investment company
under the Code.
Management
Fees and Expenses
Venture
capital funds organized as private partnerships receive management fees from the
limited partners of the fund typically in the range of 2 to 2.5 percent of
committed capital. For example, if the committed capital to a fund is
$200 million, the venture capital firm would receive management fees of
approximately $4 to $5 million per year. These management fees
typically do not decrease or increase as the value of invested capital
fluctuates during the life of the private partnership. That is, if
the invested capital is valued in a depreciated state or losses of invested
capital are realized at a point in time during the life of the partnership, the
annual management fees typically do not decrease in line with this unrealized or
realized depreciation. Moreover, in addition to receiving standard
management fees, the general partners of these funds typically also are
reimbursed by the limited partners for certain expenses incurred in connection
with the funds (e.g., those costs associated with legal work, due diligence and
portfolio company maintenance). Therefore, the total expenses paid by
a limited partner as part of its investment in a private partnership may be
greater than the management fee itself.
We are an
internally managed investment company. Our expenses are reported as a
fraction of net assets as of the end of each quarterly period. This
method of reporting differs from that of venture capital firms organized as
private partnerships in two significant ways. First, because we are
not a private partnership, we calculate our expenses as a percentage of net
assets at a fixed point in time rather than based on the equivalent of committed
capital, which would be the total capital invested plus the balance of cash and
U.S. treasury securities. For example, as of June 30, 2009, our net
assets, which are currently held in a depreciated state and do not include
invested capital in companies that are no longer in our portfolio, were
$110,412,973. Through the same date, since 2001, our cumulative
capital invested in companies commercializing or integrating products enabled by
nanotechnology and microsystems was
$107,866,260. This amount of cumulative capital invested plus the
balance of our cash and U.S. treasury securities as of June 30, 2009, equals
$155,533,154. If we were a private partnership, our expenses would be
calculated as a percentage of this amount and would be 4.0 percent, versus 5.6
percent when calculated based on net assets as of June 30, 2009.
Second,
because we are not a private partnership, we report our expenses as an aggregate
amount. We do
not separately report those expenses that result from being a publicly traded
corporation, which results in liquidity for our investors, and those expenses
that could be billed back to limited partners in a private partnership
structure. The table below contains our best estimates of how our
expenses would be allocated among management fees and expenses of limited
partners, assuming we operated as a private partnership, as well as an estimate
of the allocation for expenses associated with operating as a publicly traded
corporation. In each case, we calculate this expense ratio as a
percentage of net assets or cash, U.S. treasuries and cumulative capital
invested since 2001, as the case may be.
|
|
|
Our
Estimates of the Distribution
of
Billing of Expenses Assuming
Limited
Partnership Structure
|
As
a Percentage of:
|
Total
%
|
Public
Company
|
Management
Fees
|
Reimbursed
by
LPs
|
Net
Assets (as of June 30, 2009)
|
5.6
|
1.8
|
3.1
|
0.7
|
Cash
+ U.S. Treasuries + Cumulative Capital Invested in Tiny Technology
Companies Since 2001 (in each case, as of June 30, 2009)
|
4.0
|
1.3
|
2.2
|
0.5
|
Cash
+ U.S. Treasuries + Cumulative Capital Invested in Tiny Technology
Companies Since 2001 (in each case, as of June 30, 2009) + Capital Raised
by Selling 7 Million Shares of Common Stock at $6.36 per share (the
closing price of our Common Stock as of September 17, 2009)
|
3.1
|
1.0
|
1.7
|
0.4
|
We
believe that increasing the size of our assets should lower our expenses as a
proportion of average net assets because some of our costs, such as
administration and public company expenses, are fixed and can be spread over a
larger asset base and will decline as a percentage of assets as our assets
increase. In addition, with more assets, we expect the average size
of our investments to increase. Each due diligence investigation
entails expenses whether or not we complete the transaction, and the cost of due
diligence, negotiation and documentation of our investments does not vary
proportionately with the size of the investment or intended
investment.
Some
expenses are expected to increase as our assets increase. In the
future, we may add personnel to enable us to enlarge the scope of our activities
and our expertise in nanotechnology and microsystems. We also believe
that a larger number of outstanding shares and a larger number of beneficial
owners of shares could increase the level of our visibility and improve the
trading liquidity of our shares on the Nasdaq Global Market. We may
not realize any of these benefits.
Nanotechnology
and Microsystems
Nanotechnology
refers to materials, devices and processes with critical dimensions below 0.1
micron, equal to 100 nanometers. A nanometer is 0.000000001 meter, or
one billionth of a meter. It is at the scale below 100 nanometers,
the nanoscale, that quantum effects begin to dominate classical macroscale
physics. At the nanoscale, size- and shape-dependent properties of
materials allow previously unattainable material and device
performance. Microsystems refers to materials, devices and processes
that are on a micrometer size scale. A micrometer, which is also
referred to as a micron, is 0.000001 meter, or one millionth of a
meter. In practice, any device, or device enabled by components, in a
size range from 100 microns down to 0.1 micron may be considered
"micro."
Nanotechnology
is defined by the U.S. Government's National Nanotechnology Initiative as
research and technology development at the atomic, molecular or macromolecular
levels, in the length scale of approximately 1 to 100 nanometer range, to
provide a fundamental understanding of phenomena and materials at the nanoscale
and to create and use structures, devices and systems that have novel properties
and functions because of their small and/or intermediate size.
Nanotechnology
and its potential scientific and commercial implications are currently the
subject of intense research and development efforts in governmental, academic
and corporate sectors, in the United States and in other countries.
Nanotechnology
Commercialization
In our
view, nanotechnology is neither an industry nor a single technology, but a
variety of enabling technologies with critical dimensions below 100
nanometers. Historically, many significant transitions in the
properties and capabilities of products were enabled by the ability to study and
manipulate matter on increasingly smaller scales. We believe the
ability to study and manipulate matter on the nanoscale, in particular, will be
a key enabling component of the next wave of product innovation in many large,
diverse and important markets including instrumentation, cleantech, electronics,
photonics, computing, medical devices, pharmaceutical manufacturing, drug
delivery and drug discovery. There are currently
nanotechnology-enabled products available in a number of these markets including
examples such as sensors, semiconductor chips, batteries, memory chips,
cosmetics, consumer products, diagnostics, and pharmaceutical
therapeutics.
We
believe the benefits of nanotechnology are a result primarily of five key
attributes: 1) new tools that enable the study and manipulation of
matter at the nanoscale; 2) new properties that emerge from materials with
nanoscale dimensions; 3) the ability to manipulate and use the power of biology
for applications ranging from the development of new therapeutic treatments to
the production of renewable fuels and chemicals; 4) the ability to manufacture
products through additive processes that are more cost efficient and less
wasteful than standard subtractive methods; and 5) the opportunity to solve
problems using tools and knowledge from the convergence of traditionally
disparate scientific disciplines. This concept of convergence is
particularly unique to nanotechnology as it often requires the integration of
multiple disciplines, including biology, physics, chemistry, materials science,
computer science and the engineering sciences.
Commercialization
of nanotechnology-enabled products began with the incorporation of nanomaterials
in a bulk material, or matrix, as a filler to make a composite material with new
properties. One of the first commercial examples of a
nanotechnology-enabled composite material was a sunscreen that was transparent
and colorless. This ability to screen out harmful ultraviolet light
without scattering visible light, i.e., to be colorless, resulted from the
incorporation of zinc oxide and titanium dioxide nanoparticles, within the cream
matrix. The nanoparticles were produced by one of our former
portfolio companies and the first nanotechnology-enabled company in which we
invested, Nanophase Technologies Corporation. Beginning in 1994, we
invested a total of $1,500,418 in Nanophase and sold our interest in 2001,
netting $2,663,645 on our investment. Other companies have used
carbon nanotubes to make strong, lightweight and conductive plastics for use in
the automotive industry. Although the properties of these composite
materials are useful, it is typically difficult for venture-backed companies
that make nanomaterials to recognize value from the sale of the nanomaterials
alone due to rapid commoditization.
Tools
that enable the study and manipulation of matter on the nanoscale are also among
the first commercially available products that incorporate
nanotechnology. These tools include examples such as electron
microscopes, atomic force microscopes, lithography equipment and gene and
protein array technology. The capabilities offered by these tools
have led to new nanoscale discoveries in biology, chemistry, physics and
materials science. These tools also provide new ways of manufacturing
devices with nanoscale features such as nanoimprint lithography. This
technique overcomes the limitations of traditional lithography using light
(i.e., photolithography), by replicating a pattern of nanoscale features from a
rigid stamp. An example use for this technique may be the manufacture
of next generation ultra-high-density hard disk drives.
Improvements
in the level of understanding and the ability to control and manipulate matter
on the nanoscale permit the use of nanotechnology actively as an enabling
component of a product rather than passively as a filler
material. The commercialization of such products requires the need to
develop nanotechnology-enabled components, platforms and full systems rather
than just the materials themselves. Component-level products are
those that are used along with other components by another company to make
a system-level product. System-level products are generally
end-products that are sold to customers for use in the application
desired. Examples of component-level products and platforms that
employ nanotechnology actively include thermoelectric coolers and power
generators, energy-efficient light sources, high and low density non-volatile
memory and synthetic techniques for making carbohydrates and
macrocycles. Examples of system-level products include thin-film
solar cells, low-cost radio frequency identification tags, on-demand wound
treatments, quantum computers, and advanced therapeutics.
Although
our first investment in nanotechnology was in a nanomaterial company, later
investments have clustered largely in companies working at the tools and
component/platform level. This transition occurred because we believe
that companies that pursue such a path will capture more of the value ascribed
to the nanotechnology-enabled product. We also believe the transition
from a nanomaterial supplier to a component/platform and system-level supplier
is required for the commercialization and integration of products enabled by
nanotechnology that take full advantage of the five benefits of nanotechnology
discussed above.
Our
portfolio companies use different business models to commercialize their
respective products and intellectual property. These business models
range in complexity, or level of integration, depending on the type of product
sold, the dynamics of the target market, the capital required to bring the
product to market and the barriers to entry for competitors to sell similar
products. The table below classifies the business models of our
portfolio companies into four levels of integration: 1) System-Level
Solutions/Therapeutics, 2) Components/IP/Platforms, 3) Tools/Service and 4)
Chemicals and Coatings. The table also discusses the positives
and negatives associated with commercializing products and intellectual property
at each of the levels of integration noted below.
Level
of
Integration
|
Examples
from our Portfolio
|
Positives
and Negatives
|
|
Cleantech
|
Electronics,
Photonics
and
Tools
|
Healthcare
|
|
System-Level
Solutions / Therapeutics
|
NanoGram
|
D-Wave
Systems
Kovio
Polatis
|
PolyRemedy
BioVex
Mersana
|
(+)
Control of manufacturing processes and end product; capture most value;
formidable IP barriers
(-)
High capital intensity, significant technical and execution risks due to
high-complexity and long time to market
|
Components
/ IP / Platforms
|
BridgeLux
CFX
Battery
Cobalt
Biofuels
Crystal
IS
Innovalight
Laser
Light Engines
Nextreme
Solazyme
TetraVitae
|
Adesto
Cambrios
Nantero
NeoPhotonics
Nanosys
SiOnyx
|
Ensemble
Ancora
|
(+)
Proven markets with defined standards; opportunity for plug-and-play
replacement of inferior products
(-)
Moderate/high capital intensity; technical and execution risk; dependence
on partners for manufacturing and integration
|
Tools
/ Service
|
|
Molecular
Imprints
Xradia
|
Metabolon
|
(+)
Potential for quick revenues with positive margins on R&D products;
fast track to profitability
(-)
Scalability of business may be limited; slow adoption for mainstream
applications
|
Chemicals
and Coatings
|
Starfire
Systems
Siluria
Technologies
|
|
|
(+)
Potential for quick revenues; potential for low capital
requirements
(-)
Potential for low gross margins, rapid decline of average selling price
and overall commoditization
|
Potential
hurdles associated with pursuing products with increasing levels of integration
include additional complexity of the end product or platform and capital
required for commercialization. We believe that many nanotechnology
companies will address these hurdles through partnerships with industry-leading
companies to bring their nanotechnology-enabled product to
market. Partnerships can take the form of development dollars, equity
investments, beta-site development, outsourcing, supply of materials, joint
development agreements or distribution agreements.
Commercialization
of Nanotechnology by Our Portfolio Companies
We
believe the commercialization of nanotechnology-enabled products by
venture-capital backed companies requires the same attributes as those for
non-nanotechnology-enabled products. A company should be focused on
solving a high-impact problem that currently has limited or no available
solutions. The solution should come from a set of technologies that
are proprietary to the company and are able to be protected from use by
competitors. The company will need experienced management teams with
knowledge of the target market and customer base. The company will
require financing from one or more investors. As discussed above, the
company will likely require partners to help validate and commercialize the
technology. We are differentiated from other venture capital firms
investing in start-up companies because we focus on investing in companies that
use solutions from nanotechnology to address market needs and we bring deep
technical experience to early-stage investments.
Our nanotechnology investments have
developed around three main industry clusters: cleantech (47.0 percent of our
venture capital portfolio as of June 30, 2009); electronics, including
semiconductors (33.0 percent of our venture capital portfolio as of June 30,
2009); and healthcare (10.0 percent of our venture capital portfolio as of June
30, 2009). We call these three areas "Nanotech for CleantechSM,"
"Nanotech for ElectronicsSM," and
"Nanotech for HealthcareSM,"
respectively. We have and may continue to make investments outside
these industry areas, and we may not maintain these industry clusters or the
weightings within these clusters.
These
three clusters are multi-billion dollar industries that have grown historically
through technological innovation. "Cleantech" is a term used commonly
to describe products and processes that solve global problems related to
resource constraints. We classify Nanotech for CleantechSM
companies as those that seek to improve performance, productivity or efficiency,
and to reduce environmental impact, waste, cost, energy consumption or raw
materials using nanotechnology-enabled solutions. We believe
nanotechnology will impact cleantech solutions in at least two
ways. First, nanotechnology-enabled methods of production can allow
lower energy use at lower cost and operate with better performance than current
methods of production. Second, new materials enable the development
of new products that overcome inherent limitations of existing technology and
processes.
We classify Nanotech for
ElectronicsSM
companies as those that use nanotechnology to address problems in
electronics-related industries, including semiconductors. We believe
nanotechnology will impact these industries in at least four
ways. First, nanotechnology enables reduced manufacturing cost and
increased performance of semiconductor and electronics systems as the density of
components increases. Second, new capabilities of semiconductor and
electronic products are made possible by nanoscale materials. Third,
nanotechnology offers differentiation and improved performance that allows
nanotechnology-enabled electronics companies to capture value in a market often
characterized by outsourced manufacturing and a commodity production
process. Fourth, novel methods of computing, such as quantum
computing, may be enabled by nanoscale phenomenon.
We
classify Nanotech for HealthcareSM
companies as those that use nanotechnology to address problems in
healthcare-related industries, including biotechnology, pharmaceuticals,
diagnostics and medical devices. We believe nanotechnology will
impact these industries in at least two ways.
First, we believe the ability to study, optimize,
and design biological pathways at the nanoscale enables the manipulation and
engineering of biological systems for diagnosis and treatment of
disease. Second, we believe new tools are necessary to provide
critical insights into what is happening at the nanoscale to enhance and enable
advances in healthcare technology.
We
believe the development and commercialization of nanotechnology-enabled
solutions are the result of the convergence of traditionally separate scientific
disciplines such as biology, materials science, chemistry, electronics,
information technology, and physics. We believe such
nanotechnology‐enabled advances
in each of these industry clusters, and in general, could not otherwise occur
within one discipline alone.
We
currently have 17 companies in our portfolio that generate commercial revenue
from the sale of products or services enabled by nanotechnology and
microsystems. In 2008, these companies, cumulatively, generated
approximately $230,000,000 in gross revenue. These companies offer a
range of products including components for optical networking, high-brightness
LEDs, imaging devices for security and surveillance, printable electronics,
nano-imprint lithography equipment, X-ray imaging equipment, optical switches,
solid-state cooling, metabolomic profiling services, synthetic carbohydrates and
decorative tiles.
The
following is a summary of the products currently released or under development
(indicated by asterisks) by our active portfolio companies and their partners
where applicable:
Portfolio
Company as of
June
30, 2009
|
Product
Focus
|
Example
of Publicly Announced
Partners,
Customers and Collaborators
|
Adesto
Technologies Corporation
|
Semiconductor
products*
|
No
Publicly Announced Partners or Customers.
|
Ancora
Pharmaceuticals Inc.
|
Synthetic
carbohydrates for
pharmaceutical
markets
|
Partners
and customers include several pharmaceutical and biotechnology companies.
|
BioVex
Group, Inc.
|
Novel
biologics for treatment of cancer and infectious disease*
|
No
publicly announced partners or customers.
|
BridgeLux,
Inc.
(formerly
eLite Optoelectronics, Inc.)
|
LED
chips and arrays for solid-state lighting
|
Cree
– Supply and licensing agreement for LED chips.
|
Portfolio
Company as of
June
30, 2009
|
Product
Focus
|
Example
of Publicly Announced
Partners,
Customers and Collaborators
|
Cambrios
Technologies Corporation
|
Transparent
conductors*
|
Nissha
Printing Company – Development and application of transparent conductive
materials and films for touch panel applications.
Chisso
and Sumitomo – Commercialization of transparent conductive materials and
films for liquid crystal displays.
|
CFX
Battery, Inc.
(formerly
Lifco, Inc.)
|
Primary
and rechargeable batteries*
|
No
publicly announced partners or customers.
|
Cobalt
Biofuels, Inc.
|
Renewable
fuels and chemicals*
|
No
publicly announced partners or customers.
|
Crystal
IS, Inc.
|
Aluminum
nitride substrates and UV light-emitting diodes for water purification*
|
Sanan
Optoelectronics Co. Ltd. - Pilot manufacturing of UV LEDs.
|
D-Wave
Systems, Inc.
|
High-performance
quantum computing*
|
Google
– Collaboration to develop image recognition with an adiabatic quantum
computer.
|
Ensemble
Discovery Corporation
|
DNA
Programmed chemistry for discovery of new therapeutics*
|
Bristol-Myers
Squibb Company – Strategic alliance to discover and develop drug
candidates against a number of pharmaceutical targets.
Roche
– Product development program for cancer diagnostics.
|
Innovalight,
Inc.
|
Thin-film
photovoltaics modules*
|
J A
Solar – Commercialization of high-performance solar products using silicon
ink technology.
OTB
– Supplied first high-throughput system for solar.
Roth
& Rau – Installed first ink-jet-based solar production line.
|
Kovio,
Inc.
|
Semiconductor
products using printed electronics*
|
Panasonic
and Toppan Forms – End applications using printed RFID tags.
|
Laser
Light Engines, Inc.
|
Solid-state
light source for digital cinema and other projection-based displays*
|
No
publicly announced partners or customers.
|
Mersana
Therapeutics, Inc.
(formerly
Nanopharma Corporation)
|
Oncology-focused
therapeutic products*
|
No
publicly announced partners or customers.
|
Metabolon,
Inc.
|
Metabolomic
profiling services, biomarker discovery and diagnostic tools
|
Syngenta
- Use Metabolon's biochemical profiling technology for use in agricultural
applications.
LS9
– Use Metabolon’s biochemical profiling technology for use in biofuel
applications.
Customers
include 8 of the top 10 pharmaceutical firms.
|
Portfolio
Company as of
June
30, 2009
|
Product
Focus
|
Example
of Publicly Announced
Partners,
Customers and Collaborators
|
Molecular
Imprints, Inc.
|
Tools
for nano-imprint lithography
|
Hoya
– Initial customer for Perfecta TR 11100.
Dai
Nippon Printing - Strategic collaboration agreement to speed the
commercialization of nanoimprint lithography for high-volume semiconductor
device manufacturing.
Customers
include SEMATECH, Motorola, HP and Hitachi.
|
NanoGram
Corporation
|
Silicon-based,
thin-film solar cells*
|
Teijin
Limited - Extending NanoGram's printed silicon ink technology to use with
Teijin's flexible substrates.
|
Nanomix,
Inc.
|
Carbon-nanotube
based sensors*
|
No
publicly announced partners or customers.
|
Nanosys,
Inc.
|
Electronic,
medical and optical devices enabled by nanomaterials*
|
Life
Technologies Corporation – License agreement for commercialization of
nanotechnology-enabled anti-counterfeiting solutions.
Sharp,
Hynix and Intel – Development programs for nanotechnology-enabled
electronic devices.
|
Nantero,
Inc.
|
Carbon-nanotube
based non-volatile memory*
|
ON
Semiconductor, Hewlett Packard, Brewer Science and SVTC – Partnerships to
develop carbon nanotube-enabled devices.
|
NeoPhotonics
Corporation
|
Active
and passive optical components for optical networking
|
Huawei
and other Tier 1 telecommunications companies - Large purchaser of access,
metro and long-haul optical network equipment.
|
Nextreme
Thermal Solutions, Inc.
|
Thermoelectric
devices for thermal management of integrated circuits and for power
generation
|
Lockheed
Martin – Partnership to develop new products based on thin-film
thermoelectric materials.
Nucletron
Technologies GmbH – Partnership to sell Nextreme's products in Europe.
|
Polatis,
Inc.
(formerly
Continuum Photonics, Inc.)
|
Microelectromechanical
systems for optical networks
|
Partnered
with EdenTree Technologies, JDSU Corporation, QuikCycle and Crestron.
|
PolyRemedy,
Inc.
|
Robotic
manufacturing platform for wound treatment dressings*
|
No
publicly announced partners or customers.
|
Questech
Corporation
(formerly
Intaglio, Ltd.)
|
Decorative
tiles and switch plates made of stone and microscale-metal materials
|
Home
Depot – Distribution agreement for switch plates.
|
Siluria
Technologies, Inc.
|
Nanomaterial-enabled
products for a diverse set of markets*
|
No
publicly announced partners or customers.
|
SiOnyx,
Inc.
|
Black
Silicon-enabled optical detectors and image arrays*
|
No
publicly announced partners or customers.
|
Portfolio
Company as of
June
30, 2009
|
Product
Focus
|
Example
of Publicly Announced
Partners,
Customers and Collaborators
|
Solazyme,
Inc.
|
Algae-produced
products including nutraceuticals, industrial chemicals and energy*
|
Chevron
Technology Ventures – Agreement for biodiesel feedstock development and
testing.
|
Starfire
Systems, Inc.
|
Ceramic-based
parts for applications in electronics, aerospace and automotive industries
|
General
Motors – Partnership for development and commercialization of silicon
carbide break parts.
|
TetraVitae
Bioscience, Inc.
|
Renewable
fuels and chemicals*
|
No
publicly announced partners or customers.
|
Xradia,
Inc.
|
X-ray
imaging tools
|
Customers
include Argonne National Laboratory and University of Texas.
|
*Products under development
GENERAL
DESCRIPTION OF OUR PORTFOLIO COMPANIES
The
following are brief descriptions of each portfolio company in which we were
invested as of June 30, 2009. The portfolio companies are presented
in three categories: controlled affiliated companies where we directly or
indirectly own more than 25 percent of the outstanding voting securities of the
portfolio company; non-controlled affiliated companies where we directly or
indirectly own five percent to 25 percent of the outstanding voting securities
of the portfolio company or where we hold one or more seats on the portfolio
company's Board of Directors and, therefore, are deemed to be an affiliated
person under the 1940 Act; and unaffiliated companies where we directly or
indirectly own less than five percent of the outstanding voting securities of
the portfolio company and where we have no other affiliations. The
value described below for each portfolio company is its fair value as determined
by the Valuation Committee of our Board of Directors.
Controlled
Affiliated Companies:
Laser Light Engines, Inc.,
located at 8C Industrial Way Salem, New Hampshire 03079, is manufacturing
solid-state light sources for digital cinema and large-venue projection
displays. As of June 30, 2009, we held 7,499,062 shares of Series A
Convertible Preferred Stock (representing 44.4 percent of the total shares of
Series A Convertible Preferred Stock outstanding) and $890,000 in a Convertible
Bridge Note (representing 44.5 percent of the total Convertible Bridge Note
outstanding) of Laser Light Engines. As of the date above, our
Valuation Committee valued the total amount of shares of Laser Light Engines
held by us at $2,393,511. The Chief Executive Officer of the company
is Bill Beck. Michael A Janse and Daniel B. Wolfe serve as Directors
of the company.
SiOnyx, Inc., located at 100
Cummings Center, Beverly, Massachusetts 01915, is developing silicon-based
optoelectronic products enabled by its proprietary material, "Black
Silicon." As of June 30, 2009, we held 233,499 shares of Series A
Convertible Preferred Stock (representing 100 percent of the total shares of
Series A Convertible Preferred Stock outstanding), 2,966,667 shares of Series
A-1 Convertible Preferred Stock (representing 42.4 percent of the total shares
of Series A-1 Convertible Preferred Stock outstanding), and 4,207,537 shares of
Series A-2 Convertible Preferred Stock (representing 22.2 percent of the total
shares of Series A-2 Convertible Preferred Stock) of SiOnyx. As of
the date above, our Valuation Committee valued the total amount of shares of
SiOnyx held by us at $2,152,308. The Chief Executive Officer of the
company is Stephen D. Saylor. Daniel B. Wolfe serves as a Director of
the company.
Non-Controlled
Affiliated Companies:
Adesto Technologies
Corporation, located at 1225 Innsbruck Drive, Sunnyvale, California
94089, is developing semiconductor-related products enabled at the
nanoscale. As of June 30, 2009, we held 6,547,619 shares of Series A
Convertible Preferred Stock (representing 18.3 percent of the total shares of
Series A Convertible Preferred Stock outstanding) and $550,000 in a Convertible
Bridge Note (representing 18.3 percent of the
total Convertible Bridge Note outstanding) of Adesto. As of the above
date, our Valuation Committee valued the total amount of shares of Adesto held
by us at $1,658,077. The Chief Executive Officer of the company is
Narbeh Derhacobian. Michael A. Janse serves as a Director of the
company.
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Ancora Pharmaceuticals
Inc., located at 200 Boston Avenue, Medford, Massachusetts
02155,
is developing synthetic carbohydrates for pharmaceutical
applications. Ancora also works with pharmaceutical and industrial
partners to provide customized carbohydrate material. As of
June 30, 2009, we held 1,663,808 shares of Series B Convertible Preferred
Stock (representing 76.4 percent of the total shares of Series B
Convertible Preferred Stock outstanding) of Ancora. As of the
above date, our Valuation Committee valued the total amount of securities
of Ancora held by us at $440,909. The Chief Executive Officer
of the company is John Pena. Douglas W. Jamison serves as a
Director of the company. Misti Ushio serves as an observer to
the Board of Directors of the company.
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BridgeLux, Inc., located at
1170 Sonora Court, Sunnyvale, California 94086, is manufacturing high-power LEDs
and LED arrays that are used in various solid-state lighting and other
applications. As of June 30, 2009, we held 1,861,504 shares of Series
B Convertible Preferred Stock (representing 11.7 percent of the total shares of
Series B Convertible Preferred Stock outstanding), 2,130,699 shares of Series C
Convertible Preferred Stock (representing 6.6 percent of the total shares of
Series C Convertible Preferred Stock outstanding) and 666,667 shares of Series D
Convertible Preferred Stock (representing 3.3 percent of the total shares of
Series D Convertible Preferred Stock outstanding) of BridgeLux, as well as
warrants to purchase 163,900 shares of Series C Convertible Preferred Stock of
the company at $0.7136 per share. As of the above date, our Valuation
Committee valued of the total amount of securities of BridgeLux held by us at
$3,593,476. The Chief Executive Officer of the company is Mark
Swoboda. Michael A. Janse serves as an observer to the Board of
Directors of the company.
Cambrios Technologies
Corporation, located at 930 East Arques Avenue Sunnyvale, California
94085, is
developing nanowire-enabled electronic materials for the display
industry. As of June 30, 2009, we held 1,294,025 shares of Series B
Convertible Preferred Stock (representing 10.8 percent of the total shares of
Series B Convertible Preferred Stock outstanding) and 1,300,000 shares of Series
C Convertible Preferred Stock (representing 6.7 percent of the total shares of
Series C Convertible Preferred Stock outstanding) of Cambrios. As of
the above date, our Valuation Committee valued the total amount of shares of
Cambrios held by us at $1,297,013. The Chief Executive Officer of the
company is Michael R. Knapp. Michael A. Janse serves as an observer
to the Board of Directors of the company.
CFX Battery, Inc., located at
1300 West Optical Drive, Azusa,
California 91702,
is developing primary and rechargeable batteries using nanostructured
materials. As of June 30, 2009, we held 1,885,108 shares of Series A
Convertible Preferred Stock (representing 13.1 percent of the total shares of
Series A Convertible Preferred Stock outstanding) of CFX Battery. As
of the date above, our Valuation Committee valued the Series A Convertible
Preferred Stock held by us at $1,476,756. The Chief Executive Officer
of the company is Joe Fisher. Alexei A. Andreev serves as an observer
to the Board of Directors of the company.
Crystal IS, Inc., located at
70 Cohoes Avenue, Green Island, New York 12183, is developing single-crystal
aluminum nitride substrates for light-emitting diodes. As of June 30,
2009, we held 391,571 shares of Series A Convertible Preferred Stock
(representing 9.8 percent of the total shares of Series A Convertible Preferred
Stock outstanding) and 1,300,376 shares of Series A-1 Convertible Preferred
Stock (representing 14.2 percent of the total shares of Series A-1 Convertible
Preferred Stock outstanding) and $408,573 in a Convertible Bridge Note
(representing 13.5 percent of the total Convertible Bridge Note outstanding) of
Crystal IS, as well as warrants to purchase 21,977 shares of Series A-1
Convertible Preferred Stock of the company at $0.78 per share. As of
the date above, our Valuation Committee valued the total amount of securities of
Crystal IS held by us at $428,185. The Chief Executive Officer of the
company is Steven Berger. Michael A. Janse serves as an observer to
the Board of Directors of the company.
CSwitch Corporation, located
at 3131 Jay Street, Santa Clara, California 95054, was developing
system-on-a-chip solutions for communications-based platforms. As of
June 30, 2009, we held 6,863,118 shares of Series A-1 Convertible Preferred
Stock (representing 10.2 percent of the total shares of Series A-1 Convertible
Preferred Stock outstanding) and $1,766,673 in Convertible Bridge Notes
(representing 9.1 percent of the total Convertible Bridge Notes outstanding) of
CSwitch. As of the date above, our Valuation Committee valued the
total amount of securities of CSwitch held by us at $0. The Chief
Executive Officer of the company was Doug Laird.
Ensemble Discovery
Corporation, located at 99 Erie Street, Cambridge, Massachusetts 02139,
is developing DNA-Programmed Chemistry™ for the discovery of new classes of
therapeutics and bioassays. As of June 30, 2009, we held 1,449,275
shares of Series B Convertible Preferred Stock (representing 16.9 percent of the
total shares of Series B Convertible Preferred Stock outstanding) and $250,286
in a Convertible Bridge Note (representing 7.5 percent of the total Convertible
Bridge Note outstanding) of Ensemble. As of the date above, our
Valuation Committee valued the Series B Convertible Preferred Stock held by us
at $1,266,304. The Chief Executive Officer of the company is Michael
D. Taylor. Misti Ushio serves as an observer to the Board of Directors of the
company.
Innovalight, Inc., located at
965 East Arques, Sunnyvale, California 94085, is developing solar power products
enabled by printable, silicon-based nanomaterials. Leveraging the
advantages of solvent-based processing, Innovalight aims to accelerate the
promise of affordable, high power solar energy. Innovalight is a
development company and has yet to generate significant revenues from the
commercial sale of products. The company's main competition in this
market include companies such as First Solar, Inc., Evergreen Solar, Inc.,
Sunpower, Inc., and Canadian Solar, Inc., as these companies are also focused on
the commercialization of solar power modules. The company is highly
dependent on its intellectual property position and its ability to protect this
position. Revenue generated by the company may be affected positively
or negatively by government regulations that favor one form of energy generation
over another. As of June 30, 2009, we held 16,666,666 shares of
Series B Convertible Preferred Stock (representing 33.3 percent of the total
shares of Series B Convertible Preferred Stock outstanding) and 5,810,577 shares
of Series C Convertible Preferred Stock (representing 7.1 percent of the total
shares of Series C Convertible Preferred Stock outstanding) of
Innovalight. As of the date above, our Valuation Committee valued the
total amount of shares held by us at $5,783,838. The Chief Executive
Officer of the company is Conrad Burke. The Chief Technical Officer
and Vice President of Engineering is Homer Antoniadis. Michael A.
Janse serves as a Director of the company.
Kovio, Inc., located at 233
South Hillview Drive, Milpitas, California 95035, is developing semiconductor
products using, printed electronics and thin-film technologies. As of
June 30, 2009, we held 2,500,000 shares of Series C Convertible Preferred Stock
(representing 20.7 percent of the total shares of Series C Convertible Preferred
Stock outstanding), 800,000 shares of Series D Convertible Preferred Stock
(representing 4.7 percent of the total shares of Series D Convertible Preferred
Stock outstanding) and 1,200,000 shares of Series E Convertible Preferred Stock
(representing 7.5 percent of the total shares of Series E Convertible Preferred
Stock outstanding) of Kovio, as well as warrants to purchase 355,880 shares of
Series E Convertible Preferred Stock of the company at $1.25 per
share. As of the date above, our Valuation Committee valued the total
amount of shares held by us at $4,851,012. The Chief Executive
Officer of the company is Amir Mashkoori. Alexei A. Andreev serves as
an observer to the Board of Directors of the company.
Mersana Therapeutics, Inc.,
located at 840 Memorial Drive, Cambridge, Massachusetts 02139, is developing
advanced polymers for drug delivery. As of June 30, 2009, we held 68,451
shares of Series A Convertible Preferred Stock (representing 87.5 percent of the
total shares of Series A Convertible Preferred Stock outstanding), 866,500
shares of Series B Convertible Preferred Stock (representing 8.2 percent of the
total shares of Series B Convertible Preferred Stock outstanding) and $400,000
in Convertible Bridge Notes (representing 5.0 percent of the total Convertible
Bridge Notes outstanding) of Mersana, as well as warrants to purchase 91,625
shares of Series B Convertible Preferred Stock of the company at a price of
$2.00 per share. As of the date above, our Valuation Committee valued the
total securities of Mersana held by us at $1,386,323. The Chief Executive
Officer of the company is Julie A. Olson. Douglas W. Jamison
and Misti Ushio serve as observers to the Board of Directors of the company.
Metabolon, Inc., located at
800 Capitola Drive, Durham, North Carolina 27713, is discovering biomarkers
through the use of metabolomics. As of June 30, 2009, we held 371,739
shares of Series B Convertible Preferred Stock (representing 31.3 percent of the
total shares of Series B Convertible Preferred Stock outstanding), 148,696
shares of Series B-1 Convertible Preferred Stock (representing 32.7 percent of
the total shares of Series B-1 Convertible Preferred Stock outstanding) and
1,000,000 share of Series C Convertible Preferred Stock (representing 16.0
percent of the total shares of Series C Preferred Stock outstanding) of
Metabolon, as well as warrants to purchase 74,348 shares of Series B-1
Convertible Preferred Stock of the company at a price of $1.15 per
share. As of the date above, our Valuation Committee valued the total
amount of securities of Metabolon held by us at $2,568,464. The Chief
Executive Officer of the company is John Ryals. Douglas W. Jamison
serves as an observer to the Board of Directors of the company.
NanoGram Corporation, located
at 165 Topaz Street, Milpitas, California 95035, is developing solar power
products enabled by silicon-based nanomaterials. As of June 30, 2009
we held 63,210 shares of Series I Convertible Preferred Stock (representing 2.0
percent of the total shares of Series I Convertible Preferred Stock
outstanding), 1,250,904 shares of Series II Convertible Preferred Stock
(representing 12.5 percent of the total shares of Series II Convertible
Preferred Stock outstanding), 1,242,144 shares of Series III Convertible
Preferred Stock (representing 6.7 percent of the total shares of Series III
Convertible Preferred Stock outstanding) and 432,179 shares of Series IV
Convertible Preferred Stock (representing 2.3 percent of the total shares of
Series IV Convertible Preferred Stock outstanding) of NanoGram. As of
the date above, our Valuation Committee valued the total amount of shares of
NanoGram held by us at $735,902. The Chief Executive Officer of the
company is Kieran F. Drain. Alexei A. Andreev serves as an observer
to the Board of Directors of the company.
Nanomix, Inc., located at 5980
Horton Street, Emeryville, California 94608, is producing nanoelectronic sensors
that integrate carbon nanotube electronics with silicon
microstructures. As of June 30, 2009, we held 977,917 shares of
Series C Convertible Preferred Stock (representing 18.1 percent of the total
shares of Series C Convertible Preferred Stock outstanding) and 6,802,397 shares
of Series D Convertible Preferred Stock (representing 5.5 percent of the total
shares of Series D Convertible Preferred Stock outstanding) of
Nanomix. As of the above date, our Valuation Committee valued the
total amount of shares of Nanomix held by us at $0. The Chief
Executive Officer of the company is Garrett Gruener.
Nextreme Thermal Solutions,
Inc., located at 3908 Patriot Drive, Durham, North Carolina, 27703, is
developing thin-film thermoelectric devices for cooling and energy
conservation. As of June 30, 2009, we held 17,500, shares of Series A
Convertible Preferred Stock (representing 16.8 percent of the total shares of
Series A Convertible Preferred Stock outstanding) and 4,870,244 shares of Series
B Convertible Preferred Stock (representing 16.2 percent of the total shares of
Series B Convertible Preferred Stock outstanding) of Nextreme. As of
the above date, our Valuation Committee valued the total amount of securities of
Nextreme held by us at $4,405,257. The Chief Executive Officer of the
company is Jesko von Windheim. Daniel B. Wolfe serves as a Director
of the company, and Douglas W. Jamison serves as an observer to the Board of
Directors of the company.
Questech Corporation, located
at 92 Park Street, Rutland, Vermont 05701, manufactures and markets proprietary
metal and stone decorative tiles. As of June 30, 2009, we held
655,454 shares of Common Stock (representing 7.5 percent of the total shares of
Common Stock outstanding) of Questech, as well as warrants to purchase 5,000
shares of Common Stock of the company at $1.50 per share. As of the
date above, our Valuation Committee valued the total amount of securities of
Questech held by us at $150,976. The Chief Executive Officer of the
company is Barry J. Culkin.
