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EX-14.4 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex14-1.htm |
EX-14.2 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex14-2.htm |
EX-31.01 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex31-01.htm |
EX-31.02 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex31-02.htm |
EX-10.14 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex10-14.htm |
EX-32.01 - 180 DEGREE CAPITAL CORP. /NY/ | v177284_ex32-01.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Form
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended December 31, 2009
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _____________________ to
____________________
Commission
File No. 0-11576
HARRIS & HARRIS GROUP, INC.®
|
(Exact
Name of Registrant as Specified in Its
Charter)
|
New York
|
13-3119827
|
|
(State
or Other Jurisdiction
|
(I.R.S.
Employer
|
|
of
Incorporation or Organization)
|
Identification
No.)
|
1450 Broadway, New York, New
York
|
10018
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code (212)
582-0900
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which Registered
|
|
Common Stock, $.01 par value
|
Nasdaq Global Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
|
(Title
of Class)
|
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
¨Yes þ
No
|
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.
¨Yes þ
No
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
þYes ¨
No
|
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data file required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
þYes ¨
No
|
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
þ
|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer þ
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
¨Yes þ
No
|
The aggregate market value of the
common stock held by non-affiliates of Registrant as of June 30, 2009 was
$149,001,403 based on the last sale price as quoted by the Nasdaq Global Market
on such date (only officers and directors are considered affiliates for this
calculation).
As of March 12, 2010, the registrant
had 30,859,593 shares of common stock, par value $.01 per share,
outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
|
INCORPORATED AT
|
|
Harris
& Harris Group, Inc. Proxy Statement for the
|
Part
III, Items 9, 10,
|
|
2010
Annual Meeting of Shareholders
|
11,
12 and 13
|
TABLE OF
CONTENTS
Page
|
|||
PART
I
|
|||
Item
1.
|
Business
|
1
|
|
Item
1A.
|
Risk
Factors
|
15
|
|
Item
1B.
|
Unresolved
Staff Comments
|
30
|
|
Item
2.
|
Properties
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30
|
|
Item
3.
|
Legal
Proceedings
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30
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|
PART
II
|
|||
Item
4.
|
Market
For Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
31
|
|
Item
5.
|
Selected
Financial Data
|
34
|
|
Item
6.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
35
|
|
Item
6A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
68
|
|
Item
7.
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Consolidated
Financial Statements and Supplementary Data
|
70
|
|
Item
8.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
125
|
|
Item
8A.
|
Controls
and Procedures
|
125
|
|
Item
8B.
|
Other
Information
|
125
|
|
PART
III
|
|||
Item
9.
|
Directors,
Executive Officers and Corporate Governance
|
126
|
|
Item
10.
|
Executive
Compensation
|
126
|
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
126
|
|
Item
12.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
126
|
|
Item
13.
|
Principal
Accountant Fees and Services
|
126
|
|
PART
IV
|
|||
Item
14.
|
Exhibits
and Financial Statements Schedules
|
127
|
|
Signatures
|
130
|
||
Exhibit
Index
|
132
|
PART
I
Item
1.
|
Business.
|
Harris & Harris Group, Inc.® (the
"Company," "us," "our," and "we"), is an internally managed venture capital
company specializing in nanotechnology and microsystems that has elected to
operate as a business development company ("BDC") under the Investment Company
Act of 1940, which we refer to as the 1940 Act. For tax purposes, we
have elected to be a regulated investment company ("RIC") under Subchapter M of
the Internal Revenue Code of 1986, which we refer to as the Code. 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 incorporated under
the laws of the state of New York in August 1981. Our investment
approach is comprised of a patient examination of available opportunities,
thorough due diligence and close involvement with management. As a
venture capital company, we invest in and provide managerial assistance to our
portfolio companies, many of which, in our opinion, have significant potential
for growth. We are managed by our Board of Directors and officers and
have no investment advisor.
We make
initial venture capital investments exclusively in companies commercializing or
integrating products enabled by nanotechnology or microsystems. This
investment thesis is not a fundamental policy and accordingly may be changed
without shareholder approval, although we intend to give shareholders at least
60 days prior notice of any change in our thesis.
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. Nanotechnology and
microsystems are multidisciplinary and widely applicable, and they incorporate
technology that was not previously in widespread use. Products
enabled by nanotechnology and microsystems are applicable to a large number of
industries including pharmaceuticals, medical devices, telecommunications,
electronics and semiconductors, and industries that seek to address
global problems related to resource constraints (cleantech).
We
consider a company to fit our investment thesis if the company employs or
integrates or intends to employ or integrate technology that we consider to be
at the microscale or smaller and if the employment of that technology is
material to its business plan. Because it is in many respects a new
field, tiny technology has significant scientific, engineering and
commercialization risks.
At
December 31, 2009, our venture capital portfolio comprised 57 percent of our
total assets, our U.S. Treasury obligations and cash comprised 42 percent of our
total assets, and other assets comprised the remaining one percent of our total
assets. We had no debt outstanding.
Neither our investments, nor an
investment in us, is intended to constitute a balanced investment
program. We expect to be risk seeking rather than risk averse in our
investment approach. To such end, we reserve the fullest possible
freedom of action, subject
to our certificate of incorporation, applicable law and regulations, and policy
statements contained herein. There is no assurance that our
investment objective will be achieved.
1
We expect to invest a substantial
portion of our assets in securities that we consider to be private venture
capital investments. These private venture capital investments
usually do not pay interest or dividends and usually are subject to legal or
contractual restrictions on resale that may adversely affect the liquidity and
marketability of such securities.
We expect to make speculative venture
capital investments with limited marketability and a greater risk of investment
loss than less speculative investments. We make venture capital
investments in companies commercializing and integrating products enabled by
nanotechnology and microsystems. Such technology is enabling
technology applicable to a wide range of industries and
businesses. We do not limit our investments to any particular
industries or categories of investments within this thesis. Our
securities investments may consist of private, public or governmental issuers of
any type. Subject to the diversification requirements applicable to a
RIC, we may commit all of our assets to only a few investments.
Achievement of our investment objective
is basically dependent upon the judgment of a team of five professional,
full-time members of management, four of whom are designated as 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. This team
collectively has expertise in venture capital investing, intellectual property
and nanotechnology. There can be no assurance that a suitable replacement could
be found for any of our officers upon their retirement, resignation, inability
to act on our behalf, or death.
Subject to continuing to meet the
compliance tests applicable to BDCs, there are no limitations on the types of
securities or other assets 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;
|
|
·
|
Venture
capital investments, whether in corporate, partnership or other form,
including development-stage or start-up
entities;
|
|
·
|
Intellectual
property or patents or research and development in technology or product
development that may lead to patents or other marketable
technology;
|
|
·
|
Debt
obligations of all types having varying terms with respect to security or
credit support, subordination, purchase price, interest payments and
maturity;
|
|
·
|
Foreign
securities; and
|
|
·
|
Miscellaneous
investments.
|
2
Investments and
Strategies
The following is a summary description
of the types of assets in which we may invest, the investment strategies we may
use and the attendant risks associated with our investments and
strategies.
Equity, Equity-Related Securities and
Debt with Equity Features
We may invest in equity, equity-related
securities and debt with equity features. These securities include
common stock, preferred stock, debt instruments convertible into common or
preferred stock, limited partnership interests, other beneficial ownership
interests and warrants, options or other rights to acquire any of the
foregoing.
We may make investments in companies
with operating histories that are unprofitable or marginally profitable, that
have negative net worth or that are involved in bankruptcy or reorganization
proceedings. These investments would involve businesses that
management believes have 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. In May 2008, the Securities and Exchange Commission
("SEC") amended a rule to expand the definition of eligible portfolio companies
in which BDCs can invest to include publicly traded securities of companies with
a fully diluted market capitalization of less than $250 million. In
2009, we made one new investment in a publicly traded company, Orthovita,
Inc. We may adjust our investment focus as needed to comply with
and/or take advantage of other regulatory, legislative, administrative or
judicial actions in this area.
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.
3
Most of our current portfolio company
investments are in the equity securities of private
companies. Investments in equity securities of private companies
often involve securities 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 (“IPO”), we are typically subject to a lock-up agreement
for 180 days, 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. We may elect to hold formerly restricted securities
after they have become freely marketable, either because they remain relatively
illiquid or because we believe that they may appreciate in value, during which
holding period they may decline in value and be especially volatile as
unseasoned securities. If we need funds for investment or working
capital purposes, we might sell marketable securities at disadvantageous times
or prices.
Venture Capital
Investments
We define venture capital 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.
These businesses can range in stage from pre-revenue to generating positive cash
flow. Substantially all of our long-term venture capital investments
are in thinly capitalized, unproven, small companies focused on commercializing
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 will never
realize their potential, and some will be unprofitable or result in complete
loss of our investment.
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 to adverse business or economic developments than better capitalized
companies. Start-up businesses generally have limited product lines,
markets and/or financial resources. Start-up companies are not
well-known to the investing public and are subject to potential bankruptcy,
general movements in markets and perceptions of potential growth.
In connection with our venture capital
investments, we may participate in providing a variety of services to our
portfolio companies, including the following:
|
·
|
recruiting
management;
|
|
·
|
formulating
operating strategies;
|
|
·
|
formulating
intellectual property
strategies;
|
4
|
·
|
assisting
in financial planning;
|
|
·
|
providing
management in the initial start-up stages;
and
|
|
·
|
establishing
corporate goals.
|
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 typically 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 (“M&As”). We do not currently
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 through
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 rare instances, in effect be conducting the
operations of the portfolio company. As a venture capital-backed
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 involvement in those start-up companies that
become successful, as well as in those start-up companies that
fail.
Intellectual Property
We believe there is a role for
organizations that can assist in technology transfer. Scientists and
institutions that develop and patent intellectual property perceive the need for
and rewards of entrepreneurial commercialization of their
inventions.
Our form of investment may
be:
|
·
|
funding
research and development in the development of a
technology;
|
|
·
|
obtaining
licensing rights to intellectual property or
patents;
|
|
·
|
acquiring
intellectual property or patents;
or
|
|
·
|
forming
and funding companies or joint ventures to commercialize further
intellectual property.
|
Income from our investments in
intellectual property or its development may take the form of participation in
licensing or royalty income, fee income, or some other form of
remuneration. In order to satisfy RIC requirements, these investments
will normally be held in an entity taxable as a
corporation. 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.
5
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 December 31, 2009, the
debt obligations held in our portfolio consisted of convertible bridge notes and
U.S. Treasury securities. The convertible bridge notes generally do
not generate income, nor are they held for that purpose.
Our investments in debt obligations may
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.
6
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 BDC, our investments in non-qualifying assets,
including the securities of companies organized outside the U.S., would be
limited to 30 percent of our assets, because we must invest at least 70 percent
of our assets in "qualifying assets," and securities of foreign companies are
not "qualifying assets."
Compared to otherwise comparable
investments in securities of U.S. issuers, currency exchange risk of securities
of foreign issuers is a significant variable. The value of these
investments to us will vary with the relation of the currency in which they are
denominated to the U.S. dollar, as well as with intrinsic elements of value such
as credit risk, interest rates and performance of the
issuer. Investments in foreign securities also involve risks relating
to economic and political developments, including nationalization, expropriation
of assets, 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.
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 BDCs under the 1940 Act. The 1940 Act
currently prohibits us from borrowing any money or issuing any other senior
securities (including preferred stock but excluding temporary borrowings of up
to five percent of our assets), if after giving effect to the borrowing or
issuance, the value of our total assets less liabilities not constituting senior
securities would be less than 200 percent of our senior
securities. We may pledge assets to secure any
borrowings. We currently have no debt and have no current intention
to issue preferred stock.
7
Although not currently employed in the
operation of our business, a primary purpose of our borrowing power should we
decide to use it 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. Because 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 our 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 some or all of 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 will be required to sell securities to remain in
compliance with the margin rules. These sales might be at
disadvantageous times or prices.
Repurchase of
Shares
Our shareholders do not have the right
to compel us to redeem our shares. We may, however, purchase
outstanding shares of our common stock from time to time, subject to approval of
our Board of Directors and compliance with applicable corporate and securities
laws. The Board of Directors may authorize purchases from time to
time when they are deemed to be in the best interests of our shareholders, but
could do so only after notification to shareholders. The Board of
Directors may or may not decide to undertake any purchases of our common
stock.
Our repurchases of our common shares
would decrease our total assets and would therefore likely have the effect of
increasing our expense ratio. Subject to our investment restrictions,
we may borrow money to finance the repurchase of our common stock in the open
market pursuant to any tender offer. Interest on any borrowings to
finance share repurchase transactions will reduce our net assets. If,
because of market fluctuations or other reasons, the value of our assets falls
below the required 1940 Act coverage requirements, we may have to reduce our
borrowed debt to the extent necessary to comply with the
requirement. To achieve a reduction, it is possible that we may be
required to sell portfolio securities at inopportune times when it may be
disadvantageous to do so. Since 1998, we have repurchased a total of
1,828,740 shares of our common stock at a total cost of $3,405,531, or $1.86 per
share. Since 2002, because of our strategic decision to invest in
nanotechnology and microsystems and to grow our net assets, our Board of
Directors reaffirmed its commitment not to authorize the purchase of additional
shares of our common stock.
8
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 during a year as well as from year to year and may also be affected by
cash requirements.
Competition
Numerous companies and individuals are
engaged in the venture capital business, and such business is intensely
competitive. We believe the perpetual nature of our corporate
structure enables us to be a better long-term partner for our portfolio
companies than if we were organized as a traditional private equity fund, which
typically has a limited life. We believe that we have invested in
more nanotechnology-enabled companies than any venture capital firm and that we
have assembled a team of investment professionals that have scientific and
intellectual property expertise that is relevant to investing in
nanotechnology. Nevertheless, many of our competitors have
significantly greater financial and other resources and managerial capabilities
than we do and are therefore, in certain respects, in a better position than we
are to obtain access to attractive venture capital investments. There
can be no assurance that we will be able to compete against these venture
capital businesses for attractive investments, particularly in capital-intensive
companies.
9
Regulation
The Small Business Investment Incentive
Act of 1980 added the provisions of the 1940 Act applicable only to
BDCs. BDCs are a special type of investment company. After
a company files its election to be treated as a BDC, it may not withdraw its
election without first obtaining the approval of holders of a majority of its
outstanding voting securities. The following is a brief description
of the 1940 Act provisions applicable to BDCs, qualified in its entirety by
reference to the full text of the 1940 Act and the rules issued thereunder by
the SEC.
Generally, to be eligible to elect BDC
status, a company must primarily engage in the business of furnishing capital
and making significant managerial assistance available to companies that do not
have ready access to capital through conventional financial
channels. Such companies that satisfy certain additional criteria
described below are termed "eligible portfolio companies." In
general, in order to qualify as a BDC, a company must: (i) be a domestic
company; (ii) have registered a class of its securities pursuant to Section 12
of the Securities Exchange Act of 1934 (the "Exchange Act"); (iii) operate for
the purpose of investing in the securities of certain types of portfolio
companies, including early-stage or emerging companies and businesses suffering
or just recovering from financial distress (see following paragraph); (iv) make
available significant managerial assistance to such portfolio companies; and (v)
file a proper notice of election with the SEC.
An eligible portfolio company generally
is a domestic company that is not an investment company or a company excluded
from investment company status pursuant to exclusions for certain types of
financial companies (such as brokerage firms, banks, insurance companies and
investment banking firms) and that: (i) has a fully diluted market
capitalization of less than $250 million and has a class of equity securities
listed on a national securities exchange, (ii) does not have a class of
securities listed on a national securities exchange, or (iii) is controlled by
the BDC by itself or together with others (control under the 1940 Act is
presumed to exist where a person owns at least 25 percent of the outstanding
voting securities of the portfolio company) and has a representative on the
Board of Directors of such company.
We may be periodically examined by the
SEC for compliance with the 1940 Act.
As with other companies regulated by
the 1940 Act, a BDC must adhere to certain substantive regulatory
requirements. A majority of the 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 the
BDC. Furthermore, as a BDC, 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 such person's office.
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. Qualifying assets include: (i) securities of eligible
portfolio companies; (ii) securities of certain companies that were eligible
portfolio companies at the time we initially acquired their securities and in
which we retain a substantial interest; (iii) securities of certain controlled
companies; (iv) securities of certain bankrupt, insolvent or distressed
companies; (v) securities received in exchange for or distributed in or with
respect to any of the foregoing; and (vi) cash items, U.S. government securities
and high quality short-term debt. The SEC has adopted a rule
permitting a BDC to invest its cash in certain money market
funds. The 1940 Act also places restrictions on the nature of the
transactions in which, and the persons from whom, securities can be purchased in
some instances in order for the securities to be considered qualifying
assets.
10
We are permitted by the 1940 Act, under
specified conditions, to issue multiple classes of debt and a single class of
preferred stock if our asset coverage, as defined in the 1940 Act, is at least
200 percent after the issuance of the debt or the preferred stock (i.e., such
senior securities may not be in excess of our net
assets). Under specific conditions, we are also permitted by
the 1940 Act to issue warrants.
Except under certain conditions, we may
sell our securities at a price that is below the prevailing net asset value per
share only during the 12-month period after (i) a majority of our directors and
our disinterested directors have determined that such sale would be in the best
interest of us and our stockholders and (ii) the holders of a majority of our
outstanding voting securities and the holders of a majority of our voting
securities held by persons who are not affiliated persons of ours approve such
issuances. A majority of the disinterested directors must determine
in good faith that the price of the securities being sold is not less than a
price which closely approximates the market value of the securities, less any
distribution discount or commission.
Certain transactions involving certain
closely related persons of the Company, including its directors, officers and
employees, may require the prior approval of the SEC. However, the
1940 Act ordinarily does not restrict transactions between us and our portfolio
companies.
Subchapter M
Status
We elected to be treated as a RIC,
taxable under Subchapter M of the Internal Revenue Code (the "Code"), for
federal income tax purposes. In general, a RIC is not taxable on its
income or gains to the extent it distributes such income or gains to its
shareholders. In order to qualify as a RIC, we must, in general, (1)
annually derive at least 90 percent of our gross income from dividends, interest
and gains from the sale of securities and similar sources (the "Income Source
Rule"); (2) quarterly meet certain investment asset diversification
requirements; and (3) annually distribute at least 90 percent of our investment
company taxable income as a dividend (the "Income Distribution
Rule"). Any taxable investment company income not distributed will be
subject to corporate level tax. Any taxable investment company income
distributed generally will be taxable to shareholders as dividend
income.
11
In addition to the requirement that we
must annually distribute at least 90 percent of our investment company taxable
income, we may either distribute or retain our realized net capital gains from
investments, but any net capital gains not distributed may be subject to
corporate level tax. It is our current intention not to distribute
net capital gains. Any net capital gains distributed generally will
be taxable to shareholders as long-term capital gains.
In lieu of actually distributing our
realized net capital gains, we as a RIC may retain all or part of our net
capital gains and elect to be deemed to have made a distribution of the retained
portion to our shareholders under the "designated undistributed capital gain"
rules of the Code. We currently intend to retain and so designate all
of our net capital gains. In this case, the "deemed dividend"
generally is taxable to our shareholders as long-term capital
gains. Although we pay tax at the corporate rate on the amount deemed
to have been distributed, our shareholders receive a tax credit equal to their
proportionate share of the tax paid and an increase in the tax basis of their
shares by the amount per share retained by us.