Solazyme, Inc., located at 561
Eccles Avenues, South San Francisco, California 94080, is developing algal
biodiesel, industrial chemicals and special ingredients based on synthetic
biology. Solazyme's microbial conversion technology process may allow
algae to produce oil in standard industrial facilities quickly, efficiently and
at large scale. These oils can be used not only for advanced biofuel production,
but also as replacements for fossil fuels and plant oils in a diverse range of
products including household cleaning supplies, cosmetics and
foods. Solazyme is a development company and has yet to generate
significant revenues from the commercial sale of products. The
company's main competition in this market include companies such as LS9,
Sapphire Energy, and Amyris Biotechnologies, as these companies are also focused
on the commercialization of biofuels. The company is highly dependent
on its intellectual property position and its ability to protect this
position. Revenue generated by the company may be affected positively
or negatively by government regulations that favor one form of energy generation
over another. As of June 30, 2009, we held 988,204 shares of Series A
Convertible Preferred Stock (representing 12.8 percent of the total shares of
outstanding of Series A Convertible Preferred Stock), 495,246 shares of Series B
Convertible Preferred Stock (representing 5.8 percent of the total shares of
outstanding of Series B Convertible Preferred Stock) and 651,309 shares of
Series C Convertible Preferred Stock (representing 5.7 percent of the total
shares of outstanding of Series C Convertible Preferred Stock) of
Solazyme. As of the date above, our Valuation Committee valued the
total amount of securities of Solazyme held by us at $10,754,019. The
Chief Executive Officer of the company is Jonathan S. Wolfson. The
President and Chief Technology Officer is Harrison F.
Dillion. Douglas W. Jamison serves as an observer to the Board of
Directors of the company.
Xradia, Inc., located at 5052
Commercial Circle, Concord, California 94520, is designing, manufacturing and
selling ultra-high resolution 3D x-ray microscopes and fluorescence imaging
systems. As of June 30, 2009, we held 3,121,099 shares of Series D
Convertible Preferred Stock (representing 57.1 percent of the total shares of
Series D Convertible Preferred Stock Outstanding) of Xradia. As of
the date above, our Valuation Committee fair valued the Series D Convertible
Preferred Stock held by us at $4,000,000. The Chief Executive Officer
of the company is Rod Browning. Alexei A. Andreev serves as a
Director of the company.
Unaffiliated
Companies:
BioVex Group, Inc., located at
34 Commerce Way, Woburn, Massachusetts 01801, is developing novel biologics for
treatment of cancer and infectious disease. As of June 30, 2009, we
held 2,799,552 shares of Series E Convertible Preferred Stock (representing 10.2
percent of the total shares of Series E Convertible Preferred Stock
outstanding), and 2,011,110 shares of Series F Convertible Preferred Stock
(representing 1.3 percent of the total shares of Series F Convertible Preferred
Stock outstanding) of BioVex, as well as warrants to purchase 248,120 shares of
Series F Stock of the company at $0.241576 per share. As of the above
date, our Valuation Committee valued the total amount of securities of BioVex
held by us at $526,965. The Chief Executive Officer of the company is
Philip Astley-Sparke. Misti Ushio serves as an observer to the Board
of Directors of the company.
Cobalt Technologies, Inc.,
located at 500 Clyde Avenue, Mountain View, California 94043, is developing
technologies to produce biobutanol through biomass fermentation. As
of June 30, 2009, we held 176,056 shares of Series C Convertible Preferred Stock
(representing 3.0 percent of the total shares of Series C Convertible Preferred
Stock outstanding) of Cobalt. As of the date above, our Valuation
Committee valued the Series C Convertible Preferred Stock held by us at
$187,500. The Chief Executive Officer of the company is Rick Wilson.
D-Wave
Systems, Inc., located at
100-4401 Still Creek Drive, Burnaby, British Columbia, V5C 6G9, Canada, is
developing
high-performance quantum computing systems. As of June 30, 2009, we held 1,144,869 shares of Series B
Convertible Preferred Stock (representing 11.6 percent of the total number of
shares of Series B Convertible Preferred Stock outstanding), 450,450 shares of
Series C Convertible Preferred Stock (representing 2.2 percent of the total
shares of Series C Convertible Preferred Stock outstanding) and 1,533,395 shares
of Series D Convertible Preferred stock (representing 15.6 percent of the total
shares of Series D Convertible Preferred Stock outstanding) of
D-Wave. As of the date above, our Valuation Committee valued the
total amount of securities of D-Wave Systems held by us at
$3,016,010. As of June 30, 2009, the acting Chief Executive Officer of the company
was Warren
Wall. D-Wave Systems, Inc. is not an eligible portfolio company under
the 1940 Act, because it operates primarily outside the United
States. Alexei
Andreev serves as an observer to the Board of Directors of the
company.
Molecular Imprints, Inc.,
located at 1807 West Braker Lane, Austin, Texas 78758, is manufacturing
nanoimprint lithography capital equipment. As of June 30, 2009, we
held 1,333,333 shares of Series B Convertible Preferred Stock (representing 6.6
percent of the total shares of Series B Preferred Stock outstanding) and
1,250,000 shares of Series C Convertible Preferred Stock (representing 14.7
percent of the total shares of Series C Convertible Preferred Stock outstanding)
of Molecular Imprints, as well as warrants to purchase 125,000 shares of Series
C Convertible Preferred Stock of the company at a price of $2.00 per
share. As of the date above, our Valuation Committee valued the total
amount of securities of Molecular Imprints held by us at
$3,204,188. The Chief Executive Officer of the company is Mark
Melliar-Smith. Alexei A. Andreev serves as an observer to the Board
of Directors of the company.
Nanosys, Inc., located at 2625
Hanover Street, Palo Alto, California 94304, is a developing zero and
one-dimensional inorganic nanometer-scale materials and devices. As
of June 30, 2009, we held 803,428 shares of Series C Convertible Preferred Stock
(representing 3.9 percent of the total shares of Series C Convertible Preferred
Stock outstanding) and 1,016,950 shares of Series D Convertible Preferred Stock
(representing 6.3 percent of the total shares of Series D Preferred Stock
outstanding) of Nanosys. As of the date above, our Valuation
Committee valued the total amount of shares of Nanosys held by us at
$2,685,057. The Chief Executive Officer of the company is Jason
Hartlove.
Nantero, Inc., located at 25-E
Olympia Avenue, Woburn, Massachusetts 01801, is developing high-density,
nonvolatile, random access memory chip, enabled by carbon
nanotubes. As of June 30, 2009, we held 345,070 shares of Series A
Convertible Preferred Stock (representing 8.2 percent of the total shares of
Series A Preferred Stock outstanding), 207,051 shares of Series B Convertible
Preferred Stock (representing 3.1 percent of the total shares of Series B
Convertible Preferred Stock outstanding) and 188,315 shares of Series C
Convertible Preferred Stock (representing 3.8 percent of the total shares of
Series C Convertible Preferred Stock outstanding) of Nantero. As of
the date above, our Valuation Committee valued the total amount of shares of
Nantero held by us at $2,246,409. The Chief Executive Officer of the
company is Greg Schmergel.
NeoPhotonics Corporation,
located at 2911 Zanker Road, San Jose, California 95134, is developing and
manufacturing optical devices and components. As of June 30, 2009, we
held 716,195 shares of Common Stock (representing 1.5 percent of the total
shares of Common Stock outstanding), 1,831,256 shares of Series 1 Convertible
Preferred Stock (representing 4.1 percent of the total Series 1 Convertible
Preferred Stock), 741,898 shares of Series 2 Convertible Preferred Stock
(representing 3.5 percent of the total shares of Series 2 Convertible Preferred
Stock outstanding), 2,750,000 shares of Series 3 Convertible Preferred Stock
(representing 2.8 percent of the total shares of Series 3 Convertible Preferred
Stock outstanding) and 2,000 shares of Series X Convertible Preferred Stock
(representing 0.6 percent of the total shares of Series X Convertible Preferred
Stock outstanding) of NeoPhotonics, as well as warrants to purchase 30,427
shares of Common Stock of the company at $0.15 per share. As of the
date above, our Valuation Committee valued the total amount of securities of
NeoPhotonics held by us at $2,206,780. The Chief Executive Officer of
the company is Timothy S. Jenks. Alexei A. Andreev serves as an
observer to the Board of Directors of the company.
Polatis, Inc., located at One
Tech Drive, Andover, Massachusetts 01810, is developing MEMS-based optical
networking components. As of June 30, 2009, we held 16,775 shares of
the Series A-1 Convertible Preferred Stock (representing 6.8 percent of the
total shares of Series A-1 Convertible Preferred Stock outstanding), 71,611
shares of Series A-2 Convertible Preferred Stock (representing 4.7 percent of
the total Series A-2 Convertible Preferred Stock outstanding), 4,774 shares of
Series A-4 Convertible Preferred Stock (representing 4.7 percent of the total
shares of Series A-4 Convertible Preferred Stock outstanding) and 16,438 shares
of Series A-5 Convertible Preferred Stock (representing 1.8 percent of the total
shares of Series A-5 Convertible Preferred Stock outstanding) of
Polatis. As of the date above, our Valuation Committee valued
the total amount of shares of Polatis held by us at $0. The Chief
Executive Officer of the company is Gerald Wesel. Lori D. Pressman
serves as an observer to the Board of Directors of the company.
PolyRemedy, Inc., located at
2637 Marine Way, Mountain View, California 94043, is developing a robotic
manufacturing platform for wound treatment patches. As of June 30,
2009, we held 287,647 shares of Series B-1 Convertible Preferred Stock
(representing 1.6 percent of the total shares of the Series B-1 Convertible
Preferred Stock outstanding) and 676,147 shares of Series B-2 Convertible
Preferred Stock (representing 1.5 percent of the total shares of the Series B-2
Convertible Preferred Stock outstanding) of PolyRemedy. As of the
date above, our Valuation Committee valued the total amount of shares of
PolyRemedy held by us at $215,572. The Chief Executive Officer of the
company is Daniel A. Eckert. Alexei A. Andreev serves
as an observer to the Board of Directors of the company.
Siluria Technologies, Inc.,
located at 2750 Sand Hill Road, Menlo Park, California 94025, is developing
next-generation nanomaterials. As of June 30, 2009, we held 612,061
shares of Series S-2 Convertible Preferred Stock (representing 4.3 percent of
the total shares of Series S-2 Convertible Preferred Stock outstanding) of
Siluria. As of the above date, our Valuation Committee valued the
total amount of securities of Siluria held by us at $204,000. The
General Manager of the company is Alex Tkachenko. Michael A. Janse
serves as an observer to the Board of Directors of the company.
Starfire Systems, Inc.,
located at 10 Hermes Road, Malta, New York 12020, produces ceramic-forming
polymers. As of June 30, 2009, we held 375,000 shares of Common Stock
(representing 4.6 percent of the total shares of Common Stock outstanding) and
600,000 shares of Series A-1 Convertible Preferred Stock (representing 12.9
percent of the total shares of Series A-1 Convertible Preferred Stock
outstanding) of Starfire. As of the above date, our Valuation
Committee valued the total amount of shares of Starfire held by us at
$0. The Chief Executive Officer of the company is Herbert
Armstrong. Douglas W. Jamison serves as an observer to the Board of
Directors of the company.
TetraVitae Biosciences, Inc.,
located at 20 North Wacker Drive, Chicago, Illinois 60606, is developing
alternative chemical and fuels through biomass fermentation. As of
June 30, 2009, we held 118,804 shares of Series B Convertible Preferred Stock
(representing 4.2 percent of the total shares of Series B Convertible Preferred
Stock outstanding) of TetraVitae. As of the above date, our Valuation
Committee valued the total amount of shares of TetraVitae held by us at
$125,000. The Chief Executive Officer of the company is Jay
Kouba. Misti Ushio serves as an observer to the Board of Directors of
the company.
Although Ancora, BridgeLux, Cambrios,
Crystal IS, Kovio, Metabolon, Molecular Imprints, NanoGram, Nanomix, Nanosys,
NeoPhotonics, Nextreme, Polatis, Questech, Solazyme, Starfire Systems and Xradia
are all generating revenues ranging from nominal to significant from commercial
sales of products and/or services and/or from government-funded grants, they are
all still relatively early-stage companies with the attendant
risks. Additionally, with the exceptions of BridgeLux, Crystal IS
Exponential, Metabolon, Molecular Imprints, NanoGram, Nanomix, Nanosys,
NeoPhotonics, Nextreme, Questech, Starfire Systems and Xradia we consider all of
the foregoing portfolio companies to be development-stage
companies. This term is used to describe a company that devotes
substantially all of its efforts to establishing a new business, and either has
not yet commenced its planned principal operations, or it has commenced such
operations but has not realized significant revenue from them. Any of
the private companies may require additional funding that may not be obtainable
at all or on the terms of their most recent fundings, which would result in
partial or complete write-downs in the value of our investment. In
general, venture capital is difficult to obtain, especially in the current
economic and capital markets environment. Each company is dependent
upon a single or small number of customers and/or key operating
personnel. All of the foregoing companies rely heavily upon the
technology associated with their respective business. Therefore, each
company places great importance on its relevant patents, trademarks, licenses,
algorithms, trade secrets, franchises or concessions. Lastly, each
company is particularly vulnerable to general economic, private equity and
capital markets conditions and to changes in government regulation, interest
rates or technology.
As a participant in the venture capital
business, we invest primarily in private companies for which there is generally
no publicly available information. Because of the private nature of
these businesses, there is a need to maintain the confidentiality of the
financial and other information that we have for the private companies in our
portfolio. We believe that maintaining this confidence is important,
as disclosure of such information could disadvantage our portfolio companies and
could put us at a disadvantage in attracting new
investments. Therefore, we do not intend to disclose financial or
other information about our portfolio companies, unless required, because we
believe doing so may put them at an economic or competitive disadvantage,
regardless of our level of ownership or control.
DETERMINATION
OF NET ASSET VALUE
Our investments can be classified into
five broad categories for valuation purposes:
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Equity-related
securities;
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Investments
in intellectual property, patents, research and development in technology
or product development;
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Long-term
fixed-income securities;
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Short-term
fixed-income securities; and
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The 1940 Act requires periodic
valuation of each investment in our portfolio to determine net asset value.
Under the 1940 Act, unrestricted securities with readily available market
quotations are to be valued at the current market value; all other assets must
be valued at "fair value" as determined in good faith by or under the direction
of the Board of Directors.
Our Board of Directors is responsible
for (1) determining overall valuation guidelines and (2) ensuring the valuation
of investments within the prescribed guidelines.
Our Valuation Committee, comprised of
all of the independent Board members, is responsible for determining the
valuation of our assets within the guidelines established by the Board of
Directors.
The values assigned to these
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized, as such amounts depend on future
circumstances and cannot reasonably be determined until the individual
investments are actually liquidated or become readily marketable.
Approaches
to Determining Fair Value
Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price).
The main
approaches to measuring fair value utilized are the market approach and the
income approach.
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Market
Approach: The market approach uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities. For example, the market approach often
uses market multiples derived from a set of comparables. Multiples might
lie in ranges with a different multiple for each comparable. The selection
of where within the range each appropriate multiple falls requires
judgment considering factors specific to the measurement (qualitative and
quantitative).
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Income
Approach: The income approach uses valuation techniques to convert
future amounts (for example, cash flows or earnings) to a single present
value amount (discounted). The measurement is based on the value indicated
by current market expectations about those future amounts. Those valuation
techniques include present value techniques; option-pricing models, such
as the Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a lattice model), which incorporate present value techniques; and
the multi-period excess earnings method, which is used to measure the fair
value of certain assets.
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SFAS No.
157 classifies the inputs used to measure fair value by these approaches into
the following hierarchy:
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Level 1:
Unadjusted quoted prices in active markets for identical assets or
liabilities.
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Level 2: Quoted
prices in active markets for similar assets or liabilities, or quoted
prices for identical or similar assets or liabilities in markets that are
not active, or inputs other than quoted prices that are observable for the
asset or liability.
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Level 3:
Unobservable inputs for the asset or
liability.
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Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement and are not necessarily an indication
of risks associated with the investment.
The Company applies the methods for
determining fair value discussed above to the valuation of investments in each
of the five broad categories as follows:
Equity-Related
Securities
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market
approach is used to fair value these types of securities: readily available
public market quotations; the cost of the Company's investment; transactions in
a company's securities or unconditional firm offers by responsible parties as a
factor in determining valuation; the financial condition and operating results
of the company; the company's progress towards milestones, the long-term
potential of the business and technology of the company; the values of similar
securities issued by companies in similar businesses; multiples to revenue, net
income or EBITDA that similar securities issued by companies in similar
businesses receive; the proportion of the company's securities we own and the
nature of any rights to require the company to register restricted securities
under applicable securities laws; and the rights and preferences of the class of
securities we own as compared to other classes of securities the portfolio
company has issued. When the income approach is used to value
warrants, the Company uses the Black-Scholes-Merton formula.
Investments
in Intellectual Property, Patents, Research and Development in Technology or
Product Development
These
investments are fair valued using the market approach. The Company may consider
factors specific to these types of investments when using the market approach
including: the cost of the Company's investment; investments in the same or
substantially similar intellectual property or patents or research and
development in technology or product development or offers by responsible third
parties; the results of research and development; product development and
milestone progress; commercial prospects; term of patent projected markets; and
other subjective factors.
As of June 30, 2009, we did not have
any investments in intellectual property, patents, research and development in
technology or product development.
Long-Term
Fixed-Income Securities
Long-term fixed-income securities for
which market quotations are readily available are valued using the most recent
bid quotations when available.
Long-term
fixed-income securities for which market quotations are not readily available
are fair valued using the market approach. The factors that may be
considered when valuing these types of securities by the market approach
include: credit quality; interest rate analysis; quotations from broker-dealers;
prices from independent pricing services that the Board believes are reasonably
reliable; and reasonable price discovery procedures and data from other
sources.
Short-Term
Fixed-Income Securities
Short-Term fixed-income securities are
valued using the market approach in the same manner as long-term fixed-income
securities until the remaining maturity is 60 days or less, after which time
such securities may be valued at amortized cost if there is no concern over
payment at maturity.
All
Other Securities
All other securities are reported at
fair value as determined in good faith by the Valuation Committee using the
approaches for determining valuation as described above. As of June
30, 2009, we did not have any of these investments.
For all other securities, the reported
values shall reflect the Valuation Committee's judgment of fair values as of the
valuation date using the outlined basic approaches of valuation discussed
above. They do not necessarily represent an amount of money that
would be realized if we had to sell such assets in an immediate
liquidation. Thus, valuations as of any particular date are not
necessarily indicative of amounts that we may ultimately realize as a result of
future sales or other dispositions of investments we hold.
Determinations
of Net Asset Value in Connection with Offerings
In
connection with each offering of our Common Stock, our Board of Directors or a
committee thereof is required to make the determination that we are not selling
our Common Stock at a price below the then current net asset value of our Common
Stock at the time at which the sale is made. Our Board of Directors considers
the following factors, among others, in making such determination:
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the net asset value of our Common
Stock disclosed in the most recent periodic report we filed with the
SEC;
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our Management's assessment of
whether any material change in the net asset value of our Common Stock has
occurred (including through the realization of gains on the sale of our
portfolio securities) from the period beginning on the date of the most
recently disclosed net asset value of our Common Stock to the period
ending two days prior to the date of the sale of our Common Stock;
and
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the magnitude of the difference
between the net asset value of our Common Stock disclosed in the most
recent periodic report we filed with the SEC and our Management's
assessment of any material change in the net asset value of our Common
Stock since the date of the most recently disclosed net asset value of our
Common Stock, and the offering price of our Common Stock in the proposed
offering.
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Moreover,
to the extent that there is even a remote possibility that we may (i) issue
our Common Stock at a price below the then current net asset value of our Common
Stock at the time at which the sale is made or (ii) trigger the undertaking
(which we provided to the SEC in our registration statements) to suspend the
offering of our Common stock if the net asset value of our Common Stock
fluctuates by certain amounts in certain circumstances until the prospectus is
amended, the Board of Directors will elect, in the case of clause
(i) above, either to postpone the offering until such time that there is no
longer the possibility of the occurrence of such event or to undertake to
determine the net asset value of our Common Stock within two days prior to any
such sale to ensure that such sale will not be below our then current net asset
value, and, in the case of clause (ii) above, to comply with such
undertaking or to undertake to determine the net asset value of our Common Stock
to ensure that such undertaking has not been triggered.
INVESTMENT
POLICIES
Investments
and Strategies
The
following is a summary description of the types of assets in which we may
invest, the investment strategies we may utilize and the attendant risks
associated with our investments and strategies. For a full
description of our investments and strategies, please refer to our Annual Report
on Form 10-K.
Equity,
Equity-Related Securities and Debt with Equity Features
We may
invest in equity, equity-related securities and debt with equity
features. These securities include common stock, preferred stock,
debt instruments convertible into common or preferred stock, limited partnership
interests, other beneficial ownership interests and warrants, options or other
rights to acquire any of the foregoing.
We may
also acquire or divest companies that we believe provide opportunities to
commercialize nanotechnology or microsystems. We may make investments
in companies with operating histories that are unprofitable or marginally
profitable, that have negative net worth or that are involved in bankruptcy or
reorganization proceedings. These investments would involve
businesses that management believes have turn-around potential through the
infusion of additional capital and management assistance. In
addition, we may make investments in connection with the acquisition or
divestiture of companies or divisions of companies. There is a
significantly greater risk of loss with these types of securities than is the
case with traditional investment securities.
We may
also invest in publicly traded securities of whatever nature, including
relatively small, emerging growth companies that management believes have
long-term growth possibilities. Pursuant to a rule adopted by the
SEC, our investments in U.S. non-financial public companies whose securities are
not listed on a securities exchange will generally be treated as qualifying
assets for purposes of maintaining our business development company status if we
acquire such investments in private placements or secondary market
transactions. A recently adopted SEC rule includes the securities of
publicly traded companies with a market capitalization of less than $250 million
as qualifying assets as well.
Warrants,
options and convertible or exchangeable securities generally give the investor
the right to acquire specified equity securities of an issuer at a specified
price during a specified period or on a specified date. Warrants and
options fluctuate in value in relation to the value of the underlying security
and the remaining life of the warrant or option, while convertible or
exchangeable securities fluctuate in value both in relation to the intrinsic
value of the security without the conversion or exchange feature and in relation
to the value of the conversion or exchange feature, which is like a warrant or
option. When we invest in these securities, we incur the risk that
the option feature will expire worthless, thereby either eliminating or
diminishing the value of our investment.
Our
investments in equity securities usually involve securities of private companies
that are restricted as to sale and cannot be sold in the open market without
registration under the Securities Act of 1933 or pursuant to a specific
exemption from these registrations. Opportunities for sale are more
limited than in the case of marketable securities, although these investments
may be purchased at more advantageous prices and may offer attractive investment
opportunities. Even if one of our portfolio companies completes an
initial public offering, we are typically subject to a lock-up agreement, and
the stock price may decline substantially before we are free to
sell. Even if we have registration rights to make our investments
more marketable, a considerable amount of time may elapse between a decision to
sell or register the securities for sale and the time when we are able to sell
the securities. The prices obtainable upon sale may be adversely
affected by market conditions or negative conditions affecting the issuer during
the intervening time.
Venture
Capital Investments
We make
venture capital investments. Substantially all of our long-term, venture capital
investments are in thinly capitalized, unproven, small companies focused on
risky technologies. These businesses also tend to lack management
depth, to have limited or no history of operations and to have not attained
profitability. Because of the speculative nature of these
investments, these securities have a significantly greater risk of loss than
traditional investment securities. Some of our venture capital
investments are likely to be complete losses or unprofitable and some will never
realize their potential.
We may
own 100 percent of the securities of a start-up investment for a period of time
and may control the company for a substantial period. Start-up
companies are more vulnerable than better capitalized companies to adverse
business or economic developments. Start-up businesses generally have
limited product lines, service niches, markets and/or financial
resources. Start-up companies are not well-known to the investing
public and are subject to potential bankruptcy, general movements in markets and
perceptions of potential growth.
In
connection with our venture capital investments, we may provide managerial
assistance to our portfolio companies, including the following:
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formulating
operating strategies;
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formulating
intellectual property strategies;
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assisting
in financial planning;
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providing
management in the initial start-up stages;
and
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establishing
corporate goals.
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We may
assist in raising additional capital for these companies from other potential
investors and may subordinate our own investment to that of other
investors. We may also find it necessary or appropriate to provide
additional capital of our own. We may introduce these companies to
potential joint venture partners, suppliers and customers. In
addition, we may assist in establishing relationships with investment bankers
and other professionals. We may also assist with mergers and
acquisitions. We do not derive income from these companies for the
performance of any of the above services.
We may
control, be represented on or have observer rights on the Board of Directors of
a portfolio company by one or more of our officers or directors, who may also
serve as officers of the portfolio company. We indemnify our officers
and directors for serving on the Boards of Directors or as officers of portfolio
companies, which exposes us to additional risks. Particularly during
the early stages of an investment, we may in effect be involved in the conduct
of the operations of the portfolio company. As a venture company
emerges from the developmental stage with greater management depth and
experience, we expect that our role in the portfolio company's operations will
diminish. Our goal is to assist each company in establishing its own
independent capitalization, management and Board of Directors. We
expect to be able to reduce our interest in those start-up companies that become
successful.
Debt
Obligations
We may
hold debt securities for income and as a reserve pending more speculative
investments. Debt obligations may include U.S. government and agency
securities, commercial paper, bankers' acceptances, receivables or other
asset-based financing, notes, bonds, debentures, or other debt obligations of
any nature and repurchase agreements related to these
securities. These obligations may have varying terms with respect to
security or credit support, subordination, purchase price, interest payments and
maturity from private, public or governmental issuers of any type located
anywhere in the world. We may invest in debt obligations of companies
with operating histories that are unprofitable or marginally profitable, that
have negative net worth or are involved in bankruptcy or reorganization
proceedings, or that are start-up or development stage entities. In
addition, we may participate in the acquisition or divestiture of companies or
divisions of companies through issuance or receipt of debt
obligations. As of June 30, 2009, the debt obligations held in our
portfolio consisted of convertible bridge notes and U.S. Treasury securities.
It is
likely that our investments in debt obligations will be of varying quality,
including non-rated, unsecured, highly speculative debt investments with limited
marketability. Investments in lower-rated and non-rated securities,
commonly referred to as "junk bonds," are subject to special risks, including a
greater risk of loss of principal and non-payment of
interest. Generally, lower-rated securities offer a higher return
potential than higher-rated securities but involve greater volatility of price
and greater risk of loss of income and principal, including the possibility of
default or bankruptcy of the issuers of these securities. Lower-rated
securities and comparable non-rated securities will likely have large
uncertainties or major risk exposure to adverse conditions and are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. The
occurrence of adverse conditions and uncertainties to issuers of lower-rated
securities would likely reduce the value of lower-rated securities held by us,
with a commensurate effect on the value of our shares.
The
markets in which lower-rated securities or comparable non-rated securities are
traded generally are more limited than those in which higher-rated securities
are traded. The existence of limited markets for these securities may
restrict our ability to obtain accurate market quotations for the purposes of
valuing lower-rated or non-rated securities and calculating net asset value or
to sell securities at their fair value. Any economic downturn could
adversely affect the ability of issuers' lower-rated securities to repay
principal and pay interest thereon. The market values of lower-rated
and non-rated securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated
securities. In addition, lower-rated securities and comparable
non-rated securities generally present a higher degree of credit
risk. Issuers of lower-rated securities and comparable non-rated
securities are often highly leveraged and may not have more traditional methods
of financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss owing to default by
these issuers is significantly greater because lower-rated securities and
comparable non-rated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. We may
incur additional expenses to the extent that we are required to seek recovery
upon a default in the payment of principal or interest on our portfolio
holdings.
The market value of investments in debt
securities that carry no equity participation usually reflects yields generally
available on securities of similar quality and type at the time
purchased. When interest rates decline, the market value of a debt
portfolio already invested at higher yields can be expected to rise if the
securities are protected against early call. Similarly, when interest
rates increase, the market value of a debt portfolio already invested at lower
yields can be expected to decline. Deterioration in credit quality
also generally causes a decline in market value of the security, while an
improvement in credit quality generally leads to increased value.
Foreign
Securities
We may
make investments in securities of issuers whose principal operations are
conducted outside the United States, and whose earnings and securities are
stated in foreign currency. In order to maintain our status as a
business development company, our investments in the stocks of companies
organized outside the U.S. would be limited to 30 percent or less of our assets,
because we must invest at least 70 percent of our assets in "qualifying assets"
and securities of foreign companies are not "qualifying assets."
Compared
to otherwise comparable investments in securities of U.S. issuers, currency
exchange risk of securities of foreign issuers is a significant
variable. The value of these investments to us will vary with the
relation of the currency in which they are denominated to the U.S. dollar, as
well as with intrinsic elements of value such as credit risk, interest rates and
performance of the issuer. Investments in foreign securities also
involve risks relating to economic and political developments, including
nationalization, expropriation, currency exchange freezes and local
recession. Securities of many foreign issuers are less liquid and
more volatile than those of comparable U.S. issuers. Interest and
dividend income and capital gains on our foreign securities may be subject to
withholding and other taxes that may not be recoverable by us. We may
seek to hedge all or part of the currency risk of our investments in foreign
securities through the use of futures, options and forward currency purchases or
sales.
Intellectual
Property
We
believe there is a role for organizations that can assist in technology
transfer. Scientists and institutions that develop and patent
intellectual property perceive the need for and rewards of entrepreneurial
commercialization of their inventions.
Our form of investment may
be:
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funding
research and development in the development of a
technology;
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obtaining
licensing rights to intellectual property or
patents;
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acquiring
intellectual property or patents;
or
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forming
and funding companies or joint ventures to further commercialize
intellectual property.
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Income from our investments in
intellectual property or its development may take the form of participation in
licensing or royalty income, fee income, or some other form of
remuneration. Investment in developmental intellectual property
rights involves a high degree of risk that can result in the loss of our entire
investment as well as additional risks including uncertainties as to the
valuation of an investment and potential difficulty in liquidating an
investment. Further, investments in intellectual property generally
require investor patience as investment return may be realized only after or
over a long period. At some point during the commercialization of a
technology, our investment may be transformed into ownership of securities of a
development stage or start-up company as discussed under "Venture Capital
Investments" above.
Other
Strategies
In
pursuit of our investment strategy, we may employ one or more of the following
strategies in order to enhance investment results.
Borrowing
and Margin Transactions
We may
from time to time borrow money or obtain credit by any lawful means from banks,
lending institutions, other entities or individuals, in negotiated
transactions. We may issue, publicly or privately, bonds, debentures
or notes, in series or otherwise, with interest rates and other terms and
provisions, including conversion rights, on a secured or unsecured basis, for
any purpose, up to the maximum amounts and percentages permitted for closed-end
investment companies under the 1940 Act. The 1940 Act currently
prohibits us from borrowing any money or issuing any other senior securities
(other than preferred stock and other than temporary borrowings of up to five
percent of our assets), if in giving effect to the borrowing or issuance, the
value of our total assets would be less than 200 percent of our total
liabilities (other than liabilities not constituting senior
securities). We may pledge assets to secure any
borrowings. We currently have no leverage and have no current
intention to issue preferred stock.
A primary
purpose of our borrowing power is for leverage, to increase our ability to
acquire investments both by acquiring larger positions and by acquiring more
positions. Borrowings for leverage accentuate any increase or
decrease in the market value of our investments and thus our net asset
value. Since any decline in the net asset value of our investments
will be borne first by holders of Common Stock, the effect of leverage in a
declining market would be a greater decrease in net asset value applicable to
the Common Stock than if we were not leveraged. Any decrease would likely be
reflected in a decline in the market price of the Common Stock. To
the extent the income derived from assets acquired with borrowed funds exceeds
the interest and other expenses associated with borrowing, our total income will
be greater than if borrowings were not used. Conversely, if the
income from assets is not sufficient to cover the borrowing costs, our total
income will be less than if borrowings were not used. If our current
income is not sufficient to meet our borrowing costs (repayment of principal and
interest), we might have to liquidate our investments when it may be
disadvantageous to do so. Our borrowings for the purpose of buying
most liquid equity securities will be subject to the margin rules, which require
excess liquid collateral marked to market daily. If we are unable to
post sufficient collateral, we would be required to sell securities to remain in
compliance with the margin rules. These sales might be at
disadvantageous times or prices.
Portfolio
Company Turnover
Changes
with respect to portfolio companies will be made as our management considers
necessary in seeking to achieve our investment objective. The rate of
portfolio turnover will not be treated as a limiting or relevant factor when
circumstances exist which are considered by management to make portfolio changes
advisable.
Although
we expect that many of our investments will be relatively long term in nature,
we may make changes in our particular portfolio holdings whenever it is
considered that an investment no longer has substantial growth potential or has
reached its anticipated level of performance, or (especially when cash is not
otherwise available) that another investment appears to have a relatively
greater opportunity for capital appreciation. We may also make
general portfolio changes to increase our cash to position us in a defensive
posture. We may make portfolio changes without regard to the length
of time we have held an investment, or whether a sale results in profit or loss,
or whether a purchase results in the reacquisition of an investment that we may
have only recently sold. Our investments in privately held companies
are illiquid, which limits portfolio turnover.
The
portfolio turnover rate may vary greatly from year to year as well as during a
year and may also be affected by cash requirements.
MANAGEMENT
OF THE COMPANY
BOARD
OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth
below are the names, ages, positions and principal occupations during the past
five years of our directors and executive officers. We have no
advisory board. Our business address and that of our officers and
directors is 111 West 57th Street,
Suite 1100, New York, New York 10019.
Executive
Officers
Messrs.
Jamison, Wolfe, Andreev and Janse, Managing Directors, are primarily responsible
for the day-to-day management of our portfolio. They have served as
employees of the Company since 2002, 2004, 2005 and 2007,
respectively.
Douglas W.
Jamison. Mr. Jamison, age 39, has served as Chairman and Chief
Executive Officer since January 1, 2009, as President and as Chief Operating
Officer from January 1, 2005 through December 31, 2008, as Treasurer from
March 2005 to May 2008, as a Managing Director since January 2004, as Chief
Financial Officer from January 2005 through December 2007 and as Vice President
from September 2002 through December 2004. He has been a member of
our Board of Directors since May 2007. Since January 2005, he has
been President and a Director of Harris & Harris Enterprises, Inc., a
wholly owned subsidiary of Harris & Harris Group, Inc. Mr.
Jamison is a director of Ancora Pharmaceuticals, Inc., a privately held
nanotechnology-enabled company in which we have an investment. He is
Co-Editor-in-Chief of "Nanotechnology Law & Business." He is
Co-Chair of the Advisory Board, Converging Technology Bar Association, a member
of the University of Pennsylvania Nano-Bio Interface Ethics Advisory Board and a
member of the Advisory Board, Massachusetts Technology Collaborative
Nanotechnology Venture Forum. His professional societies include the
Association of University Technology Managers. From 1997 to 2002, he worked as a
senior technology manager at the University of Utah Technology Transfer Office,
where he managed intellectual property in physics, chemistry and the engineering
sciences. He was graduated from Dartmouth College (B.A.) and the
University of Utah (M.S.).
Daniel B.
Wolfe. Mr. Wolfe, age 32, has served as President and Chief
Operating Officer since January 1, 2009, as Chief Financial Officer and as a
Managing Director since January 2008 and as Treasurer since May
2008. He served as Principal from January 2007 to January 2008, as
Senior Associate from January 2006 to January 2007, and as Vice President from
July 2004 to January 2008. Since January 1, 2009, he is President and
a Director of Harris & Harris Enterprises, Inc., a wholly owned subsidiary
of the Company. He is a director of Laser Light Engines, Inc.,
SiOnyx, Inc., and Nextreme Thermal Solutions, Inc., privately held
nanotechnology-enabled companies in which we have investments. Prior
to joining us, he served as a consultant to Nanosys, Inc. (from 2002 to 2004),
to CW Group (from 2001 to 2004) and to Bioscale, Inc. (from January 2004 to June
2004). He was graduated from Rice University (B.A., Chemistry), where
his honors included the Zevi and Bertha Salsburg Memorial Award in Chemistry and
the Presidential Honor Roll, and from Harvard University (A.M., Ph.D.,
Chemistry), where he was an NSF Predoctoral Fellow.
At our
request, Mr. Wolfe was interim Chief Executive Officer of Evolved Nanomaterial
Sciences, Inc. ("ENS"), one of our portfolio companies, from July 1, 2007, to
September 28, 2007. ENS filed for Chapter 7 bankruptcy on September
30, 2007.
Alexei A.
Andreev. Mr. Andreev, age 37, has served as an Executive Vice
President and as a Managing Director since March 2005. From 2002 to
March 2005, he was an Associate with Draper Fisher Jurvetson, a venture capital
firm. He is a director of Xradia, Inc., privately held
nanotechnology-enabled companies in which we have investments. He was
graduated with honors in Engineering/Material Sciences (B.S.), in Solid State
Physics (Ph.D.) from Moscow Steel and Alloys Institute and from Stanford
Graduate School of Business (M.B.A.).
Michael A.
Janse. Mr. Janse, age 40, has served as an Executive Vice
President and as a Managing Director since April 2007. From January
2007 to April 2007, he was a Principal with ARCH Venture Partners and was an
Associate from June 2002 to January 2007, following earlier roles as an intern
and then consultant. He concentrated on investment opportunities in
advanced semiconductor products, nanotechnology, and novel
materials. He is a director of Adesto Technologies Corp.,
Innovalight, Inc., and Laser Light Engines, Inc., privately held
nanotechnology-enabled companies in which we have investments. He was
graduated from Brigham Young University (B.S., Chemical Engineering) and The
University of Chicago (M.B.A.).
Misti Ushio. Ms.
Ushio, age 37, has served as a Vice President and Associate since May 2007. From
June 2006 to May 2007, Ms. Ushio was a Technology Licensing Officer at Columbia
University. From May 1996 to May 2006, she was employed by Merck
& Co., Inc., most recently as a Senior Research Biochemical Engineer
with the Bioprocess R&D group. She is a member of the Nanotechnology
Institute Corporate Advisory Group of Philadelphia, Pennsylvania. She
was graduated from Johns Hopkins University (B.S., Chemical Engineering), Lehigh
University (M.S., Chemical Engineering) and University College London (Ph.D.,
Biochemical Engineering).
Sandra Matrick Forman,
Esq. Ms. Forman, age 43, has served as General Counsel, as
Chief Compliance Officer and as Director of Human Resources since August 2004,
and as our Corporate Secretary since January 1, 2009. From 2001 to
2004, she was an Associate at Skadden, Arps, Slate, Meagher & Flom LLP,
in the Investment Management Group. She was graduated from New York
University (B.A.), where her honors included National Journalism Honor Society,
and from the University of California Los Angeles (J.D.), where her honors
included Order of the Coif and membership on the Law Review. She is
currently a member of the working group for the National Venture Capital
Association model documents.
Patricia N. Egan. Ms. Egan,
age 35, has served as Chief Accounting Officer, as a Vice President and as
Senior Controller since June 2005. From June 2005 to December 2005,
from August 2006 to March 2008 and from May 2008 to December 31, 2008, she
served as an Assistant Secretary. Since January 2006, she has served
as Treasurer and as Secretary of Harris & Harris Enterprises, Inc., a wholly
owned subsidiary of the Company. From 1996 to 2005, she was employed
by PricewaterhouseCoopers LLP, most recently as a Manager in its financial
services group. She was graduated from Georgetown University (B.S., Accounting),
where her honors included the Othmar F. Winkler Award for Excellence in
Community Service. She is a Certified Public Accountant.
Mary P. Brady. Ms. Brady, age 48, has
served as a Vice President and as Controller since November
2005. From November 2005 to March 2008, she served as an Assistant
Secretary. From 2003 through 2005, she served as a senior accountant
at Clarendon Insurance Company in its program accounting group. She
was graduated Summa Cum Laude from Lehman College (B.S.,
Accounting). She is a Certified Public Accountant.
Board
of Directors
Our Board
of Directors supervises our management. The responsibilities of each
director include, among other things, the oversight of the investment approval
process, the quarterly valuation of our assets, and the oversight of our
financing arrangements.
Interested
Directors:
Douglas W.
Jamison. See
biography under "Executive Officers."
Lori D.
Pressman. Ms. Pressman, age 52, has served as a member of our
Board of Directors since March 2002. She has served as a consultant
to us on nanotechnology, microsystems, intellectual property and in our due
diligence work on certain prospective investments. She also acts as
an observer for us at Board meetings of certain portfolio companies in the
Boston area. She is a business consultant providing advisory services
to start-ups and venture capital companies, including certain of our portfolio
companies. She consults internationally on technology transfer
practices and metrics for non-profit and government
organizations. She was graduated from the Massachusetts Institute of
Technology (S.B., Physics) and the Columbia School of Engineering
(MSEE). She may be considered to be an "interested person" of the
Company because of the consulting work she does for us.
Independent
Directors:
W. Dillaway Ayres, Jr. Mr. Ayres, age 58, has
served as a member of our Board of Directors since November 2006. He
has served as the Chief Operating Officer of Cold Spring Harbor Laboratory, a
research and educational institution in the biological sciences, since November
2000. Prior to joining Cold Spring Harbor Laboratory in 1998, Mr.
Ayres had a 20-year business career during which he worked as a corporate
executive, investment banker and entrepreneur. He was graduated from
Princeton University (A.B., English) and from the Columbia University Graduate
School of Business (M.B.A., Finance).
Dr. C. Wayne
Bardin. Dr. Bardin, age 74, has served as a member of our
Board of Directors since December 1994. Since 1996, he has served as
the President of Bardin LLC, a consulting firm to pharmaceutical
companies. His professional appointments have included: Professor of
Medicine, Chief of the Division of Endocrinology, The Milton S. Hershey Medical
Center of Pennsylvania State University, and Senior Investigator, Endocrinology
Branch, National Cancer Institute. He has also served as a consultant
to several pharmaceutical companies. He has been appointed to the
editorial boards of 15 journals. He has also served on national and
international committees and boards for the National Institutes of Health, World
Health Organization, The Ford Foundation and numerous scientific
societies. He was graduated from Rice University (B.A.), Baylor
University (M.S., M.D.), and he received a Doctor Honoris Causa from the
University of Caen, the University of Paris and the University of
Helsinki.
Dr. Phillip A.
Bauman. Dr. Bauman, age 54, has served as a member of our
Board of Directors since February 1998. Since 1999, he has been
Senior Attending of Orthopaedic Surgery at St. Luke's/Roosevelt Hospital Center
in Manhattan, and since 2000, he has served as an elected member of the
Executive Committee of the Medical Board of St. Luke's/Roosevelt
Hospital. He is a founding member and has been on the Board of
Managers for the Hudson Crossing Surgery Center since 2005. Since
1997, he has been Assistant Professor of Orthopaedic Surgery at Columbia
University. Since 1994, he has been a Vice President of Orthopaedic
Associates of New York. He has served as a consultant to private
equity venture capital groups. He is an active member of the American
Academy of Orthopaedic Surgeons, the American Orthopaedic Society for Sports
Medicine, the American Orthopaedic Foot and Ankle Society, the New York State
Society of Orthopaedic Surgeons, the New York State Medical Society and the
American Medical Association. He was graduated from Harvard College
(A.B.), Harvard University (A.M., Biology) and the College of Physicians and
Surgeons at Columbia University (M.D.).
G. Morgan
Browne. Mr. Browne, age 74, has served as a member of our
Board of Directors since June 1992. Since 2004, he has been President
and since 2000, a Trustee of Planting Fields Foundation, a supporting
institution of Planting Fields Arboretum State Historic Park. Since
2004, he has been a Director and Treasurer of Society for Preservation L.I.
Antiquities. He is Chairman of the OSI Pharmaceuticals Foundation
which supports cancer and diabetes patient care and science
education. He was a founding director of the New York Biotechnology
Association. He was graduated from Yale University (B.A.).
Dugald A.
Fletcher. Mr. Fletcher, age 80, was appointed Lead Independent
Director on November 2, 2006. Since 1996, he has served as a member
of our Board of Directors. Since 1984, he has served as President of
Fletcher & Company, Inc., a management consulting firm. He
is currently a Trustee of the Gabelli Growth Fund and a Director of the Gabelli
Convertible and Income Securities Fund, Inc. He was graduated from
Harvard College (A.B.) and Harvard Business School (M.B.A.).
Charles E.
Ramsey. Mr. Ramsey, age 66, has served as a member of our
Board of Directors since October 2002. Since 1997, he has been a
consultant. He is a retired founder and principal of Ramsey/Beirne
Associates, Inc., an executive search firm that specialized in recruiting top
officers for high technology companies, many of which were backed by venture
capital. He is a member of the board of directors and Chairman
Emeritus of Bridges to Community, a non-governmental organization dedicated to
construction projects in Nicaragua. As Chairman Emeritus, he serves
on the Executive, Personnel and Administration and Fund Development
Committees. He was graduated from Wittenberg University
(B.A.).
James E.
Roberts. Mr. Roberts, age 63, has served as a member of our
Board of Directors since June 1995. Since January 2006, he has been
President of AequiCap Insurance Company and since September 2007, President of
AequiCap Program Administrators. Mr. Roberts is also a senior officer
of various other AequiCap affiliated entities. From November 2002 to
October 2005, he was Executive Vice President and Chief Underwriting Officer of
the Reinsurance Division of Alea North America Company and Senior Vice President
of Alea North America Insurance Company. He was graduated from
Cornell University (A.B.).
Richard P.
Shanley. Mr. Shanley, age 62, has served as a member of our
Board of Directors since March 2007. From February 2001 to December
31, 2006, he was a partner of Deloitte & Touche LLP. During his
over 30 years of public accounting experience, he served as lead audit partner
on numerous audit engagements for public and private companies and companies
making public stock offerings. He served as lead audit partner
primarily for biotech, pharmaceutical and high-tech companies, including
companies enabled by nanotechnology. He has been actively involved on
the Biotech Council of New Jersey, the New Jersey Technology Council, the New
York Biotechnology Association, the Connecticut Venture Group, the Biotechnology
Industry Organization and the NanoBusiness Alliance. He is a member
of the board of directors of Redpoint Bio Corporation, a publicly held
biotechnology company. He is an active member of the New York State
Society of Certified Public Accountants and the American Institute of Certified
Public Accountants. He is currently serving his fifth term on the New
York State Society of CPA's Professional Ethics Committee and as of June 2009 is
chairing that committee. He is a licensed Certified Public Accountant
in New York. He was graduated from Fordham University (B.S.) and Long
Island University (M.B.A. in Accounting).
Committees
of the Board of Directors
Our Board
of Directors maintains six standing committees: an Executive
Committee, an Audit Committee, a Compensation Committee, a Nominating Committee,
a Valuation Committee and an Independent Directors Committee. All of
the members of each committee other than Mr. Jamison (who sits on the Executive
Committee) are non-interested directors (as defined in Section 2(a)(19) of the
1940 Act).
The
Executive Committee may meet from time to time between regular meetings of the
Board of Directors for strategic planning and to exercise the authority of the
Board to the extent provided by law. The Executive Committee did not
meet as a separate committee and did not act by unanimous written consent in
2008. The members of the Executive Committee are Messrs. Jamison
(Chairman), Ayres, Bardin, Fletcher and Ramsey.
The Audit
Committee operates pursuant to a charter that sets forth the responsibilities of
the Audit Committee. The Audit Committee's responsibilities include
selecting and retaining our independent registered public accounting firm,
reviewing with the independent registered public accounting firm the planning,
scope and results of their audit and our financial statements and the fees for
services performed, reviewing with the independent registered public accounting
firm the adequacy of internal control systems, reviewing our annual financial
statements and receiving our audit reports and financial
statements. The Audit Committee met four times and did not act by
unanimous written consent in 2008. The members of the Audit Committee
are Messrs. Shanley (Chairman), Ayres, Browne, Fletcher and Roberts, all of whom
are considered independent under the rules promulgated by the Nasdaq Global
Market.
The
Compensation Committee operates pursuant to a written charter and determines the
compensation for our executive officers and the amount of salary and bonus to be
included in the compensation package for each of our officers. The
Committee met five times and acted by unanimous written consent once in
2008. The members of the Compensation Committee are Messrs. Roberts
(Chairman), Fletcher, Shanley and Dr. Bauman.
The
Nominating Committee acts pursuant to a written charter as an advisory committee
to the Board by identifying individuals qualified to serve on the Board as
directors and on committees of the Board, and recommending nominees to stand for
election as directors at the next annual meeting of shareholders. The
Nominating Committee met one time and did not act by unanimous written consent
in 2008. The members of the Nominating Committee are
Messrs. Ramsey (Chairman) and Brown and Drs. Bardin and
Bauman.
The
Nominating Committee will consider director candidates recommended by
shareholders. In considering candidates submitted by shareholders,
the Nominating Committee will take into consideration the needs of the Board and
the qualifications of the candidate. The Nominating Committee may
also take into consideration the number of shares held by the recommending
shareholder and the length of time that such shares have been
held. To have a candidate considered by the Nominating Committee, a
shareholder must submit the recommendation in writing and must
include:
|
•
|
The
name of the shareholder and evidence of the person's ownership of shares
of the Company, including the number of shares owned and the length of
time of ownership;
|
|
•
|
The
name of the candidate, the candidate's resume or a listing of his or her
qualifications to be a Director of the Company and the person's consent to
be named as a Director if selected by the Nominating Committee and
nominated by the Board and consent to serve if elected;
and
|
|
•
|
If
requested by the Nominating Committee, a completed and signed director's
questionnaire.
|
The
shareholder recommendation and information described above must be sent to the
Company's Corporate Secretary, c/o Harris & Harris Group, Inc., 111 West
57th Street, Suite 1100, New York, New York 10019, and must be received by the
Corporate Secretary not less than 90 days nor more than 120 days prior to the
anniversary of the date of the Company's immediately preceding annual meeting of
shareholders or, if the meeting has moved by more than 30 days, it must be
received by the Corporate Secretary not later than the close of business on the
10th
day following the day on which notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs.
The
Valuation Committee reviews and approves the valuation of our assets, from time
to time, as prescribed by the 1940 Act, pursuant to Valuation Procedures
established by our Board of Directors. The Valuation Committee met
six times and did not act by unanimous written consent in 2008. The
members of the Valuation Committee are Messrs. Browne (Chairman), Ayres,
Fletcher, Ramsey, Roberts, Shanley and Drs. Bardin and Bauman.
The
Independent Directors Committee has the responsibility of proposing corporate
governance and long-term planning matters to the Board of Directors and making
the required determinations pursuant to the 1940 Act. The Independent
Directors Committee met four times and did not act by unanimous written consent
in 2008. The members of the Independent Directors Committee are
Messrs. Fletcher (Chairman), Ayres, Browne, Ramsey, Roberts, Shanley and Drs.
Bardin and Bauman.
The
following table sets forth the dollar range of equity securities beneficially
owned by each director as of December 31, 2008:
Name
of Director
|
Dollar
Range of Equity Securities
Beneficially
Owned (1)(2)(3)
|
Interested Directors
|
|
Douglas
W. Jamison (4)
|
Over
$100,000
|
Lori
D. Pressman (5)
|
$50,001
- $100,000
|
|
|
Independent Directors
|
|
W.
Dillaway Ayres, Jr.
|
$10,001
- $50,000
|
Dr.
C. Wayne Bardin
|
Over
$100,000
|
Dr.
Phillip A. Bauman
|
Over
$100,000
|
G.
Morgan Browne
|
Over
$100,000
|
Dugald
A. Fletcher
|
Over
$100,000
|
Charles
E. Ramsey
|
Over
$100,000
|
James
E. Roberts
|
Over
$100,000
|
Richard
P. Shanley
|
$10,001
-
$50,000
|
___________________
(1)
|
Beneficial
ownership has been determined in accordance with Rule 16a-1(a)(2) under
the Exchange Act.
|
(2)
|
The
dollar ranges are: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000 and over $100,000.
|
(3)
|
The
dollar ranges are based on the price of the equity securities as of
December 31, 2008.
|
(4)
|
Denotes
an individual who is an "interested person" as defined in the 1940
Act.
|
(5)
|
Denotes
an individual who may be considered an "interested person" because of
consulting work performed for us.
|
Principal
Shareholders and Ownership by Directors and Executive Officers
Set forth below is information, as of
September 17, 2009, unless otherwise indicated, with respect to the beneficial
ownership of our Common Stock by (i) each person who is known by us to be the
beneficial owner of more than five percent of the outstanding shares of the
Common Stock, (ii) each of our directors and nominees, (iii) each of our named
executive officers (as defined below) and (iv) all of our directors and
executive officers as a group. Except as otherwise indicated, to our
knowledge, all shares are beneficially owned and investment and voting power is
held by the persons named as owners. None of the shares owned by
directors or officers have been pledged. Certain information in the
table below is from publicly available information that may be as of dates
earlier than September 17, 2009. Unless otherwise provided, the
address of each holder is c/o Harris & Harris Group, Inc., 111 West 57th Street,
Suite 1100, New York, New York 10019.
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of
Beneficial
Ownership(1)
|
|
Percentage
of Outstanding
Common
Shares Owned(2)
|
|
|
|
|
|
|
|
Independent
Directors:
|
|
|
|
|
|
|
W.
Dillaway Ayres, Jr.
|
|
|
11,363
|
|
|
|
*
|
|
Dr.
C. Wayne Bardin
|
|
|
33,958
|
|
|
|
*
|
|
Dr.
Phillip A. Bauman
|
|
|
36,661
|
(3)
|
|
|
*
|
|
G.
Morgan Browne
|
|
|
37,726
|
|
|
|
*
|
|
Dugald
A. Fletcher
|
|
|
32,263
|
|
|
|
*
|
|
Charles
E. Ramsey
|
|
|
46,550
|
|
|
|
*
|
|
James
E. Roberts
|
|
|
32,166
|
|
|
|
*
|
|
Richard
P. Shanley
|
|
|
13,619
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Interested
Directors:
|
|
|
|
|
|
|
|
|
Douglas
W. Jamison
|
|
|
310,439
|
(4)
|
|
|
1.18
|
|
Lori
D. Pressman
|
|
|
13,373
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Named
Executive Officers:
|
|
|
|
|
|
|
|
|
Alexei
A. Andreev
|
|
|
272,836
|
(5)
|
|
|
1.04
|
|
Charles
E. Harris
|
|
|
1,934,515
|
(6)
|
|
|
7.14
|
|
Michael
A. Janse
|
|
|
420,473
|
(7)
|
|
|
1.59
|
|
Daniel
B. Wolfe
|
|
|
180,219
|
(8)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (17 persons)
|
|
|
3,672,998
|
(9)
|
|
|
12.88
|
|
________________
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 of the Act
1934.
|
(2)
|
The
percentage of ownership is based on 25,966,758 shares of Common Stock
outstanding as of September 17, 2009, together with the exercisable
options of such shareholder, as applicable. In computing the percentage
ownership of a shareholder, shares that can be acquired upon the exercise
of outstanding options are not deemed outstanding for purposes of
computing the percentage ownership of any other person.
|
(3)
|
Includes
5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's wife; 100 shares
owned by Adelaide Polk-Bauman, Dr. Bauman's daughter; 100 shares owned by
Milbry Polk-Bauman, Dr. Bauman's daughter; and 100 shares owned by Mary
Polk-Bauman, Dr. Bauman's daughter. Ms. Milbry C. Polk is the
custodian for the accounts of the three
children.
|
(4)
|
Includes
24,143 shares owned and 286,296 shares that can be acquired upon the
exercise of outstanding options.
|
(5)
|
Includes
10,575 shares owned and 262,261 shares that can be acquired upon the
exercise of outstanding options.
|
(6)
|
Pursuant
to a Form 13D/A filed on August 13, 2009, includes 806,254 shares owned
and 1,128,261 shares that can be acquired upon the exercise of outstanding
options by Mr. Harris. Mr. Harris retired from the Company on
December 31, 2008, pursuant to the Company's Executive Mandatory
Retirement Benefit Plan.
|
(7)
|
Includes
266 shares owned and 420,207 shares that can be acquired upon the exercise
of outstanding options.
|
(8)
|
Includes
9,035 shares owned and 171,184 shares that can be acquired upon the
exercise of outstanding options.
|
(9)
|
Includes
2,551,480 shares that can be acquired upon the exercise of outstanding
options.
|
EXECUTIVE
COMPENSATION
Compensation
Discussion & Analysis
Overview
This
Compensation Discussion & Analysis ("CD&A") describes the material
elements of compensation awarded to, earned by, or paid to our principal
executive officer, principal financial officer and the three most highly paid
executive officers (other than the principal executive officer and the principal
financial officer) serving as such at the end of 2008 (the "named executive
officers"), who in 2008 held the following roles:
|
·
|
Charles
E. Harris, Chairman, Chief Executive Officer and a Managing
Director;
|
|
·
|
Douglas
W. Jamison, President, Chief Operating Officer and a Managing
Director;
|
|
·
|
Daniel
B. Wolfe, Chief Financial Officer and a Managing
Director;
|
|
·
|
Alexei
A. Andreev, an Executive Vice President and a Managing Director;
and
|
|
·
|
Michael
A. Janse, an Executive Vice President and a Managing
Director.
|
This
CD&A focuses on the information contained in the following tables and
related footnotes and narrative for primarily the last completed fiscal
year. We also describe compensation actions taken before or after the
last completed fiscal year to the extent it enhances the understanding of our
executive compensation for the last completed fiscal year. Pursuant
to our Compensation Committee's written charter, the Committee oversees the
design and administration of our executive compensation program. The
Committee ensures that the total compensation paid to our executive officers is
fair, reasonable and competitive.
Compensation
Program Objectives and Philosophy
In General. The objectives of the
Company's compensation program are to:
|
·
|
attract,
motivate and retain employees by providing market-competitive compensation
while preserving company resources;
|
|
·
|
maintain
our leadership position as a venture capital firm specializing in
nanotechnology and microsystems;
and
|
|
·
|
align
management's interests with shareholders'
interests.
|
To
achieve the above objectives, the Committee designed a total compensation
program in 2008 for our named executive officers composed of a base salary, a
bonus opportunity and equity awards in the form of stock options. The
Committee believes that the equity component of compensation is a crucial
component of our compensation package. Short-term and long-term
vesting stock options are utilized for short-term and long-term incentive, and
to make the Company's compensation program more competitive, particularly with
compensation programs of private partnerships that, unlike the Company, are able
to award carried interests taxable as long-term gains and to permit
co-investments in deals. Such private partnerships also are more
easily able to pay cash bonuses because of their fee structure and because they
do not have the expenses associated with being publicly traded. Our
executive compensation programs and related data are reviewed throughout the
year and on an annual basis by the Committee to determine whether the
compensation program is providing its intended results.
The
Committee believes that retention is especially important for a company of our
size (11 employees) and the specialized nature of our business. Our
employees have been selected and trained to support our focus on investment in
companies enabled by nanotechnology and microsystems, and the administration
necessary to comply with the specialized regulatory environment required of a
business development company. Our nanotechnology focus requires
highly specialized scientific knowledge. There are relatively few
individuals who have both such scientific knowledge and venture capital
experience. Additionally, our business development company structure
requires specialized management, administrative, legal and financial knowledge
of our specific regulatory regime. Because there are very few
business development companies, it would be difficult to find replacements for
certain executive, legal and financial positions.
Competitive
Market. For our investment team members, the competition for
retention and recruitment is primarily private venture capital firms, hedge
funds, venture-backed nanotechnology companies and, to a lesser extent,
investment banking firms. Venture capital funds commonly pay at least
20 percent of the profits (including capital gains), or carried interest, of
each newly raised fund to the management firm, which awards interests to its
partners and employees. For our legal and accounting professionals,
in addition to the foregoing, the competition is other public companies without
regard to industry, asset management companies and legal and accounting
firms. The Company does not have a readily identifiable peer group,
because most business development companies are not early stage venture capital
companies, and most other early stage venture capital companies are not publicly
traded. Thus, we do not emphasize the use of peer comparison groups
in the design of our compensation program. As one factor in
determining compensation, we utilize compensation comparables, on an individual
basis, to the extent that they seem appropriately analogous, as provided to the
Committee by an independent compensation consultant.
Compensation Process. On an annual basis, the
Committee reviews and approves each element of compensation for each of our
executive officers, taking into consideration the recommendation of our Chief
Executive Officer (for compensation other than his own, which for Mr. Harris was
subject to an employment agreement as discussed below) in the context of the
Committee's compensation philosophy, to ensure that the total compensation
program and the weight of each of its elements meets the overall objectives
discussed above. For the Chief Compliance Officer, the Committee
recommends her compensation to the full Board, for approval by at least a
majority of the non-interested directors (as defined in Section 2(a)(19) of the
1940 Act).
In 2008,
an independent compensation consultant, Johnson Associates, supplied the
Committee with market data on all positions. The information provided
for 2008-2009 was for private equity firms, venture capital firms and investment
management firms, and was adjusted to reflect compensation for a venture capital
firm with $100 – $200 million in assets under management. Data was
also provided for public companies with comparable market
capitalizations. Further data was provided for 1940 Act compliance
personnel (collectively, the "Identified Group"). The independent
consultant did not identify the names of companies included in the Identified
Group. The Committee considers recommendations from the Chief
Executive Officer regarding salaries, along with factors such as individual
performance, current and potential impact on Company performance, reputation,
skills and experience. When determining compensation, the Committee
considers the importance of retaining certain key officers whose replacement
would be challenging owing to the Company's status as a 1940 Act company and
owing to its nanotechnology specialty. The Committee also considers
the highly specialized nature of certain positions in determining overall
compensation. In 2008, a key factor in compensation was the increasing
importance of retention of key employees owing to the retirement of Mr. Harris
on December 31, 2008, pursuant to the Company's Executive Mandatory Retirement
Plan.
When
addressing executive compensation matters, the Committee generally meets outside
the presence of all executive officers except our Chief Executive Officer and
our General Counsel, each of whom leaves the meeting when his/her compensation
is reviewed.
Regulatory
Considerations. The 1940 Act permits business development
companies to either pay out up to 20 percent of net income after taxes through
the implementation of a profit-sharing plan or issue up to 20 percent of shares
issued and outstanding through implementation of a stock option
plan. The exercise price of stock options may not be less than the
current market value at the date of issuance of the options.
We have
applied for exemptive relief from the SEC to permit us to issue restricted stock
to employees pursuant to the Stock Plan and to permit non-employee directors to
participate in the Stock Plan. Until such time as we receive such
exemptive relief and such provisions are approved by shareholders, we will not
issue any shares of restricted stock, and our non-employee directors will not
participate in the Stock Plan.
The
Company has been informed that the SEC has commenced its review of the exemptive
application, and we have received and responded to formal written
comments. We cannot, however, evaluate whether or when an order
regarding our application for the relief requested may be
granted.
We have
also designed our Stock Plan with the intention that awards made thereunder
generally will qualify as performance-based compensation under Section 162(m) of
the Code, but we reserve the right to pay amounts thereunder that do not qualify
as such performance-based compensation if we determine such payments to be
appropriate in light of our compensation objectives from time to
time. Section 162(m) of the Code generally disallows a tax deduction
to publicly held companies for compensation paid to their chief executive
officer or any of their three other most highly compensated executive officers
(other than the chief financial officer), to the extent that compensation
exceeds $1 million per covered officer in any fiscal year. However,
if compensation qualifies as performance-based, the limitation does not
apply.
Our
status as a regulated investment company under Subchapter M of the Code makes
the deductibility of our compensation arrangements a much less important factor
for the Committee to consider than it would be if we were an operating
company. Under Subchapter M, the Company cannot deduct operating
expenses from its long-term capital gains, which are its most significant form
of income. The Company presently has more operating expenses than it
can deduct for tax purposes, even before equity compensation.
Compensation
Components
The principal elements of our executive
compensation program for 2008 are base salary, bonus, equity and other benefits
and perquisites. The Committee believes that each element is
essential to achieve the Company's objectives as set forth above. The
Committee is mindful of keeping cash compensation expenses at as low a level of
total operating expenses as is consistent with maintaining the Company's
competitiveness versus private venture capital funds while meeting the expenses
of complying with the regulatory requirements of a publicly traded
company. Therefore, the equity component of compensation is key to
keeping overall compensation competitive, while making prudent use of the
Company's resources.
Base Salaries. We
recognize the need to pay our named executive officers, and other employees, a
competitive annual base salary. We review base salaries for our named
executive officers annually. In 2008, the Committee compared salary
ranges for all executive officers against the Identified Group. Base
salaries are generally adjusted annually for inflation and also based on changes
in the marketplace and an executive's individual performance, salary position
among peers, career growth potential and/or a change in
responsibilities. Other than Mr. Harris, whose salary was set
pursuant to his employment agreement as described below, all of the named
executive officers are Managing Directors and are paid the same base
salary.
Effective January 1, 2008, the base
salary of Daniel B. Wolfe was increased from $210,000 in 2007 to $274,770 in
2008, because of his promotion from Vice President to Chief Financial Officer
and a Managing Director. This increase puts his base salary on parity
with the other Managing Directors.
All other named executive officers
received cost of living adjustments in 2008. There presently are no
contemplated increases in base salary for any of the named executive officers in
2009, other than cost-of-living adjustments.
Bonuses. We have
been informed by the Committee's independent compensation consultant that
historically our overall compensation has not always been competitive for our
named executive officers because we have not always paid bonuses. If
the named executive officers, however, do not receive sufficient cash from the
exercise and sale of stock options in a year to provide market-competitive total
compensation, as determined by the Committee, and based on advice from the
independent compensation consultant, the Committee may pay the named executive
officers cash bonuses. In 2008, the named executive officers,
exclusive of Mr. Harris who retired on December 31, 2008, each received a
$75,000 bonus based on data obtained from the compensation
consultant. The Committee believes that retention of key employees is
crucial because of the specialized nature of our business as described more
fully below. Additionally, the Committee has considered that, owing
to the retirement of Mr. Harris, the importance of retaining the other team
members has increased. Based on market conditions, our cash position
and the size of our assets, the Committee may exercise its discretion not to
award bonuses that are market competitive.
In 2008, we learned from the
compensation consultant that current market conditions and the credit crisis
have reduced the overall compensation paid to the employees of the Identified
Group, and bonuses were determined accordingly. If such market
conditions continue throughout 2009, our total compensation may be more
competitive in 2009, even without cash bonuses or the exercise of stock
options.
Equity Incentive
Awards.
In General
Commencing
in 2006, we have provided the opportunity for our named executive officers and
other employees to earn long-term and short-term equity incentive
awards. Equity incentive awards in the form of options potentially
generate cash for the Company that can be used for portfolio company investments
and for working capital.
Long-Term
Equity Incentive Awards
The
long-term equity incentive awards provide employees with the incentive to stay
with us for long periods of time, which in turn provides us with greater
stability. In 2008, all options granted expired in nine to ten years
and were considered long-term equity incentive awards. Long-term
equity incentive awards are meant to substitute for carried interest that our
investment professionals would receive were they employed by private-sector
venture capital firms, which typically pay at least 20 percent of profits before
any taxes. Further, that carried interest is usually in the form of
long-term capital gains, not ordinary income. The Committee believes
that strategically timed awards of restricted stock are also important to
ensuring the retention, stability and desired succession of executive talent,
but the Company is not permitted to grant awards of restricted stock unless the
Company receives an exemptive order from the SEC to do so. On July
11, 2006, we filed an application with the SEC to obtain such exemptive relief
(as described above) and the Company has responded to comments from the SEC on
the application. If we receive the exemptive relief, the Committee
will not grant any awards of restricted stock unless an amended or new Stock
Plan providing for restricted stock awards is approved by
shareholders. It is currently anticipated that such awards would be
long term.
Short-Term
Equity Incentive Awards
Short-term
equity incentive awards help to motivate employees in the short
term. Without cash bonuses or cash retained through the exercise and
sale of short-term options, the Committee's independent compensation consultant
has advised that certain key positions are not competitive when compared with
the Identified Group. Short-term equity incentive awards also permit
each executive officer to increase his/her ownership in Company stock, pursuant
to minimum share ownership guidelines established by our
Board. Short-term vesting periods also have the potential of
generating cash for the Company in the short term, through the purchase of stock
in the course of the exercise of options that can be used for making venture
capital investments and for working capital. In 2009, it is
anticipated that 75 percent of option awards will be short-term awards that
expire within two years.
Awards
Under the Stock Plan
In
accordance with the Stock Plan, which was approved by shareholders at the 2006
Annual Meeting of Shareholders, the Committee can issue options from time to
time for up to 20 percent of the total shares of stock issued and
outstanding. Thus, the number of shares of stock able to be reserved
for the grant of awards under the Stock Plan will automatically increase (or
decrease) with each increase (or decrease) in the number of shares of stock
issued and outstanding. The Board intends to increase the number of
shares reserved for stock option grants (currently 5,192,821) from time to time
as the number of outstanding shares increases. The Committee may
grant awards under the Stock Plan to the full extent permitted at the time of
each grant in order to compete with the Identified Group by retaining the
specially qualified and trained personnel that have been carefully recruited and
developed for the Company's specialized business. Because our primary
competitors are organized as private partnerships, they do not have the overhead
of a publicly traded company. As a consequence, unlike the Company,
they can afford for cash compensation to be a larger percentage of their total
expenses. Unlike us, they are not prohibited from paying out at least
20 percent of their profits to key employees, primarily in the form of long-term
capital gains. They also, unlike us, are permitted to grant their
employees co-investment rights.
Under the
Stock Plan, no more than 25 percent of the shares of stock reserved for the
grant of the awards under the Stock Plan may be restricted stock awards at any
time during the term of the Stock Plan. If any shares of restricted
stock are awarded, such awards will reduce on a percentage basis the total
number of shares of stock for which options may be awarded. If we do
not receive exemptive relief from the SEC to issue restricted stock, all shares
granted under the Stock Plan must be subject to stock options. If we
were to receive such exemptive relief and were to issue the full 25 percent of
the shares of stock reserved for grant under the Stock Plan as restricted stock,
no more than 75 percent of the shares granted under the Stock Plan could be
subject to stock options. No more than 1,000,000 shares of our Common
Stock may be made subject to awards under the Stock Plan to any individual in
any year.
On March
19, 2008, the Committee 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. 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 the date of
grant. Upon exercise, the shares would be issued from our previously
authorized but unissued shares.
On August
13, 2008, the Committee and the full Board of Directors of the Company approved
a grant of individual NQSO awards for certain officers and employees of the
Company. Options to purchase a total of 1,163,724 shares of stock
were granted with vesting periods ranging from December 2008 to August 2012 and
with an exercise price of $6.92, which was the closing volume weighted average
price of our shares of Common Stock on the date of grant. Upon
exercise, the shares would be issued from our previously authorized but unissued
shares.
The
Committee has generally granted the same number of stock options to each of the
Managing Directors, with the exception of Mr. Harris as discussed below,
regardless of any other corporate duties that an individual Managing Director
may have.
The
number of options per employee and the vesting and expiration dates were
originally proposed by the independent consultant after conversations with the
Chairman of the Committee and input from the Chief Executive Officer (with
respect to options other than his own). All awards granted to
executive officers vest subject to continued employment with the Company through
each applicable vesting date, except for certain retirees. All stock
option awards to the named executive officers will be subject to share ownership
guidelines (as described below on page 77).
The Committee plans to give quarterly,
rather than annual, grants to executive officers in any quarter in which there
are options available to grant and there is an "open window" in which to grant
options. The Committee believes that giving four smaller grants
quarterly, rather than one annual grant, will more closely align employees'
interests with those of shareholders. We do not time stock option
grants in coordination with the release of material, non-public information, nor
do we time the release of material, non-public information for the purpose of
affecting the value of executive compensation. All Committee meetings
for the purpose of granting options are scheduled well in advance of the
meeting.
Option
grants in 2008 were not subject to performance goals. Other than
stock options being tied to stock price, no other items of corporate performance
were taken into account at the time of grant, because of the difficulty of
determining annual performance metrics. Business development
companies like us do not report earnings per share; moreover, write-downs and
write-offs of investments are an expected part of our risk-seeking strategy, and
it is not uncommon for even our most successful investments to take years to
come to fruition. The Committee may create performance goals for the
vesting of restricted stock (subject to receipt of an exemptive
order). If performance goals are used in the future, the Board will
have the authority to make equitable adjustments to the performance goals in
recognition of unusual or non-recurring events affecting the Company or the
financial statements of the Company, in response to changes in applicable laws
or regulations or to account for items of gain, loss or expense determined to be
extraordinary or unusual in nature or infrequent in occurrence or related to the
disposal of a segment of a business or related to a change in accounting
principles.
Generally,
the Committee is made aware of the tax and accounting treatment of various
compensation alternatives. Statement of Accounting Standards 123(R)
"Share-Based Payment" ("FAS 123(R)"), requires us to record the fair value of
equity awards on the date of grant as a component of equity. We
account for the Stock Plan in accordance with the provisions of FAS 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. The increase to our operating expenses is offset by the
increase to our additional paid-in capital, resulting in no net impact to our
net asset value. Thus, the granting of options is expected to have no
net impact on our net asset value. If and when the options are
exercised, the net asset value per share will be decreased if the net asset
value per share at the time of exercise is higher than the exercise price, and
increased if the net asset value per share at the time of exercise is lower than
the exercise price. As a result, although we consider the accounting
treatment of granting options, we do not consider the accounting treatment to be
a dominant factor in the form and/or design of awards.
Additionally,
we do not record tax benefits associated with expensing of stock options,
because we intend to qualify as a regulated investment company under Subchapter
M of the Code. As a regulated investment company, we cannot use all
of our existing operating expenses for tax purposes.
10b5-1
Plans
We have
established a policy of permitting our officers to enter into trading plans to
sell shares of our Common Stock in accordance with Rule 10b5-1 under the
Exchange Act. The policy allows our participating officers to adopt a
pre-arranged stock trading plan to sell pre-determined amounts of our Common
Stock over a period of time. This policy was established in
recognition of the liquidity and diversification objectives of our officers,
including enabling our officers to sell certain shares of our Common Stock
(shares they acquire upon exercise of stock options, to pay for the exercise of
options, to provide for taxes triggered by the exercise of options and to
generate cash from the exercise of options).
Benefits and
Perquisites. We provide the opportunity for our named
executive officers and other full-time employees to receive certain perquisites
and general health and welfare benefits which consist of life and health
insurance benefits, reimbursement for certain medical expenses and gym
membership fees. We also offer participation in our defined
contribution 401(k) plan. For the year ended December 31, 2008, the
Committee approved a 401(k) plan match of 100 percent of employee
contributions. With the retirement of Mr. Harris on December 31,
2008, our executive officers, including our Chief Executive Officer, Mr.
Jamison, generally receive the same benefits and perquisites as our full-time
administrative employees. Mr. Harris's perquisites were provided for
in his employment agreement as set forth below.
Profit
Sharing. Prior to the adoption of the Stock Plan, the Company
maintained the Amended and Restated Harris & Harris Group, Inc. Employee
Profit-Sharing Plan (the "2002 Plan"). Under the 2002 Plan,
approximately 90 percent of the amount determined as "qualifying income" was
paid out to participants pursuant to distribution percentages determined by the
Committee. The remaining payment was paid out after we finalized our
tax returns for each plan year. Effective May 4, 2006, the 2002 Plan
was terminated. On January 31, 2007, a final profit sharing award of
$261,661 was paid to certain participants related to the 2005 plan year after
finalization of our tax returns for 2005. Please see the "Non-Equity
Incentive Plan Compensation" column and accompanying footnote in the 2008
Summary Compensation Table for more information about profit-sharing
awards.
Internal Pay
Equity. In 2008, the Committee discussed the internal pay
equity of the named executive officers. The Committee noted that Mr.
Harris's compensation was appropriate based on his role as Founder and on the
unique qualifications and skills required for the Chief Executive Officer
position in our Company. The Committee further noted that our
investment professionals work together as a team rather than as a collection of
individuals, which was the basis for the Committee's decision to pay all
Managing Directors (except for Mr. Harris) identically. In 2009, it
is anticipated that all Managing Directors will receive the same compensation
regardless of any other corporate duties, such as Chief Executive Officer,
President, Chief Operating Officer or Chief Financial Officer. The
Committee believes that, on a small team, all members must pull their full
weight. Accordingly, the Committee believes that the team approach to
compensation promotes teamwork among the Managing Directors. The
Committee further noted that the Managing Directors should receive more stock
options than other employees based on their income-generating role and to keep
their total compensation competitive with the Identified Group.
Compensation of our Chief
Executive Officer
In 2008, our Chief Executive Officer
was Charles E. Harris. Mr. Harris, who also was our Chairman and a
Managing Director, retired on December 31, 2008, pursuant to our mandatory
retirement plan for senior executives. The Committee reviewed
all elements of the compensation of Mr. Harris on an annual basis and then made
a determination about his compensation without his presence, subject to his
employment agreement.