To the extent that we declare a deemed
dividend, each shareholder will receive an IRS Form 2439 that will reflect each
shareholder's receipt of the deemed dividend income and a tax credit equal to
each shareholder's proportionate share of the tax paid by us. This
tax credit, which is paid at the corporate rate, is often credited at a higher
rate than the actual tax due by a shareholder on the deemed dividend
income. The "residual" credit can be used by the shareholder to
offset other taxes due in that year or to generate a tax refund to the
shareholder. Tax exempt investors may file for a refund.
The following simplified examples
illustrate the tax treatment under Subchapter M of the Code for us and our
individual shareholders with regard to three possible distribution alternatives,
assuming a net capital gain of $1.00 per share, consisting entirely of sales of
non-real property assets held for more than 12 months.
Under Alternative A: 100
percent of net capital gain declared as a cash dividend and distributed to
shareholders:
1. No
federal taxation at the Company level.
2. Taxable
shareholders receive a $1.00 per share dividend and pay federal tax at a rate
not in excess of 15 percent* or $.15 per share, retaining $.85 per
share.
3. Non-taxable
shareholders that file a federal tax return receive a $1.00 per share dividend
and pay no federal tax, retaining $1.00 per share.
Under Alternative B (Current Tax
Structure Employed): 100 percent of net capital gain retained by the
Company and designated as "undistributed capital gain" or deemed
dividend:
1. The
Company pays a corporate-level federal income tax of 35 percent on the
undistributed gain or $.35 per share and retains 65 percent of the gain or $.65
per share.
12
2. Taxable
shareholders increase their cost basis in their stock by $.65 per
share. They pay federal capital gains tax at a rate not in excess of
15 percent* on 100 percent of the undistributed gain of $1.00 per share or $.15
per share in tax. Offsetting this tax, shareholders receive a tax
credit equal to 35 percent of the undistributed gain or $.35 per
share.
3. Non-taxable
shareholders that file a federal tax return receive a tax refund equal to $.35
per share.
*Assumes all capital gains qualify for
long-term rates of 15 percent, which may increase for gains realized after
December 31, 2010.
Under Alternative
C: 100 percent of net capital gain retained by the Company,
with no designated undistributed capital gain or deemed dividend:
1. The
Company pays a corporate-level federal income tax of 35 percent on the retained
gain or $.35 per share plus an excise tax of four percent of $.98 per share, or
about $.04 per share.
2. There
is no tax consequence at the shareholder level.
Although we may retain income and gains
subject to the limitations described above (including paying corporate level tax
on such amounts), we could be subject to an additional four percent excise tax
if we fail to distribute 98 percent of our aggregate annual taxable
income.
As noted above, in order to qualify as
a RIC, we must meet certain investment asset diversification requirements each
quarter. Because of the specialized nature of our investment
portfolio, in some years we have been able to satisfy the diversification
requirements under Subchapter M of the Code primarily as a result of receiving
certifications from the SEC under the Code with respect to each taxable year
beginning after 1998 that we were "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" for such year.
Although we received SEC certifications
for 1999-2008, there can be no assurance that we will receive such certification
for subsequent years (to the extent we need additional certifications as a
result of changes in our portfolio). In 2009, we qualified for RIC
treatment even without certification. If we require, but fail to
obtain, the SEC certification for a taxable year, we may fail to qualify as a
RIC for such year. We will also fail to qualify as a RIC for a
taxable year if we do not satisfy the Income Source Rule or Income Distribution
Rule for such year. In the event we do not qualify as a RIC for any
taxable year, we will be subject to federal tax with respect to all of our
taxable income, whether or not distributed. In addition, all our
distributions to shareholders in that situation generally will be taxable as
ordinary dividends.
13
Although we generally intend to qualify
as a RIC for each taxable year, under certain circumstances we may choose to
take action with respect to one or more taxable years to ensure that we would be
taxed under Subchapter C of the Code (rather than Subchapter M) for such year or
years. We will choose to take such action only if we determine that
the result of the action will benefit us and our shareholders.
Subsidiaries
Harris & Harris Enterprises,
Inc.SM
("Enterprises"), is a 100 percent wholly owned subsidiary of the Company and is
consolidated in our financial statements. Enterprises holds the lease
for our office space in Palo Alto, California, is a partner in Harris Partners
I, L.P.
SM, and is taxed as a C Corporation. Harris Partners I, L.P.,
is a limited partnership. Harris Partners I, L.P., owned our interest in
AlphaSimplex Group, LLC, until AlphaSimplex was sold to Natixis Global Asset
Management. We received our share of the proceeds on October 30,
2007. The partners of Harris Partners I, L.P., are Harris &
Harris Enterprises, Inc. (sole general partner) and the Company (sole limited
partner).
Available
Information
Additional information about us,
including our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, are available on our
website at www.HHVC.com. Information on our website is not part of
this annual report on Form 10-K.
Employees
We currently employ directly 11
full-time employees.
14
Item
1A.
|
Risk
Factors.
|
Investing
in our common stock involves significant risks relating to our business and
investment objective. You should carefully consider the risks and
uncertainties described below before you purchase any shares of our common
stock. These risks and uncertainties are not the only ones we
face. Unknown additional risks and uncertainties, or ones that we
currently consider immaterial, may also impair our business. If any
of these risks or uncertainties materialize, our business, financial condition
or results of operations could be materially adversely affected. In
this event, the trading price of our common stock could decline, and you could
lose all or part of your investment.
Risks
related to the companies in our portfolio.
The
recent financial crisis could increase the non-performance risk for our
portfolio companies.
The effects of the banking and global
stock market collapses, and the slowdown in global economic activities that
began with the intensification of the housing and credit crisis during the third
quarter of 2008, remain especially taxing on the venture capital
industry. The public markets have rebounded from the lows of March
2009, the general economic decline appears to be leveling off and there are
signs of economic improvements. However, even within this improving
general economic environment, the availability of capital for venture capital
firms and venture-backed companies continues to be extremely
tight. The majority of our portfolio companies, and venture-backed
companies in general, have negative cash flow, and thus require follow-on
financings to continue operations. A substantial decrease in
the availability of this necessary capital would dramatically increase the
non-performance 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 IPO opportunities and a decrease in M&A 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 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-backed
companies are also causing some venture capital firms to change their investment
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.
15
Investing
in small, private and public companies involves a high degree of risk and is
highly speculative.
We have
invested a substantial portion of our assets in privately held companies, the
securities of which are inherently illiquid. We also seek to invest
in small publicly traded companies that we believe have exceptional growth
potential. Although these companies are publicly traded, their stock
may not trade at high volumes and prices can be volatile, which may restrict our
ability to sell our positions. These privately held and publicly
traded 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 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 an emerging or existing industry. 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 some 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.
16
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 of
public equities, the reliance on the capital and debt markets to finance large
capital outlays, change in climate, including climate-related regulations, 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 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.
17
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, the reliance on partners
outside of the United States, particularly in Asia, 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 that 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.
18
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 may
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 or other forms of debt securities. 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 or other debt securities, 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 and/or other debt
securities 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, equity-linked, or debt securities
acquired directly from small companies. These securities are
generally subject to restrictions on resale or otherwise have no established
trading market. The illiquidity of most of our portfolio of
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.
19
Unfavorable
regulatory changes could impair our ability to engage in liquidity
events.
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 IPOs of their equity
securities, and such reforms have increased the expense and legal exposure of
being a public company. Slowdowns in IPOs may also be having an
adverse effect on the frequency and prices of acquisitions of privately held
companies. A lack of M&A 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 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 IPOs, the returns on our investments in those companies would
be uncertain.
When
companies in which we have invested as private entities complete IPOs 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 IPOs. The market price of securities that we hold may decline
substantially before we are able to sell these securities. Most IPOs
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
economies of the United States and many other countries are in recession or are
just emerging from recession with slow economic growth and high unemployment
that may persist for a substantial period. 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. 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.
20
Our
business and results of operations could be impacted adversely by a number of
follow-on effects of the recent 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 may increase, and the value of
our portfolio may decrease if this period of market illiquidity
persists. 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 the Valuation Committee, a committee made up of all of the
independent members of our Board of Directors, 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.
21
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 Statement 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, changes in valuations from one valuation point to another
tend to be larger than changes in valuations of marketable securities that are
revalued in the marketplace much more frequently, in some highly liquid cases,
virtually continuously. Although we carefully monitor each of our
portfolio companies, 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 expect to continue to experience
material write-downs of securities of portfolio companies.
Write-downs of securities of our
privately held companies have always been a by-product and risk of our
business. We expect to continue to experience material write-downs of
securities of privately held portfolio companies. Write-downs of such
companies occur at all stages of their development. Such write-downs
may increase in dollar terms, frequency and as a percentage of our net asset
value as our dollar investment activity in privately held companies continues to
increase, and the number of such holdings in our portfolio continues to
grow. If the average size of each of our investments in
nanotechnology increases, the average size of our write-downs may also
increase.
22
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; on Misti Ushio, a Vice President; 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 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.
23
In
addition to the difficulty of finding attractive investment opportunities, our
status as a regulated BDC may hinder our ability to participate in investment
opportunities or to protect the value of existing investments.
As a BDC,
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 BDC 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 BDC 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.
24
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 RIC under the Code, which would in most circumstances be materially adverse
to the holders of our common stock. As of the date hereof, we do not
have any debt or preferred stock outstanding, and have no current intention to
do so.
We
are authorized to issue preferred stock, which would convey special rights and
privileges to its owners senior to those of common stock
shareholders.