Pursuant
to that agreement, as most recently amended as of August 2, 2007 (the
"Employment Agreement"), during the period of employment, Mr. Harris was to
receive compensation in the form of base salary, with automatic yearly
adjustments to reflect inflation, which amounted to a minimum required base
salary of $246,651 for 2006. In addition, the Board could increase
such salary, and subsequently decrease it, but not below the level provided for
by the automatic adjustments described above. Mr. Harris's base
salary for 2006 was increased to $300,000 (thereby also increasing his SERP
benefit as described below). Mr. Harris's base salary for 2007 and
2008 was increased to $306,187 and $314,623, respectively, based on
cost-of-living adjustments.
In 2008,
the Committee granted to Mr. Harris the following stock options:
|
Expiration
Date
|
|
Year
of Vesting
|
|
Exercise
|
|
of Options
|
|
2008
|
|
Price
|
9.4
Yr NQSO (vest 100% on 12/31/08)
|
12/27/2017
|
|
187,039
|
|
$6.92
|
The
amount of options granted to Mr. Harris was based on creating long-term
incentives for Mr. Harris with respect to strategy and investment, balance
sheet, personnel and lease decisions despite his scheduled retirement, in
recognition of his role as Founder of the Company, and as an incentive for him
to sign upon his retirement a non-compete agreement covering the period after
his retirement. On July 31, 2008, Mr. Harris and the Company entered
into such an agreement, which prohibits competition with the Company for the
longer of (a) three (3) years from the date of the agreement, or (b) the entire
duration for which he may exercise any stock option pursuant to the Company's
Stock Plan.
Under his
employment agreement, Mr. Harris was entitled to participate in all compensation
and employee benefit plans or programs, and to receive all benefits,
perquisites, and emoluments, for which salaried employees are
eligible. Under the Employment Agreement, we furnished Mr. Harris
with certain perquisites, which included a company car, health-club membership,
personal trainer, membership in certain social or country clubs, reimbursement
for an annual physical examination and up to a $5,000 annual reimbursement,
adjusted for inflation, over the period of the agreement, for personal financial
or tax advice.
The
Employment Agreement also provided Mr. Harris with life insurance for the
benefit of his designated beneficiary in the amount of at least $2,000,000;
provided reimbursement for uninsured medical expenses, not to exceed $10,000 per
annum, adjusted for inflation, over the period of the agreement; provided Mr.
Harris and his spouse with long-term care insurance; and provided Mr. Harris
with disability insurance providing for continuation of 100 percent of his base
salary for a specified period. These benefits were for the term of
his employment with us.
Mr. Harris's Employment Agreement also
provided for a supplemental executive retirement plan (the "SERP") and a
severance compensation agreement for his benefit. See "2008
Non-Qualified Deferred Compensation" below for more information about the
SERP. For more information about Mr. Harris's severance compensation,
please see "Potential Payments upon Termination or Change in Control"
below.
The
Committee determined that the Employment Agreement, the severance compensation
agreement and the awards made to Mr. Harris in 2008 pursuant to the Stock Plan
were appropriate based on the unique qualifications and skills required for his
role as Founder of the Company and as the Chief Executive Officer position in
our Company. Our Chief Executive Officer must have expertise in
managing a public company, managing a business development company and managing
a venture capital company. He must also have knowledge of
nanotechnology and microsystems, have stature within both the nanotechnology
community and the venture capital community and have relationships with the
investment banking community.
With the
retirement of Mr. Harris on December 31, 2008, no employees have employment
agreements, and Mr. Jamison, our new Chief Executive Officer, receives the same
benefits as our other salaried employees.
Share Ownership
Guidelines
Officers:
Each
Section 16 reporting executive officer may establish a 10b5-1 plan to exercise
and sell (through a cashless exercise) up to 95 percent of the options granted
to that individual in each grant by the Board of Directors. The
remaining five percent of these options must be available to meet the retention
requirements. For example, if an officer sells 9,500 shares in a
cashless exercise, he or she must use a portion of the net proceeds received to
exercise and hold 500 shares.
Each Section 16 reporting executive
officer is subject to this retention requirement until such time as he or she
meets a minimum share ownership percentage level. For the Managing
Directors, the share ownership percentage level is 2.5 percent of the total
shares issued and outstanding. For other deal team members (including
the General Counsel, Chief Accounting Officer and Investment Team Associate) the
percentages are a smaller percentage of the issued and outstanding shares based
on the number of options granted as compared with the number granted to the
Managing Directors.
Directors:
The Board
of Directors believes that the Company's directors should also own and hold
Common Stock of the Company to further align their interests and actions with
interests of the Company's shareholders. Members of the Board of
Directors who are not also officers of the Company are encouraged to buy shares
of the Company's Common Stock with an appropriate percentage (as determined by
each director) of the fees received for their service on the Board or Board
committees, and to hold those shares as long as they serve on the
Board. In order to facilitate these acquisitions, the Company will
assist in establishing a brokerage account in each director's name at a
brokerage firm approved by the applicable director. The Company will
obtain from each director on an annual basis a participation election that will
identify the percentage, if any, of the director's fees for services (including
the retainer) that he or she directs to be used to purchase shares of the
Company's stock on the open market. The Company will thereafter
deposit such amounts in the applicable director's broker account at the time
that fees are paid. The Company, the broker and the directors will
work together to take all actions necessary such that the purchases of Company
shares are made in accordance with the requirements of Rule 10b5-1 under the
Exchange Act. In 2008, the directors collectively bought 50,069
shares in the open market.
Compensation
and Share Ownership of Our Managing Directors
Messrs.
Jamison, Andreev, Janse and Wolfe are Managing Directors and are primarily
responsible for the day-to-day management of our portfolio. They have
served as employees of the Company since 2002, 2005, 2007 and 2004 respectively,
although the title "Managing Director" was first utilized by our Company in
2004.
In 2008,
Messrs. Jamison, Andreev, Janse and Wolfe each received a fixed base salary, a
bonus and participated in the Stock Plan (as described above) and received all
benefits, perquisites, and emoluments for which salaried employees were
eligible.
For more information on compensation of
our Managing Directors, see Compensation Discussion and Analysis
above.
The
following table sets forth the dollar range of equity securities beneficially
owned by each Managing Director as of December 31, 2008.
Name
of Managing Director
|
|
Dollar
Range of Equity Securities
Beneficially
Owned
(1)(2)(3)
|
Douglas
W. Jamison
|
|
Over
$1,000,000(4)
|
Alexei
A. Andreev
|
|
Over
$1,000,000(5)
|
Michael
A. Janse
|
|
Over
$1,000,000(6)
|
Daniel
B. Wolfe
|
|
Over
$1,000,000(7)
|
___________________
(1)
|
Beneficial
ownership has been determined in accordance with Rule 16a-1(a)(2) of the
Exchange Act.
|
(2)
|
The
dollar ranges are: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000, $100,001-$500,000, $500,001-$1,000,000 and over
$1,000,000.
|
(3)
|
The
dollar ranges are based on the price of the equity securities as of
December 31, 2008.
|
(4)
|
Includes
712,616 shares that can be acquired upon the exercise of outstanding
options.
|
(5)
|
Includes
676,204 shares that can be acquired upon the exercise of outstanding
options.
|
(6)
|
Includes
673,360 shares that can be acquired upon the exercise of outstanding
options.
|
(7)
|
Includes
476,788 shares that can be acquired upon the exercise of outstanding
options.
|
Related
Party Transactions
In the ordinary course of business, the
Company enters into transactions with portfolio companies that may be considered
related party transactions. Other than these transactions, for the
fiscal year ended December 31, 2008, there were no transactions, or proposed
transactions, in which the registrant was or is a participant in which any
related person had or will have a direct or indirect material
interest.
In order
to ensure that the Company does not engage in any prohibited transactions with
any persons affiliated with the Company, the Company has implemented procedures,
which are set forth in the Company's Compliance Manual. Our Audit
Committee must review in advance any "related party" transaction, or series of
similar transactions, to which the Company or any of its subsidiaries was or is
to be a party, in which the amount involved exceeds $120,000 and in which such
related party had, or will have, a direct or indirect material
interest. The Board of Directors reviews these procedures on an
annual basis.
In
addition, the Company's Code of Conduct for Directors and Employees ("Code of
Conduct"), which is signed by all employees and directors on an annual basis,
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual's personal interests and the interests of
the Company. Pursuant to the Code of Conduct, each employee and
director must disclose any conflicts of interest, or actions or relationships
that might give rise to a conflict, to the Chief Compliance
Officer. The Independent Directors Committee is charged with
monitoring and making recommendations to the Board of Directors regarding
policies and practices relating to corporate governance. If there
were any actions or relationships that might give rise to a conflict of
interest, such actions or relationships would be reviewed and approved by the
Board of Directors.
Remuneration of Named
Executive Officers
2008
Summary Compensation Table
The
following table sets forth a summary for the years ended December 31, 2008,
December 31, 2007, and December 31, 2006, of the cash and non-cash compensation
paid to our named executive officers. The primary elements of each
named executive officer's total compensation reported in the table are base
salary, bonus and equity incentives consisting of stock options. The
Summary Compensation Table should be read in conjunction with the CD&A and
the other tables and narrative descriptions that follow.
Name
and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards(1)
($)
|
Non-Equity
Incentive
Plan
Compensation
(2)
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings(3)
($)
|
All
Other
Compensation
($)(4)(6)(7)
|
Total
($)
|
Charles
E. Harris
Chairman
of the Board,
Chief
Executive Officer, Managing Director(5)
|
2008
2007
2006
|
314,623
306,187
300,000
|
0
0
0
|
2,225,350
3,374,224
2,034,482
|
0
0
29,067
|
4,141
42,063
54,692
|
432,590
418,479
405,628
|
2,976,704
4,140,953
2,823,869
|
Douglas
W. Jamison
President,
Chief Operating Officer, Chief Financial Officer (2007),
Managing Director
|
2008
2007
2006
|
274,770
267,403
262,000
|
75,000
0
0
|
795,931
953,931
668,677
|
0
0
3,957
|
0
0
0
|
15,500
15,500
15,000
|
1,161,201
1,236,834
949,634
|
Daniel
B. Wolfe
Chief
Financial Officer and Managing Director (2008)
Former
Vice President
|
2008
2007
2006
|
274,770
210,000
175,000
|
75,000
0
0
|
401,956
438,159
322,130
|
0
7,849
56,416
|
0
0
0
|
15,500
15,500
15,000
|
767,226
663,661
576,393
|
Alexei
A. Andreev
Managing
Director, Executive Vice President
|
2008
2007
2006
|
274,770
267,403
262,000
|
75,000
0
0
|
724,448
897,250
668,677
|
0
0
0
|
0
0
0
|
15,500
15,500
15,000
|
1,089,718
1,180,153
945,677
|
Michael
A. Janse
Managing
Director, Executive Vice President(8)
|
2008
2007
2006
|
274,770
184,211
0
|
75,000
0
0
|
792,957
873,201
0
|
0
0
0
|
0
0
0
|
15,500
45,500
0
|
1,158,227
1,102,912
0
|
(1)
|
The
figures in this column do not represent amounts actually paid to the named
executive officers, but represent the aggregate dollar amount of
compensation cost recognized by us in 2008, 2007 and 2006 under FAS 123(R)
for options granted in 2008 and prior years. We use the
Black-Scholes-Merton model to calculate compensation cost under FAS
123(R). You may find more information about the assumptions we
use in the Black-Scholes-Merton model under "Fair Valuation of Option
Awards." During the period from January 1, 2006 through June
30, 2009, a total of 1,110,539 options, or 19.5 percent, of those granted
to the named executive officers expired unexercised. The
expired options had an aggregate fair value of $3,219,048. Options which
expire unexercised do not generate any compensation to the employee.
|
(2)
|
In
2006, these amounts represent the actual amounts earned as a result of
realized gains during the year ended December 31, 2005, and paid out in
2006 and 2007, under the Harris & Harris Group Employee Profit-Sharing
Plan. These 2006 amounts are in addition to the $1,107,088 for
Mr. Harris and $165,308 for Mr. Jamison reported in the 2005 proxy and
were determined in 2006 based on the finalization of our 2005 tax
returns.
|
(3)
|
Represents
increase in pension obligation. There were no preferential or
above market earnings on Mr. Harris's deferred
compensation.
|
(4)
|
The
amounts reported for Mr. Harris for 2008 represent actual amounts of
benefits paid or payable including personal use of an automobile,
membership in a private club totaling $11,569, membership in a health club
and use of a trainer totaling $10,601, medical care reimbursement,
consultation with a financial planner totaling $20,214, long-term
disability insurance, group term-life insurance, long-term care insurance
for him and his wife and $20,500 in employer contributions to the Harris
& Harris Group, Inc. 401(k) Plan. It also includes the
employer contribution to his SERP totaling
$314,623.
|
(5)
|
In
2008, 2007 and 2006, Mr. Harris's wife received compensation of $24,000,
$25,000 and $21,000, respectively, for serving as our
Secretary.
|
(6)
|
The
amounts reported for Mr. Janse for 2007 represent qualified moving
expenses paid totaling $30,000 and $15,500 in employer contributions to
the Harris & Harris Group 401(k)
Plan.
|
(7)
|
Except
for Mr. Harris (see footnote 4 above) and Mr. Janse (see footnote 6
above), amounts reported for 2008 represent our contributions on behalf of
the named executive to the Harris & Harris Group, Inc. 401(k)
Plan. The named executive did not earn any other compensation
reportable in this column for 2008 that met the threshold reporting
requirements.
|
(8)
|
Mr.
Janse joined the Company in April
2007.
|
Fair
Valuation of Option Awards
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 FAS No.
123(R). The stock options were awarded in five different grant types,
each with different contractual terms. The assumptions used in the
calculation of fair value using the Black-Scholes-Merton model for each contract
term for grants in 2008 were as follows:
|
|
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|
Contractual
|
of
Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
Type of Award
|
Term
|
Granted
|
in Yrs
|
Factor
|
Yield
|
Rate
|
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock
options
|
9.78
Years
|
348,032
|
6.14
|
57.1%
|
0%
|
2.62%
|
$3.45
|
|
|
|
|
|
|
|
|
Non-qualified
stock
options
|
9.38
Years
|
1,163,724
|
Ranging
from
4.88
to
5.94
|
Ranging
from
50.6%
to
55.1%
|
0%
|
Ranging
from
3.24%
to
3.40%
|
Ranging
from
$3.25
to
$3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,511,756
|
|
|
|
|
|
An option's expected term is the
estimated period between the grant date and the exercise date of the
option. As the expected-term period increases, the fair value of the
option and the compensation cost will also increase. The
expected-term assumption is generally calculated using historical stock option
exercise data. The Company does not have historical exercise data to
develop such an assumption. In cases where companies do not have
historical data and where the options meet certain criteria, SEC Staff
Accounting Bulletin 107 ("SAB 107") provides the use of a simplified
expected-term calculation. Accordingly, the Company calculated the
expected terms using the SAB 107 simplified method.
Expected volatility is the measure of
how the stock's price is expected to fluctuate over a period of
time. An increase in the expected volatility assumption yields a
higher fair value of the stock option. Expected volatility factors
for the stock options were based on the historical fluctuations in the Company's
stock price over a period commensurate with the expected term of the option,
adjusted for stock splits and dividends.
The expected-dividend yield assumption
is traditionally calculated based on a company's historical dividend
yield. An increase to the expected-dividend yield results in a
decrease in the fair value of the option and resulting compensation
cost. Although the Company has declared deemed dividends in previous
years, most recently in 2005, the amounts and timing of any future dividends
cannot be reasonably estimated. Therefore, for purposes of
calculating fair value, the Company has assumed an expected-dividend yield of 0
percent.
The risk-free interest rate assumptions
are based on the annual yield on the measurement date of a zero-coupon U.S.
Treasury bond, the maturity of which equals the option's expected
term. Higher assumed interest rates yield higher fair
values.
2008
Grants of Plan-Based Awards
The following table presents
information regarding the equity incentive awards granted to the named executive
officers during the fiscal year ended December 31, 2008.
Name
|
Grant
Date
|
All
Other Option
Awards:
Number
of
Securities
Underlying
Options
(#)
|
Exercise
or
Base
Price
of
Option
Awards*
($/Share)
|
Closing
Price
on
Grant Date
($)
|
Grant
Date Fair
Value
of Option
Awards
|
|
|
|
|
|
|
Charles
E. Harris
|
August
13, 2008
|
187,039
|
$6.92
|
$7.14
|
$607,877
|
|
|
|
|
|
|
Douglas
W. Jamison
|
March
19, 2008
|
72,550
|
$6.18
|
$6.20
|
$250,298
|
|
August
13, 2008
|
199,682
|
$6.92
|
$7.14
|
$756,795
|
|
|
|
|
|
|
Daniel
B. Wolfe
|
March
19, 2008
|
72,550
|
$6.18
|
$6.20
|
$250,298
|
|
August
13, 2008
|
199,682
|
$6.92
|
$7.14
|
$756,795
|
|
|
|
|
|
|
Alexei
A. Andreev
|
March
19, 2008
|
72,550
|
$6.18
|
$6.20
|
$250,298
|
|
August
13, 2008
|
199,682
|
$6.92
|
$7.14
|
$756,795
|
|
|
|
|
|
|
Michael
A. Janse
|
March
19, 2008
|
72,550
|
$6.18
|
$6.20
|
$250,298
|
|
August
13, 2008
|
199,682
|
$6.92
|
$7.14
|
$756,795
|
*Equals
the closing volume weighted average price on the date of grant.
2008
Outstanding Equity Awards at Fiscal Year-End
The following table presents
information regarding the outstanding equity awards held by each of the named
executive officers as of December 31, 2008.
|
Option
Awards
|
Name
|
Number
of Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Charles
E. Harris
|
681,530
|
0
|
$10.11
|
June
26, 2016
|
|
18,711
|
0
|
$10.11
|
June
26, 2016
|
|
26,666
|
0
|
$10.11
|
June
26, 2009
|
|
240,981
|
0
|
$11.11
|
June
26, 2016
|
|
187,039
|
0
|
$6.92
|
Dec.
27, 2017
|
Douglas
W. Jamison
|
18,538
|
59,346(1)
|
$10.11
|
June
26, 2016
|
|
160,000
|
0
|
$10.11
|
June
26, 2009
|
|
0
|
92,365(2)
|
$11.11
|
Dec.
27, 2010
|
|
110,135
|
0
|
$11.11
|
Dec.
27, 2009
|
|
0
|
72,550(3)
|
$6.18
|
Dec.
27, 2017
|
|
0
|
199,682(4)
|
$6.92
|
Dec.
27, 2017
|
Daniel
B. Wolfe
|
27,076
|
59,346(1)
|
$10.11
|
June
26, 2016
|
|
53,334
|
0
|
$10.11
|
June
26, 2009
|
|
0
|
29,557(2)
|
$11.11
|
Dec.
27, 2010
|
|
35,243
|
0
|
$11.11
|
Dec.
27, 2009
|
|
0
|
72,550(3)
|
$6.18
|
Dec.
27, 2017
|
|
0
|
199,682(4)
|
$6.92
|
Dec.
27, 2017
|
Alexei
A. Andreev
|
22,626
|
59,346(1)
|
$10.11
|
June
26, 2016
|
|
160,000
|
0
|
$10.11
|
June
26, 2009
|
|
88,108
|
0
|
$11.11
|
Dec.
27, 2009
|
|
0
|
73,892(2)
|
$11.11
|
Dec.
27, 2010
|
|
0
|
72,550(3)
|
$6.18
|
Dec.
27, 2017
|
|
0
|
199,682(4)
|
$6.92
|
Dec.
27, 2017
|
Michael
A. Janse
|
248,108
|
0
|
$11.11
|
Dec.
27, 2009
|
|
0
|
73,892(2)
|
$11.11
|
Dec.
27, 2010
|
|
19,782
|
59,346(5)
|
$11.11
|
June
26, 2016
|
|
0
|
72,550(4)
|
$6.18
|
Dec.
27, 2017
|
|
0
|
199,682(4)
|
6.92
|
Dec.
27,
2017
|
(1)
|
Options
vest in six equal installments on June 26, 2009, June 26, 2010, June 26,
2011, June 26, 2012, June 26, 2013, and June 26,
2014.
|
(2)
|
Options
vest 100% on December 27, 2009.
|
(3)
|
Options
vest in four equal installments on March 19, 2009, March 19, 2010, March
19, 2011, and March 19, 2012.
|
(4)
|
Options
vest in four equal installments on August 13, 2009, August 13, 2010,
August 13, 2011 and August 13,
2012.
|
(5)
|
Options
vest in six equal installments on June 27, 2009, June 27, 2010, June 27,
2011, June 27, 2012, June 27, 2013, and June 27,
2014.
|
2008
Option Exercises and Stock Vested
The following table presents
information regarding the exercises of stock options by named executive officers
for the fiscal year ended December 31, 2008.
|
Option
Awards
|
Name
|
Number
of Shares
Acquired
on Exercise
(#)
|
Value
Realized on
Exercise
($)
|
Charles
E. Harris
|
0
|
0
|
Douglas
W. Jamison
|
0
|
0
|
Daniel
B. Wolfe
|
0
|
0
|
Alexei
A. Andreev
|
0
|
0
|
Michael
A. Janse
|
0
|
0
|
The following table presents
information about the pension benefits attributable to the named executive
officers as of December 31, 2008, and any pension benefit payments to them
during 2008.
Name
|
Plan
Name
|
Number
of Years
Credited
Service
(#)
|
Present
Value of
Accumulated
Benefits
($)
|
Payments
During
Last
Fiscal Year
($)
|
Charles
E. Harris
|
Executive
Mandatory
Retirement
Plan
|
25
|
151,443
|
0
|
Douglas
W. Jamison
|
Executive
Mandatory
Retirement
Plan
|
4
|
0
|
0
|
Daniel
B. Wolfe
|
Executive
Mandatory
Retirement
Plan
|
1
|
0
|
0
|
The present value of accumulated
benefits amount reported in the table above was calculated pursuant to FAS 87,
"Employers' Accounting for Pensions" and FAS 158, "Employers' Accounting for
Pensions and Other Postretirement Plans – an amendment of FASB Statements No.
87, 88, 106, and 132(R)." Several statistical and other factors that
attempt to anticipate future events are used in calculating the expense and
liability values related to our pension plan. These factors include a
discount rate assumption of 5.75 percent and use of the 94GAM mortality
table. The calculation also assumes that the benefit is earned
uniformly over the employees' careers. Any benefit attributable to
service prior to the effective date of the plan is amortized over each person's
future working lifetime.
Executive
Mandatory Retirement Benefit Plan
In 2003, in order to begin planning for
eventual management succession, the Board of Directors voted to establish the
Executive Mandatory Retirement Benefit Plan for individuals who are employed by
us in a bona fide executive or high policy-making position. The plan was amended
and restated effective January 1, 2005, to comply with certain provisions of the
Code. There are currently four individuals serving in positions, or
who served in positions, that qualify under the plan: Charles E. Harris, the
former Chairman and Chief Executive Officer, Douglas W. Jamison, the Chairman
and Chief Executive Officer, Daniel B. Wolfe, the President, Chief Operating
Officer and Chief Financial Officer, and Mel P. Melsheimer, the former
President, Chief Operating Officer and Chief Financial Officer. Under
this plan, mandatory retirement takes place effective December 31 of the year in
which the eligible individuals attain the age of 65. On an annual
basis beginning in the year in which the designated individual attains the age
of 65, a committee of the Board consisting of non-interested directors may
determine for our benefit to postpone the mandatory retirement date for that
individual for one additional year.
Under
applicable law prohibiting discrimination in employment on the basis of age, we
can impose a mandatory retirement age of 65 for our executives or employees in
high policy-making positions only if each employee subject to the mandatory
retirement age is entitled to an immediate retirement benefit at retirement age
of at least $44,000 per year. The benefits payable at retirement to
Mr. Harris and Mr. Melsheimer under our existing 401(k) plan do not equal this
threshold. The Executive Mandatory Retirement Plan was established to
provide the difference between the benefit required under the age discrimination
laws and that provided under our existing plans. For individuals
retiring after 2007, the benefit under the plan is paid to the qualifying
individual in the form of a lump sum, and is paid six months and one day after
the individual's separation from service with the Company. Mr.
Harris's mandatory benefit is $151,443 and was paid as a lump sum on July 10,
2009.
2008
Non-Qualified Deferred Compensation
The following table presents
information regarding the Company's Amended and Restated Supplemental Executive
Retirement Plan for the fiscal year ended December 31, 2008.
Name
|
Executive
Contributions
in
Last FY
($)
|
Registrant
Contribution
in
Last
FY
($)(1)
|
Aggregate
Earnings
in
Last
FY
($)
|
Aggregate
Withdrawals/
Distributions
($)
|
Aggregate
Balance
at Last
FYE
($)
|
|
|
|
|
|
|
Charles
E. Harris
|
0
|
314,623
|
96,528
|
2,889,717
|
188,454
|
(1) This
amount is included in the Summary Compensation Table under "All Other
Compensation."
SERP
The
Employment Agreement provides that we adopt a supplemental executive retirement
plan (the "SERP") for the benefit of Mr. Harris. Under the SERP, we
caused an amount equal to one-twelfth of Mr. Harris's current annual salary to
be credited each month (a "Monthly Credit") to a special account maintained on
our books for the benefit of Mr. Harris (the "SERP Account"), provided that Mr.
Harris was employed by us on the last business day of such month. The
amounts credited to the SERP Account were deemed invested or reinvested in such
investments as were requested by Mr. Harris and agreed to by the
Company. The SERP Account is credited and debited to reflect the
deemed investment returns, losses and expenses attributed to such deemed
investments and reinvestments in accordance with the terms of the
SERP. Mr. Harris's benefit under the SERP equals the balance in the
SERP Account and such benefit will always be 100 percent vested (i.e., not
forfeitable).
In 2005,
Mr. Harris received a $125,000 distribution from the SERP Account. On
May 30, 2008, Mr. Harris was paid a lump sum of $2,889,717, and the balance at
of $189,383 was paid on July 31, 2009.
With the
retirement of Mr. Harris on December 31, 2008, no employees are entitled to any
non-qualified deferred compensation benefits (other than pursuant to the
Executive Mandatory Retirement Plan as described above).
Potential
Payments upon Termination or Change in Control
Other than Mr. Harris, who was entitled
to certain severance protections pursuant to his Employment Agreement, as of
December 31, 2008, none of our executive officers had a change in control
agreement or was entitled to any special payments solely upon a change in
control. See "2008 Pension Benefits" and "2008 Non-Qualified Deferred
Compensation" above for information about pension and other deferred
compensation benefits.
On June
30, 1994, we adopted the Medical Benefit Retirement Plan. On February
10, 1997, we amended this plan to include employees who have seven full years of
service and have attained 58 years of age. On November 3, 2005, we
amended this plan to reverse the 1997 amendment for future retirees and to
remove dependents other than spouses from the plan. The coverage is
secondary to any government or subsequent employer-provided health-insurance
plans. The annual premium cost to us with respect to the entitled
retiree shall not exceed $14,891 for 2008. As of December 31, 2008,
2007 and 2006, we had liabilities of $1,018,311, $913,904 and $791,972,
respectively, for the plan; there are no plan assets.
The stock
options of retirees who qualify for the Medical Benefit Retirement Plan will
remain exercisable (to the extent exercisable at the time of the optionee's
termination) post retirement, subject to certain conditions, if such retiree
executes a post-termination non-solicitation agreement, in a form reasonably
acceptable to the Company, until the expiration of its
term. Effective as of July 31, 2008, Mr. Harris and the Company
entered into the Nonsolicitation and Noncompetition Agreement (the
"Agreement"). Pursuant to the Agreement, Mr. Harris has agreed not to
compete with the Company by generally not engaging in investing activities in
privately held companies in the area of tiny technology, nor to solicit the
Company's employees for employment until the later of (i) three (3) years from
the effective date of the Agreement, or (ii) the date on which he no longer
holds any exercisable stock options under any of the Company's current stock
option award agreements. By executing the Agreement, Mr. Harris
satisfied the requirement set forth in his current stock option award agreements
to permit the extension of the exercise periods for his outstanding stock
options beyond his retirement. Mr. Harris's exercisable options as of
December 31, 2008, are reflected in the table "2008 Outstanding Equity Awards at
Fiscal Year-End."
Pursuant to his Employment Agreement,
upon his retirement on December 31, 2008, Mr. Harris was entitled to (1) earned
but unpaid base salary, (2) benefits under the Medical Benefit Retirement Plan,
and (3) the amounts described under "2008 Pension Benefits" and "2008
Non-Qualified Deferred Compensation" above.
Remuneration
of Directors
The
following table sets forth the compensation paid by us to our directors for the
fiscal year ended December 31, 2008. During 2008, we did not grant
any stock option awards or pay or accrue any pension or retirement benefits for
our directors.
2008
Director Compensation
|
|
Fees
Earned or Paid
in
Cash ($)
|
|
|
All
Other
Compensation
($)
|
|
|
|
|
Independent
Directors:
|
|
|
|
|
|
|
|
|
|
W.
Dillaway Ayres, Jr.
|
|
|
40,500 |
|
|
|
0 |
|
|
|
40,500 |
|
Dr.
C. Wayne Bardin
|
|
|
39,000 |
|
|
|
0 |
|
|
|
39,000 |
|
Dr.
Phillip A. Bauman
|
|
|
42,000 |
|
|
|
0 |
|
|
|
42,000 |
|
G.
Morgan Browne
|
|
|
43,500 |
|
|
|
0 |
|
|
|
43,500 |
|
Dugald
A. Fletcher
|
|
|
52,500 |
|
|
|
0 |
|
|
|
52,500 |
|
Charles
E. Ramsey
|
|
|
37,500 |
|
|
|
0 |
|
|
|
37,500 |
|
James
E. Roberts
|
|
|
51,000 |
|
|
|
0 |
|
|
|
51,000 |
|
Richard
P. Shanley
|
|
|
41,750 |
|
|
|
0 |
|
|
|
41,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interested
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
E. Harris(1)(2)
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Douglas
W. Jamison(1)
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Kelly
S. Kirkpatrick
|
|
|
6,025 |
|
|
|
3,000 |
(3) |
|
|
9,025 |
|
Lori
D. Pressman
|
|
|
21,000 |
|
|
|
41,863 |
(4) |
|
|
62,863 |
|
__________________________
(1)
|
Mr.
Harris and Mr. Jamison do not receive additional compensation as
Directors. Refer to the "2008 Summary Compensation Table" for
details of Mr. Harris's and Mr. Jamison's compensation for
2008.
|
(2)
|
Mr.
Harris retired pursuant to the Company's Mandatory Retirement Benefit Plan
on December 31, 2008.
|
(3)
|
Represents
$3,000 for consulting services. Kelly S. Kirkpatrick did not
stand for re-election at the Annual Meeting held on May 1,
2008.
|
(4)
|
Represents
$41,863 for consulting services. Ms. Pressman may be considered
an "interested person" because of consulting work performed for
us. Additionally, Ms. Pressman was paid $22,413 and $3,438 in
2008 for consulting work for two of our portfolio companies, Ancora
Pharmaceuticals and Phoenix Molecular, respectively. Ms.
Pressman's total compensation paid by us and our portfolio companies for
the last two fiscal years is
$153,777.
|
There are
no outstanding option awards to directors.
The
directors who are not officers receive $1,500 for each meeting of the Board of
Directors and $1,500 for each committee meeting they attend, and a monthly
retainer of $750. Each non-employee committee Chairman receives an
additional monthly retainer of $250. The Lead Independent Director
receives an additional monthly retainer of $500.
OTHER
INFORMATION
We are
not subject to any material pending or, to our knowledge, threatened legal
proceedings.
Our
custodian, The Bank of New York Mellon, located at One Wall Street, New York,
New York 10286, holds physical custody of our securities.
Our
transfer and dividend-paying agent is American Stock Transfer & Trust
Company, 59 Maiden Lane, New York, NY 10038.
Our
independent registered public accounting firm is PricewaterhouseCoopers LLP, 300
Madison Avenue, New York, NY 10017. It also provides tax return
preparation services for us.
BROKERAGE
We did
not effect any brokerage transactions in portfolio securities in 2008, 2007 or
2006 except for the purchase and sale of treasury securities, for which we do
not pay any brokerage commissions. Brokers are selected on the basis of our best
judgment as to which brokers are most likely to be in contact with likely buyers
of the thinly traded securities of our portfolio companies. We will
also consider the competitiveness of such broker's commission
rates. We might pay a premium for a broker's knowledge of the
potential buyers or research services provided by the broker.
DIVIDENDS
AND DISTRIBUTIONS
As a
regulated investment company under the Code, we will not be subject to U.S.
federal income tax on our investment company taxable income that we distribute
to shareholders, provided that at least 90 percent of our investment company
taxable income for that taxable year is distributed to our
shareholders. We currently intend to retain our net capital gains for
investment and pay the associated federal corporate income tax. We
may change this policy in the future.
To the
extent that we retain any net capital gain, we may pay deemed capital gain
dividends to shareholders. If we do pay a deemed capital gain
dividend, you will not receive a cash distribution, but instead you will receive
a tax credit equal to your proportionate share of the tax paid by
us. When we declare a deemed dividend, our dividend-paying agent will
send you an IRS Form 2439 which will reflect receipt of the deemed dividend
income and the tax credit. This tax credit, which we pay at the
applicable corporate rate, is normally at a higher rate than the rate payable by
individual shareholders on the deemed dividend income. The excess
credit can be used by the shareholder to offset other taxes due in that year or
to generate a tax refund to the shareholder. In addition, each
shareholder's tax basis in his shares of Common Stock is increased by the excess
of the capital gain on which we paid taxes over the amount of taxes we
paid. See "Taxation."
We did
not pay a cash dividend or declare a deemed capital gain dividend for
2008.
TAXATION
The
following discussion is a brief summary of certain U.S. federal income tax
considerations affecting the Company and our shareholders. The
discussion is based upon the Code, Treasury Regulations, judicial authorities,
published positions of the Internal Revenue Service (the "IRS") and other
applicable authorities, all as in effect on the date hereof and all of which are
subject to differing interpretations or change (possibly with retroactive
effect). The discussion does not address all of the tax consequences
that may be relevant to a particular shareholder or to shareholders subject to
special treatment under U.S. federal income tax laws. This discussion
is limited to shareholders who hold their common shares as capital
assets. Counsel to the Company has not rendered and will not render
any legal opinion regarding any tax consequences relating to the Company or an
investment in the Company. No assurance can be given that the IRS
would not assert, or that a court would not sustain, a position contrary to any
of the tax aspects set forth below. Prospective investors must consult
their own tax advisors as to the U.S. federal income tax consequences of
purchasing common shares of the Company as part of this offering, as well as the
effects of state, local and non-U.S. tax laws.
We have
elected to qualify, qualified and intend to continue to qualify to be taxed as a
regulated investment company under Subchapter M of the
Code. Accordingly, we must, among other things, (a) derive in each
taxable year at least 90 percent of our gross income (including tax-exempt
interest) from (i) dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gain from options, futures and forward contracts) derived with respect to our
business of investing in stock, securities or currencies and (ii) net income
derived from interests in publicly traded partnerships (as defined in section
7704(b)) that are treated as partnerships for U.S. federal income tax purposes
and that derive less than 90 percent of their gross income from the items
described in (i) above (each a "Qualified Publicly Traded Partnership"); and (b)
diversify our holdings so that, at the end of each fiscal quarter (i) at least
50 percent of the market value of our total assets is represented by cash and
cash items, U.S. government securities, the securities of other regulated
investment companies and other securities, with such other securities limited,
in respect of any one issuer, to an amount not greater than five percent of the
value of our total assets and not more than 10 percent of the outstanding voting
securities of the issuer (subject to the exception described below), and (ii)
not more than 25 percent of the market value of our total assets is invested in
the securities of (A) any one issuer (other than U.S. government securities and
the securities of other regulated investment companies), (B) any two or more
issuers (other than regulated investment companies) that we control and that are
determined to be engaged in the same business or similar or related trades or
businesses or (C) any one or more Qualified Publicly Traded
Partnerships.
In the
case of a regulated investment company which furnishes capital to development
corporations, there is an exception to the rule relating to the diversification
of investments described above. This exception is available only to
registered management investment companies which the SEC determines to be
principally engaged in the furnishing of capital to other corporations which are
principally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not previously generally
available ("SEC Certification"). We have received SEC Certification
since 1999, including for 2008, but it is possible that we may not receive SEC
Certification in future years. Pursuant to the SEC Certification, we
are generally entitled to include, in the computation of the 50 percent value of
our assets (described in (b)(i) above), the value of any securities of an
issuer, whether or not we own more than 10 percent of the outstanding voting
securities of the issuer, if the basis of the securities, when added to our
basis of any other securities of the issuer that we own, does not exceed five
percent of the value of our total assets, so long as we have not continuously
held any security of such issuer for 10 or more years.
As a
regulated investment company, in any fiscal year with respect to which we
distribute at least 90 percent of the sum of our (i) investment company taxable
income (which includes, among other items, dividends, interest and the excess of
any net short-term capital gains over net long-term capital losses and other
taxable income other than any net capital gain (as defined below) reduced by
deductible expenses) determined without regard to the deduction for dividends
paid and (ii) net tax-exempt interest (the excess of our gross tax-exempt
interest over certain disallowed deductions), we (but not our shareholders)
generally will not be subject to U.S. federal income tax on investment company
taxable income and net capital gains (which consist of the excess of our net
long-term capital gain over our net short-term capital loss) that we distribute
to shareholders. To the extent that we retain our net capital gains
for investment, we will be subject to U.S. federal income tax at regular
corporate rates. We currently intend to retain our net capital gains
for investment and pay the associated federal corporate income
tax. We may change this policy in the future.
Amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible four percent excise tax
payable by us. To avoid this tax, we must distribute (or be deemed to
have distributed) during each calendar year an amount equal to the sum
of:
|
(a)
|
at
least 98 percent of our ordinary income (not taking into account any
capital gains or losses) for the calendar
year;
|
|
(b)
|
at
least 98 percent of our capital gains in excess of our capital losses
(adjusted for certain ordinary losses) for a one-year period generally
ending on October 31 of the calendar year (unless an election is made by a
company with a November or December year-end to use the company's fiscal
year); and
|
|
(c)
|
any
undistributed amounts from previous years on which we paid no U.S. federal
income tax.
|
While we
intend to distribute any income and capital gains in the manner necessary to
minimize imposition of the four percent excise tax, sufficient amounts of our
taxable income and capital gains may not be distributed to avoid entirely the
imposition of the tax. In that event, we will be liable for the tax
only on the amount by which we do not meet the foregoing distribution
requirement.
Although
we do not presently expect to do so, we are authorized to borrow funds and to
sell assets in order to satisfy the distribution
requirement. However, under the 1940 Act, we are not permitted to
make distributions to our stockholders while our debt obligations and other
senior securities are outstanding unless certain asset coverage tests are
met. See "Certain Government Regulations." Moreover, our
ability to dispose of assets to meet the distribution requirement may be limited
by (a) the illiquid nature of our portfolio and/or (b) other requirements
relating to our status as a regulated investment company, including the
diversification requirement. If we dispose of assets in order to meet
the distribution requirement or to avoid the excise tax, we may make such
dispositions at times that, from an investment standpoint, are not advantageous.
As a regulated investment company we are not allowed to carry
forward or carry back a net operating loss for purposes of computing our
investment company taxable income in other taxable years.
If we
were unable to satisfy the 90 percent distribution requirement or otherwise were
to fail to qualify as a regulated investment company in any year, we would be
taxed in the same manner as an ordinary corporation, and distributions to our
shareholders would not be deductible in computing our taxable
income. In such case, distributions generally would be eligible (a)
for treatment as qualified dividend income in the case of individual
shareholders and (b) for the dividend received deduction in the case of
corporate shareholders. To qualify again to be taxed as a regulated
investment company in a subsequent year, we would be required to distribute to
our shareholders our earnings and profits attributable to non-regulated
investment company years reduced by an interest charge on 50 percent of such
earnings and profits payable by us to the IRS. In addition, if we
failed to qualify as a regulated investment company for a period greater than
two taxable years, then, in order to qualify as a regulated investment company
in a subsequent year, we would be required to elect to recognize and pay tax on
any net built-in gain (the excess of aggregate gain, including items of income,
over aggregate loss that would have been realized if we had sold our property to
an unrelated party for fair market value) or, alternatively, be subject to
taxation on such built-in gain recognized for a period of 10 years.
We may
decide to be taxed as a corporation even if we could otherwise qualify as a
regulated investment company.
We may
make certain investments which would subject us to special provisions of the
Code that, among other things, may affect the character of the gains or losses
realized by us and require us to recognize income or gain without receiving cash
with which to make distributions.
Certain
of our investment practices may be subject to special and complex federal income
tax provisions that may, among other things, (i) treat dividends that would
otherwise constitute qualified dividend income as non-qualified dividend income,
(ii) treat dividends that would otherwise be eligible for the corporate
dividends-received deduction as ineligible for such treatment, (iii) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, (iv)
convert lower-taxed long-term capital gain into higher-taxed short-term capital
gain or ordinary income, (v) convert an ordinary loss or a deduction into a
capital loss (the deductibility of which is more limited), (vi) cause us to
recognize income or gain without a corresponding receipt of cash, (vii)
adversely affect the time as to when a purchase or sale of stock or securities
is deemed to occur, (viii) adversely alter the characterization of certain
complex financial transactions and (ix) produce income that will not be
qualifying income for purposes of the 90 percent income test.
In the
event we invest in foreign securities, we may be subject to foreign taxes and
withholding with respect to those securities. We do not expect to
satisfy the requirement permitting us to elect to pass through to the
shareholders their share of the foreign taxes paid by us.
Distributions
we pay to you from our investment company taxable income, which includes the
excess of net short-term capital gains over net long-term capital losses
(together referred to hereinafter as "ordinary income dividends"), are taxable
to you as ordinary income to the extent of our earnings and
profits. Distributions made to you from an excess of net long-term
capital gains over net short-term capital losses ("capital gain dividends"),
including capital gain dividends credited to you but retained by us, are taxable
to you as long-term capital gains, regardless of the length of time you have
owned our shares. Distributions in excess of our current and
accumulated earnings and profits will first reduce the adjusted tax basis of
your shares and, after the adjusted tax basis is reduced to zero, will
constitute capital gains to you (assuming you hold your shares as a capital
asset). Generally, you will be provided with a written notice
designating the amount of any (a) ordinary income dividends no later than 30
days after the close of the taxable year, and (b) capital gain dividends or
other distributions no later than 60 days after the close of the taxable year.
In the
event that we retain any net capital gains, we may designate the retained
amounts as undistributed capital gains in a notice to our
shareholders. If a designation is made, shareholders would include in
income, as long-term capital gains, their proportionate share of the
undistributed amounts, but would be allowed a credit or refund, as the case may
be, for their proportionate share of the corporate tax paid by us. In
addition, the tax basis of shares owned by a shareholder would be increased by
an amount equal to the difference between (a) the amount included in the
shareholder's income as long-term capital gains and (b) the shareholder's
proportionate share of the corporate tax paid by us. Shareholders
should consult their tax advisors for further information about the impact of a
deemed dividend on their state or local taxes. Because of the nature
of our investments, ordinary income dividends paid by us generally will not be
eligible for the reduced rates applicable to so-called "qualified dividend
income." In addition, a dividend will not be treated as qualified
dividend income (even if received by the Company and paid by the Company to a
shareholder) (a) if the dividend is received with respect to any share held for
fewer than 61 days during the 121-day period beginning on the date which is 60
days before the date on which such share becomes ex-dividend with respect to
such dividend, (b) to the extent that the shareholder is under an obligation
(whether pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property, or (c) if the
shareholder elects to have the dividend treated as investment income for
purposes of the limitation on deductibility of investment interest.
Dividends
and other taxable distributions are taxable to you even though they are
reinvested in additional shares of our Common Stock. If we pay you a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of these months,
then the dividend will be treated for tax purposes as being paid by us and
received by you on December 31 of the year in which the dividend was
declared.
A
shareholder will realize gain or loss on the sale or exchange of our common
shares in an amount equal to the difference between the shareholder's adjusted
basis in the shares sold or exchanged and the amount realized on their
disposition. Generally, gain recognized by a shareholder on the sale
or other disposition of our common shares will result in capital gain or loss to
you, and will be a long-term capital gain or loss if the shares have been held
for more than one year at the time of sale. Any loss upon the sale or
exchange of our shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends received
(including amounts credited as an undistributed capital gain dividend) by you
with respect to those shares. A loss realized on a sale or exchange
of our shares will be disallowed if you reacquire our shares (or other
substantially identical shares), whether through the automatic reinvestment of
dividends or otherwise, within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed of. In
this case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
In
general, U.S. federal withholding taxes at a 30 percent rate (or a lower rate
pursuant to a tax treaty) will apply to distributions to shareholders (except to
those distributions designated by us as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations (a "non-U.S.
investor"). Different tax consequences may result if a non-U.S.
investor is engaged in a trade or business in the United States or, in the case
of an individual, is present in the United States for 183 or more days during a
taxable year and certain other conditions are met. Foreign investors
should consult their tax advisors regarding the tax consequences of investing in
our Common Stock.
We are
required in some circumstances to backup withholding on taxable dividends and
other payments paid to non-corporate holders of our shares who do not furnish us
with their correct taxpayer identification number and certifications, or who are
otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to you may be
refunded or credited against your U.S. federal income tax liability, if any,
provided that the required information is furnished to the Internal Revenue
Service.
CERTAIN
GOVERNMENT REGULATIONS
A
business development company is regulated by the 1940 Act. A business
development company must be organized in the United States for the purpose of
investing primarily in companies that are organized in the United States and
engaged primarily in businesses other than certain financial businesses and that
either (i) do not have any securities listed on a national securities exchange,
(ii) are listed on a national exchange and have a market capitalization less
than $250 million, or (iii) are controlled by the business development
company. In addition, the business development company must make
managerial assistance available to these portfolio companies. A
business development company may use capital provided by public shareholders and
from other sources to invest in portfolio companies. A business
development company provides shareholders the ability to retain the liquidity of
a publicly traded stock, while sharing in the possible benefits, if any, of
investing primarily in what are usually privately owned companies.
As a
business development company, we may not acquire any assets other than
"qualifying assets" unless, at the time we make the acquisition, the value of
our qualifying assets represents at least 70 percent of the value of our total
assets. The principal categories of qualifying assets relevant to our
business are:
|
·
|
securities
purchased in transactions not involving any public offering, the issuer of
which is an eligible portfolio
company;
|
|
·
|
securities
received in exchange for or distributed with respect to securities
described in the bullet above or pursuant to the exercise of options,
warrants or rights relating to the securities;
and
|
|
·
|
cash,
cash items, government securities or high quality debt securities (within
the meaning of the 1940 Act), maturing in one year or less from the time
of investment.
|
An
eligible portfolio company is generally a domestic company that is not an
investment company (other than a small business investment company wholly owned
by a business development company) and is not engaged primarily in certain
financial businesses and that:
|
·
|
either
has a market capitalization of less than $250 million or does not have a
class of securities registered on a national
securities exchange;
|
|
·
|
is
actively controlled by the business development company and has an
affiliate of a business development company on its Board of Directors;
or
|
|
·
|
meets
other criteria as may be established by the
SEC.
|
Control
under the 1940 Act is presumed to exist where a business development company
beneficially owns more than 25 percent of the outstanding voting securities of
the portfolio company.
To
include securities described above as qualifying assets for the purpose of the
70 percent test, a business development company must make available to the
issuer of those securities (whether directly or through cooperating parties)
significant managerial assistance, such as providing significant guidance and
counsel concerning the management, operations or business objectives and
policies of a portfolio company. We offer to provide managerial
assistance to each of our portfolio companies.
As a
business development company, we are entitled to issue senior securities in the
form of stock or indebtedness, including bank borrowings and debt securities, as
long as our senior securities have an asset coverage of at least 200 percent
immediately after each issuance. See "Risk Factors."
We may
also be prohibited under the 1940 Act from knowingly participating in certain
transactions with our affiliates without the prior approval of members of our
Board of Directors who are not interested persons and, in some cases, may have
to seek prior approval from the SEC.
As with
other companies regulated by the 1940 Act, a business development company must
adhere to substantive regulatory requirements. A majority of our
directors must be persons who are not interested persons, as that term is
defined in the 1940 Act. Additionally, we are required to provide and
maintain a bond issued by a reputable fidelity insurance company to protect us
against larceny and embezzlement. Furthermore, as a business
development company, we are prohibited from protecting any director or officer
against any liability to us or our shareholders arising from willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of that person's office.
We
maintain a code of ethics under Rule 17j-1 of the 1940 Act that establishes
procedures for personal investment and restricts some transactions by our
personnel. Our code of ethics requires pre-approval for investment by
our employees in private or public securities that may be purchased or held by
us. The code of ethics is filed as an exhibit to our registration
statement of which this Prospectus is a part. You may read and copy
the code of ethics at the SEC's Public Reference Room in Washington,
D.C. You may obtain information on operations of the Public Reference
Room by calling the SEC at (800) SEC-0330. In addition, the code of
ethics is available on the EDGAR Database on the SEC Internet site at
http://www.sec.gov. You may obtain copies of the code of ethics,
after paying a duplicating fee, by electronic request at the following email
address: [email protected], or by writing to the SEC's Public Reference
Section, 100 F Street, NE, Washington, D.C. 20549.
We may
not change the nature of our business so as to cease to be, or withdraw our
election as, a business development company unless authorized by vote of a
majority of the outstanding voting securities, voting on the matter at a meeting
at which a quorum is present.
We vote
proxies relating to our portfolio securities in what management believes is in
the best interest of our shareholders. We carefully review on a case
by case basis each proposal submitted to a shareholder vote to determine its
impact on the portfolio securities held by us. Although we generally
vote against proposals that may have a negative impact on our portfolio
securities, we may vote for such a proposal if there exists a compelling
long-term reason to do so.
Our proxy
voting decisions are made by the Managing Directors who are responsible for
monitoring each of our investments. To ensure that our vote is not
the product of a conflict of interest, we required that: (i) anyone involved in
the decision-making process disclose to our Chief Compliance Officer any
potential conflict that he or she is aware of and any contact that he or she has
had with any interested party regarding a proxy vote; and (ii) employees
involved in the decision-making process or vote administration are prohibited
from revealing how we intend to vote on a proposal in order to reduce any
attempted influence from interested parties.
Shareholders
may obtain information regarding how we voted proxies with respect to our public
portfolio companies without charge by making a written request for proxy voting
information or by contacting us by telephone at 1-877-846-9832.
CAPITALIZATION
We are
authorized to issue 45,000,000 shares of Common Stock, par value $0.01 per
share, and 2,000,000 shares of preferred stock, par value $0.10 per
share. Each share within a particular class or series thereof has
equal voting, dividend, distribution and liquidation rights. When
issued, in accordance with the terms thereof, shares of Common Stock will be
fully paid and non-assessable. Shares of Common Stock are not
redeemable and have no preemptive, conversion, or cumulative voting
rights.
The
following table shows the number of shares of (i) capital stock authorized, (ii)
the amount held by us or for our own account, and (iii) capital stock
outstanding for each class of our authorized securities as of September 18,
2009.
|
|
|
|
|
Amount
Held by
Company
or for its
Own
Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
45,000,000 |
|
|
|
1,828,740 |
|
|
|
25,966,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
2,000,000 |
|
|
|
0 |
|
|
|
0 |
|
Issuance
of Preferred Stock
Our Board
of Directors is authorized by our articles of incorporation to issue up to
2,000,000 shares of preferred stock having a par value of $0.10 per
share. The Board of Directors is authorized to divide the preferred
stock into one or more series and to determine the terms of each series,
including, but not limited to, the voting rights, redemption provisions,
dividend rate and liquidation preference. Any terms must be
consistent with the requirements of the 1940 Act. The 1940 Act
currently prohibits us from issuing any preferred stock if after giving effect
to the issuance the value of our total assets, less all liabilities and
indebtedness other than senior securities, would be less than 200 percent of the
aggregate amount of senior securities representing indebtedness plus the
aggregate involuntary liquidation value of our preferred stock (other than up to
5 percent borrowings for temporary purposes). Leveraging with
preferred stock raises the same general potential for loss or gain and other
risks as does leveraging with borrowings described above.
Options
and Warrants
We have
no warrants outstanding. As of September 18, 2009, we had 4,581,567
options outstanding, which were granted pursuant to our Stock Plan described
herein. Under the 1940 Act, we cannot issue options and/or warrants
for more than 25 percent of our outstanding voting securities.
PLAN
OF DISTRIBUTION
Our
Common Stock may be offered directly to one or more purchasers, through agents
designated from time to time by us, including in transactions that are deemed to
be "at the market" as defined in Rule 415 under the Securities Act of 1933, to
or through underwriters or dealers or through a combination of any such methods
of sale. Any underwriter or agent involved in the offer and sale of
our Common Stock will be named in the applicable Prospectus
Supplement.
The
distribution of our Common Stock may be effected from time to time in one or
more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided, however, that
unless we have shareholder approval, the offering price per share must equal or
exceed the net asset value per share of our Common Stock exclusive of any
underwriting commissions or discounts.
In
connection with the sale of our Common Stock, underwriters or agents may receive
compensation from us in the form of discounts, concessions or
commissions. Underwriters may sell our Common Stock to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and
agents that participate in the distribution of our Common Stock may be deemed to
be underwriters under the Securities Act of 1933, and any discounts and
commissions they receive from us and any profit realized by them on the resale
of our Common Stock may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933. Any such underwriter or agent will
be identified and any such compensation received from us will be described in
the applicable Prospectus Supplement. The maximum commission or
discount to be received by any FINRA member or independent broker-dealer will
not exceed eight percent. We will not pay any compensation to any
underwriter or agent in the form of warrants, options, consulting or structuring
fees or similar arrangements.
Any
Common Stock sold pursuant to a Prospectus Supplement will be listed on the
Nasdaq Global Market.
Under
agreements into which we may enter, underwriters, dealers and agents who
participate in the distribution of our Common Stock may be entitled to
indemnification by us against certain liabilities, including liabilities under
the Securities Act of 1933. Underwriters, dealers and agents may
engage in transactions with us, or perform services for us, in the ordinary
course of business.
If so
indicated in the applicable Prospectus Supplement, we will authorize
underwriters or other persons acting as our agents to solicit offers by certain
institutions to purchase our Common Stock from us pursuant to contracts
providing for payment and delivery on a future date. Institutions
with which such contacts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by us. The obligations of any purchaser under any such
contract will be subject to the condition that the purchase of the Common Stock
shall not at the time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The underwriters and
such other agents will not have any responsibility in respect of the validity or
performance of such contracts. Such contracts will be subject only to
those conditions set forth in the Prospectus Supplement, and the Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
In order
to comply with the securities laws of certain states, if applicable, our Common
Stock offered hereby will be sold in such jurisdictions only through registered
or licensed brokers or dealers.
LEGAL
MATTERS
Certain
legal matters will be passed on by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York, our special counsel in connection with the offering of
Common Stock.
EXPERTS
Our
audited financial statements as of December 31, 2008 and 2007 and for each of
the three years in the period ended December 31, 2008 are included in this
Registration Statement in reliance on the report of PricewaterhouseCoopers LLP,
independent registered public accounting firm, given on the authority of that
firm as experts in accounting and auditing. PricewaterhouseCoopers
LLP is located at 300 Madison Avenue, New York, New York 10017.
We will
furnish, without charge, a copy of such financial statements upon request by
writing to 111 West 57th Street, Suite 1100, New York, New York 10019,
Attention: Investor Relations, or calling 1-877-846-9832.
FURTHER
INFORMATION
We are
subject to the informational requirements of the Exchange Act and in accordance
therewith file reports, proxy statements and other information with the
SEC. The reports, proxy statements and other information filed by us
can be inspected and copied at public reference facilities maintained by the SEC
at 100 F Street, N.E., Washington, D.C. 20549, its New York Regional Office, 3
World Financial Center, Suite 400, New York, New York 10281 and its Chicago
Regional Office, 175 West Jackson Boulevard, Suite 900, Chicago, Illinois
60604. You can obtain information on the operation of the Public
Reference room by calling the SEC at (800) SEC-0330. The SEC also
maintains a website that contains reports, proxy statements, and other
information. The address of the SEC's website is
http://www.sec.gov. Copies of this material may also be obtained from
the Public Reference Branch, Office of Consumer Affairs and Information Services
of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed
rates.
PRIVACY
POLICY
We are
committed to maintaining the privacy of our shareholders and to safeguarding
their non-public personal information. The following information is
provided to help you understand what personal information we collect, how we
protect that information and why, in some cases, we may share information with
select other parties.
Generally, we do not receive any
non-public personal information relating to our shareholders, although some
non-public personal information of our shareholders may become available to
us. We do not disclose any non-public personal information about our
shareholders or former shareholders to anyone, except as permitted by law or as
is necessary in order to service shareholder accounts (for example, to a
transfer agent or third party administrator).
We
restrict access to non-public personal information about our shareholders to our
employees and to employees of our service providers and their affiliates with a
legitimate business need for the information. We maintain physical,
electronic and procedural safeguards designed to protect the non-public personal
information of our shareholders.
CONSOLIDATED
FINANCIAL STATEMENTS
HARRIS
& HARRIS GROUP, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Documents
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|
|
Page
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Management's
Report on Internal Control Over Financial Reporting
|
F-2
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Audited Consolidated Financial
Statements
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of December 31, 2008, and
2007
|
F-4
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
F-6
|
|
|
Consolidated
Statements of Changes in Net Assets for the years ended December 31, 2008,
2007, and 2006
|
F-7
|
|
|
Consolidated
Schedule of Investments as of December 31, 2008
|
F-8
|
|
|
Consolidated
Schedule of Investments as of December 31, 2007
|
F-17
|
|
|
Footnote
to Consolidated Schedule of Investments
|
F-27
|
|
|
Notes
to Consolidated Financial Statements
|
F-30
|
|
|
Financial
Highlights for the years ended December 31, 2008, 2007, and
2006
|
F-44
|
|
|
Unaudited Consolidated Financial
Statements
|
|
|
|
Consolidated
Statements of Assets and Liabilities as of June 30, 2009, and December 31,
2008
|
F-45
|
|
|
Consolidated
Statements of Operations for the three months ended June 30, 2009, and
2008
|
F-46
|
|
|
Consolidated
Statements of Cash Flows for the three months ended June 30, 2009, and
2008
|
F-47
|
|
|
Consolidated
Statements of Changes in Net Assets for the three months ended June 30,
2009, and year ended December 31, 2008
|
F-48
|
|
|
Consolidated
Schedule of Investments as of June 30, 2009
|
F-49
|
|
|
Footnote
to Consolidated Schedule of Investments
|
F-58
|
|
|
Notes
to Consolidated Financial Statements
|
F-61
|
|
|
Financial
Highlights for the three months ended June 30, 2009, and 2008
|
F-70
|
Management's Report on
Internal Control Over Financial Reporting
Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers and effected by the
Company's Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
•
|
pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
•
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness of internal control over financial reporting to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management has assessed the
effectiveness of our internal control over financial reporting as of December
31, 2008. In making its assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on the results
of this assessment, management (including our Chief Executive Officer and Chief
Financial Officer) has concluded that, as of December 31, 2008, the Company's
internal control over financial reporting was effective.
The effectiveness of the Company's
internal control over financial reporting has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on page F-3 of this
Prospectus.
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Harris & Harris Group,
Inc.:
In our
opinion, the accompanying consolidated statements of assets and liabilities,
including the consolidated schedules of investments, and the related
consolidated statements of operations, changes in net assets, cash flows, and
the financial highlights present fairly, in all material respects, the financial
position of Harris & Harris Group, Inc. and its subsidiaries at December 31,
2008 and December 31, 2007, and the results of their operations, changes in net
assets, cash flows, and the financial highlights for each of the three years in
the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008 based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing on
page 57 of the 2008 Annual Report to Shareholders. Our responsibility is to
express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated
audits. We conducted
our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As more
fully disclosed in Note 2 of the Notes to the Consolidated Financial Statements,
the financial statements include investments valued at $56,965,153 (52.1% of net
assets) at December 31, 2008, the fair values of which have been estimated by
the Board of Directors in the absence of readily ascertainable market
values. These estimated values may differ significantly from the
values that would have been used had a ready market for the investments existed,
and the differences could be material.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
New York,
New York
March 13,
2009
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
Investments,
in portfolio securities at value:
|
|
|
|
|
|
|
Unaffiliated
companies (cost: $24,208,281 and $21,435,392,
respectively)
|
|
$ |
12,086,503 |
|
|
$ |
21,103,836 |
|
Non-controlled
affiliated companies (cost: $60,796,720 and $54,306,393,
respectively)
|
|
|
39,650,187 |
|
|
|
52,651,189 |
|
Controlled
affiliated companies (cost: $6,085,000 and $6,935,743,
respectively)
|
|
|
5,228,463 |
|
|
|
4,355,359 |
|
Total,
investments in private portfolio companies at value (cost: $91,090,001 and
$82,677,528, respectively)
|
|
$ |
56,965,153 |
|
|
$ |
78,110,384 |
|
|
|
|
|
|
|
|
|
|
Investments,
in U.S. Treasury obligations at value (cost: $52,956,288 and $59,552,933,
respectively)
|
|
|
52,983,940 |
|
|
|
60,193,593 |
|
Cash
and cash equivalents
|
|
|
692,309 |
|
|
|
330,009 |
|
Restricted
funds (Note 7)
|
|
|
191,955 |
|
|
|
2,667,020 |
|
Receivable
from portfolio company
|
|
|
0 |
|
|
|
524 |
|
Interest
receivable
|
|
|
56 |
|
|
|
647,337 |
|
Prepaid
expenses
|
|
|
484,567 |
|
|
|
488,667 |
|
Other
assets
|
|
|
309,621 |
|
|
|
455,798 |
|
Total
assets
|
|
$ |
111,627,601 |
|
|
$ |
142,893,332 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES & NET
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 7)
|
|
$ |
2,088,348 |
|
|
$ |
4,515,463 |
|
Deferred
rent
|
|
|
8,140 |
|
|
|
14,525 |
|
Total
liabilities
|
|
|
2,096,488 |
|
|
|
4,529,988 |
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
109,531,113 |
|
|
$ |
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 12/31/08 and
12/31/07; 27,688,313 issued at 12/31/08 and 25,143,313 issued at
12/31/07
|
|
|
276,884 |
|
|
|
251,434 |
|
Additional
paid in capital (Note 10)
|
|
|
181,251,507 |
|
|
|
160,927,691 |
|
Accumulated
net operating and realized loss
|
|
|
(34,494,551 |
) |
|
|
(15,483,766 |
) |
Accumulated
unrealized depreciation of investments
|
|
|
(34,097,196 |
) |
|
|
(3,926,484 |
) |
Treasury
stock, at cost (1,828,740 shares at 12/31/08 and 12/31/07)
|
|
|
(3,405,531 |
) |
|
|
(3,405,531 |
) |
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$ |
109,531,113 |
|
|
$ |
138,363,344 |
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
25,859,573 |
|
|
|
23,314,573 |
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$ |
4.24 |
|
|
$ |
5.93 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
|
|
Fixed-income
securities
|
|
$ |
1,971,178 |
|
|
$ |
2,705,597 |
|
|
$ |
2,991,261 |
|
Miscellaneous
income
|
|
|
16,169 |
|
|
|
39 |
|
|
|
37,500 |
|
Total
investment income
|
|
|
1,987,347 |
|
|
|
2,705,636 |
|
|
|
3,028,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 5)
|
|
|
10,090,658 |
|
|
|
11,435,329 |
|
|
|
7,933,276 |
|
Administration
and operations
|
|
|
1,160,025 |
|
|
|
1,432,653 |
|
|
|
1,250,080 |
|
Profit-sharing
provision
|
|
|
0 |
|
|
|
0 |
|
|
|
50,875 |
|
Professional
fees
|
|
|
694,007 |
|
|
|
902,911 |
|
|
|
737,828 |
|
Rent
|
|
|
276,023 |
|
|
|
235,998 |
|
|
|
239,846 |
|
Directors'
fees and expenses
|
|
|
367,383 |
|
|
|
435,060 |
|
|
|
340,750 |
|
Depreciation
|
|
|
54,795 |
|
|
|
63,113 |
|
|
|
64,916 |
|
Custodian
fees
|
|
|
31,607 |
|
|
|
28,115 |
|
|
|
24,125 |
|
Total
expenses
|
|
|
12,674,498 |
|
|
|
14,533,179 |
|
|
|
10,641,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(10,687,151 |
) |
|
|
(11,827,543 |
) |
|
|
(7,612,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized (loss) gain from investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gain (loss) from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
companies
|
|
|
3,588 |
|
|
|
119,082 |
|
|
|
32,484 |
|
Non-controlled
affiliated companies
|
|
|
(6,509,404 |
) |
|
|
0 |
|
|
|
0 |
|
Controlled
affiliated companies
|
|
|
(2,893,487 |
) |
|
|
0 |
|
|
|
0 |
|
U.S.
Treasury obligations/other
|
|
|
1,109,790 |
|
|
|
(945 |
) |
|
|
(1,146 |
) |
Realized
(loss) gain from investments
|
|
|
(8,289,513 |
) |
|
|
118,137 |
|
|
|
31,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (benefit) (Note 8)
|
|
|
34,121 |
|
|
|
87,975 |
|
|
|
(227,355 |
) |
Net
realized (loss) gain from investments
|
|
|
(8,323,634 |
) |
|
|
30,162 |
|
|
|
258,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in unrealized depreciation on
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
8,292,072 |
|
|
|
0 |
|
|
|
0 |
|
Change
on investments held
|
|
|
(38,462,784 |
) |
|
|
5,080,936 |
|
|
|
(4,418,870 |
) |
Net
(increase) decrease in unrealized depreciation on
investments
|
|
|
(30,170,712 |
) |
|
|
5,080,936 |
|
|
|
(4,418,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(49,181,497 |
) |
|
$ |
(6,716,445 |
) |
|
$ |
(11,773,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
average basic and diluted outstanding share
|
|
$ |
(1.99 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares
|
|
|
24,670.516 |
|
|
|
22,393,030 |
|
|
|
20,759,547 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
$ |
(49,181,497 |
) |
|
$ |
(6,716,445 |
) |
|
$ |
(11,773,112 |
) |
Adjustments
to reconcile net decrease in net assets resulting from operations to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized and unrealized loss (gain) on investments
|
|
|
38,460,225 |
|
|
|
(5,199,073 |
) |
|
|
4,420,619 |
|
Depreciation
of fixed assets, amortization of premium or discount on U.S. government
securities, and bridge note interest
|
|
|
(179,809 |
) |
|
|
(60,009 |
) |
|
|
(426,168 |
) |
Stock-based
compensation expense
|
|
|
5,965,769 |
|
|
|
8,050,807 |
|
|
|
5,038,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
2,475,065 |
|
|
|
(517,235 |
) |
|
|
(419,351 |
) |
Receivable
from portfolio company
|
|
|
524 |
|
|
|
(524 |
) |
|
|
75,000 |
|
Interest
receivable
|
|
|
621,856 |
|
|
|
(21,965 |
) |
|
|
(376,808 |
) |
Prepaid
expenses
|
|
|
4,100 |
|
|
|
(477,722 |
) |
|
|
(7,951 |
) |
Other
receivables
|
|
|
0 |
|
|
|
819,905 |
|
|
|
(819,905 |
) |
Other
assets
|
|
|
111,828 |
|
|
|
(152,012 |
) |
|
|
(176,325 |
) |
Accounts
payable and accrued liabilities
|
|
|
(2,427,115 |
) |
|
|
400,163 |
|
|
|
1,002,643 |
|
Accrued
profit sharing
|
|
|
0 |
|
|
|
(261,661 |
) |
|
|
(1,846,197 |
) |
Deferred
rent
|
|
|
(6,385 |
) |
|
|
(6,801 |
) |
|
|
(9,677 |
) |
Current
income tax liability
|
|
|
0 |
|
|
|
0 |
|
|
|
(9,637,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(4,155,439 |
) |
|
|
(4,142,572 |
) |
|
|
(14,955,302 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of U.S. government securities
|
|
|
(133,032,933 |
) |
|
|
(60,744,292 |
) |
|
|
(70,030,872 |
) |
Sale
of U.S. government securities
|
|
|
140,831,769 |
|
|
|
60,508,538 |
|
|
|
107,624,461 |
|
Investment
in private placements and notes
|
|
|
(17,779,462 |
) |
|
|
(20,595,161 |
) |
|
|
(24,408,187 |
) |
Proceeds
from sale of private placements and notes
|
|
|
136,837 |
|
|
|
174,669 |
|
|
|
28,295 |
|
Purchase
of fixed assets
|
|
|
(21,969 |
) |
|
|
(41,640 |
) |
|
|
(15,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(9,865,758 |
) |
|
|
(20,697,886 |
) |
|
|
13,198,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
proceeds from public offering (Note 10)
|
|
|
15,651,750 |
|
|
|
14,027,000 |
|
|
|
0 |
|
Gross
expenses for public offering (Note 10)
|
|
|
(1,268,253 |
) |
|
|
(1,033,832 |
) |
|
|
0 |
|
Proceeds
from stock option exercises (Note 5)
|
|
|
0 |
|
|
|
10,105,511 |
|
|
|
2,615,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
14,383,497 |
|
|
|
23,098,679 |
|
|
|
2,615,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the year
|
|
|
330,009 |
|
|
|
2,071,788 |
|
|
|
1,213,289 |
|
Cash
and cash equivalents at end of the year
|
|
|
692,309 |
|
|
|
330,009 |
|
|
|
2,071,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
362,300 |
|
|
$ |
(1,741,779 |
) |
|
$ |
858,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
45,765 |
|
|
$ |
80,236 |
|
|
$ |
9,425,922 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET
ASSETS
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$ |
(10,687,151 |
) |
|
$ |
(11,827,543 |
) |
|
$ |
(7,612,935 |
) |
Net
realized (loss) gain on investments
|
|
|
(8,323,634 |
) |
|
|
30,162 |
|
|
|
258,693 |
|
Net
decrease in unrealized depreciation on investments as a result of
sales
|
|
|
8,292,072 |
|
|
|
0 |
|
|
|
0 |
|
Net
(increase) decrease in unrealized depreciation on investments
held
|
|
|
(38,462,784 |
) |
|
|
5,080,936 |
|
|
|
(4,418,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
|
(49,181,497 |
) |
|
|
(6,716,445 |
) |
|
|
(11,773,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from capital stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock upon the exercise of stock options
|
|
|
0 |
|
|
|
9,996 |
|
|
|
2,587 |
|
Issuance
of common stock on offering
|
|
|
25,450 |
|
|
|
13,000 |
|
|
|
0 |
|
Additional
paid in capital on common stock issued
|
|
|
14,358,047 |
|
|
|
23,075,683 |
|
|
|
2,612,603 |
|
Stock-based
compensation expense
|
|
|
5,965,769 |
|
|
|
8,050,807 |
|
|
|
5,038,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from capital stock
transactions
|
|
|
20,349,266 |
|
|
|
31,149,486 |
|
|
|
7,654,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from adoption of
SFAS No. 158
|
|
|
0 |
|
|
|
0 |
|
|
|
61,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets
|
|
|
(28,832,231 |
) |
|
|
24,433,041 |
|
|
|
(4,057,439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the year
|
|
|
138,363,344 |
|
|
|
113,930,303 |
|
|
|
117,987,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of the year
|
|
$ |
109,531,113 |
|
|
$ |
138,363,344 |
|
|
$ |
113,930,303 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 11.0% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 11.0% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (4)(5)(6)(7)(8) -- Developing novel biologics for treatment of
cancer and infectious disease
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
(M)
|
|
|
2,799,552 |
|
|
$ |
60,750 |
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$200,000 |
|
|
|
203,222 |
|
|
|
|
|
|
|
|
|
263,972 |
|
Cobalt
Technologies, Inc. (4)(5)(6)(9)(10) – Developing biobutanol through
biomass fermentation
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
176,056 |
|
|
|
187,500 |
|
|
|
|
|
|
|
|
|
|
|
Exponential
Business Development Company (4)(5) – Venture capital partnership focused
on early stage companies
|
|
|
|
|
|
|
|
|
|
Limited
Partnership Interest
|
(M)
|
|
|
1 |
|
|
|
2,219 |
|
|
|
|
|
|
|
|
|
|
|
Kereos,
Inc. (4)(5)(6) -- Developing emulsion-based imaging
agents and targeted therapeutics to image and treat cancer and
cardiovascular disease
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
545,456 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (4)(5) -- Manufacturing nanoimprint lithography capital
equipment
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,333,333 |
|
|
|
1,083,333 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
1,250,000 |
|
|
|
1,015,625 |
|
Warrants
at $2.00 expiring 12/31/11
|
( I
)
|
|
|
125,000 |
|
|
|
35,625 |
|
|
|
|
|
|
|
|
|
2,134,583 |
|
Nanosys,
Inc. (4)(5) -- 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 DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 11.0% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 11.0% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NeoPhotonics
Corporation (4)(5) -- Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
716,195 |
|
|
$ |
181,262 |
|
Series
1 Convertible Preferred Stock
|
(M)
|
|
|
1,831,256 |
|
|
|
463,472 |
|
Series
2 Convertible Preferred Stock
|
(M)
|
|
|
741,898 |
|
|
|
187,767 |
|
Series
3 Convertible Preferred Stock
|
(M)
|
|
|
2,750,000 |
|
|
|
695,995 |
|
Series
X Convertible Preferred Stock
|
(M)
|
|
|
2,000 |
|
|
|
101,236 |
|
Warrants
at $0.15 expiring 01/26/10
|
( I
)
|
|
|
16,364 |
|
|
|
2,373 |
|
Warrants
at $0.15 expiring 12/05/10
|
( I
)
|
|
|
14,063 |
|
|
|
2,349 |
|
|
|
|
|
|
|
|
|
1,634,454 |
|
Polatis,
Inc. (4)(5)(6)(11) -- 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 |
|
|
|
0 |
|
Series
A-4 Convertible Preferred Stock
|
(M)
|
|
|
4,774 |
|
|
|
0 |
|
Series
A-5 Convertible Preferred Stock
|
(M)
|
|
|
16,438 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
PolyRemedy,
Inc. (4)(5)(6)(9) --Developing a robotic manufacturing platform for wound
treatment patches
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
(M)
|
|
|
287,647 |
|
|
|
122,250 |
|
|
|
|
|
|
|
|
|
|
|
Starfire
Systems, Inc. (4)(5) -- Producing ceramic-forming polymers
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
375,000 |
|
|
|
0 |
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
600,000 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
TetraVitae
Bioscience, Inc. (4)(5)(6)(9)(12) -- Developing alternative fuels through
biomass fermentation
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
118,804 |
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$24,208,281)
|
|
|
|
|
|
|
$ |
12,086,503 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $24,208,281)
|
|
|
|
|
|
|
$ |
12,086,503 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(13) – 36.2% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 36.2% 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 |
|
|
$ |
1,100,000 |
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals, Inc. (4)(5)(6) -- Developing synthetic carbohydrates for pharmaceutical
applications
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,663,808 |
|
|
|
1,200,000 |
|
|
|
|
|
|
|
|
|
|
|
BridgeLux,
Inc. (4)(5)(14) -- Manufacturing high-power light emitting
diodes
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,861,504 |
|
|
|
1,396,128 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
2,130,699 |
|
|
|
1,598,025 |
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
666,667 |
|
|
|
500,000 |
|
Warrants
at $0.7136 expiring 12/31/14
|
( I
)
|
|
|
98,340 |
|
|
|
60,774 |
|
Warrants
at $0.7136 expiring 12/31/14
|
( I
)
|
|
|
65,560 |
|
|
|
40,516 |
|
|
|
|
|
|
|
|
|
3,595,443 |
|
Cambrios
Technologies Corporation (4)(5)(6) – Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,294,025 |
|
|
|
647,013 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
1,300,000 |
|
|
|
650,000 |
|
|
|
|
|
|
|
|
|
1,297,013 |
|
CFX
Battery, Inc. (4)(5)(6)(15) -- Developing batteries using
nanostructured materials
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
1,880,651 |
|
|
|
1,473,264 |
|
|
|
|
|
|
|
|
|
|
|
Crystal
IS, Inc. (4)(5) -- Developing single-crystal aluminum nitride substrates
for optoelectronic devices
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
391,571 |
|
|
|
76,357 |
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
1,300,376 |
|
|
|
253,574 |
|
Warrants
at $0.78 expiring 05/05/13
|
( I
)
|
|
|
15,231 |
|
|
|
1,584 |
|
Warrants
at $0.78 expiring 05/12/13
|
( I
)
|
|
|
2,350 |
|
|
|
244 |
|
Warrants
at $0.78 expiring 08/08/13
|
( I
)
|
|
|
4,396 |
|
|
|
479 |
|
|
|
|
|
|
|
|
|
332,238 |
|
CSwitch
Corporation (4)(5)(6)(16) -- Developing next-generation, system-on-a-chip
solutions for communications-based platforms
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
6,863,118 |
|
|
|
0 |
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$1,766,673 |
|
|
|
118,624 |
|
|
|
|
|
|
|
|
|
118,624 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(13) – 36.2% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 36.2% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (4)(5)(6)(17) -- Developing high-performance quantum
computing systems
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,144,869 |
|
|
$ |
1,038,238 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
450,450 |
|
|
|
408,496 |
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
1,533,395 |
|
|
|
1,390,578 |
|
|
|
|
|
|
|
|
|
2,837,312 |
|
Ensemble
Discovery Corporation (4)(5)(6)(18) -- Developing DNA Programmed
Chemistry for the discovery of new classes of therapeutics and
bioassays
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,449,275 |
|
|
|
1,000,000 |
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$250,286 |
|
|
|
256,375 |
|
|
|
|
|
|
|
|
|
1,256,375 |
|
Innovalight,
Inc. (4)(5)(6) -- Developing solar power products enabled by silicon-based
nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
16,666,666 |
|
|
|
4,288,662 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
5,810,577 |
|
|
|
1,495,176 |
|
|
|
|
|
|
|
|
|
5,783,838 |
|
Kovio,
Inc. (4)(5)(6) -- Developing semiconductor products
using printed electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
2,500,000 |
|
|
|
2,561,354 |
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
800,000 |
|
|
|
819,633 |
|
Series
E Convertible Preferred Stock
|
(M)
|
|
|
1,200,000 |
|
|
|
1,229,450 |
|
Warrants
at $1.25 expiring 12/31/12
|
( I
)
|
|
|
355,880 |
|
|
|
253,066 |
|
|
|
|
|
|
|
|
|
4,863,503 |
|
Mersana
Therapeutics, Inc. (4)(5)(6)(19) -- Developing advanced polymers for drug
delivery
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
68,451 |
|
|
|
68,451 |
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
866,500 |
|
|
|
866,500 |
|
Warrants
at $2.00 expiring 10/21/10
|
( I
)
|
|
|
91,625 |
|
|
|
33,718 |
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$200,000 |
|
|
|
208,110 |
|
|
|
|
|
|
|
|
|
1,176,779 |
|
Metabolon,
Inc. (4)(5) -- Discovering biomarkers through the use of
metabolomics
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
2,173,913 |
|
|
|
882,768 |
|
Series
B-1 Convertible Preferred Stock
|
(M)
|
|
|
869,565 |
|
|
|
353,107 |
|
Warrants
at $1.15 expiring 3/25/15
|
( I
)
|
|
|
434,783 |
|
|
|
127,391 |
|
|
|
|
|
|
|
|
|
1,363,266 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(13) – 36.2% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 36.2% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (4)(5) -- Developing solar power products enabled by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
(M)
|
|
|
63,210 |
|
|
$ |
31,131 |
|
Series
II Convertible Preferred Stock
|
(M)
|
|
|
1,250,904 |
|
|
|
616,070 |
|
Series
III Convertible Preferred Stock
|
(M)
|
|
|
1,242,144 |
|
|
|
611,756 |
|
Series
IV Convertible Preferred Stock
|
(M)
|
|
|
432,179 |
|
|
|
212,848 |
|
|
|
|
|
|
|
|
|
1,471,805 |
|
Nanomix,
Inc. (4)(5) -- Producing nanoelectronic sensors that integrate carbon
nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
977,917 |
|
|
|
23,622 |
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
6,802,397 |
|
|
|
6,428 |
|
|
|
|
|
|
|
|
|
30,050 |
|
Nextreme
Thermal Solutions, Inc. (4)(5) -- Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
17,500 |
|
|
|
875,000 |
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
4,870,244 |
|
|
|
1,327,629 |
|
|
|
|
|
|
|
|
|
2,202,629 |
|
Questech
Corporation (4)(5) -- Manufacturing and marketing proprietary metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
655,454 |
|
|
|
128,266 |
|
Warrants
at $1.50 expiring 11/19/09
|
( I
)
|
|
|
5,000 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
128,286 |
|
Siluria
Technologies, Inc. (4)(5)(6) -- Developing next-generation
nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
(M)
|
|
|
482,218 |
|
|
|
0 |
|
Unsecured
Bridge Note (including interest)
|
(M)
|
|
|
$42,542 |
|
|
|
42,731 |
|
|
|
|
|
|
|
|
|
42,731 |
|
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 |
|
|
|
2,489,088 |
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
495,246 |
|
|
|
1,247,426 |
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
651,309 |
|
|
|
1,640,517 |
|
|
|
|
|
|
|
|
|
5,377,031 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$60,796,720)
|
|
|
|
|
|
|
$ |
39,650,187 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$60,796,720)
|
|
|
|
|
|
|
$ |
39,650,187 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(20) – 4.8% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 4.8% of net assets
at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
SiOnyx,
Inc. (4)(5)(6) -- Developing silicon-based optoelectronic products enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
233,499 |
|
|
|
101,765 |
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
2,966,667 |
|
|
|
1,292,948 |
|
Series
A-2 Convertible Preferred Stock
|
(M)
|
|
|
4,207,537 |
|
|
|
1,833,750 |
|
|
|
|
|
|
|
|
|
3,228,463 |
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost: $6,085,000)
|
|
|
|
|
|
|
$ |
5,228,463 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$6,085,000)
|
|
|
|
|
|
|
$ |
5,228,463 |
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $91,090,001)
|
|
|
|
|
|
|
$ |
56,965,153 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities (21) – 48.4% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date 01/29/09
|
(M)
|
|
$ |
52,985,000 |
|
|
$ |
52,983,940 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government Securities (cost:
$52,956,288)
|
|
|
|
|
|
|
$ |
52,983,940 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $144,046,289)
|
|
|
|
|
|
|
$ |
109,949,093 |
|
The accompanying notes are an integral part of
these consolidated financial statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
Notes to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 87 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 $24,208,281. 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
$13,853,972.