We are currently authorized to issue up
to 2,000,000 shares of preferred stock, under terms and conditions determined by
our Board of Directors. These shares would have a preference over our
common stock with respect to dividends and liquidation. The statutory
class voting rights of any preferred shares we would issue could make it more
difficult for us to take some actions that might, in the future, be proposed by
the Board and/or holders of common stock, such as a merger, exchange of
securities, liquidation or alteration of the rights of a class of our
securities, if these actions were perceived by the holders of the preferred
shares as not in their best interests. The issuance of preferred
shares convertible into shares of common stock might also reduce the net income
and net asset value per share of our common stock upon conversion.
Loss
of status as a RIC could reduce our net asset value and distributable
income.
We have
elected to qualify, qualified and intend to continue to qualify as a RIC under
the Code. As a RIC, we do not have to pay federal income taxes on our
income (including realized gains) that is distributed to our
shareholders. Accordingly, we are not permitted under accounting
rules to establish reserves for taxes on our unrealized capital
gains. If we failed to qualify for RIC status in 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 RIC in a subsequent year, we would be required to distribute to our
shareholders our earnings and profits attributable to non-RIC 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 RIC for a period
greater than two taxable years, then, in order to qualify as a RIC 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 RIC, 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.
25
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, public disclosure and market regulation,
including the Sarbanes-Oxley Act of 2002, new SEC regulations, new federal
accounting standards and Nasdaq Stock Market rules, create 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. 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.
26
Market prices of our common stock will
continue to be volatile.
We expect
that the market price of our common stock price 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
|
|
•
|
departures
of key personnel.
|
We will not have control over many of
these factors, but expect that our stock price may be influenced by
them. As a result, our stock price may be volatile, and you may lose
all or part of your investment.
Quarterly results fluctuate and are not
indicative of future quarterly performance.
Our
quarterly operating results fluctuate as a result of a number of
factors. These factors include, among others, variations in and the
timing of the recognition of realized and unrealized gains or losses, the degree
to which we and our portfolio companies encounter competition in our markets and
general economic and capital markets conditions. As a result of these
factors, results for any one quarter should not be relied upon as being
indicative of performance in future quarters.
To
the extent that we do not realize income or choose not to retain after-tax
realized capital gains, we will have a greater need for additional capital to
fund our investments and operating expenses.
As a RIC,
we must annually distribute at least 90 percent of our investment company
taxable income as a dividend and may either distribute or retain our realized
net capital gains from investments. As a result, these earnings may
not be available to fund investments. If we fail to generate net
realized capital gains or to obtain funds from outside sources, it would have a
material adverse effect on our financial condition and results of operations as
well as our ability to make follow-on and new investments. Because of
the structure and objectives of our business, we generally expect to experience
net operating losses and rely on proceeds from sales of investments, rather than
on investment income, to defray a significant portion of our operating
expenses. These sales are unpredictable and may not
occur. In addition, as a BDC, 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.
27
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.
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 and in the semiconductor and
information technology, life science, materials science and other
high-technology industries, including cleantech, may also affect the price of
our common stock.
28
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 December 31, 2009, our stock closed at $4.57 per share, a
premium of $0.22 to our net asset value per share of $4.35 as of December 31,
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.
29
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.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
Item
2.
|
Properties.
|
The
Company maintains its offices at 1450 Broadway, New York, New York 10018, where
it leases through Enterprises approximately 6,900 square feet of office space
pursuant to a lease agreement expiring on December 31, 2019. (See
"Note 9. Commitments and Contingencies" contained in "Item 7. Consolidated
Financial Statements and Supplementary Data.")
On July 1, 2008, we signed a five-year
lease for approximately 2,290 square feet of office space at 420 Florence
Street, Suite 200, Palo Alto, California 94301, commencing on August 1, 2008,
and expiring on August 31, 2013.
Item
3.
|
Legal
Proceedings.
|
The
Company is not a party to any legal proceedings.
30
PART
II
Item
4.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
Our
common stock is traded on the Nasdaq Global Market under the symbol
"TINY." The following table sets forth the range of the high and low
sales price of the Company's shares during each quarter of the last two fiscal
years, as reported by Nasdaq Global Market. The quarterly stock
prices quoted represent interdealer quotations and do not include markups,
markdowns or commissions.
2009 Quarter Ending
|
Low
|
High
|
||||||
March
31
|
$ | 2.65 | $ | 4.48 | ||||
June
30
|
$ | 3.57 | $ | 5.99 | ||||
September
30
|
$ | 5.01 | $ | 6.93 | ||||
December
31
|
$ | 4.04 | $ | 6.31 |
2008 Quarter Ending
|
Low
|
High
|
||||||
March
31
|
$ | 5.76 | $ | 8.98 | ||||
June
30
|
$ | 6.00 | $ | 8.73 | ||||
September
30
|
$ | 4.97 | $ | 8.50 | ||||
December
31
|
$ | 3.10 | $ | 6.58 |
Shareholders
As of March 12, 2010, there were
approximately 138 holders of record and approximately 19,806 beneficial owners
of the Company's common stock.
Dividends
We did not pay a cash dividend or
declare a deemed dividend for 2009 or 2008. For more information
about deemed dividends, please refer to the discussion under "Subchapter M
Status."
31
Securities
Authorized for Issuance Under Equity Compensation Plans
EQUITY
COMPENSATION PLAN INFORMATION
As
of December 31, 2009
Number of securities
to be issued upon
exercise of out-
standing options,
warrants and rights
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
Column (a))
|
||||||||
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||
Equity
compensation plans approved by security holders
|
4,184,503
|
$8.20
|
(1)
|
|||||||
|
||||||||||
Equity
compensation plans not approved by security holders
|
-
|
|
|
-
|
-
|
|||||
TOTAL
|
4,184,503
|
$8.20
|
(1)
|
(1) A maximum of twenty
percent (20%) of our total shares of our common stock issued and outstanding may
be available for awards under the plan, subject to adjustment as described
below. Shares issued under the plan may be authorized but unissued
shares or treasury shares. If any shares subject to an award granted
under the plan are forfeited, cancelled, exchanged or surrendered, or if an
award terminates or expires without a distribution of shares, those shares will
again be available for awards under the plan.
Recent
Sales of Unregistered Securities
The Company did not sell any equity
securities during 2009 that were not registered under the Securities Act of
1933.
Performance
Graph
The graph below compares the cumulative
five-year total return of holders of the Company's common stock with the
cumulative total returns of the Nasdaq Composite index and the Nasdaq Financial
index. The graph assumes that the value of the investment in the Company's
common stock and in each of the indexes (including reinvestment of dividends)
was $100 on December 31, 2004, and tracks it through December 31,
2009.
32
12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||||||||||||||
Harris
& Harris Group, Inc.
|
100.00 | 84.86 | 73.81 | 53.66 | 24.11 | 27.90 | ||||||||||||||||||
NASDAQ
Composite
|
100.00 | 101.33 | 114.01 | 123.71 | 73.11 | 105.61 | ||||||||||||||||||
NASDAQ
Financial
|
100.00 | 106.94 | 123.77 | 113.75 | 77.43 | 79.26 |
The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.
Source:
Research Data Group, Inc.
Stock
Transfer Agent
American
Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038
(Telephone 800-937-5449, Attention: Mr. Jennifer Donovan) serves as our transfer
agent. Certificates to be transferred should be mailed directly to the transfer
agent, preferably by registered mail.
33
Item
5.
|
Selected
Financial Data.
|
The
information below was derived from the audited Consolidated Financial Statements
included in this report and in previous annual reports filed with the
SEC. This information should be read in conjunction with those
Consolidated Financial Statements and Supplementary Data and the notes
thereto. These historical results are not necessarily indicative of
the results to be expected in the future.
Financial
Position as of December 31:
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Total
assets
|
$ | 136,109,101 | $ | 111,627,601 | $ | 142,893,332 | $ | 118,328,590 | $ | 132,938,120 | ||||||||||
Total
liabilities
|
$ | 1,950,843 | $ | 2,096,488 | $ | 4,529,988 | $ | 4,398,287 | $ | 14,950,378 | ||||||||||
Net
assets1
|
$ | 134,158,258 | $ | 109,531,113 | $ | 138,363,344 | $ | 113,930,303 | $ | 117,987,742 | ||||||||||
Net
asset value per outstanding share
|
$ | 4.35 | $ | 4.24 | $ | 5.93 | $ | 5.42 | $ | 5.68 | ||||||||||
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 year1
|
30,859,593 | 25,859,573 | 23,314,573 | 21,015,017 | 20,756,345 |
Operating
Data for Year Ended December 31:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Total
investment income
|
$ | 247,848 | $ | 1,987,347 | $ | 2,705,636 | $ | 3,028,761 | $ | 1,540,862 | ||||||||||
Total
expenses2
|
$ | 9,009,063 | $ | 12,674,498 | $ | 14,533,179 | $ | 10,641,696 | $ | 7,006,623 | ||||||||||
Net
operating loss
|
$ | (8,761,215 | ) | $ | (10,687,151 | ) | $ | (11,827,543 | ) | $ | (7,612,935 | ) | $ | (5,465,761 | ) | |||||
Total
tax (benefit) expense 3
|
$ | (753 | ) | $ | 34,121 | $ | 87,975 | $ | (227,355 | ) | $ | 8,288,778 | ||||||||
Net
realized (loss) income from investments
|
$ | (11,105,577 | ) | $ | (8,323,634 | ) | $ | 30,162 | $ | 258,693 | $ | 14,208,789 | ||||||||
Net
decrease (increase) in unrealized depreciation on
investments
|
$ | 19,718,327 | $ | (30,170,712 | ) | $ | 5,080,936 | $ | (4,418,870 | ) | $ | (2,026,652 | ) | |||||||
Net
(decrease) increase in net assets resulting from
operations
|
$ | (148,465 | ) | $ | (49,181,497 | ) | $ | (6,716,445 | ) | $ | (11,773,112 | ) | $ | 6,716,376 | ||||||
(Decrease)
increase in net assets resulting from operations per average outstanding
share
|
$ | (0.01 | ) | $ | (1.99 | ) | $ | (0.30 | ) | $ | (0.57 | ) | $ | 0.36 |
1 We completed offerings of
our common stock as follows: 4,887,500 shares in 2009; 2,545,000
shares in 2008; 1,300,000 shares in 2007; 0 shares in 2006; and 3,507,500 shares
in 2005.