|
(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)
|
With
our investment in a convertible bridge note issued by BioVex Group, Inc.,
we received a warrant to purchase a number of shares of the class of stock
sold in the next financing of BioVex equal to $60,000 divided by the price
per share of the class of stock sold in the next financing of
BioVex. The ability to exercise this warrant is, therefore,
contingent on BioVex completing successfully a subsequent round of
financing. This warrant shall expire and no longer be
exercisable on November 13, 2015. The cost basis of this
warrant is $200.
|
(9)
|
Initial
investment was made during 2008.
|
(10)
|
Cobalt
Technologies, Inc., does business as Cobalt
Biofuels.
|
(11)
|
Continuum
Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
|
(12)
|
With
our purchase of the Series B Convertible Preferred Stock of TetraVitae
Bioscience, Inc., we received the right to purchase, at a price of
$2.63038528 per share, a number of shares in the Series C financing equal
to the number of shares of Series B Preferred Stock purchased. The
ability to exercise this right is contingent on TetraVitae Bioscience
completing successfully a subsequent round of
financing.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2008
|
(13)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $60,796,720. The gross
unrealized appreciation based on the tax cost for these securities is
$2,798,072. The gross unrealized depreciation based on the tax
cost for these securities is
$23,944,605.
|
(14)
|
BridgeLux,
Inc., was previously named eLite Optoelectronics,
Inc.
|
(15)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery,
Inc. The surviving entity is CFX Battery,
Inc.
|
(16)
|
With
our investments in secured convertible bridge notes issued by CSwitch, we
received three warrants to purchase a number of shares of the class of
stock sold in the next financing of CSwitch equal to $529,322, $985,835
and $249,750, 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, $986 and $250,
respectively.
|
(17)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We invested in D-Wave Systems, Inc., through D-Wave
USA, a Delaware company. Our investment is denominated in
Canadian dollars and is subject to foreign currency
translation. See "Note 2. Summary of Significant Accounting
Policies."
|
(18)
|
With
our investment in a convertible bridge note issued by Ensemble Discovery,
we received a warrant to purchase a number of shares of the class of stock
sold in the next financing of Ensemble Discovery equal to $125,105.40
divided by the price per share of the class of stock sold in the next
financing of Ensemble Discovery. The ability to exercise this
warrant is, therefore, contingent on Ensemble Discovery completing
successfully a subsequent round of financing. This warrant
shall expire and no longer be exercisable on September 10,
2015. The cost basis of this warrant is
$75.20.
|
(19)
|
Mersana
Therapeutics, Inc., was previously named Nanopharma
Corp.
|
(20)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $6,085,000. The gross
unrealized appreciation based on the tax cost for these securities is
$0. The gross unrealized depreciation based on the tax cost for
these securities is $856,537.
|
(21)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $52,956,288. The gross unrealized appreciation on
the tax cost for these securities is $27,652. The gross
unrealized depreciation on the tax cost of these securities is
$0.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 15.25% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 15.25% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BioVex
Group, Inc. (4)(5)(6)(7)(8) – Developing novel biologics for treatment of
cancer and infectious disease
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock
|
(B)
|
|
|
2,799,552 |
|
|
$ |
2,500,000 |
|
|
|
|
|
|
|
|
|
|
|
Exponential
Business Development Company (4)(5) – Venture capital partnership focused
on early stage companies
|
|
|
|
|
|
|
|
|
|
Limited
Partnership Interest
|
(B)
|
|
|
1 |
|
|
|
2,026 |
|
|
|
|
|
|
|
|
|
|
|
Molecular
Imprints, Inc. (4)(5) -- Manufacturing nanoimprint lithography capital
equipment
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
1,333,333 |
|
|
|
2,000,000 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
1,250,000 |
|
|
|
2,389,250 |
|
Warrants
at $2.00 expiring 12/31/11
|
(B)
|
|
|
125,000 |
|
|
|
110,750 |
|
|
|
|
|
|
|
|
|
4,500,000 |
|
Nanosys,
Inc. (4)(5)(7) -- Developing zero and one-dimensional inorganic
nanometer-scale materials and devices
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
803,428 |
|
|
|
2,370,113 |
|
Series
D Convertible Preferred Stock
|
(B)
|
|
|
1,016,950 |
|
|
|
3,000,003 |
|
|
|
|
|
|
|
|
|
5,370,116 |
|
Nantero,
Inc. (4)(5)(7) -- Developing a high-density, nonvolatile, random access
memory chip, enabled by carbon nanotubes
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
345,070 |
|
|
|
1,046,908 |
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
207,051 |
|
|
|
628,172 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
188,315 |
|
|
|
571,329 |
|
|
|
|
|
|
|
|
|
2,246,409 |
|
NeoPhotonics
Corporation (4)(5) -- Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(B)
|
|
|
716,195 |
|
|
|
133,141 |
|
Series
1 Convertible Preferred Stock
|
(B)
|
|
|
1,831,256 |
|
|
|
1,831,256 |
|
Series
2 Convertible Preferred Stock
|
(B)
|
|
|
741,898 |
|
|
|
741,898 |
|
Series
3 Convertible Preferred Stock
|
(B)
|
|
|
2,750,000 |
|
|
|
2,750,000 |
|
Warrants
at $0.15 expiring 01/26/10
|
(B)
|
|
|
16,364 |
|
|
|
1,325 |
|
Warrants
at $0.15 expiring 12/05/10
|
(B)
|
|
|
14,063 |
|
|
|
1,139 |
|
|
|
|
|
|
|
|
|
5,458,759 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 15.25% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 15.25% of net assets at value
(cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polatis,
Inc. (4)(5)(7)(9) -- Developing MEMS-based optical networking
components
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
16,775 |
|
|
$ |
0 |
|
Series
A-2 Convertible Preferred Stock
|
(B)
|
|
|
71,611 |
|
|
|
132,653 |
|
Series
A-4 Convertible Preferred Stock
|
(B)
|
|
|
4,774 |
|
|
|
8,768 |
|
Series
A-5 Convertible Preferred Stock
|
(B)
|
|
|
16,438 |
|
|
|
135,105 |
|
|
|
|
|
|
|
|
|
276,526 |
|
Starfire
Systems, Inc. (4)(5)(7) -- Producing ceramic-forming
polymers
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(B)
|
|
|
375,000 |
|
|
|
150,000 |
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
600,000 |
|
|
|
600,000 |
|
|
|
|
|
|
|
|
|
750,000 |
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost:
$21,435,392)
|
|
|
|
|
|
|
$ |
21,103,836 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $21,435,392)
|
|
|
|
|
|
|
$ |
21,103,836 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 38.06% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 38.06% of net
assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adesto
Technologies Corporation (4)(5)(6)(7) – Developing semiconductor-related
products enabled at the nanoscale
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
3,416,149 |
|
|
$ |
1,147,826 |
|
|
|
|
|
|
|
|
|
|
|
Ancora
Pharmaceuticals Inc. (4)(5)(6)(7) – Developing synthetic carbohydrates for pharmaceutical
markets and for internal drug development
programs
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
909,091 |
|
|
|
639,062 |
|
Warrants
at $1.06 expiring 05/01/08
|
(B)
|
|
|
754,717 |
|
|
|
60,377 |
|
|
|
|
|
|
|
|
|
699,439 |
|
BridgeLux,
Inc. (4)(5)(11) -- Manufacturing high-power light emitting
diodes
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
1,861,504 |
|
|
|
2,792,256 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
2,130,699 |
|
|
|
3,196,050 |
|
Warrants
at $0.7136 expiring 02/02/2017
|
(B)
|
|
|
98,340 |
|
|
|
138,856 |
|
Warrants
at $0.7136 expiring 04/26/2017
|
(B)
|
|
|
65,560 |
|
|
|
92,833 |
|
|
|
|
|
|
|
|
|
6,219,995 |
|
Cambrios
Technologies Corporation (4)(5)(7) – Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
1,294,025 |
|
|
|
1,294,025 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
1,300,000 |
|
|
|
1,300,000 |
|
|
|
|
|
|
|
|
|
2,594,025 |
|
Chlorogen,
Inc. (4)(5)(12) -- Developed patented chloroplast technology to produce
plant-made proteins
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
4,478,038 |
|
|
|
0 |
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
2,077,930 |
|
|
|
0 |
|
Secured
Convertible Bridge Note (including interest)
|
(B)
|
|
|
$176,811 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
Crystal
IS, Inc. (4)(5)(7) -- Developing single-crystal aluminum nitride
substrates for optoelectronic devices
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
391,571 |
|
|
|
305,425 |
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
1,300,376 |
|
|
|
1,014,294 |
|
Warrants
at $0.78 expiring 05/05/2013
|
(B)
|
|
|
15,231 |
|
|
|
9,550 |
|
Warrants
at $0.78 expiring 05/12/2013
|
(B)
|
|
|
2,350 |
|
|
|
1,473 |
|
Warrants
at $0.78 expiring 08/08/2013
|
(B)
|
|
|
4,396 |
|
|
|
2,796 |
|
|
|
|
|
|
|
|
|
1,333,538 |
|
CSwitch
Corporation. (4)(5)(7)(13) -- Developing next-generation, system-on-a-chip
solutions for communications-based platforms
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
6,863,118 |
|
|
|
3,431,559 |
|
Secured
Convertible Bridge Note (including interest)
|
(B)
|
|
|
$
529,852 |
|
|
|
541,581 |
|
|
|
|
|
|
|
|
|
3,973,140 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 38.06% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 38.06% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (4)(5)(7)(14) -- Developing high- performance quantum
computing systems
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
2,000,000 |
|
|
$ |
2,226,488 |
|
|
|
|
|
|
|
|
|
|
|
Ensemble
Discovery Corporation (4)(5)(6)(7) – Developing DNA Programmed
Chemistry for the discovery of new classes of therapeutics and
bioassays
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
1,449,275 |
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (4)(5)(7) – Developing renewable energy products enabled by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
16,666,666 |
|
|
|
5,718,216 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
5,810,577 |
|
|
|
1,993,568 |
|
|
|
|
|
|
|
|
|
7,711,784 |
|
Kereos,
Inc. (4)(5)(7) -- Developing emulsion-based imaging
agents and targeted therapeutics to image and treat cancer and
cardiovascular disease
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
545,456 |
|
|
|
159,743 |
|
|
|
|
|
|
|
|
|
|
|
Kovio,
Inc. (4)(5)(7) -- Developing semiconductor products
using printed electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
2,500,000 |
|
|
|
3,125,000 |
|
Series
D Convertible Preferred Stock
|
(B)
|
|
|
800,000 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
4,125,000 |
|
Lifco,
Inc. (4)(5)(6)(7)(15) -- Developing energy solutions using
nanostructured materials
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
1,208,262 |
|
|
|
946,528 |
|
|
|
|
|
|
|
|
|
|
|
Mersana
Therapeutics, Inc. (4)(5)(7)(16) -- Developing advanced polymers for drug
delivery
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
68,451 |
|
|
|
136,902 |
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
866,500 |
|
|
|
1,733,000 |
|
Warrants
at $2.00 expiring 10/21/10
|
(B)
|
|
|
91,625 |
|
|
|
118,380 |
|
|
|
|
|
|
|
|
|
1,988,282 |
|
Metabolon,
Inc. (4)(5)(7) – Discovering biomarkers through the use of
metabolomics
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
2,173,913 |
|
|
|
2,500,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 38.06% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 38.06% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NanoGram
Corporation (4)(5)(7) -- Developing a broad suite of intellectual property
utilizing nanoscale materials
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
(B)
|
|
|
63,210 |
|
|
$ |
124,524 |
|
Series
II Convertible Preferred Stock
|
(B)
|
|
|
1,250,904 |
|
|
|
2,464,281 |
|
Series
III Convertible Preferred Stock
|
(B)
|
|
|
1,242,144 |
|
|
|
2,447,024 |
|
Series
IV Convertible Preferred Stock
|
(B)
|
|
|
432,179 |
|
|
|
851,393 |
|
|
|
|
|
|
|
|
|
5,887,222 |
|
Nanomix,
Inc. (4)(5)(7) -- Producing nanoelectronic sensors that integrate carbon
nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
977,917 |
|
|
|
330,228 |
|
Series
D Convertible Preferred Stock
|
(B)
|
|
|
6,802,397 |
|
|
|
680,240 |
|
|
|
|
|
|
|
|
|
1,010,468 |
|
NanoOpto
Corporation (4)(5)(17) -- Manufactured discrete and integrated optical
communications sub-components on a chip by utilizing nano manufacturing
and nano coating technology
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
267,857 |
|
|
|
0 |
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
3,819,935 |
|
|
|
0 |
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
1,932,789 |
|
|
|
0 |
|
Series
D Convertible Preferred Stock
|
(B)
|
|
|
1,397,218 |
|
|
|
0 |
|
Warrants
at $0.4359 expiring 03/15/10
|
(B)
|
|
|
193,279 |
|
|
|
0 |
|
Secured
Convertible Bridge Note (including interest)
|
(B)
|
|
|
$
268,654 |
|
|
|
105,714 |
|
|
|
|
|
|
|
|
|
105,714 |
|
Nextreme
Thermal Solutions, Inc. (4)(5)(7) -- Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
1,750,000 |
|
|
|
1,750,000 |
|
|
|
|
|
|
|
|
|
|
|
Questech
Corporation (4)(5) -- Manufacturing and marketing proprietary metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(B)
|
|
|
655,454 |
|
|
|
589,259 |
|
Warrants
at $1.50 expiring 11/19/08
|
(B)
|
|
|
5,000 |
|
|
|
1,085 |
|
Warrants
at $1.50 expiring 11/19/09
|
(B)
|
|
|
5,000 |
|
|
|
1,910 |
|
|
|
|
|
|
|
|
|
592,254 |
|
Siluria
Technologies, Inc. (4)(5)(6)(7) – Developing new-generation
nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
(B)
|
|
|
482,218 |
|
|
|
160,723 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(10) – 38.06% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 38.06% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Solazyme,
Inc. (4)(5)(7) -- Developing energy-harvesting machinery of photosynthetic
microbes to produce industrial and pharmaceutical
molecules
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
988,204 |
|
|
$ |
997,691 |
|
Series
B Convertible Preferred Stock
|
(B)
|
|
|
495,246 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
1,497,691 |
|
Xradia,
Inc. (4)(5) – Designing, manufacturing and selling ultra high resolution
3D x-ray microscopes and fluorescence imaging systems
|
|
|
|
|
|
|
|
|
|
Series
D Convertible Preferred Stock
|
(B)
|
|
|
3,121,099 |
|
|
|
4,000,000 |
|
|
|
|
|
|
|
|
|
|
|
Zia
Laser, Inc. (4)(5)(18) -- Developed quantum dot semiconductor
lasers
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(B)
|
|
|
1,500,000 |
|
|
|
21,329 |
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost:
$54,306,393)
|
|
|
|
|
|
|
$ |
52,651,189 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost:
$54,306,393)
|
|
|
|
|
|
|
$ |
52,651,189 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(19) – 3.15% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 3.15% of net
assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evolved
Nanomaterial Sciences, Inc. (4)(5)(20) – Developed nanoscale-enhanced
approaches for the resolution of chiral molecules
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
5,870,021 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
Phoenix
Molecular Corporation (4)(5)(6)(7) – Developing technology to enable the
separation of difficult-to-separate materials.
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(B)
|
|
|
1,000 |
|
|
|
10 |
|
Unsecured
Convertible Bridge Note (including interest)
|
(B)
|
|
|
$
50,000 |
|
|
|
50,733 |
|
|
|
|
|
|
|
|
|
50,743 |
|
SiOnyx,
Inc. (4)(5)(7) -- Developing silicon-based optoelectronic products enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(B)
|
|
|
233,499 |
|
|
|
135,686 |
|
Series
A-1 Convertible Preferred Stock
|
(B)
|
|
|
2,966,667 |
|
|
|
1,723,930 |
|
Series
A-2 Convertible Preferred Stock
|
(B)
|
|
|
4,207,537 |
|
|
|
2,445,000 |
|
|
|
|
|
|
|
|
|
4,304,616 |
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost: $6,935,743)
|
|
|
|
|
|
|
$ |
4,355,359 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost:
$6,935,743)
|
|
|
|
|
|
|
$ |
4,355,359 |
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $82,677,528)
|
|
|
|
|
|
|
$ |
78,110,384 |
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
U.S.
Government and Agency Securities – 43.50% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date
02/21/08
|
(J)
|
|
$ |
2,750,000 |
|
|
$ |
2,738,725 |
|
U.S.
Treasury Notes -- due date 02/15/08, coupon 3.375%
|
(H)
|
|
|
15,005,000 |
|
|
|
15,006,200 |
|
U.S.
Treasury Notes -- due date 05/15/08, coupon 3.75%
|
(H)
|
|
|
9,000,000 |
|
|
|
9,010,530 |
|
U.S.
Treasury Notes -- due date 09/15/08, coupon 3.125%
|
(H)
|
|
|
5,000,000 |
|
|
|
4,991,800 |
|
U.S.
Treasury Notes -- due date 01/15/09, coupon 3.25%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,005,160 |
|
U.S.
Treasury Notes -- due date 02/15/09, coupon 4.50%
|
(H)
|
|
|
5,100,000 |
|
|
|
5,176,908 |
|
U.S.
Treasury Notes -- due date 04/15/09, coupon 3.125%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,001,410 |
|
U.S.
Treasury Notes -- due date 07/15/09, coupon 3.625%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,023,910 |
|
U.S.
Treasury Notes -- due date 10/15/09, coupon 3.375%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,018,510 |
|
U.S.
Treasury Notes -- due date 01/15/10, coupon 3.625%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,034,680 |
|
U.S.
Treasury Notes -- due date 04/15/10, coupon 4.00%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,060,930 |
|
U.S.
Treasury Notes -- due date 07/15/10, coupon 3.875%
|
(H)
|
|
|
3,000,000 |
|
|
|
3,060,930 |
|
U.S.
Treasury Notes -- due date 10/15/10, coupon 4.25%
|
(H)
|
|
|
2,000,000 |
|
|
|
2,063,900 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government and Agency Securities (cost:
$59,552,933)
|
|
|
|
|
|
|
$ |
60,193,593 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $142,230,461)
|
|
|
|
|
|
|
$ |
138,303,977 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
Notes to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 78 of our
December 31, 2007, Annual Report on Form 10-K for a description of the
Valuation Procedures at December 31,
2007.
|
(2)
|
Investments
in unaffiliated companies consist of investments in which we own less than
five percent of the voting shares of the portfolio
company. Investments in non-controlled affiliated companies
consist of investments in which we own five percent or more, but less than
25 percent, of the voting shares of the portfolio company, or where we
hold one or more seats on the portfolio company’s Board of Directors but
do not control the company. Investments in controlled
affiliated companies consist of investments in which we own 25 percent or
more of the voting shares of the portfolio company or otherwise control
the company.
|
(3)
|
The
aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $21,435,392. The gross unrealized
appreciation based on the tax cost for these securities is
$1,732,194. The gross unrealized depreciation based on the tax
cost for these securities is
$2,063,750.
|
(4)
|
Legal
restrictions on sale of investment.
|
(5)
|
Represents
a non-income producing security. Equity investments that have
not paid dividends within the last 12 months are considered to be
non-income producing.
|
(6)
|
Initial
investment was made during 2007.
|
(7)
|
These
investments are development stage companies. A development
stage company is defined as a company that is devoting substantially all
of its efforts to establishing a new business, and either it has not yet
commenced its planned principal operations, or it has commenced such
operations but has not realized significant revenue from
them.
|
(8)
|
With
our purchase of Series E Convertible Preferred Stock of BioVex, we
received a warrant to purchase a number of shares of common stock of
BioVex as determined by dividing 624,999.99 by the price per share at
which the common stock is offered and sold to the public in connection
with the initial public offering. The ability to exercise this
warrant is therefore contingent on BioVex completing successfully an
initial public offering before the expiration date of the warrant of
September 27, 2012. The exercise price of this warrant shall be
110 percent of the initial public offering
price.
|
(9)
|
Continuum
Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
|
(10)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $54,306,393. The gross
unrealized appreciation based on the tax cost for these securities is
$10,915,201. The gross unrealized depreciation based on the tax
cost for these securities is
$12,570,405.
|
(11)
|
BridgeLux,
Inc., was previously named eLite Optoelectronics,
Inc.
|
(12)
|
On
November 30, 2007, Chlorogen filed a Certificate of Dissolution with the
state of Delaware.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2007
|
(13)
|
With
our investment in a secured convertible bridge note issued by CSwitch, we
received a warrant to purchase a number of shares of the class of stock
sold in the next financing of CSwitch equal to $529,322.36, the principal
of the note, divided by the lowest price per share of the class of stock
sold in the next financing of CSwitch. The ability to exercise this
warrant is therefore contingent on CSwitch completing successfully a
subsequent round of financing. The warrant will expire five years
from the date of the close of the next round of financing. The cost
basis of this warrant is $529.32.
|
(14)
|
D-Wave
Systems, Inc., is located and is doing business primarily in
Canada. We invested in D-Wave Systems, Inc., through
D-Wave USA, a Delaware company. Our investment is denominated
in Canadian dollars and is subject to foreign currency
translation. See "Note 2. Summary of Significant
Accounting Policies."
|
(15)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery, Inc., to form CFX
Battery, Inc.
|
(16)
|
Mersana
Therapeutics, Inc., was previously named Nanopharma
Corp.
|
(17)
|
On
July 19, 2007, NanoOpto Corporation sold its assets to API Nanotronics,
Inc.
|
(18)
|
On
November 30, 2006, the assets of Zia Laser, Inc., were acquired by
Innolume, Inc.
|
(19)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $6,935,743. The gross
unrealized appreciation based on the tax cost for these securities is
$219,616. The gross unrealized depreciation based on the tax
cost for these securities is
$2,800,000.
|
(20)
|
On
September 30, 2007, Evolved Nanomaterial Sciences, Inc., filed for Chapter
7 bankruptcy.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
FOOTNOTE
TO CONSOLIDATED SCHEDULE OF
INVESTMENTS
|
VALUATION
PROCEDURES
I.
|
Determination
of Net Asset Value
|
The 1940 Act requires periodic
valuation of each investment in the portfolio of the Company to determine its
net asset value. Under the 1940 Act, unrestricted securities with readily
available market quotations are to be valued at the current market value; all
other assets must be valued at "fair value" as determined in good faith by or
under the direction of the Board of Directors.
The Board of Directors is responsible
for (1) determining overall valuation guidelines and (2) ensuring that the
investments of the Company are valued within the prescribed
guidelines.
The Valuation Committee, comprised of
all of the independent Board members, is responsible for reviewing and approving
the valuation of the Company’s assets within the guidelines established by the
Board of Directors. The Valuation Committee receives information and
recommendations from management.
The values assigned to these
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized, as such amounts depend on future
circumstances and cannot reasonably be determined until the individual
investments are actually liquidated or become readily marketable.
II.
|
Approaches
to Determining Fair Value
|
Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price).
The main
approaches to measuring fair value utilized are the market approach and the
income approach.
|
·
|
Market Approach
(M): The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets
or liabilities. For example, the market approach often uses market
multiples derived from a set of comparables. Multiples might lie in ranges
with a different multiple for each comparable. The selection of where
within the range each appropriate multiple falls requires judgment
considering factors specific to the measurement (qualitative and
quantitative).
|
|
·
|
Income Approach
(I): The income approach uses valuation techniques to convert
future amounts (for example, cash flows or earnings) to a single present
value amount (discounted). The measurement is based on the value indicated
by current market expectations about those future amounts. Those valuation
techniques include present value techniques; option-pricing models, such
as the Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a lattice model), which incorporate present value techniques; and
the multi-period excess earnings method, which is used to measure the fair
value of certain assets.
|
SFAS No.
157 classifies the inputs used to measure fair value by these approaches into
the following hierarchy:
|
·
|
Level
1: Unadjusted quoted prices in active markets for
identical assets or
liabilities.
|
|
·
|
Level
2: Quoted prices in active markets for similar assets or
liabilities, or quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or
liability.
|
|
·
|
Level
3: Unobservable inputs for the asset or
liability.
|
Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
III.
|
Investment
Categories
|
The Company’s investments can be
classified into five broad categories for valuation purposes:
|
·
|
Equity-related
securities;
|
|
·
|
Long-term
fixed-income securities;
|
|
·
|
Short-term
fixed-income securities;
|
|
·
|
Investments
in intellectual property, patents, research and development in technology
or product development;
and
|
The Company applies the methods for
determining fair value discussed above to the valuation of investments in each
of these five broad categories as follows:
|
A.
|
EQUITY-RELATED
SECURITIES
|
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market
approach is used to fair value these types of securities:
|
§
|
Readily
available public market quotations;
|
|
§
|
The
cost of the Company’s investment;
|
|
§
|
Transactions
in a company's securities or unconditional firm offers by responsible
parties as a factor in determining
valuation;
|
|
§
|
The
financial condition and operating results of the
company;
|
|
§
|
The
company's progress towards
milestones.
|
|
§
|
The
long-term potential of the business and technology of the
company;
|
|
§
|
The
values of similar securities issued by companies in similar
businesses;
|
|
§
|
Multiples
to revenue, net income or EBITDA that similar securities issued by
companies in similar businesses
receive;
|
|
§
|
The
proportion of the company's securities we own and the nature of any rights
to require the company to register restricted securities under applicable
securities laws; and
|
|
§
|
The
rights and preferences of the class of securities we own as compared to
other classes of securities the portfolio company has
issued.
|
When the
income approach is used to value warrants, the Company uses the
Black-Scholes-Merton formula.
|
B.
|
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.
|
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 and milestone progress;
|
|
·
|
Other
subjective factors.
|
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 III. They do not
necessarily represent an amount of money that would be realized if we had to
sell such assets in an immediate liquidation. Thus, valuations as of
any particular date are not necessarily indicative of amounts that we may
ultimately realize as a result of future sales or other dispositions of
investments we hold.
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
NOTE 1. THE
COMPANY
Harris & Harris Group, Inc. (the
"Company," "us," "our" and "we"), is a venture capital company operating as a
business development company ("BDC") under the Investment Company Act of 1940
("1940 Act"). We operate as an internally managed company whereby our
officers and employees, under the general supervision of our Board of Directors,
conduct our operations.
We elected to become a BDC on July 26,
1995, after receiving the necessary shareholder approvals. From
September 30, 1992, until the election of BDC status, we operated as a
closed-end, non-diversified investment company under the 1940
Act. Upon commencement of operations as an investment company, we
revalued all of our assets and liabilities in accordance with the 1940
Act. Prior to September 30, 1992, we were registered and filed under
the reporting requirements of the Securities Exchange Act of 1934 (the "1934
Act") as an operating company and, while an operating company, operated directly
and through subsidiaries.
Harris & Harris Enterprises,
Inc.SM, is a
100 percent wholly owned subsidiary of the Company. Harris &
Harris Enterprises, Inc., is a partner in Harris Partners I, L.P. SM, and
is taxed under Subchapter C of the Code (a "C Corporation"). Harris
Partners I, L.P, is a limited partnership and 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 year ended December 31, 2008,
there was no non-passive investment income generated by Harris Partners I,
L.P. The Company consolidates the results of its subsidiaries for
financial reporting purposes.
NOTE 2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of
significant accounting policies followed in the preparation of the consolidated
financial statements:
Principles of
Consolidation. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and include the accounts of the Company and its wholly
owned subsidiary. 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 and the reported amounts of revenues and
expenses. 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. 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 December 31,
2008, our financial statements include private venture capital investments
valued at $56,965,153, 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.
The Company adopted SFAS No. 157 on
a prospective basis on January 1, 2008. SFAS No. 157 requires the Company to assume that
the portfolio investment is to be sold in the principal market to market
participants, or in the absence of a principal market, the most advantageous
market, which may be a hypothetical market.
On
October 10, 2008, FASB Staff Position 157-3, "Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active," ("FSP 157-3") was
issued. FSP 157-3 reiterated that an entity should utilize its own
assumptions, information and techniques to estimate fair value when relevant
observable inputs are not available, including the use of risk-adjusted discount
factors for non-performance risk or liquidity risk.
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 twelve months ended December 31, 2008, included in
the net decrease in unrealized depreciation on investments was a $626,593 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. When
securities are determined to be non-income producing, the Company ceases
accruing interest 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 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 8. 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. The final payment from this rabbi trust will
be made on July 31, 2009, after which the rabbi trust will be
closed.
Property and
Equipment. Property and equipment are included in "Other
Assets" and are carried at $119,180 and $153,528 at December 31, 2008, and 2007,
respectively, representing cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the premises and equipment. We
estimate the useful lives to be five to ten years for furniture and fixtures,
three years for computer equipment, and five to seven years for leasehold
improvements.
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 3. BUSINESS
RISKS AND UNCERTAINTIES
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 greater risk of loss than is the
case with traditional investment securities.
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 and bridge note 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 and is subject to significant estimates and
judgments. 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.
NOTE
4. INVESTMENTS
At
December 31, 2008, our financial assets were categorized as follows in the fair
value hierarchy for SFAS No. 157 purposes:
|
|
|
|
|
Fair Value Measurement at Reporting Date
Using:
|
|
|
|
|
|
|
|
|
Description
|
|
December 31,
2008
|
|
|
Quoted Prices in
Active
Markets for
Identical
Assets (Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities
|
|
$ |
52,983,940 |
|
|
$ |
52,983,940 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Companies
|
|
$ |
56,965,153 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
56,965,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
109,949,093 |
|
|
$ |
52,983,940 |
|
|
$ |
0 |
|
|
$ |
56,965,153 |
|
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the year ended December 31, 2008.
|
|
Fair
Value Measurements Using Significant
|
|
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
Portfolio Companies
|
|
|
|
|
|
Beginning
Balance, January 1, 2008
|
|
$ |
78,110,384 |
|
|
|
|
|
|
Total
realized losses included in changes in net assets
|
|
|
(9,402,893 |
) |
Total
unrealized losses included in changes in net assets
|
|
|
(29,557,705 |
) |
Purchases
and interest on bridge notes
|
|
|
17,949,104 |
|
Disposals
|
|
|
(133,737 |
) |
Ending
Balance, December 31, 2008
|
|
$ |
56,965,153 |
|
|
|
|
|
|
The
amount of total losses for the period
included
in changes in net assets attributable to the
change
in unrealized gains or losses relating to
assets
still held at the reporting date
|
|
$ |
(38,851,029 |
) |
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 the
Company has 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 stockholder approval for such provisions, the
Compensation Committee may, in the future, authorize awards of stock options
under an amended Stock Plan to non-employee directors of the Company and
authorize grants of restricted stock to officers and 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 must 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.
During the years ended December 31,
2008, 2007, and 2006, the Compensation Committee of the Board of Directors of
the Company approved individual stock option awards for certain officers and
employees of the Company. Both non-qualified stock options ("NQSOs")
and incentive stock options ("ISOs"), subject to the limitations of Section 422
of the Internal Revenue Code, were awarded under the Stock Plan. The
terms and conditions of the stock options granted were determined by the
Compensation Committee and set forth in award agreements between the Company and
each award recipient.
The
option grants during the years ended December 31, 2008, 2007, and 2006 were as
follows:
Grant Date
|
No.
of Options
Granted
|
Option Type
|
Vesting Period
|
Exercise Price
|
|
|
|
|
|
August
13, 2008
|
1,163,724
|
NQSO
|
12/08
to 08/12
|
$6.92
|
March
19, 2008
|
348,032
|
NQSO
|
03/09
to 03/12
|
$6.18
|
June
27, 2007
|
1,700,609
|
NQSO
|
12/07
to 06/14
|
$11.11
|
June
26, 2006
|
3,958,283
|
NQSO
& ISO
|
12/06
to 06/14
|
$10.11
|
The exercise price for the August 2008,
March 2008, and June 2007 option grants was the closing volume weighted average
price of our shares of common stock on the date of grant. The full
Board of Directors ratified and approved the June 2006 grants on August 3, 2006,
on which date the Company's common stock price fluctuated between $9.76 and
$10.00. 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. For the years ended December 31, 2008, 2007, and 2006, 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 stock options
granted on June 26, 2006, were awarded in five different grant types, each with
different contractual terms. The assumptions used in the calculation
of fair value of the stock options granted on June 26, 2006, using the
Black-Scholes-Merton model for each contract term were as
follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
1
Year
|
1,001,017
|
0.75
|
37.4%
|
0%
|
5.16%
|
$1.48
|
Non-qualified
stock options
|
2
Years
|
815,000
|
1.625
|
45.2%
|
0%
|
5.12%
|
$2.63
|
Non-qualified
stock options
|
3
Years
|
659,460
|
2.42
|
55.7%
|
0%
|
5.09%
|
$3.81
|
Non-qualified
stock options
|
10
Years
|
690,000
|
5.75
|
75.6%
|
0%
|
5.08%
|
$6.94
|
Incentive
stock options
|
10
Years
|
792,806
|
7.03
|
75.6%
|
0%
|
5.08%
|
$7.46
|
Total
|
|
3,958,283
|
|
|
|
|
$4.25
|
The stock
options granted on June 27, 2007, were awarded in four different grant types,
each with different contractual terms. The assumptions used in the
calculation of fair value of the stock options granted on June 27, 2007, using
the Black-Scholes-Merton model for each contract term were as
follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
1.5
Years
|
380,000
|
1
|
42.6%
|
0%
|
4.93%
|
$2.11
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
2.5
Years
|
600,540
|
2
|
40.1%
|
0%
|
4.91%
|
$2.92
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
3.5
Years
|
338,403
|
3
|
44.7%
|
0%
|
4.93%
|
$3.94
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
9
Years
|
381,666
|
Ranging
from
4.75-
6.28
|
Ranging
from
57.8%
to
59.9%
|
0%
|
Ranging
from
4.97%
to
5.01%
|
Ranging
from
$5.92
to
$6.85
|
|
|
|
|
|
|
|
|
Total
|
|
1,700,609
|
|
|
|
|
|
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:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
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
|
The
assumptions used in the calculation of fair value of the stock options granted
on August 13, 2008, using the Black-Scholes-Merton model for the contract term
was as follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
9.38
Years
|
976,685
|
5.94
|
55.1%
|
0%
|
3.40%
|
$3.79
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
9.38
Years
|
187,039
|
4.88
|
50.6%
|
0%
|
3.24%
|
$3.25
|
|
|
|
|
|
|
|
|
Total
|
|
1,163,724
|
|
|
|
|
|
For the
years ended December 31, 2008, December 31, 2007, and December 31, 2006, the
Company recognized $5,965,769, $8,050,807 and $5,038,956 of compensation expense
in the Consolidated Statements of Operations, respectively. As of
December 31, 2008, there was approximately $7,575,244 of unrecognized
compensation cost related to unvested stock option awards. This cost
is expected to be recognized over a weighted-average period of approximately 2.1
years.
For the year ended December 31, 2008,
no stock options were exercised. For the year ended December 31,
2007, a total of 999,556 options were exercised for total proceeds to the
Company of $10,105,511. For the year ended December 31, 2006, a total
of 258,672 shares were exercised for total proceeds to the Company of
$2,615,190.
The grant date fair value of options
vested during the years ended December 31, 2008, December 31, 2007, and December
31, 2006, was $6,779,996, $6,851,874, and $3,781,681, respectively.
For the years ended December 31, 2008,
December 31, 2007, and December 31, 2006, the calculation of the net decrease in
net assets resulting from operations per share excludes the stock options
because such options were anti-dilutive. The options may be dilutive
in future periods in which there is a net increase in net assets resulting from
operations, in the event that there is a significant increase in the average
stock price in the stock market or significant decreases in the amount of
unrecognized compensation cost.
A summary of the changes in outstanding
stock options for the year ended December 31, 2008, 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
December
31, 2007
|
3,967,744
|
$ 10.54
|
$ 4.77
|
|
|
|
|
|
|
|
|
Granted
|
1,511,756
|
$ 6.75
|
$ 3.64
|
8.99
|
|
|
|
|
|
|
|
Exercised
|
0
|
$ 0
|
$ 0
|
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
841,287
|
$ 10.58
|
$ 2.43
|
|
|
|
|
|
|
|
|
Options
Outstanding at
December
31, 2008
|
4,638,213
|
$ 9.30
|
$ 4.83
|
6.03
|
$0
|
|
|
|
|
|
|
Options
Exercisable at
December
31, 2008
|
2,467,587
|
$ 10.24
|
$ 5.03
|
4.68
|
$0
|
|
|
|
|
|
|
Options
Exercisable and Expected to be
Exercisable
at December 31, 2008
|
4,567,402
|
$ 9.28
|
$ 4.79
|
6.00
|
$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 $3.95 on the last trading day of 2008 and the exercise price,
multiplied by the number of in-the-money options. This calculation
represents the total pre-tax intrinsic value that would have been received by
the option holders had all options been fully vested and all option holders
exercised their awards on December 31, 2008.
At December 31, 2007, there were
2,250,619 unvested options with a weighted average grant date fair value of
$5.02. At December 31, 2008, there were 2,170,626 unvested options
with a weighted average grant date fair value of $4.60.
For the twelve months ended December
31, 2007, the aggregate intrinsic value of the 999,556 options exercised was
$1,700,552. For the twelve months ended December 31, 2006, the
aggregate intrinsic value for the 258,672 options exercised was
$512,171. No options were exercised during 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. DISTRIBUTABLE EARNINGS
As of December 31, 2008, December 31,
2007, and December 31, 2006, there were no distributable
earnings. The difference between the book basis and tax basis
components of distributable earnings is primarily nondeductible deferred
compensation and net operating losses.
The Company did not declare dividends
for the years ended December 31, 2008, 2007 or 2006.
NOTE 7. EMPLOYEE
BENEFITS
Employment Agreement with
Charles E. Harris
Pursuant
to his employment agreement, as most recently amended as of August 2, 2007 (the
"Employment Agreement"), during the period of employment, Charles E. Harris
received compensation in the form of base salary, with automatic yearly
adjustments to reflect inflation, which amounted to a minimum required base
salary of $246,651 for 2006. Mr. Harris's base salary for 2006 was
increased to $300,000 (thereby also increasing his SERP benefit as described
below). Mr. Harris's base salary for 2007 and 2008 was
increased to $306,187 and $314,623, respectively, based on cost-of-living
adjustments.
Under his
employment agreement, Mr. Harris was entitled to participate in all compensation
and employee benefit plans or programs, and to receive all benefits,
perquisites, and emoluments for which salaried employees are
eligible. Under the Employment Agreement, we furnished Mr. Harris
with certain perquisites, which included a company car, health-club membership,
membership in certain social or country clubs, a reimbursement for an annual
physical examination and up to a $5,000 annual reimbursement, adjusted for
inflation, over the period of the agreement, for personal financial or tax
advice.
The
Employment Agreement also provided Mr. Harris with life insurance for the
benefit of his designated beneficiary in the amount of at least $2,000,000;
provided reimbursement for uninsured medical expenses, not to exceed $10,000 per
annum, adjusted for inflation, over the period of the agreement; provided Mr.
Harris and his spouse with long-term care insurance; and provided Mr. Harris
with disability insurance providing for continuation of 100 percent of his base
salary for a specified period. These benefits were for the term of
the Employment Agreement. The Employment Agreement provided that the
term of Mr. Harris's employment could not be extended beyond December 31, 2008,
unless a committee of the Board consisting of non-interested Directors extended
the date by one year pursuant to the Executive Mandatory Retirement Benefit
Plan, and Mr. Harris agreed to serve beyond December 31, 2008. Mr.
Harris retired on December 31, 2008.
Mr. Harris's Employment Agreement also
provided for a supplemental executive retirement plan (the "SERP") and a
severance compensation agreement for his benefit as discussed
below.
Other than Mr. Harris, our Chairman and
Chief Executive Officer through December 31, 2008, none of our executive
officers has a change in control agreement. None of our executive
officers is entitled to any special payments solely upon a change in
control.
SERP
The
Employment Agreement provided that we adopt a supplemental executive retirement
plan (the "SERP") for the benefit of Mr. Harris. Under the SERP, each
month, we deposited one-twelfth of Mr. Harris's annual salary to a special
account maintained on our books for the benefit of Mr. Harris, provided that Mr.
Harris was employed by us on the last business day of that month. The
amounts credited to the SERP Account were deemed invested or reinvested in such
investments as were requested by Mr. Harris and agreed to by the
Company. The SERP Account was credited and debited to reflect the
deemed investment returns, losses and expenses attributed to such deemed
investments and reinvestments in accordance with the terms of the
SERP. Mr. Harris's benefit under the SERP equaled the balance in the
SERP Account and such benefit was 100 percent vested (i.e., not
forfeitable).
We
established a rabbi trust for the purpose of accumulating funds to satisfy the
obligations incurred by us under the SERP, which amounted to $188,454 and
$2,667,020 at December 31, 2008, and 2007, respectively, and is included in
accounts payable and accrued liabilities. The restricted funds for
the SERP Account totaled $188,454 and $2,667,020 at December 31, 2008, and 2007,
respectively. Mr. Harris's rights to benefits pursuant to this SERP
are no greater than those of a general creditor of us.
Mr.
Harris received a distribution from his SERP Account totaling $2,889,717 during
2008. The balance at December 31, 2008, of $188,454, plus any
interest or earnings credited to the account through July 31, 2009, will be paid
on July 31, 2009.
If Mr.
Harris dies before the entire benefit under the SERP Account is paid to him, the
amount remaining in the SERP Account will be distributed to his beneficiary in a
lump-sum payment on the 90th day
after the date of his death.
401(k)
Plan
We adopted a 401(k) Plan covering
substantially all of our employees. Matching contributions to the
plan are at the discretion of the Compensation Committee. For the
year ended December 31, 2008, the Compensation Committee approved a 100 percent
match which amounted to $180,500. The 401(k) Company match for the
years ended December 31, 2007, and 2006 was $176,873 and $155,000,
respectively.
Medical Benefit Retirement
Plan
On June 30, 1994, we adopted a plan to
provide medical and dental insurance for retirees, their spouses and dependents
who, at the time of their retirement, have ten years of service with us and have
attained 50 years of age or have attained 45 years of age and have 15 years of
service with us. On February 10, 1997, we amended this plan to
include employees who have seven full years of service and have attained 58
years of age. On November 3, 2005, we amended this plan to reverse
the 1997 amendment for future retirees and to remove dependents other than
spouses from the plan. The coverage is secondary to any government or
subsequent employer provided health insurance plans. The annual
premium cost to us with respect to the entitled retiree shall not exceed
$12,000, subject to an index for inflation. On December 8, 2003, the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act") was signed into law. The Act introduces a prescription drug
benefit under Medicare (Medicare Part D) as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. The Act, which went
into effect January 1, 2006, provides a 28 percent subsidy for post-65
prescription drug benefits. Our liability assumes our plan is
actuarially equivalent under the Act.
The stock options of retirees who
qualify for the Medical Benefit Retirement Plan will remain exercisable (to the
extent exercisable at the time of the optionee’s termination) post retirement,
if such retiree executes a post-termination non-solicitation agreement in a form
reasonably acceptable to the Company, until the expiration of its
term.
The plan is unfunded and has no
assets. The following disclosures about changes in the benefit
obligation under our plan to provide medical and dental insurance for retirees
are as of the measurement date of December 31:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation at Beginning of Year
|
|
$ |
628,745 |
|
|
$ |
696,827 |
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
|
|
86,497 |
|
|
|
102,676 |
|
|
|
|
|
|
|
|
|
|
Interest
Cost
|
|
|
39,972 |
|
|
|
33,935 |
|
|
|
|
|
|
|
|
|
|
Actuarial
(Gain)/Loss
|
|
|
109,312 |
|
|
|
(196,248 |
) |
|
|
|
|
|
|
|
|
|
Benefits
Paid
|
|
|
(10,847 |
) |
|
|
(8,445 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation at End of Year
|
|
$ |
853,679 |
|
|
$ |
628,745 |
|
In accounting for the plan, the
assumption made for the discount rate was 5.71 percent and 6.55 percent for the
years ended December 31, 2008, and 2007, respectively. The assumed
health care cost trend rates in 2008 were nine percent grading to six percent
over three years for medical and five percent per year for
dental. The assumed health care cost trend rates in 2007 were 9
percent grading to 6 percent over three years for medical and 5 percent per year
for dental. The effect on disclosure information of a one
percentage point change in the assumed health care cost trend rate for each
future year is shown below.
|
|
1%
Decrease
|
|
|
Assumed
|
|
|
1%
Increase
|
|
|
|
in Rates
|
|
|
Rates
|
|
|
in Rates
|
|
|
|
|
|
|
|
|
|
|
|
Aggregated
Service and Interest Cost
|
|
$ |
98,688 |
|
|
$ |
126,469 |
|
|
$ |
164,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Postretirement Benefit Obligation
|
|
$ |
700,499 |
|
|
$ |
853,679 |
|
|
$ |
1,056,068 |
|
The net periodic postretirement benefit
cost for the year is determined as the sum of service cost for the year,
interest on the accumulated postretirement benefit obligation and amortization
of the transition obligation (asset) less previously accrued expenses over the
average remaining service period of employees expected to receive plan
benefits. The following is the net periodic postretirement benefit
cost for the years ended December 31, 2008, 2007, and 2006:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
|
$ |
86,497 |
|
|
$ |
102,676 |
|
|
$ |
79,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Cost on Accumulated Postretirement Benefit Obligation
|
|
|
39,972 |
|
|
|
33,935 |
|
|
|
33,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Transition Obligation
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Net (Gain)/Loss
|
|
|
(11,215 |
) |
|
|
(6,234 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Periodic Post Retirement Benefit Cost
|
|
$ |
115,254 |
|
|
$ |
130,377 |
|
|
$ |
113,167 |
|
The Company estimates the following
benefits to be paid in each of the following years:
2009
|
$ 23,639
|
2010
|
$ 25,584
|
2011
|
$ 20,213
|
2012
|
$ 21,663
|
2013
|
$ 23,175
|
2014
through 2017
|
$146,044
|
On December 31, 2006, the Company
adopted the recognition and disclosure provisions of Statement of Financial
Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans," ("SFAS No. 158"). SFAS No. 158
required the Company to recognize the funded status of its retirement benefit
plans in the December 31, 2006 statement of assets and liabilities with a
corresponding adjustment to net assets. The adjustment to net assets
at adoption of $61,527 represents the net unrecognized actuarial gains of
$95,145 applicable to the healthcare benefit plan net of $33,618 of unrecognized
actuarial losses applicable to the Executive Mandatory Retirement Benefit
Plan. Such amounts previously were reflected as a net increase of the
plan's funded status in the Company's statement of assets and liabilities
pursuant to the provisions of Statement of Financial Accounting Standards No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and No. 87, "Employers' Accounting for Pensions." These amounts will
be subsequently recognized as net periodic benefit cost pursuant to the
Company's historical accounting policy for amortizing such
amounts. Further, actuarial gains and losses that arise in subsequent
periods and are not recognized as net periodic benefit cost in the same periods
will be recognized as a component of net assets. Those amounts are
recognized as a component of net periodic benefit cost on the same basis as the
amounts recognized at adoption of SFAS No. 158.
For the year ended December 31, 2008,
net unrecognized actuarial losses, which resulted from the decrease in the
discount rate referred to above, decreased by $120,527, which represents
$109,312 of actuarial losses arising during the year, net of an $11,215
reclassification adjustment which increased the net periodic benefit cost for
the year.
For the year ended December 31, 2007,
net unrecognized actuarial gains, which resulted from the increase in the
discount rate, increased by $190,014, which represents $196,248 of actuarial
gains arising during the year, net of a $6,234 reclassification adjustment which
reduced the net periodic benefit cost for the year.
Executive Mandatory
Retirement Benefit Plan
On March 20, 2003, in order to begin
planning for eventual management succession, the Board of Directors voted to
establish the Executive Mandatory Retirement Benefit Plan for individuals who
are employed by us in a bona fide executive or high policy-making position. The
plan was amended and restated effective January 1, 2005, to comply with certain
provisions of the Internal Revenue Code. There are currently four
individuals that qualify under the plan: Charles E. Harris, the Chairman and
Chief Executive Officer through December 31, 2008, Douglas W. Jamison, the
Chairman and Chief Executive Officer, Daniel B. Wolfe, the President, Chief
Operating Officer and Chief Financial Officer, and Mel P. Melsheimer, the former
President, Chief Operating Officer and Chief Financial Officer. Under
this plan, mandatory retirement takes place effective December 31 of the year in
which the eligible individuals attain the age of 65. On an annual
basis beginning in the year in which the designated individual attains the age
of 65, a committee of the Board consisting of non-interested directors may
determine for our benefit to postpone the mandatory retirement date for that
individual for one additional year.
Under
applicable law prohibiting discrimination in employment on the basis of age, we
can impose a mandatory retirement age of 65 for our executives or employees in
high policy-making positions only if each employee subject to the mandatory
retirement age is entitled to an immediate retirement benefit at retirement age
of at least $44,000 per year. The benefits payable at retirement to
Mr. Harris and Mr. Melsheimer under our existing 401(k) plan do not equal this
threshold. The plan was established to provide the difference between
the benefit required under the age discrimination laws and that provided under
our existing plans. For individuals retiring after 2007, the benefit
under the plan is paid to the qualifying individual in the form of a lump sum,
and is paid six months and one day after the individual’s separation from
service with the Company, pursuant to certain exceptions.
At
December 31, 2008, and 2007, we had accrued $380,737 and $382,932, respectively,
for benefits under this plan. At December 31, 2008, $229,294 was
accrued for Mr. Melsheimer and $151,443 was accrued for Mr.
Harris. Currently, there is no accrual for Mr. Jamison or Mr.
Wolfe. This benefit will be unfunded, and the expense as it relates
to Mr. Melsheimer and Mr. Harris was amortized over the fiscal periods through
the years ended December 31, 2004, and 2008, respectively. On
December 31, 2004, Mr. Melsheimer retired pursuant to the Executive Mandatory
Retirement Benefit Plan. His annual benefit under the plan is
$22,915. On December 31, 2008, Mr. Harris retired pursuant to the
Executive Mandatory Retirement Benefit Plan. Mr. Harris's projected
mandatory benefit will be approximately $151,443 and will be paid as a lump sum
six months and one day after his retirement.
NOTE 8. INCOME
TAXES
We filed
for the 1999 tax year to elect treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986 (the "Code") and
qualified for the same treatment for the years 2000 through
2007. However, there can be no assurance that we will qualify as a
RIC for 2008 or subsequent years.
In the
case of a RIC which furnishes capital to development corporations, there is an
exception to the rule relating to the diversification of investments required to
qualify for RIC treatment. This exception is available only to
registered investment companies that 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
2005 through 2008 tax years remain open for examination by the tax authorities
under the normal three year statute of limitations. Generally, for
state tax purposes, the Company’s 2004 through 2008 tax years remain open for
examination by the tax authorities under a four year statute of
limitations.
During
2008, we paid $17,592 in federal, state and local income taxes. At
December 31, 2008, we had $0 accrued for federal, state and local taxes payable
by the Company.
We pay federal, state and local taxes
on behalf of our wholly owned subsidiary, Harris & Harris Enterprises, Inc.,
which is taxed as a C Corporation. For the years ended December 31,
2008, 2007, and 2006, our income tax expense for Harris & Harris
Enterprises, Inc., was $16,528, $3,231, and $9,475, respectively.
Tax
expense included in the Consolidated Statement of Operations consists of the
following:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
34,121 |
|
|
$ |
87,975 |
|
|
$ |
(227,355 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income tax (benefit) expense
|
|
$ |
34,121 |
|
|
$ |
87,975 |
|
|
$ |
(227,355 |
) |
For the years ended December 31, 2008,
2007, and 2006, we paid $706, $74,454, and $0, respectively, in interest and
penalties. At December 31, 2008, we had capital loss carryforwards of
$8,292,068, which expire in 2016.
Continued
qualification as a RIC requires us to satisfy certain investment asset
diversification requirements in future years. Our ability to satisfy
those requirements may not be controllable by us. There can be no assurance that
we will qualify as a RIC in subsequent years.
NOTE
9. COMMITMENTS & CONTINGENCIES
On April
17, 2003, we signed a seven-year sublease for office space at 111 West 57th Street
in New York City. On December 17, 2004, we signed a sublease for
additional office space at our current location. The subleases expire on April
29, 2010. Total rent expense for our office space in New York City
was $186,698 in 2008, $178,167 in 2007 and $174,625 in 2006. Future
minimum sublease payments in each of the following years are: 2009 --
$197,700; and thereafter, for the remaining term -- $65,969.
On July 1, 2008, we signed a five-year
lease for office space at 420 Florence Street, Suite 200, Palo Alto, California,
commencing on August 1, 2008, and expiring on August 31, 2013. Total
rent expense for our office space in Palo Alto was $51,525 in
2008. Future minimum lease payments in each of the following years
are: 2009 - $125,206; 2010 - $128,962; 2011 - $132,831; 2012 - $136,816 and 2013
- $93,135.
In the ordinary course of business, we
indemnify our officers and directors, subject to certain regulatory limitations,
for loss or liability related to their service on behalf of the Company,
including serving on the Boards of Directors or as officers of portfolio
companies. At December 31, 2008, and 2007, we believe our estimated
exposure is minimal, and accordingly we have no liability recorded.
NOTE 10. CAPITAL
TRANSACTIONS
On
November 29, 2006, we filed a shelf registration statement with the SEC on Form
N-2 to register 4,000,000 shares of our common stock, which was declared
effective by the SEC on May 11, 2007. The common stock could be sold
at prices and on terms to be set forth in one or more supplements to the
prospectus from time to time.
On June 25, 2007, we completed the sale
of 1,300,000 shares of our common stock for gross proceeds of $14,027,000; net
proceeds of this offering, after placement agent fees and offering costs of
$1,033,832, were $12,993,168.
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 11. CHANGE
IN NET ASSETS PER SHARE
The
following table sets forth the computation of basic and diluted per share net
increases in net assets resulting from operations for the twelve months ended
December 31, 2008, 2007, and 2006.
|
2008
|
2007
|
2006
|
|
|
|
|
Numerator
for decrease in net assets per share
|
$(49,181,497)
|
$(6,716,445)
|
$(11,773,112)
|
|
|
|
|
Denominator
for basic and diluted weighted average shares
|
24,670,516
|
22,393,030
|
20,759,547
|
|
|
|
|
Basic
and diluted net decrease in net assets per share resulting from
operations
|
(1.99)
|
$(0.30)
|
$(0.57)
|
NOTE
12. SUBSEQUENT EVENTS
On February 4, 2009, we made a $408,573
follow-on investment in a privately held tiny technology portfolio
company.
On February 13, 2009, we made a
$200,000 follow-on investment in a privately held tiny technology portfolio
company.
On March 11, 2009, we made a $3,492
follow-on investment in a privately held tiny technology portfolio
company.
On December 31, 2008, we valued the
shares of one of our privately held tiny technology portfolio companies at
$2.5188 per share. On February 27, 2009, that company raised
additional funding from a third party, independent financial investor at $5.0376
per share. This transaction could be a material input to our
determination of the value of our shares of this portfolio company at March 31,
2009. A valuation calculated based on this input alone could increase
the value of this portfolio company at March 31, 2009, ranging from $0 to
approximately $5,400,000, or $0 to approximately $0.21 per share, from the value
at December 31, 2008. This input will be one of many used by our
Valuation Committee, which is made up of all of our independent directors, to
set the value of this portfolio company at March 31, 2009.
NOTE
13. SELECTED QUARTERLY DATA (UNAUDITED)
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
576,302 |
|
|
$ |
467,625 |
|
|
$ |
587,918 |
|
|
$ |
355,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$ |
(2,480,618 |
) |
|
$ |
(2,638,283 |
) |
|
$ |
(2,196,739 |
) |
|
$ |
(3,371,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from
operations
|
|
$ |
(3,289,035 |
) |
|
$ |
1,354,709 |
|
|
$ |
(34,032,747 |
) |
|
$ |
(13,214,424 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
|
$ |
(0.14 |
) |
|
$ |
0.06 |
|
|
$ |
(1.32 |
) |
|
$ |
(0.51 |
) |
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
$ |
652,498 |
|
|
$ |
637,701 |
|
|
$ |
743,414 |
|
|
$ |
672,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
$ |
(2,667,118 |
) |
|
$ |
(2,891,667 |
) |
|
$ |
(3,117,595 |
) |
|
$ |
(3,151,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from
operations
|
|
$ |
(6,390,160 |
) |
|
$ |
(4,093,644 |
) |
|
$ |
604,237 |
|
|
$ |
3,163,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
|
$ |
0.03 |
|
|
$ |
0.16 |
|
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of year
|
|
$ |
5.93 |
|
|
$ |
5.42 |
|
|
$ |
5.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss*
|
|
|
(0.43 |
) |
|
|
(0.53 |
) |
|
|
(0.37 |
) |
Net
realized (loss) income on investments*
|
|
|
(0.34 |
) |
|
|
0.00 |
|
|
|
0.01 |
|
Net
decrease in unrealized depreciation as a result of sales*
|
|
|
0.34 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Net
(increase) decrease in unrealized depreciation on investments
held*(1)
|
|
|
(1.49 |
) |
|
|
0.23 |
|
|
|
(0.21 |
) |
Total
from investment operations*
|
|
|
(1.92 |
) |
|
|
(0.30 |
) |
|
|
(0.57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock-based compensation expense*
|
|
|
0.24 |
|
|
|
0.36 |
|
|
|
0.24 |
|
Net
increase as a result of proceeds from exercise of options
|
|
|
0.00 |
|
|
|
0.19 |
|
|
|
0.07 |
|
Net
(decrease) increase as a result of stock offering, net of offering
expenses
|
|
|
(0.01 |
) |
|
|
0.26 |
|
|
|
0.00 |
|
Total
increase from capital stock transactions
|
|
|
0.23 |
|
|
|
0.81 |
|
|
|
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of year
|
|
$ |
4.24 |
|
|
$ |
5.93 |
|
|
$ |
5.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
price per share, end of year
|
|
$ |
3.95 |
|
|
$ |
8.79 |
|
|
$ |
12.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
return based on stock price
|
|
|
(55.06 |
)% |
|
|
(27.3 |
)% |
|
|
(13.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of year
|
|
$ |
109,531,113 |
|
|
$ |
138,363,344 |
|
|
$ |
113,930,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets
|
|
|
9.6 |
% |
|
|
11.6 |
% |
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net operating loss to average net assets
|
|
|
(8.1 |
)% |
|
|
(9.5 |
)% |
|
|
(6.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid per share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
payable on behalf of shareholders on the deemed dividend per
share
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares outstanding, end of year
|
|
|
25,859,573 |
|
|
|
23,314,573 |
|
|
|
21,015,017 |
|
*Based on
average shares outstanding.
(1) Net unrealized gains
(losses) includes rounding adjustments to reconcile change in net asset value
per share. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a description of unrealized
losses on investments.
The
accompanying notes are an integral part of this schedule.
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Investments,
in portfolio securities at value:
|
|
|
|
|
|
|
Unaffiliated
companies (cost: $26,273,391 and $24,208,281, respectively)
|
|
$
|
14,617,481
|
|
|
$
|
12,086,503
|
|
Non-controlled
affiliated companies (cost: $59,737,665 and $60,796,720, respectively)
|
|
|
44,796,511
|
|
|
|
39,650,187
|
|
Controlled
affiliated companies (cost: $6,978,511 and $6,085,000, respectively)
|
|
|
4,545,819 |
|
|
|
5,228,463 |
|
Total,
investments in private portfolio companies at value (cost: $92,989,567 and
$91,090,001, respectively)
|
|
$
|
63,959,811
|
|
|
$
|
56,965,153
|
|
|
|
|
|
|
|
|
|
|
Investments,
in U.S. Treasury obligations at value (cost: $46,379,087 and $52,956,288,
respectively)
|
|
|
46,395,504
|
|
|
|
52,983,940
|
|
Cash
and cash equivalents
|
|
|
1,271,390
|
|
|
|
692,309
|
|
Restricted
funds (Note 10)
|
|
|
189,369
|
|
|
|
191,955
|
|
Interest
receivable
|
|
|
25,774
|
|
|
|
56
|
|
Prepaid
expenses
|
|
|
232,113
|
|
|
|
484,567
|
|
Other
assets
|
|
|
281,886 |
|
|
|
309,621 |
|
Total
assets
|
|
$
|
112,355,847 |
|
|
$
|
111,627,601 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES & NET
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities (Note 10)
|
|
$
|
1,937,885
|
|
|
$
|
2,088,348
|
|
Deferred
rent
|
|
|
4,989 |
|
|
|
8,140 |
|
Total
liabilities
|
|
|
1,942,874 |
|
|
|
2,096,488 |
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
110,412,973 |
|
|
$
|
109,531,113 |
|
|
|
|
|
|
|
|
|
|
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 6/30/09 and
12/31/08; 27,688,313 issued at 6/30/09 and 12/31/08
|
|
|
276,884
|
|
|
|
276,884
|
|
Additional
paid in capital (Note 6)
|
|
|
182,663,424
|
|
|
|
181,251,507
|
|
Accumulated
net operating and realized loss
|
|
|
(40,108,465
|
)
|
|
|
(34,494,551
|
)
|
Accumulated
unrealized depreciation of investments
|
|
|
(29,013,339
|
)
|
|
|
(34,097,196
|
)
|
Treasury
stock, at cost (1,828,740 shares at 6/30/09 and 12/31/08)
|
|
|
(3,405,531 |
)
|
|
|
(3,405,531 |
)
|
|
|
|
|
|
|
|
|
|
Net
assets
|
|
$
|
110,412,973 |
|
|
$
|
109,531,113 |
|
|
|
|
|
|
|
|
|
|
Shares
outstanding
|
|
|
25,859,573 |
|
|
|
25,859,573 |
|
|
|
|
|
|
|
|
|
|
Net
asset value per outstanding share
|
|
$
|
4.27 |
|
|
$
|
4.24 |
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income
securities and bridge notes (Note 3)
|
|
$
|
75,084
|
|
|
$
|
464,456
|
|
|
$
|
39,185
|
|
|
$
|
1,040,758
|
|
Miscellaneous
income
|
|
|
8,750 |
|
|
|
3,169 |
|
|
|
21,088 |
|
|
|
3,169 |
|
Total
investment income
|
|
|
83,834 |
|
|
|
467,625 |
|
|
|
60,273 |
|
|
|
1,043,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
benefits and stock-based compensation (Note 6)
|
|
|
1,506,597
|
|
|
|
2,461,802
|
|
|
|
2,893,937
|
|
|
|
4,895,097
|
|
Administration
and operations
|
|
|
231,161
|
|
|
|
283,361
|
|
|
|
521,596
|
|
|
|
585,216
|
|
Professional
fees
|
|
|
152,291
|
|
|
|
201,866
|
|
|
|
367,541
|
|
|
|
340,098
|
|
Rent
|
|
|
78,998
|
|
|
|
59,748
|
|
|
|
157,061
|
|
|
|
117,602
|
|
Directors’
fees and expenses
|
|
|
89,100
|
|
|
|
79,169
|
|
|
|
173,609
|
|
|
|
184,315
|
|
Depreciation
|
|
|
12,878
|
|
|
|
13,819
|
|
|
|
25,737
|
|
|
|
27,804
|
|
Custodian
fees
|
|
|
11,080 |
|
|
|
6,143 |
|
|
|
17,942 |
|
|
|
12,696 |
|
Total
expenses
|
|
|
2,082,105 |
|
|
|
3,105,908 |
|
|
|
4,157,423 |
|
|
|
6,162,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss
|
|
|
(1,998,271 |
)
|
|
|
(2,638,283 |
)
|
|
|
(4,097,150 |
)
|
|
|
(5,118,901 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized (loss) gain from investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
(loss) gain from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated
companies
|
|
|
(1,511,042
|
)
|
|
|
3,420
|
|
|
|
(1,514,330
|
)
|
|
|
3,420
|
|
Non-Controlled
affiliated companies
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5,014,653
|
)
|
U.S.
Treasury obligations/other
|
|
|
0 |
|
|
|
492 |
|
|
|
(325 |
)
|
|
|
275 |
|
Realized
(loss) gain from investments
|
|
|
(1,511,042
|
)
|
|
|
3,912
|
|
|
|
(1,514,655
|
)
|
|
|
(5,010,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense (Note 7)
|
|
|
1,729 |
|
|
|
668 |
|
|
|
2,109 |
|
|
|
46,866 |
|
Net
realized (loss) gain from investments
|
|
|
(1,512,771 |
)
|
|
|
3,244 |
|
|
|
(1,516,764 |
)
|
|
|
(5,057,824 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in unrealized depreciation on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
as a result of investment sales
|
|
|
1,511,042
|
|
|
|
0
|
|
|
|
1,511,042
|
|
|
|
5,014,653
|
|
Change
on investments held
|
|
|
2,421,367 |
|
|
|
3,989,748 |
|
|
|
3,572,815 |
|
|
|
3,227,746 |
|
Net
decrease in unrealized depreciation on investments
|
|
|
3,932,409 |
|
|
|
3,989,748 |
|
|
|
5,083,857 |
|
|
|
8,242,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets resulting from operations
|
|
$
|
421,367 |
|
|
$
|
1,354,709 |
|
|
$
|
(530,057 |
)
|
|
$
|
(1,934,326 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
average basic and diluted outstanding share
|
|
$
|
0.02 |
|
|
$
|
0.06 |
|
|
$
|
(0.02 |
)
|
|
$
|
(0.08 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
outstanding shares
|
|
|
25,859,573 |
|
|
|
23,622,210 |
|
|
|
25,859,573 |
|
|
|
23,468,392 |
|
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, 2009
|
|
|
June
30, 2008
|
|
|
|
|
|
|
|
|
Cash
flows used in operating activities:
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
$
|
(530,057
|
)
|
|
$
|
(1,934,326
|
)
|
Adjustments
to reconcile net decrease in net assets resulting from operations to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Net
realized and unrealized gain on investments
|
|
|
(3,569,202
|
)
|
|
|
(3,231,441
|
)
|
Depreciation
of fixed assets, amortization of premium or discount on U.S. government
securities, and bridge note interest
|
|
|
73,663
|
|
|
|
82,877
|
|
Stock-based
compensation expense
|
|
|
1,411,917
|
|
|
|
2,966,325
|
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
funds
|
|
|
2,586
|
|
|
|
2,613,149
|
|
Receivable
from portfolio company
|
|
|
0
|
|
|
|
(20,976
|
)
|
Interest
receivable
|
|
|
4,317
|
|
|
|
73,651
|
|
Prepaid
expenses
|
|
|
252,454
|
|
|
|
225,304
|
|
Other
assets
|
|
|
3,312
|
|
|
|
3,894
|
|
Accounts
payable and accrued liabilities
|
|
|
(150,463
|
)
|
|
|
(2,518,610
|
)
|
Deferred
rent
|
|
|
(3,151 |
)
|
|
|
(3,235 |
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,504,624 |
)
|
|
|
(1,743,388 |
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of U.S. government securities
|
|
|
(103,318,117
|
)
|
|
|
(66,940,804
|
)
|
Sale
of U.S. government securities
|
|
|
109,851,434
|
|
|
|
65,395,679
|
|
Investment
in private placements and bridge loans
|
|
|
(3,451,549
|
)
|
|
|
(10,847,095
|
)
|
Proceeds
from sale of investments
|
|
|
3,250
|
|
|
|
112,234
|
|
Purchase
of fixed assets
|
|
|
(1,313 |
)
|
|
|
(2,013 |
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
3,083,705 |
|
|
|
(12,281,999 |
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
0 |
|
|
|
14,383,497 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of the period
|
|
|
692,309
|
|
|
|
330,009
|
|
Cash
and cash equivalents at end of the period.