2 Included in total expenses is non-cash,
stock-based, compensation expense of $3,089,520 in 2009; $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. Also included in total expenses are the
following profit-sharing expenses: $0 in each of 2009, 2008 and 2007;
$50,875 in 2006; and $1,796,264 in 2005.
3 Included
in total tax expense are the following taxes paid by the Company on behalf of
shareholders: $0 in each of 2009, 2008, 2007 and 2006; and $8,122,367 in
2005.
34
Item
6.
|
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 2009 Consolidated
Financial Statements and notes thereto.
Forward-Looking
Statements
The information contained herein may
contain "forward-looking statements" based on our current expectations,
assumptions and estimates about us and our industry. These
forward-looking statements involve risks and uncertainties. Words
such as "believe," "anticipate," "estimate," "expect," "intend," "plan," "will,"
"may," "might," "could," "continue" and other similar expressions identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of several factors more fully described in "Risk Factors" and
elsewhere in this Form 10-K. The forward-looking statements made in
this Form 10-K 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.
Background
and Overview
We incorporated under the laws of the
state of New York in August 1981. In 1983, we completed an
IPO. 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
BDC subject to the provisions of Sections 55 through 65 of the 1940
Act.
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. We define venture capital 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. These
businesses can range in stage from pre-revenue to generating positive cash
flow. These businesses tend to be thinly capitalized, unproven, small
companies that lack management depth, have little or no history of operations
and are developing unproven technologies.
35
As of
December 31, 2009, $77,797,086, or 57 percent, of our total assets at fair value
consisted of private venture capital investments, net of unrealized depreciation
of $14,293,994. As of December 31, 2009, $226,395, or less than one
percent, of our total assets at market value consisted of publicly traded
venture capital investments, net of unrealized depreciation of
$72,432. As of December 31, 2008, $56,965,153, or 51 percent, of our
total assets at fair value consisted of private venture capital investments, net
of unrealized depreciation of $34,124,848. As of December 31, 2008,
$0 of our total assets consisted of publicly traded venture capital
investments.
Historical
Investments
Since our investment in Otisville in
1983 through December 31, 2009, we have made a total of 86 venture capital
investments, including four private placement investments in securities of
publicly traded companies. We have exited 55 of these 86 investments,
realizing total gross proceeds of $143,930,719 on our cumulative invested
capital of $71,854,116.
Historically, as measured from first
dollar in to last dollar out, the average and median holding periods for the 55
investments we have exited were 4.0 years and 3.3 years,
respectively.
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. From August 2001
through December 31, 2009, all 44 of our initial investments have been in
companies commercializing or integrating products enabled by nanotechnology or
microsystems. From August 2001 through December 31, 2009, we have
invested a total (before any subsequent write-ups, write-downs or dispositions)
of $116,748,763 in these companies.
Age
of Current Portfolio
We currently have 31 active tiny
technology companies in our portfolio, including one investment made prior to
2001. At December 31, 2009, from first dollar in, the average and
median holding periods for these 31 active tiny technology investments were 4.3
years and 3.7 years, respectively.
36
Tiny
Technology Companies in Our Active Portfolio as of December 31,
2009
|
Holding
Period (Years)
|
Adesto
Technologies Corporation
|
2.9
|
Ancora
Pharmaceuticals Inc.
|
2.7
|
BioVex
Group, Inc.
|
2.3
|
Bridgelux,
Inc.
|
4.6
|
Cambrios
Technologies Corporation
|
5.1
|
CFX
Battery, Inc.
|
2.5
|
Cobalt
Technologies, Inc.
|
1.2
|
Crystal
IS, Inc.
|
5.3
|
D-Wave
Systems, Inc.
|
3.7
|
Ensemble
Discovery Corporation
|
2.6
|
Enumeral
Technologies, Inc.
|
0.1
|
Innovalight,
Inc.
|
3.7
|
Kovio,
Inc.
|
4.1
|
Laser
Light Engines, Inc.
|
1.7
|
Mersana
Therapeutics, Inc.
|
7.9
|
Metabolon,
Inc.
|
4.0
|
Molecular
Imprints, Inc.
|
5.8
|
NanoGram
Corporation
|
6.7
|
Nanosys,
Inc.
|
6.7
|
Nantero,
Inc.
|
8.4
|
NeoPhotonics
Corporation
|
6.1
|
Nextreme
Thermal Solutions, Inc.
|
5.1
|
Orthovita,
Inc.
|
0.4
|
Polatis,
Inc.
|
7.5
|
PolyRemedy,
Inc.
|
1.9
|
Questech
Corporation
|
15.6
|
Siluria
Technologies, Inc.
|
2.2
|
SiOnyx,
Inc.
|
3.6
|
Solazyme,
Inc.
|
5.1
|
TetraVitae
Bioscience, Inc.
|
1.2
|
Xradia,
Inc.
|
3.0
|
Average
|
4.3
|
Median
|
3.7
|
Investment
Pace
We invested $489,999 in nanotechnology
and microsystems in 2001. We invested $12,334,051 in nanotechnology
and microsystems in 2009. The following is a summary of our annual
initial and follow-on investments in nanotechnology from January 1, 2005, to
December 31, 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.
37
2005
|
2006
|
2007
|
2008
|
2009
|
|
Total
Incremental Investments
|
$16,251,339
|
$24,408,187
|
$20,595,161
|
$17,779,462
|
$12,334,051
|
Investments
in Privately Held Companies
|
|||||
No.
of New Investments
|
4
|
6
|
7
|
4
|
1
|
No.
of Follow-On Investment Rounds
|
13
|
14
|
20
|
25
|
27
|
No.
of Rounds Led
|
0
|
7
|
3
|
4
|
5
|
Average
Dollar Amount – Initial
|
$1,575,000
|
$2,383,424
|
$1,086,441
|
$683,625
|
$250,000
|
Average
Dollar Amount – Follow-On
|
$765,488
|
$721,974
|
$649,504
|
$601,799
|
$436,490
|
Investments
in Publicly Traded Companies
|
|||||
No.
of New Investments
|
0
|
0
|
0
|
0
|
1
|
No.
of Follow-On Investment Rounds
|
0
|
0
|
0
|
0
|
2
|
Average
Dollar Amount – Initial
|
$0
|
$0
|
$0
|
$0
|
$99,624
|
Average
Dollar Amount – Follow-On
|
$0
|
$0
|
$0
|
$0
|
$99,602
|
We have a robust deal flow in privately
held companies operating at various stages of maturity. Technology
platforms and interesting intellectual property estates are being formed in
specific areas of nanotechnology that may be interesting on their own
or combined with our existing nanotechnology companies. With our
current portfolio, with our current asset size and with the current state of the
venture capital market, we are primarily focused on examining private company
opportunities at the earliest stages of maturity and at later stages of
maturity. In early-stage private companies, we are looking for
opportunities where there is the potential for generating near-term revenue and
where we will have the opportunity to own greater than five percent of the
company at the time of exit. In late-stage private companies, we are
looking for opportunities where the company has a clear path to revenue growth,
where there is a near-term exit opportunity and where we believe the current
round of financing may be the last round of private financing. We are
currently planning to invest between five and seven million dollars over the
life of our investment in private companies.
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 and venture capital turmoil
has decreased the availability of capital to many of our potential
co-investors. This situation may reduce the number of potential
co-investors available to us when forming syndicates.
We
believe recent market dynamics present opportunities to invest in
micro-capitalization publicly traded companies. Additionally, in July
2008, the SEC ruled that companies with a fully diluted market capitalization
below $250 million would be considered "good" BDC investments. We
believe this ruling provides new opportunities under our current structure as a
BDC. We began investing in such opportunities actively in
2009.
38
Our
approach to investing in publicly traded companies is similar to that of
privately held companies, albeit with a shorter investment timeframe of one to
three years versus five to seven years for private venture capital
investments. The liquidity of these investments and our intention to
hold these investments for a shorter period of time potentially enables us to
increase the overall liquidity of our venture capital
portfolio. We focus on:
|
·
|
micro-capitalization
companies listed on Nasdaq or on the over-the-counter (OTC)
markets;
|
|
·
|
companies
that we think have exceptional growth
potential;
|
|
·
|
companies
that operate in markets in which we are familiar because our privately
held venture-backed companies operate in these
markets;
|
|
·
|
opportunities
where our experience in emerging technology provides insight into
competitive advantages;
|
|
·
|
companies
with disruptive products enabled by nanotechnology that have a shorter
time to commercial launch than that of similar privately held
companies;
|
|
·
|
opportunities
where there is a disparity in valuation of similar publicly traded and
privately held companies;
|
|
·
|
companies
that have not been widely discovered or followed by the investment
community; and
|
|
·
|
opportunities
where the addition of capital to the investee company enables it to reach
a critical milestone, and where the capital is the main factor in
decreasing the risk of meeting that
milestone.
|
We may
also invest in companies that have known pending events, such as regulatory
approvals, or potential events such as M&A transactions or transitions from
OTC to Nasdaq, that may drive liquidity and stock-price
appreciation.
Importance
of Availability of Liquid Capital
Private
venture capital funds that we typically co-invest with are structured commonly
as limited partnerships with a committed level of capital and finite
lifetime. Capital is "called" from limited partners to make
investments and pay for expenses of running the firm at various points within
the lifetime of the fund. For each initial investment, the fund must
reserve additional capital for follow-on investments at later stages of the life
of the portfolio companies. These follow-on investments are required
because often venture-backed portfolio companies in areas we invest in operate
with negative cash flow for lengthy periods of time. In general, the
cumulative total of initial invested capital and reserves cannot exceed the
committed level of capital of the fund.
39
Our
strategy for investing capital is similar to this approach in some
respects. We make initial investments in portfolio companies and
project the amount of capital that may be required should the company mature
successfully. These projections, equivalent to the reserves of
private venture capital funds, are reviewed weekly by management, are updated
frequently and are a component of the data that guide our decisions on whether
to make new and follow-on investments. As a publicly traded,
internally managed venture capital company, our cash used to make investments
and pay expenses is held by us and not called from external sources when
needed. Accordingly, it is crucial that we operate the company with a
substantial balance of liquid capital for this reason and for four additional
reasons.
1)
|
We
manage the company and our investment pace and criteria such that our
projected needs for capital to make new and follow-on investments does not
exceed the total of our liquid investments. Although we use
best efforts to predict when this capital will be required for use in new
and follow-on investments, we cannot predict with certainty the timing for
these investments. We would be unable to make new or follow-on
investments in our portfolio companies without having substantial liquid
resources of capital available to
us.
|
2)
|
Venture
capital firms traditionally invest beside other venture capital firms in a
process called syndication. The size of the fund and the amount
of capital reserves available to syndicate partners is often an attribute
potential co-investors consider when deciding on syndicate
partners. As we do not have committed capital from limited
partners, we believe we must have adequate available liquid capital on our
balance sheet to be able to have access to high-quality deal flow and to
co-invest with top-tier venture capital
firms.
|
3)
|
We
rarely commit the total amount of cumulative capital intended for
investment in any portfolio company at one point in
time. Instead, our investments consist of multiple rounds of
financing of a given portfolio company, in which we typically participate
if we believe that the merits of such an investment outweigh the
risks. We also commonly have preemptive rights to invest
additional capital in our portfolio companies. These rights
have value, and sometimes are necessary to protect and potentially
increase the value of our positions in our portfolio companies as they
mature. Commonly, the terms of such financings also include
penalties for those investors that do not invest in these subsequent
rounds of financing. Without available capital at the time of
investment, our ownership in the company would be subject to these
penalties that can lead to a partial or complete loss of the capital
invested prior to that round of
financing.
|
4)
|
We
may have the opportunity to increase ownership in late rounds of financing
in some of our most mature companies. Many private venture
capital funds that invested in these companies are reaching the end of the
term associated with their limited partnerships. This issue may
limit the available capital to these funds for follow-on investments, and
the ability to take advantage of potentially valuable terms given to those
who have investable capital. Having permanent, liquid capital
available for investment allows us to take advantage of these
opportunities as they arise. In the fourth quarter of 2009, we
had such an opportunity in NeoPhotonics Corporation, one of our most
mature companies.
|
Our principal objective is to achieve
long-term capital appreciation, rather than current income. We cannot
count on current income to provide adequate capital for our venture capital
investments and the timing of long-term capital gains is
uncertain. We believe, therefore, that the appropriate balance of
highly liquid capital is essential to our business.
40
Involvement
with Portfolio Companies
The 1940 Act requires that business
development companies offer to "make available significant managerial
assistance" to portfolio companies. We are actively involved with our
portfolio companies through membership on boards of directors, as observers to
the boards of directors and/or through frequent communication with
management. As of December 31, 2009, we held at least a board seat or
observer rights on 25 of our 31 active portfolio companies (80.6 percent). The
table below lists those portfolio companies in which we have one or more members
of Management serving as a member of the board of directors or as an observer to
the board of directors at the request of the Company.
Portfolio
Company
|
Board
Member
|
Observer
|
Adesto
Technologies Corporation
|
X
|
|
Ancora
Pharmaceuticals Inc.
|
X
(2)
|
|
BioVex
Group, Inc.
|
X
|
|
Bridgelux,
Inc.
|
X
|
|
Cambrios
Technology Corporation
|
X
|
|
CFX
Battery, Inc.
|
X
|
|
Crystal
IS, Inc.
|
X
|
|
D-Wave,
Inc.
|
X
|
|
Ensemble
Discovery Corporation
|
X
|
|
Enumeral
Technologies, Inc.
|
X
(2)
|
|
Innovalight,
Inc.
|
X
|
|
Kovio,
Inc.
|
X
|
|
Laser
Light Engines
|
X
(2)
|
|
Mersana
Therapeutics, Inc.
|
X
(2)
|
|
Metabolon,
Inc.
|
X
|
|
Molecular
Imprints, Inc.
|
X
|
|
NanoGram
Corporation
|
X
|
|
NeoPhotonics
Corporation
|
X
|
|
Nextreme
Thermal Solutions, Inc.
|
X
|
X
|
PolyRemedy,
Inc.
|
X
|
|
Siluria
Technologies, Inc.
|
X
|
|
Sionyx,
Inc.
|
X
|
|
Solazyme,
Inc
|
X
|
|
Tetravitae
Bioscience, Inc.
|
X
|
|
Xradia,
Inc.
|
X
|
We may hold two or more board seats in
early-stage portfolio companies or those in which we have significant
ownership. We currently have two board seats in Ancora
Pharmaceuticals, Enumeral Technologies, and Laser Light Engines. We
may transition off of the board of directors to an observer role as our
portfolio companies raise additional capital from new investors, as they mature
or as they are able to attract independent members who have relevant industry
experience and contacts. We also typically step off the board of
directors upon the completion of an IPO.
41
We may be actively involved in the
formation and development of business strategies of our earliest stage portfolio
companies. This involvement may include hiring management, licensing
intellectual property, securing space and raising additional
capital. We also provide managerial assistance to late-stage
companies looking for potential exit opportunities by leveraging our status as a
public company through our relationships with the banking community and our
knowledge and experience implementing and complying with Section 404 of the
Sarbanes-Oxley Act.
Commercialization
of Nanotechnology by Our Portfolio Companies
Our nanotechnology investments have
matured around three main industry clusters: cleantech (44.7 percent of our
venture capital portfolio as of December 31, 2009); electronics, including
semiconductors (27.7 percent of our venture capital portfolio as of December 31,
2009); and healthcare/biotechnology (12.3 percent of our venture capital
portfolio as of December 31, 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.
42
These
three clusters are comprised of 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 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 define market domains as groupings
of technology that enable new user, business or economic experiences. There are
many billion-dollar market domains within each of the above listed industry
clusters. These market domains hold the potential for effecting
substantial change in everyday life. The internet, biologic drugs and
mobile and optical telecommunication are examples of market domains that emerged
within the past twenty years. Our experience is that technology
adoption occurs on two time scales. Existing market domains can allow
for rapid adoption as new technologies are continuously added to the existing
domain. These new technologies refine and improve the existing
experience provided by the market domain. Emerging market domains
often require more time for the adoption of technology than existing market
domains, as the new market domain is itself being absorbed by society and the
economy.
43
We classify our portfolio companies
into either existing market domains or emerging market domains. We
expect that the time scale at which these companies mature commercially will be
impacted by whether their technology is being adopted into an existing market
domain or an emerging market domain. In addition to the
characteristics we look for when investing in private companies outlined on page
38, we continue to look for investment opportunities in emerging market domains,
as we believe these investments have the potential to create outsized venture
capital returns.
44
Maturity
of Current Venture Capital Portfolio
Our active venture capital portfolio is
composed of companies at varying maturities facing different types of
risks. We have defined these levels of maturity and
sources of risk as: 1) Early Stage / Technology Risk, 2) Mid Stage / Market Risk
and 3) Late Stage / Execution Risk. Early-stage companies have a high
degree of technical, market and execution risk (which is typical of initial
investments by venture capital firms, including us). These companies
often require substantial development of their technologies before they begin
introducing products to market. Mid-Stage companies are those that
have overcome most of the technical risk associated with their products and are
now focused on addressing the market acceptance for their
products. For those companies developing therapeutics or medical
devices, the focus is on bringing their products through the first phases of
clinical trials. Late-stage companies are those that have determined
there is a market for their products, and they are now focused on sales
execution and scale. Late-stage healthcare and biotechnology
companies are typically either in Phase III Clinical Trials, which are the
pivotal trials before a possible FDA approval and commercial launch of a
product, or are generating revenue from the commercial sale of one or more
products. The chart below shows our assessment of the stage of
maturity of our 31 active portfolio companies.
45
We
currently have 20 companies in our active venture capital portfolio that
generate revenues ranging from nominal to significant from commercial sales of
products and/or services enabled by nanotechnology and microsystems, from
commercial partnerships and/or from government grants. Our privately
held portfolio companies generated approximately $267 million in aggregate
revenue in 2009, a 10.5 percent increase from revenues generated in
2008. Our publicly held portfolio company, Orthovita, reported
revenue of $92.9 million from commercial sales of its nanotechnology-enabled
products in 2009, a 21 percent increase from revenue generated in
2008.
One of our portfolio companies has
retained bankers to pursue a potential filing for an IPO in
2010. There can be no assurance that this company will file for
an IPO in 2010, and a variety of factors, including stock market and general
business conditions, could lead it to terminate such
considerations.
Current
Business Environment
The
effects of the banking and global stock market collapses, and the slowdown in
global economic activities that began with the intensification of the housing
and credit crisis during the third quarter of 2008 remain especially taxing on
the venture capital industry as of December 31, 2009. The fourth
quarter of 2009 concluded with the public markets having their third positive
quarter in a row, with the general economic decline appearing to level off and
with the first signs of life in the IPO market for venture-backed companies
emerging. However, even within this improving general economic
environment, the availability of capital for venture capital firms and
venture-backed companies continues to be extremely
limited. This conclusion is supported in part by data from the
National Venture Capital Association that indicate the total amount invested in
technology companies in 2009 was the lowest amount since 1997 and that financing
of start-ups raising money for the first time fell to the lowest level since the
two firms started tracking venture investment in 1995.