|
|
|
1,271,390 |
|
|
|
688,119 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
$
|
579,081 |
|
|
$
|
358,110 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
2,109
|
|
|
$
|
46,325
|
|
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, 2009
|
|
|
December
31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Changes
in net assets from operations:
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
(4,097,150
|
)
|
|
$
|
(10,687,151
|
)
|
Net
realized loss on investments
|
|
|
(1,516,764
|
)
|
|
|
(8,323,634
|
)
|
Net
decrease in unrealized depreciation on investments as a result of sales
|
|
|
1,511,042
|
|
|
|
8,292,072
|
|
Net
decrease (increase) in unrealized depreciation on investments held
|
|
|
3,572,815 |
|
|
|
(38,462,784 |
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in net assets resulting from operations
|
|
|
(530,057 |
)
|
|
|
(49,181,497 |
)
|
|
|
|
|
|
|
|
|
|
Changes
in net assets from capital stock transactions:
|
|
|
|
|
|
|
|
|
Issuance
of common stock on offering
|
|
|
0
|
|
|
|
25,450
|
|
Additional
paid-in capital on common stock issued
|
|
|
0
|
|
|
|
14,358,047
|
|
Stock-based
compensation expense
|
|
|
1,411,917 |
|
|
|
5,965,769 |
|
|
|
|
|
|
|
|
|
|
Net
increase in net assets resulting from capital stock transactions
|
|
|
1,411,917 |
|
|
|
20,349,266 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in net assets
|
|
|
881,860 |
|
|
|
(28,832,231 |
)
|
|
|
|
|
|
|
|
|
|
Net
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
109,531,113 |
|
|
|
138,363,344 |
|
|
|
|
|
|
|
|
|
|
End
of the period
|
|
$
|
110,412,973 |
|
|
$
|
109,531,113 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 13.2% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 13.2% 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
|
|
|
$
|
85,995
|
|
Series
F Convertible Preferred Stock
|
(M)
|
|
|
2,011,110
|
|
|
|
411,641
|
|
Warrants
at $0.241576 expiring 11/13/15
|
( I
)
|
|
|
248,120
|
|
|
|
29,329 |
|
|
|
|
|
|
|
|
|
526,965 |
|
Cobalt
Technologies, Inc. (4)(5)(6)(8) – Developing processes for making
biobutanol through biomass fermentation
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
176,056
|
|
|
|
187,500 |
|
|
|
|
|
|
|
|
|
|
|
D-Wave
Systems, Inc. (4)(5)(6)(9) -- Developing high-performance quantum
computing systems
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,144,869
|
|
|
|
1,103,628
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
450,450
|
|
|
|
434,224
|
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
1,533,395
|
|
|
|
1,478,158 |
|
|
|
|
|
|
|
|
|
3,016,010 |
|
Molecular
Imprints, Inc. (4)(5) -- Manufacturing nanoimprint lithography capital
equipment
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,333,333
|
|
|
|
1,625,000
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
1,250,000
|
|
|
|
1,523,438
|
|
Warrants
at $2.00 expiring 12/31/11
|
( I
)
|
|
|
125,000
|
|
|
|
55,750 |
|
|
|
|
|
|
|
|
|
3,204,188 |
|
Nanosys,
Inc. (4)(5) -- Developing zero and one-dimensional inorganic
nanometer-scale materials and devices
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
803,428
|
|
|
|
1,185,056
|
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
1,016,950
|
|
|
|
1,500,001 |
|
|
|
|
|
|
|
|
|
2,685,057 |
|
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 |
|
NeoPhotonics
Corporation (4)(5) -- Developing and manufacturing optical devices and
components
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
716,195
|
|
|
|
244,702
|
|
Series
1 Convertible Preferred Stock
|
(M)
|
|
|
1,831,256
|
|
|
|
625,686
|
|
Series
2 Convertible Preferred Stock
|
(M)
|
|
|
741,898
|
|
|
|
253,484
|
|
Series
3 Convertible Preferred Stock
|
(M)
|
|
|
2,750,000
|
|
|
|
939,592
|
|
Series
X Convertible Preferred Stock
|
(M)
|
|
|
2,000
|
|
|
|
136,668
|
|
Warrants
at $0.15 expiring 01/26/10
|
( I
)
|
|
|
16,364
|
|
|
|
3,371
|
|
Warrants
at $0.15 expiring 12/05/10
|
( I
)
|
|
|
14,063
|
|
|
|
3,277 |
|
|
|
|
|
|
|
|
|
2,206,780 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Unaffiliated Companies (2)(3) – 13.2% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Portfolio (Illiquid) – 13.2% of net assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polatis,
Inc. (4)(5)(6) -- 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
|
|
|
|
0
|
|
Series
A-4 Convertible Preferred Stock
|
(M)
|
|
|
4,774
|
|
|
|
0
|
|
Series
A-5 Convertible Preferred Stock
|
(M)
|
|
|
16,438
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
PolyRemedy,
Inc. (4)(5)(6) --Developing a robotic manufacturing platform for wound
treatment patches
|
|
|
|
|
|
|
|
|
|
Series
B-1 Convertible Preferred Stock
|
(M)
|
|
|
287,647
|
|
|
|
93,866
|
|
Series
B-2 Convertible Preferred Stock
|
(M)
|
|
|
676,147
|
|
|
|
121,706 |
|
|
|
|
|
|
|
|
|
215,572 |
|
Siluria
Technologies, Inc. (4)(5)(6) -- Developing next-generation nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
S-2 Convertible Preferred Stock
|
(M)
|
|
|
612,061
|
|
|
|
204,000 |
|
|
|
|
|
|
|
|
|
|
|
Starfire
Systems, Inc. (4)(5) -- Producing ceramic-forming polymers
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
375,000
|
|
|
|
0
|
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
600,000
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
TetraVitae
Bioscience, Inc. (4)(5)(6)(10) -- Developing methods of producing
alternative chemicals and fuels through biomass fermentation
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
118,804
|
|
|
|
125,000 |
|
|
|
|
|
|
|
|
|
|
|
Total
Unaffiliated Private Placement Portfolio (cost: $26,273,391)
|
|
|
|
|
|
|
$
|
14,617,481 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Unaffiliated Companies (cost: $26,273,391)
|
|
|
|
|
|
|
$
|
14,617,481 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) –40.6% of net assets at
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 40.6% 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
|
|
|
$
|
1,100,000
|
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
550,000 |
|
|
|
558,077 |
|
|
|
|
|
|
|
|
|
1,658,077 |
|
Ancora Pharmaceuticals Inc. (4)(5)(6) --
Developing synthetic carbohydrates for pharmaceutical
applications
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,663,808
|
|
|
|
440,909 |
|
|
|
|
|
|
|
|
|
|
|
BridgeLux,
Inc. (4)(5) -- Manufacturing high-power light emitting diodes and arrays
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,861,504
|
|
|
|
1,396,128
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
2,130,699
|
|
|
|
1,598,025
|
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
666,667
|
|
|
|
500,000
|
|
Warrants
at $0.7136 expiring 12/31/14
|
( I
)
|
|
|
163,900
|
|
|
|
99,323 |
|
|
|
|
|
|
|
|
|
3,593,476 |
|
Cambrios
Technologies Corporation (4)(5)(6) – Developing nanowire-enabled
electronic materials for the display industry
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,294,025
|
|
|
|
647,013
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
1,300,000
|
|
|
|
650,000 |
|
|
|
|
|
|
|
|
|
1,297,013 |
|
CFX Battery, Inc. (4)(5)(6)(12) -- Developing batteries using
nanostructured materials
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
1,885,108
|
|
|
|
1,476,756 |
|
|
|
|
|
|
|
|
|
|
|
Crystal
IS, Inc. (4)(5) -- Developing single-crystal aluminum nitride substrates
for light-emitting diodes
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
391,571
|
|
|
|
0
|
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
1,300,376
|
|
|
|
0
|
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
408,573 |
|
|
|
428,185
|
|
Warrants
at $0.78 expiring 05/05/13
|
( I
)
|
|
|
15,231
|
|
|
|
0
|
|
Warrants
at $0.78 expiring 05/12/13
|
( I
)
|
|
|
2,350
|
|
|
|
0
|
|
Warrants
at $0.78 expiring 08/08/13
|
( I
)
|
|
|
4,396
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
428,185 |
|
CSwitch
Corporation (4)(5)(6)(13) -- Developed system-on-a-chip solutions for
communications-based platforms
|
|
|
|
|
|
|
|
|
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
6,863,118
|
|
|
|
0
|
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
1,766,673 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
Ensemble Discovery Corporation (4)(5)(6)(14) --
Developing DNA-Programmed
Chemistry™ for the discovery of new classes
of therapeutics and bioassays
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
1,449,275
|
|
|
|
1,000,000
|
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
250,286 |
|
|
|
266,304 |
|
|
|
|
|
|
|
|
|
1,266,304 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 40.6% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 40.6% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovalight,
Inc. (4)(5)(6) -- Developing solar power products enabled by silicon-based
nanomaterials
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
16,666,666
|
|
|
$
|
4,288,662
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
5,810,577
|
|
|
|
1,495,176 |
|
|
|
|
|
|
|
|
|
5,783,838 |
|
Kovio,
Inc. (4)(5)(6) -- Developing semiconductor products
using printed electronics and thin-film technologies
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
2,500,000
|
|
|
|
2,561,354
|
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
800,000
|
|
|
|
819,633
|
|
Series
E Convertible Preferred Stock
|
(M)
|
|
|
1,200,000
|
|
|
|
1,229,450
|
|
Warrants
at $1.25 expiring 12/31/12
|
( I
)
|
|
|
355,880
|
|
|
|
240,575 |
|
|
|
|
|
|
|
|
|
4,851,012 |
|
Mersana
Therapeutics, Inc. (4)(5)(6) -- Developing advanced polymers for drug
delivery
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
68,451
|
|
|
|
68,451
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
866,500
|
|
|
|
866,500
|
|
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
400,000 |
|
|
|
425,534
|
|
Warrants
at $2.00 expiring 10/21/10
|
( I
)
|
|
|
91,625
|
|
|
|
25,838 |
|
|
|
|
|
|
|
|
|
1,386,323 |
|
Metabolon,
Inc. (4)(5) -- Discovering biomarkers through the use of metabolomics
|
|
|
|
|
|
|
|
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
371,739
|
|
|
|
1,034,061
|
|
Series
B-1 Convertible Preferred Stock
|
(M)
|
|
|
148,696
|
|
|
|
413,625
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Warrants
at $1.15 expiring 3/25/15
|
( I
)
|
|
|
74,348
|
|
|
|
120,778 |
|
|
|
|
|
|
|
|
|
2,568,464 |
|
NanoGram
Corporation (4)(5) -- Developing solar power products enabled by
silicon-based nanomaterials
|
|
|
|
|
|
|
|
|
|
Series
I Convertible Preferred Stock
|
(M)
|
|
|
63,210
|
|
|
|
15,565
|
|
Series
II Convertible Preferred Stock
|
(M)
|
|
|
1,250,904
|
|
|
|
308,035
|
|
Series
III Convertible Preferred Stock
|
(M)
|
|
|
1,242,144
|
|
|
|
305,878
|
|
Series
IV Convertible Preferred Stock
|
(M)
|
|
|
432,179
|
|
|
|
106,424 |
|
|
|
|
|
|
|
|
|
735,902 |
|
Nanomix,
Inc. (4)(5) -- Producing nanoelectronic sensors that integrate carbon
nanotube electronics with silicon microstructures
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
977,917
|
|
|
|
0
|
|
Series
D Convertible Preferred Stock
|
(M)
|
|
|
6,802,397
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
0 |
|
Nextreme
Thermal Solutions, Inc. (4)(5) -- Developing thin-film thermoelectric
devices for cooling and energy conversion
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
17,500
|
|
|
|
1,750,000
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
4,870,244
|
|
|
|
2,655,257 |
|
|
|
|
|
|
|
|
|
4,405,257 |
|
Questech
Corporation (4)(5) -- Manufacturing and marketing proprietary metal and
stone decorative tiles
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
(M)
|
|
|
655,454
|
|
|
|
150,976
|
|
Warrants
at $1.50 expiring 11/19/09
|
( I
)
|
|
|
5,000
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
150,976 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Non-Controlled Affiliated Companies (2)(11) – 40.6% of net assets at
value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 40.6% of net
assets at value (cont.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
4,978,157
|
|
Series
B Convertible Preferred Stock
|
(M)
|
|
|
495,246
|
|
|
|
2,494,841
|
|
Series
C Convertible Preferred Stock
|
(M)
|
|
|
651,309
|
|
|
|
3,281,021 |
|
|
|
|
|
|
|
|
|
10,754,019 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
Total
Non-Controlled Private Placement Portfolio (cost: $59,737,665)
|
|
|
|
|
|
|
$
|
44,796,511 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Non-Controlled Affiliated Companies (cost: $59,737,665)
|
|
|
|
|
|
|
$
|
44,796,511 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
Investments
in Controlled Affiliated Companies (2)(15) – 4.1% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement
Portfolio (Illiquid) – 4.1% of net assets
at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laser
Light Engines, Inc. (4)(5)(6) -- Manufacturing solid-state light sources
for digital cinema and large-venue projection displays
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
7,499,062
|
|
|
$
|
1,500,000
|
|
Secured
Convertible Bridge Note (including interest)
|
(M)
|
|
|
$
890,000 |
|
|
|
893,511 |
|
|
|
|
|
|
|
|
|
2,393,511 |
|
SiOnyx,
Inc. (4)(5)(6) -- Developing silicon-based optoelectronic products enabled
by its proprietary "Black Silicon"
|
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred Stock
|
(M)
|
|
|
233,499
|
|
|
|
67,843
|
|
Series
A-1 Convertible Preferred Stock
|
(M)
|
|
|
2,966,667
|
|
|
|
861,965
|
|
Series
A-2 Convertible Preferred Stock
|
(M)
|
|
|
4,207,537
|
|
|
|
1,222,500 |
|
|
|
|
|
|
|
|
|
2,152,308 |
|
|
|
|
|
|
|
|
|
|
|
Total
Controlled Private Placement Portfolio (cost: $6,978,511)
|
|
|
|
|
|
|
$
|
4,545,819 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in Controlled Affiliated Companies (cost: $6,978,511)
|
|
|
|
|
|
|
$
|
4,545,819 |
|
|
|
|
|
|
|
|
|
|
|
Total
Private Placement Portfolio (cost: $92,989,567)
|
|
|
|
|
|
|
$
|
63,959,811 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
|
Method
of
|
|
Shares/
|
|
|
|
|
|
Valuation (1)
|
|
Principal
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Securities (16) – 42.0% of net assets at value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury Bill -- due date
07/02/09
|
(M)
|
|
$
|
9,375,000
|
|
|
$
|
9,375,000
|
|
U.S.
Treasury Bill -- due date
10/01/09
|
(M)
|
|
|
30,500,000
|
|
|
|
30,485,055
|
|
U.S.
Treasury Bill -- due date
12/17/09
|
(M)
|
|
|
2,700,000
|
|
|
|
2,695,815
|
|
U.S.
Treasury Notes -- due date
02/28/10, coupon 2.000%
|
(M)
|
|
|
3,800,000
|
|
|
|
3,839,634
|
|
|
|
|
|
|
|
|
|
|
|
Total
Investments in U.S. Government Securities (cost: $46,379,087)
|
|
|
|
|
|
|
$
|
46,395,504 |
|
|
|
|
|
|
|
|
|
|
|
Total
Investments (cost: $139,368,654)
|
|
|
|
|
|
|
$
|
110,355,315 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
HARRIS & HARRIS GROUP,
INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30, 2009
(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 $26,273,391. The gross unrealized
appreciation based on the tax cost for these securities is
$903,721. The gross unrealized depreciation based on the tax
cost for these securities is $12,559,631.
|
(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)
|
Cobalt
Technologies, Inc., does business as Cobalt
Biofuels.
|
(9)
|
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."
|
(10)
|
With
our purchase of the Series B Convertible Preferred Stock of TetraVitae
Bioscience, Inc., we received the right to purchase, at a price of
$2.63038528 per share, a number of shares in the Series C financing equal
to the number of shares of Series B Preferred Stock purchased. The
ability to exercise this right is contingent on TetraVitae Bioscience
completing successfully a subsequent round of
financing.
|
(11)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $59,737,665. The gross
unrealized appreciation based on the tax cost for these securities is
$8,193,588. The gross unrealized depreciation based on the tax
cost for these securities is $23,134,742.
|
(12)
|
On
February 28, 2008, Lifco, Inc., merged with CFX Battery,
Inc. The surviving entity is CFX Battery, Inc.
|
(13)
|
CSwitch
ceased operations in June 2009.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF JUNE 30, 2009
(Unaudited)
|
(14)
|
With
our investment in a convertible bridge note issued by Ensemble Discovery,
we received a warrant to purchase a number of shares of the class of stock
sold in the next financing of Ensemble Discovery equal to $125,105.40
divided by the price per share of the class of stock sold in the next
financing of Ensemble Discovery. The ability to exercise this
warrant is, therefore, contingent on Ensemble Discovery completing
successfully a subsequent round of financing. This warrant
shall expire and no longer be exercisable on September 10,
2015. The cost basis of this warrant is $75.20.
|
(15)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $6,978,511. The gross
unrealized appreciation based on the tax cost for these securities is
$0. The gross unrealized depreciation based on the tax cost for
these securities is $2,432,692.
|
(16)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $46,379,087. The gross unrealized appreciation on
the tax cost for these securities is $16,417. The gross
unrealized depreciation on the tax cost of these securities is $0.
|
The
accompanying notes are an integral part of this consolidated
schedule.
HARRIS
& HARRIS GROUP, INC.
FOOTNOTE
TO CONSOLIDATED SCHEDULE OF
INVESTMENTS
|
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 determining the
valuation of the Company’s assets within the guidelines established by the Board
of Directors. The Valuation Committee receives information and
recommendations from management.
The values assigned to these
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized, as such amounts depend on future
circumstances and cannot reasonably be determined until the individual
investments are actually liquidated or become readily marketable.
II.
|
Approaches
to Determining Fair Value
|
Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (exit price).
The main
approaches to measuring fair value utilized are the market approach and the
income approach.
|
·
|
Market Approach
(M): The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets
or liabilities. For example, the market approach often uses market
multiples derived from a set of comparables. Multiples might lie in ranges
with a different multiple for each comparable. The selection of where
within the range each appropriate multiple falls requires judgment
considering factors specific to the measurement (qualitative and
quantitative).
|
|
·
|
Income Approach
(I): The income approach uses valuation techniques to convert
future amounts (for example, cash flows or earnings) to a single present
value amount (discounted). The measurement is based on the value indicated
by current market expectations about those future amounts. Those valuation
techniques include present value techniques; option-pricing models, such
as the Black-Scholes-Merton formula (a closed-form model) and a binomial
model (a lattice model), which incorporate present value techniques; and
the multi-period excess earnings method, which is used to measure the fair
value of certain assets.
|
SFAS No.
157 classifies the inputs used to measure fair value by these approaches into
the following hierarchy:
|
·
|
Level
1: Unadjusted quoted prices in active markets for
identical assets or liabilities.
|
|
·
|
Level
2: Quoted prices in active markets for similar assets or
liabilities, or quoted prices for identical or similar assets or
liabilities in markets that are not active, or inputs other than quoted
prices that are observable for the asset or
liability.
|
|
·
|
Level
3: Unobservable inputs for the asset or
liability.
|
Financial assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement and are not necessarily an indication
of risks associated with the investment.
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;
|
|
·
|
Investments
in intellectual property, patents, research and development in technology
or product development;
and
|
The Company applies the methods for
determining fair value discussed above to the valuation of investments in each
of these five broad categories as follows:
|
A.
|
EQUITY-RELATED
SECURITIES
|
Equity-related
securities, including warrants, are fair valued using the market or income
approaches. The following factors may be considered when the market
approach is used to fair value these types of securities:
|
§
|
Readily
available public market quotations;
|
|
§
|
The
cost of the Company’s investment;
|
|
§
|
Transactions
in a company's securities or unconditional firm offers by responsible
parties as a factor in determining valuation;
|
|
§
|
The
financial condition and operating results of the company;
|
|
§
|
The
company's progress towards milestones;
|
|
§
|
The
long-term potential of the business and technology of the company;
|
|
§
|
The
values of similar securities issued by companies in similar businesses;
|
|
§
|
Multiples
to revenue, net income or EBITDA that similar securities issued by
companies in similar businesses receive;
|
|
§
|
The
proportion of the company's securities we own and the nature of any rights
to require the company to register restricted securities under applicable
securities laws; and
|
|
§
|
The
rights and preferences of the class of securities we own as compared to
other classes of securities the portfolio company has issued.
|
When the
income approach is used to value warrants, the Company uses the
Black-Scholes-Merton formula.
|
B.
|
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.
|
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 and milestone progress;
|
|
·
|
Other
subjective factors.
|
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 this Section III. They do not
necessarily represent an amount of money that would be realized if we had to
sell such assets in an immediate liquidation. Thus, valuations as of
any particular date are not necessarily indicative of amounts that we may
ultimately realize as a result of future sales or other dispositions of
investments we hold.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
NOTE 1. THE
COMPANY
Harris & Harris Group, Inc. (the
"Company," "us," "our" and "we"), is a venture capital company operating as a
business development company ("BDC") under the Investment Company Act of 1940
("1940 Act"). We operate as an internally managed company whereby our
officers and employees, under the general supervision of our Board of Directors,
conduct our operations.
We elected to become a BDC on July 26,
1995, after receiving the necessary shareholder approvals. From
September 30, 1992, until the election of BDC status, we operated as a
closed-end, non-diversified investment company under the 1940
Act. Upon commencement of operations as an investment company, we
revalued all of our assets and liabilities in accordance with the 1940
Act. Prior to September 30, 1992, we were registered and filed under
the reporting requirements of the Securities Exchange Act of 1934 (the "1934
Act") as an operating company and, while an operating company, operated directly
and through subsidiaries.
Harris & Harris Enterprises,
Inc.SM, is a
100 percent wholly owned subsidiary of the Company. Harris &
Harris Enterprises, Inc., is a partner in Harris Partners I, L.P. SM, and
is taxed under Subchapter C of the Code (a "C Corporation"). Harris
Partners I, L.P, is a limited partnership and, from time to time, may be 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, 2009, there was no
non-passive investment income generated by Harris Partners I,
L.P. The Company consolidates the results of its subsidiaries for
financial reporting purposes.
NOTE 2. 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 of valuation adjustments and 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, 2008.
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 and include the accounts of the Company and its wholly
owned subsidiary. 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 and the reported amounts of revenues and
expenses. 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. 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,
2009, our financial statements include private venture capital investments
valued at $63,959,811, 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.
The Company adopted SFAS No. 157 on
January 1, 2008. SFAS No. 157 requires the Company to assume that the
portfolio investment is to be sold in the principal market to market
participants, or in the absence of a principal market, the most advantageous
market, which may be a hypothetical market.
On
October 10, 2008, FASB Staff Position 157-3, "Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active," ("FSP 157-3") was
issued. FSP 157-3 reiterated that an entity should utilize its own
assumptions, information and techniques to estimate fair value when relevant
observable inputs are not available, including the use of risk-adjusted discount
factors for non-performance risk or liquidity risk.
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, 2009, included in the
net decrease in unrealized depreciation on investments was a $178,698 gain
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 an accrual
basis. When securities are determined to be non-income producing, the
Company ceases accruing interest and writes off any previously accrued
interest. During the three months and six months ended June 30, 2009,
the Company earned $36,077 and $73,588, respectively, in interest on U.S.
government securities and interest-bearing accounts. During the three
months and six months ended June 30, 2009, the Company recorded, net of
write-offs, $39,007 and $(34,403), respectively, of bridge note 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 Harris & Harris
Group, Inc. 2006 Equity Incentive Plan (the "Stock Plan") by determining 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, 2009, and December 31,
2008, 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. 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. See "Note 6. 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. 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 7. 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, the former Chairman and Chief Executive Officer of the
Company. The final payment from this rabbi trust was made on July 31,
2009, after which the rabbi trust was closed.
Property and
Equipment. Property and equipment are included in "Other
Assets" and are carried at $94,757 and $119,180 at June 30, 2009, and December
31, 2008, respectively, representing cost, less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the premises and equipment. We
estimate the useful lives to be five to ten years for furniture and fixtures,
three years for computer equipment, and five to seven years for leasehold
improvements.
Concentration of Credit
Risk. The Company places its cash and cash equivalents with
financial institutions and, at times, cash held in checking accounts may exceed
the Federal Deposit Insurance Corporation insured limit.
Recent Accounting
Pronouncements. In April of 2009, the FASB issued Staff
Position 157-4, "Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly" ("FSP 157-4"). This position
provides additional guidance for fair value measures under SFAS No. 157 in
determining if the market for an asset or liability is inactive and,
accordingly, if quoted market prices may not be indicative of fair
value. The adoption of FSP 157-4 did not have a material impact on
the Company's consolidated financial statements.
FASB
Staff Position 107-1, "Interim Disclosures About Fair Value of Financial
Instruments" ("FSP 107-1"), extends the existing disclosure requirements related
to the fair value of financial instruments, which were previously only required
in annual financial statements, to interim periods. Given that FSP
107-1 provides for additional disclosures, its adoption did not have any impact
on the Company's consolidated financial statements. The disclosure
requirements under FSP 107-1 are included in Note 5 to the consolidated
financial statements.
In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165"), which
sets forth principles and requirements for subsequent events, specifically
(1) the period during which management should evaluate events or
transactions that may occur for potential recognition and disclosure,
(2) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date, and (3) the
disclosures that an entity should make about events and transactions occurring
after the balance sheet date. SFAS No. 165 is effective for interim
reporting periods ending after June 15, 2009. The Company has
adopted SFAS No. 165, and this adoption did not have a material impact on its
consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162" ("SFAS No. 168"),
which will become the source of authoritative U.S. GAAP recognized by the FASB
to be applied to non-governmental entities. On its effective date,
SFAS No. 168 will supersede all then-existing, non-SEC accounting and reporting
standards. SFAS No. 168 is effective for financial statements issued
for interim and annual periods ending after September 15,
2009. The Company is currently evaluating the potential impact of the
adoption of SFAS No. 168, but does not believe that it will have a material
impact on its consolidated financial statements.
NOTE 4. BUSINESS
RISKS AND UNCERTAINTIES
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 greater risk of loss than is the
case with traditional investment securities.
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 and bridge note 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 and is subject to significant estimates and
judgments. 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 decreases in
unrealized depreciation on investments." Changes in valuation of any
of our investments in privately held companies from one period to another may be
volatile.
NOTE
5. INVESTMENTS
At June
30, 2009, 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, 2009
|
|
|
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
|
|
$
|
46,395,504
|
|
|
$
|
42,555,870
|
|
|
$
|
3,839,634
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Companies
|
|
$
|
63,959,811 |
|
|
$
|
0 |
|
|
$
|
0 |
|
|
$
|
63, 959,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,355,315 |
|
|
$
|
42,555,870 |
|
|
$
|
3,839,634 |
|
|
$
|
63, 959,811 |
|
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the three months ended June 30, 2009.
|
|
Fair
Value Measurements Using Significant
|
|
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
Portfolio Companies
|
|
|
|
|
|
Beginning
Balance, April 1, 2009
|
|
$
|
58,793,688
|
|
|
|
|
|
|
Total
realized losses included in change in net assets
|
|
|
(1,511,042
|
)
|
|
|
|
|
|
Total
unrealized gains included in change in net assets
|
|
|
3,913,035
|
|
|
|
|
|
|
Investments
in private placements and interest on bridge notes
|
|
|
2,767,380
|
|
|
|
|
|
|
Disposals
|
|
|
(3,250 |
)
|
|
|
|
|
|
Ending
Balance, June 30, 2009
|
|
$
|
63, 959,811 |
|
|
|
|
|
|
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
|
|
$
|
2,400,596 |
|
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the six months ended June 30, 2009.
|
|
Fair
Value Measurements Using Significant
|
|
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
Portfolio
Companies
|
|
|
|
|
|
Beginning
Balance, January 1, 2009
|
|
$
|
56,965,153
|
|
|
|
|
|
|
Total
realized losses included in change in net assets
|
|
|
(1,514,330
|
)
|
|
|
|
|
|
Total
unrealized gains included in change in net assets
|
|
|
5,095,092
|
|
|
|
|
|
|
Purchases
and interest on bridge notes
|
|
|
3,515,484
|
|
|
|
|
|
|
Disposals
and write-offs of bridge note interest
|
|
|
(101,588 |
)
|
|
|
|
|
|
Ending
Balance, June 30, 2009
|
|
$
|
63, 959,811 |
|
|
|
|
|
|
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
|
|
$
|
3,579,731 |
|
NOTE
6. STOCK-BASED COMPENSATION
On March
18, 2009, 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 329,999
shares of stock were granted with vesting periods ranging from March 2010 to
March 2013 and with an exercise price of $3.75, which was the closing price of
our shares of common stock as quoted on the Nasdaq Global Market on March 18,
2009. The awards may become fully vested and exercisable prior to the
date or dates in the vesting schedule if (1) the market price of the shares of
our stock reaches $6 per share at the close of business on three consecutive
trading days on the Nasdaq Global Market or (2) the Board of Directors accepts
an offer for the sale of substantially all of the Company's
assets. The accelerated vesting clause related to the stock price was
satisfied on July 28, 2009, and the options immediately vested and became
exercisable. See "Note 11. Subsequent Events." Upon
exercise, the shares would be issued from our previously authorized but unissued
shares.
On May
13, 2009, the Compensation Committee of the Board of Directors and the full
Board of Directors of the Company approved a grant of individual NQSO awards for
certain officers and employees of the Company. The terms and
conditions of the stock options granted were set forth in award agreements
between the Company and each award recipient entered into on that
date. Options to purchase a total of 200,000 shares of stock were
granted with vesting periods ranging from November 2009 to May 2013 and with an
exercise price of $4.46, which was the closing price of our shares of common
stock as quoted on the Nasdaq Global Market on May 13, 2009. The
awards may become fully vested and exercisable prior to the date or dates in the
vesting schedule if the Board of Directors accepts an offer for the sale of
substantially all of the Company's assets. Upon exercise, the shares
would be issued from our previously authorized but unissued shares.
The fair
value of the options was determined on the date of grant using the
Black-Scholes-Merton or lattice models based on the following factors, as
permitted by SFAS No. 123(R).
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. Management has performed an
analysis and has determined that historical exercise data does not provide a
sufficient basis to calculate the expected term of the option. 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 term used in the Black-Scholes-Merton model 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. The expected
volatility factor for the Black-Scholes-Merton and lattice models were based on
the historical fluctuations in the Company’s stock price over a period
commensurate with the expected term and contractual term, respectively, of the
options, adjusted for stock splits and dividends.
The
expected exercise factor in the lattice model is an estimate of when options
will be exercised when they are in the money. An expected exercise
factor of two assumes that options will be exercised when they reach two times
their strike price.
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 assumption
used in the Black-Scholes-Merton model is 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. The lattice model uses interest
rates commensurate with the contractual term of the options. Higher assumed
interest rates yield higher fair values.
The
assumptions used in the calculation of fair value of the two-year NQSOs granted
on March 18, 2009, using the Black-Scholes-Merton model for the expected term
was as follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
2
Years
|
245,770
|
1.5
|
71.7%
|
0%
|
0.71%
|
$1.29
|
Total
|
|
245,770
|
|
|
|
|
$1.29
|
The
assumptions used in the calculation of fair value of the 10-year NQSOs granted
on March 18, 2009, using a binomial lattice model for the contract term was as
follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Exercise
Behavior
Factor
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
10
Years
|
84,229
|
2
|
73.1%
|
0%
|
2.59%
|
$1.97
|
Total
|
|
84,229
|
|
|
|
|
$1.97
|
The
assumptions used in the calculation of fair value of the two-year and 10-year
NQSOs granted on May 13, 2009, using the Black-Scholes-Merton model for the
expected term was as follows:
Type of Award
|
Term
|
Number
of
Options
Granted
|
Expected
Term
in Yrs
|
Expected
Volatility
Factor
|
Expected
Dividend
Yield
|
Risk-free
Interest
Rates
|
Weighted
Average
Fair
Value
Per Share
|
|
|
|
|
|
|
|
|
Non-qualified
stock options
|
2
Years
|
148,800
|
1.375
|
105.5%
|
0%
|
0.52%
|
$2.08
|
Non-qualified
stock options
|
10
Years
|
51,200
|
6.25
|
60.6%
|
0%
|
2.35%
|
$2.60
|
|
|
200,000
|
|
|
|
|
$2.21
|
For the
three months and six months ended June 30, 2009, the Company recognized $776,279
and $1,411,917, respectively, of compensation expense in the Consolidated
Statements of Operations. As of June 30, 2009, there was
approximately $7,088,927 of unrecognized compensation cost related to unvested
stock option awards. Of this amount, $364,839 was recognized on July
28, 2009, owing to the accelerated vesting condition being satisfied for the
March 18, 2009, stock option grant. (See "Note 11. Subsequent
Events.") The remaining $6,724,088 of unrecognized compensation 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, 2009, no stock options were exercised.
For the three months and six months
ended June 30, 2009, the calculation of the net increase and net decrease,
respectively, in net assets resulting from operations per share excludes the
stock options because such options were anti-dilutive. The options
may be dilutive in future periods in which there is a net increase in net assets
resulting from operations, in the event that there is a significant increase in
the average stock price in the stock market or significant decreases in the
amount of unrecognized compensation cost.
A summary of the changes in outstanding
stock options for the six months ended June 30, 2009, 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, 2009
|
4,638,213
|
$ 9.30
|
$ 4.83
|
6.03
|
$ 0
|
|
|
|
|
|
|
Granted
|
529,999
|
$ 4.02
|
$ 1.75
|
3.82
|
|
|
|
|
|
|
|
Exercised
|
0
|
$ 0
|
$ 0
|
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
(479,460)
|
$
10.11
|
$ 3.81
|
|
|
|
|
|
|
|
|
Options
Outstanding at June 30, 2009
|
4,688,752
|
$ 8.62
|
$ 4.58
|
5.90
|
$960,398
|
|
|
|
|
|
|
Options
Exercisable at June 30, 2009
|
2,159,619
|
$
10.10
|
$ 5.33
|
5.40
|
$ 0
|
|
|
|
|
|
|
Options
Exercisable and Expected to be Exercisable at June 30, 2009
|
4,629,651
|
$ 8.60
|
$
4.55
|
5.89
|
$960,398
|
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 $5.83 on the last trading day of the second quarter of 2009 and the
exercise price, multiplied by the number of in-the-money
options. This amount 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, 2009.
NOTE 7. 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
2008. However, there can be no assurance that we will qualify as a
RIC for 2009 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 investment companies that 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 each year
from 1999 to 2008, but it is possible that we may not receive SEC Certification
for 2009 or 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.
For the
six months ended June 30, 2009, we paid $2,109 in federal, state and local
income taxes. During
the second quarter of 2009, we paid $1,729 in federal, state and local income
taxes. At June 30, 2009, 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, 2009, and 2008, our income tax expense for Harris & Harris Enterprises,
Inc., was $0 and $668, respectively. For the six months ended June
30, 2009, and 2008, our income tax expense for Harris & Harris Enterprises,
Inc., was $0 and $31,068, 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 8. CAPITAL
TRANSACTIONS
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 9. CHANGE IN
NET ASSETS PER SHARE
The following table sets forth the
computation of basic and diluted per share net increases (decreases) in net
assets resulting from operations for the three months and six months ended June
30, 2009, and June 30, 2008.
|
For
the Three Months Ended
June
30
|
|
For
the Six Months Ended
June
30
|
|
2009
|
2008
|
|
2009
|
2008
|
|
|
|
|
|
|
Numerator
for increase (decrease) in net assets per share
|
$421,367
|
$1,354,709
|
|
$(530,057)
|
$(1,934,326)
|
|
|
|
|
|
|
Denominator
for basic and diluted weighted average shares
|
25,859,573
|
23,622,210
|
|
25,859,573
|
23,468,392
|
|
|
|
|
|
|
Basic
and diluted net increase (decrease) in net assets per share resulting from
operations
|
$0.02
|
$0.06
|
|
$(0.02)
|
$(0.08)
|
NOTE 10. EMPLOYEE
BENEFITS
We
established a rabbi trust for the purpose of accumulating funds to satisfy the
obligations incurred by us under the SERP, which amounted to $189,369 and
$188,454 at June 30, 2009, and December 31, 2008, respectively, and is included
in accounts payable and accrued liabilities. The restricted funds for
the SERP Account totaled $189,369 and $188,454 at June 30, 2009, and December
31, 2008, respectively. Mr. Harris's rights to benefits pursuant to
this SERP are no greater than those of a general creditor of us.
Mr.
Harris received a distribution from his SERP Account totaling $2,889,717 during
2008. On July 31, 2009, the balance of $189,383 was paid to Mr.
Harris, and the rabbi trust was closed.
NOTE
11. SUBSEQUENT EVENTS
On July
2, 2009, we made a $250,000 follow-on investment in a privately held tiny
technology portfolio company.
On July
17, 2009, we made a $533,239 follow-on investment in a privately held tiny
technology portfolio company.
On July
24, 2009, we filed a shelf Registration Statement on Form N-2 with the SEC to
register an additional 7,000,000 shares of our common stock. After
the effective date, the common stock may be sold at prices and on terms to be
set forth in one or more supplements to the prospectus from time to time.
On July
27, 2009, we made a $125,000 follow-on investment in a privately held tiny
technology portfolio company.
At the
close of business on July 28, 2009, the price of our stock reached $6.00 for the
third consecutive trading day on the Nasdaq Global Market. Pursuant
to the terms of the stock options granted on March 18, 2009, the vesting
schedule accelerated and all 329,999 options became immediately vested and
exercisable. The remaining compensation cost of $364,839 will be
recognized in the third quarter. This expense has no impact on the
net asset value as the non-cash compensation cost is offset by an increase to
our additional paid-in capital.
We have
evaluated subsequent events through August 6, 2009, which represents the
issuance date of the financial statements.
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
(Unaudited)
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, beginning of period
|
|
$
|
4.22
|
|
|
$
|
5.86
|
|
|
$
|
4.24
|
|
|
$
|
5.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating (loss)*
|
|
|
(0.07
|
)
|
|
|
(0.13
|
)
|
|
|
(0.16
|
)
|
|
|
(0.23
|
)
|
Net
realized (loss) on investments*
|
|
|
(0.06
|
)
|
|
|
(0.00
|
)
|
|
|
(0.06
|
)
|
|
|
(0.22
|
)
|
Net
decrease in unrealized depreciation as a result of sales*
|
|
|
0.06
|
|
|
|
0.00
|
|
|
|
0.06
|
|
|
|
0.21
|
|
Net
decrease in unrealized depreciation on investments held*
|
|
|
0.09 |
|
|
|
0.17 |
|
|
|
0.14 |
|
|
|
0.14 |
|
Total
from investment operations*
|
|
|
0.02 |
|
|
|
0.04 |
|
|
|
(0.02 |
)
|
|
|
(0.10 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase as a result of stock-based compensation expense
|
|
|
0.03
|
|
|
|
0.06
|
|
|
|
0.05
|
|
|
|
0.13
|
|
Net
increase as a result of net proceeds of stock offering, after expenses
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
Net
increase as a result of proceeds from exercise of options
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
Total
increase from capital stock transactions
|
|
|
0.03 |
|
|
|
0.05 |
|
|
|
0.05 |
|
|
|
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value per share, end of period
|
|
$
|
4.27 |
|
|
$
|
5.95 |
|
|
$
|
4.27 |
|
|
$
|
5.95 |
|
Stock
price per share, end of period
|
|
$
|
5.83
|
|
|
$
|
6.00
|
|
|
$
|
5.83
|
|
|
$
|
6.00
|
|
Total
return based on stock price (1)
|
|
|
57.57
|
%
|
|
|
(15.85
|
)%
|
|
|
47.59
|
%
|
|
|
(31.74
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets, end of period
|
|
$
|
110,412,973
|
|
|
$
|
153,778,840
|
|
|
$
|
110,412,973
|
|
|
$
|
153,778,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of expenses to average net assets (1)
|
|
|
1.9
|
%
|
|
|
2.1
|
%
|
|
|
3.8
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net operating (loss) to average net assets (1)
|
|
|
(1.8
|
)%
|
|
|
(1.8
|
)%
|
|
|
(3.7
|
)%
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
25,859,573
|
|
|
|
25,859,573
|
|
|
|
25,859,57
3 |
|
*Based on
Average Shares Outstanding
(1) Not
annualized
The
accompanying notes are an integral part of this schedule.
HARRIS
& HARRIS GROUP, INC.
7,000,000
Shares
Common
Stock
The date
of the Prospectus is September 21, 2009
__________________
This
Prospectus constitutes a part of a registration statement on Form N-2 (together
with all the exhibits and the appendix thereto, the "Registration Statement")
filed by us with the SEC under the Securities Act of 1933. This
Prospectus does not contain all of the information set forth in the Registration
Statement. Reference is hereby made to the Registration Statement and
related exhibits for further information with respect to us and the shares
offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of the material terms of such
documents.
No
dealer, salesperson or other person has been authorized to give any information
or to make any representations not contained in this Prospectus. If
given or made, any information or representation must not be relied upon as
having been authorized by us. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of Common Stock offered by this Prospectus, nor does it constitute an
offer to sell or the solicitation of an offer to buy shares of Common Stock by
anyone in any jurisdiction in which such offer or solicitation would be
unlawful.
4,250,000 Shares of Common
Stock
____________________________
Prospectus
Supplement
____________________________
Needham & Company,
LLC
October
6, 2009