Even
though the public markets increased in value during the fourth quarter of 2009,
the global economic recession continues to affect the ability of investors to
exit investments in privately held companies. The fourth quarter of 2009,
included more venture-backed exits through M&As than during the previous
three quarters, and it included three IPOs of venture-backed
companies. The liquidity generated in the fourth quarter accounted
for 44 percent of the total liquidity generated for venture-backed companies
during 2009. The total amount of liquidity generated from these
companies was, however, down 34 percent from the total generated during
2008. These data support our belief that the increases in the
value of publicly traded companies do not necessarily correspond with the
ability of investors to exit privately held companies. As such, we
expect that it may take significantly more time for the market for
venture-backed companies to recover from the current economic turmoil than the
public stock markets. We continue to believe the lack of liquidity
will negatively affect the amount of capital available to privately held
companies from venture capital firms.
46
Many of
our portfolio companies have negative cash flow and, therefore, need additional
rounds of financing to continue operations. Historically, this
capital typically comes from the existing venture capital syndicate as well as
new investors. As a result of the economic downturn and the tight
availability of capital for investment by venture capital firms, the existing
investors in a syndicate are increasingly required to provide this capital
without the participation of new investors. This limited market for
capital to invest also affects existing members of syndicates of
investors. Some of these co-investors are unable to invest their full
pro rata amount of a round of financing, if at all, which results in a fractured
syndicate. A fractured syndicate can result in a portfolio company
being unable to raise additional capital to fund operations. The
portfolio company may be forced to sell before reaching its full potential or be
shut down entirely if the remaining investors cannot financially support the
company.
We
continue to view the disruption in the venture capital industry as both a
concern and an opportunity. Through 2009, our aim was 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 as we monitored the state of the capital markets. During
2009, we invested $349,624 in two new investments, and we invested $11,984,428
in 29 follow-on investments. This pace compares with four new and 25
follow-on investments totaling $2,734,500 and $15,044,962, respectively, in
2008.
Our
overall goal remains unchanged, which is to maintain our leadership position in
investing in nanotechnology and microsystems and to increase our net asset
value. The current environment for venture capital financings favors
those firms that have capital to invest regardless of the stage of the investee
company. 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 believe the turmoil of the venture capital industry
and the current economic climate provide opportunities to invest this capital at
historically low valuations in new and existing portfolio companies of varying
maturities.
Valuation
of Investments
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.")
Publicly traded companies, one of the
most observable asset classes continued to increase in value broadly during the
fourth quarter of 2009, and ended the year up substantially from the lows
reached during the first quarter of 2009. That said, these values,
including that of the Company, remain below those before the economic
collapse. The table below provides the percentage increases in value
during the past quarter and during the full year of 2009 for some common public
market indices and for the Company.
47
Q4 2009
|
2009
|
|
9/30/09 - 12/31/09
|
12/31/08 – 12/31/09
|
|
Dow Jones Industrial Avg.
|
7.4%
|
18.8%
|
Nasdaq Composite
|
6.9%
|
43.9%
|
S&P 500 Composite
|
5.5%
|
23.5%
|
Russell 2000
|
3.5%
|
25.2%
|
Harris & Harris Group
|
-26.9%
|
15.7%
|
The
values of privately held, venture capital-backed companies are inherently more
difficult to assess at any single point in time because securities of these
types of companies are not actively traded. We believe, perhaps even
more than in the past, that illiquidity, and the perception of illiquidity, can
affect value. We continue to believe that private valuations may be
slower to respond to improving economic conditions than publicly traded
companies because their securities are illiquid.
Difficult
venture environments can result in weak companies not receiving financing and
being subsequently closed down with a loss to venture investors, and/or strong
companies receiving financing but at significantly lower valuations than the
preceding financing rounds. The current state of the venture capital
market limits the availability of capital for investment by venture capital
firms. Increasingly, existing investors in a syndicate are required to provide
capital without the participation of new investors. Some of these
existing investors are unable to invest their full pro rata amount of a round of
financing, if at all, which results in a fractured syndicate. A
fractured syndicate can result in a portfolio company being unable to raise
additional capital to fund operations regardless of the potential of the
intellectual property or business of the portfolio company. The
portfolio company may be forced to sell before reaching its full potential or be
shut down entirely if the remaining investors cannot financially support the
company. These scenarios may adversely affect value.
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. If
we decide to proceed with a follow-on investment, these rounds of financing may
occur at valuations lower than those at which we originally
invested. 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. In 2009, we decided not to
make follow-on investments in Crystal IS, NanoGram and Polatis. These
decisions resulted in punitive actions to our preferred ownership in each of
these companies, which, when combined with additional factors, results in a
value of $0 of our securities of these companies as of December 31,
2009.
48
Non-Performance
Risk
As part of the valuation process, we
consider non-performance risk. Non-performance risk is 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 December 31, 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. As of
December 31, 2009, non-performance risk was a significant factor in determining
value of 12 of our 30 private portfolio companies that accounted for $23,972,048
of the total value of our privately held venture capital portfolio.
In each of the years in the period 2005
through 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 change in value of private portfolio
securities as a percentage of net assets at the beginning of the
year.
2005
|
2006
|
2007
|
2008
|
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 | ) | $ |
(12,845,574
|
)
|
|||||
Gross
Write-Ups During Year
|
$ | 23,485,176 | $ | 279,363 | $ | 11,694,618 | $ | 820,559 | $ |
21,631,864
|
||||||||||
Gross
Write-Downs as a Percentage of Net Asset Value, BOY
|
-4.62%
|
-3.57%
|
-6.86%
|
-28.67%
|
-11.7%
|
|||||||||||||||
Gross
Write-Ups as a Percentage of Net Asset Value,
BOY
|
31.42%
|
|
0.24%
|
10.26%
|
0.59%
|
19.7%
|
||||||||||||||
Net
Change as a Percentage of Net Asset Value, BOY
|
26.8%
|
-3.33%
|
3.40%
|
-28.08%
|
8.0%
|
1
From
September 30, 2009 to December 31, 2009, the value of our private venture
capital portfolio increased by $7,920,876 from $69,876,210 to
$77,797,086. The table below indicates some of the inputs used to
determine value of our privately held portfolio companies and the portion of the
change in value, on a quarter over quarter basis, relevant to those
inputs. It should be noted that our Valuation
Committee takes into account multiple sources of quantitative and
qualitative inputs to ultimately determine the value of our privately held
portfolio companies.
49
Q3
2009 to
Q4
2009
|
Q2
2009 to
Q3
2009
|
Q1
2009 to
Q2
2009
|
Q4
2008 to
Q1
2009
|
|||||||||||||
Value
of Private Portfolio as of Previous Quarter
|
$ | 69,876,210 | $ | 63,959,811 | $ | 58,793,688 | $ | 56,965,153 | ||||||||
Value
of Private Portfolio as of Current Quarter
|
$ | 77,797,086 | $ | 69,876,210 | $ | 63,959,811 | $ | 58,793,688 | ||||||||
Examples
of Inputs that Contribute to Changes in Value
|
||||||||||||||||
Total
New and Follow-On Investments
|
$ | 4,698,782 | $ | 3,884,893 | $ | 2,728,373 | $ | 723,176 | ||||||||
(+)
Due to Terms of New Equity Rounds of Financing
|
$ | 5,229,990 | $ | 4,725,316 | $ | 2,898,224 | $ | 5,376,988 | ||||||||
(-)
Due to Terms of New Equity Rounds of Financing
|
$ | 0 | $ | (1,967,156 | ) | $ | (53,846 | ) | $ | (346,319 | ) | |||||
(+)
Due to (+) in Values of Comparables
|
$ | 1,938,047 | $ | 2,823,833 | $ | 680,485 | $ | 0 | ||||||||
(-)
Due to (-) in Values of Comparables
|
$ | (6,313 | ) | $ | 0 | $ | (30,050 | ) | $ | (107,681 | ) | |||||
(+)
Due to (-) in Non-Performance Risk
|
$ | 500,000 | $ | 0 | $ | 1,049,480 | $ | 0 | ||||||||
(-)
Due to (+) in Non-Performance Risk
|
$ | (4,795,765 | ) | $ | (3,794,138 | ) | $ | (2,437,523 | ) | $ | (3,648,616 | ) | ||||
Other
Factors1
|
$ | 356,135 | $ | 243,6512 | $ | 330,980 | $ | (169,013 | ) | |||||||
Total
Change in Value of Private Portfolio from Quarter to
Quarter
|
$ | 7,920,876 | $ | 5,916,399 | $ | 5,166,123 | $ | 1,828,535 |
1
|
Other
factors include changes in accrued bridge note interest, currency
fluctuations and the value of
warrants.
|
2
|
Includes
changes in the capital account of Exponential Business Development
Company.
|
As of December 31, 2009, our top ten
investments by value accounted for approximately 69 percent of the value of our
venture capital portfolio. As of that date, we believe at least three
of these companies will require additional invested capital by the end of
2010.
50
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 December
31, 2009, we held $55,947,581 in U.S. government obligations.
Investment
Objective
Our principal objective is to achieve
long-term capital appreciation, rather than current income, by making venture
capital investments. We seek to reach the point where future growth
is financed through reinvestment of our capital gains from these
investments. 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.
51
In previous years, we have been able to
generate substantial amounts of interest income from our holdings of U.S.
treasury securities. As of December 31, 2009, we held three U.S.
treasury securities, with maturity dates of less than six months, yielding
approximately 0.26 percent. As of December 31, 2009, yields for
3-month, 6-month, and 12-month U.S. treasury securities were 0.06 percent, 0.20
percent and 0.47 percent, respectively. With yields at this level, we
expect to generate less interest income than in previous fiscal quarters and
years.
Results
of Operations
We present the financial results of our
operations utilizing generally accepted accounting principles ("GAAP") 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.
Years
Ended December 31, 2009, 2008, and 2007
During the years ended December 31,
2009, 2008, and 2007, we had net decreases in net assets resulting from
operations of $148,465, $49,181,497, and $6,716,445, respectively.
Investment Income and
Expenses:
During the years ended December 31,
2009, 2008, and 2007, we had net operating losses of $8,761,215, $10,687,151,
and $11,827,543, respectively. The variation in these results is
primarily owing to the changes in investment income and operating expenses,
including non-cash expense of $3,089,520 in 2009, $5,965,769 in 2008, and
$8,050,807 in 2007 associated with the granting of stock
options. During the years ended December 31, 2009, 2008, and 2007,
total investment income was $247,848, $1,987,347, and $2,705,636,
respectively. During the years ended December 31, 2009, 2008, and
2007, total operating expenses were $9,009,063, $12,674,498, and $14,533,179,
respectively.
52
During 2009, as compared with 2008,
investment income decreased from $1,987,347 to $247,848, primarily reflecting a
substantial decrease in interest rates. The average yield on our U.S.
government securities decreased from 3.2 percent for the year ended December 31,
2008, to 0.3 percent for the year ended December 31, 2009. During the
twelve months ended December 31, 2009, our average holdings of such securities
were $52,154,428, as compared with $55,978,372 during the year ended December
31, 2008.
Operating expenses, including non-cash,
stock-based compensation expenses, were $9,009,063 and $12,674,498 for the
twelve months ended December 31, 2009, and December 31, 2008,
respectively. The decrease in operating expenses for the twelve
months ended December 31, 2009, as compared with the twelve months ended
December 31, 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 custody fees. Salaries, benefits
and stock-based compensation expense decreased by $3,763,191, or 37.3 percent,
through December 31, 2009, as compared with December 31, 2008, primarily as a
result of a decrease in non-cash expense of $2,876,249 associated with the
Harris & Harris Group, Inc. 2006 Equity Incentive Plan (the "Stock Plan")
and a decrease in salaries and benefits owing primarily to a decrease in our
headcount, mainly the retirement of Charles E. Harris. At December
31, 2009, we had 11 full-time employees, as compared with 12 full-time employees
at December 31, 2008. While the non-cash, stock-based, compensation
expense for the Stock Plan increased our operating expenses by $3,089,520, 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 $34,759,
or 3.0 percent, for the year ended ended December 31, 2009, as compared with the
year ended December 31, 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. Directors' fees and expenses decreased by $29,156, or 7.9
percent, for the year ended December 31, 2009, primarily as a result of fewer
meetings held during the year, as compared with the year ended December 31,
2008. Professional fees increased by $73,070, or 10.5 percent, for
the year ended December 31, 2009, as compared with the year ended December 31,
2008, primarily as a result of an increase in certain legal, consulting and
accounting fees. Rent expense increased $40,581, or 14.7 percent, for
the year ended December 31, 2009, owing to a full year of higher rent associated
with our Palo Alto office lease which became effective July 1,
2008. Custody fees increased by $51,850, or 164.0 percent, for the
year ended December 31, 2009, as compared with the year ended December 31,
2008. This increase is owing to the higher fees charged by our new
custodian, The Bank of New York Mellon, who has more expertise in working with
investment companies.
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.
53
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.
Realized Income and Losses
from Investments:
During the years ended December 31,
2009, and December 31, 2008, we realized net losses on investments of
$11,105,577 and $8,323,634, respectively. During the year ended
December 31, 2007, we had net realized income from investments of
$30,162. 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, 2009,
2008, and 2007, we realized (losses) gains from investments, before taxes, of
$(11,106,330), $(8,289,513) and $118,137, respectively. Income tax
(benefit) expense for the years ended December 31, 2009, 2008, and 2007 was
$(753), $34,121 and $87,975, respectively.
During the year ended December 31,
2009, we realized net losses of $11,106,330, consisting primarily of realized
losses on our investments in CSwitch Corporation of $5,649,297, in Exponential
Business Development Company of $14,330, in Kereos, Inc., of $1,500,000, in
Nanomix, Inc., of $3,176,125, in Questech Corporation of $16,253, and in
Starfire Systems, Inc., of $750,000. 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 third quarter of 2009, we received a payment of
$4,115 from the sale of our interest in Nanomix, Inc. The realized
loss on Questech Corporation was owing to an unexercised warrant that expired on
November 19, 2009.
54
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 an unexercised
warrant of 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. The realized
loss on Questech Corporation was owing to an unexercised warrant that expired on
November 19, 2008.
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.
Net Unrealized Appreciation and
Depreciation of Portfolio Securities:
During
the year ended December 31, 2009, net unrealized depreciation on total
investments decreased by $19,718,327.
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, 2009, net unrealized depreciation on our venture
capital investments decreased by $19,758,422, or 57.9 percent, from net
unrealized depreciation of $34,124,848 at December 31, 2008, to net unrealized
depreciation of $14,366,426 at December 31, 2009, owing primarily to increases
in the valuations of the following investments held:
Investment
|
Amount
of Write-Up
|
||
Adesto
Technologies Corporation
|
$1,320,000
|
||
BioVex
Group, Inc.
|
845,952
|
||
Bridgelux,
Inc.
|
987,642
|
||
CFX
Battery, Inc.
|
812,383
|
||
Ensemble
Discovery Corporation
|
500,000
|
||
Metabolon,
Inc.
|
196,512
|
||
Molecular
Imprints, Inc.
|
3,841,541
|
||
NeoPhotonics
Corporation
|
3,350,923
|
||
Nextreme
Thermal Solutions, Inc.
|
2,202,628
|
||
Questech
Corporation
|
297,104
|
||
Siluria
Technologies, Inc.
|
160,723
|
||
Solazyme,
Inc.
|
5,376,988
|
||
Xradia,
Inc.
|
1,723,215
|
55
These write-ups for the twelve months ended
December 31, 2009, were partially offset by the following
write-downs:
Investment
|
Amount
of Write-Down
|
||
Ancora
Pharmaceuticals Inc.
|
$1,072,811
|
||
Cambrios
Technologies Corporation
|
257,878
|
||
Cobalt
Technologies, Inc.
|
187,499
|
||
Crystal
IS, Inc.
|
779,094
|
||
D-Wave
Systems, Inc.
|
826,786
|
||
Innovalight,
Inc.
|
1,537,713
|
||
Kovio,
Inc.
|
2,266,912
|
||
Laser
Light Engines, Inc.
|
999,999
|
||
Mersana
Therapeutics, Inc.
|
17,500
|
||
NanoGram
Corporation
|
1,471,805
|
||
Nanosys,
Inc.
|
2,685,059
|
||
Orthovita,
Inc.
|
72,432
|
||
PolyRemedy,
Inc.
|
136,170
|
||
SiOnyx,
Inc.
|
1,076,155
|
We also
had decreases to unrealized depreciation for CSwitch Corporation of $5,629,011,
Exponential Business Development Company of $15,361, Kereos, Inc., of
$1,500,000, Nanomix, Inc., of $3,150,190 and Starfire Systems, Inc., of $750,000
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 a decrease to unrealized depreciation for Questech
Corporation of $16,253 owing to a realized loss on an unexercised warrant that
expired on November 19, 2009.
We had an
increase owing to foreign currency translation of $469,809 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 unrealized depreciation of $12,443 at December 31,
2009.
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:
56
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.
57
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.
Financial
Condition
December
31, 2009
At December 31, 2009, our total
assets and net assets were $136,109,101 and $134,158,258,
respectively. Our net asset value ("NAV") per share at that date was
$4.35, and our shares outstanding increased to 30,859,593 as of December 31,
2009.
Significant developments in the twelve
months ended December 31, 2009, included an increase in
the holdings of our venture capital investments and U.S. government obligations
of $21,058,328 and $2,963,641, respectively. The increase in the
value of our venture capital investments from $56,965,153 at December 31, 2008,
to $78,023,481 at December 31, 2009, resulted primarily from an increase in the
net value of our venture capital investments of $8,652,415 and two new and
29 follow-on investments of $12,344,051. The increase in the value of our U.S.
government obligations from $52,983,940 at December 31, 2008, to $55,947,581 at
December 31, 2009, is primarily owing to net proceeds of $21,264,140 received
through a public follow-on offering and proceeds received from stock option
exercises of $421,950, offset by the payment of cash basis operating expenses of
$5,683,624 and by new and follow-on venture capital investments totaling
$12,344,051.
The following table is a summary of
additions to our portfolio of venture capital investments made during the twelve
months ended December 31, 2009:
New Investments
|
Amount of Investment
|
|||
Orthovita,
Inc.
|
$ | 99,624 | ||
Enumeral
Technologies, Inc.
|
250,000 |
58
Follow-On Investments
|
Amount of Investment
|
|||
Adesto
Technologies Corporation
|
$550,000
|
|||
Adesto
Technologies Corporation
|
1,635,775
|
|||
Ancora
Pharmaceuticals Inc.
|
125,000
|
|||
Ancora
Pharmaceuticals Inc.
|
200,000
|
|||
Ancora
Pharmaceuticals Inc.
|
100,000
|
|||
Ancora
Pharmaceuticals Inc.
|
700,000
|
|||
BioVex
Group, Inc.
|
111,111
|
|||
BioVex
Group, Inc.
|
166,667
|
|||
BioVex
Group, Inc.
|
299,145
|
|||
Bridgelux,
Inc.
|
250,124
|
|||
Cambrios
Technologies Corporation
|
515,756
|
|||
CFX
Battery, Inc.
|
3,492
|
|||
CFX
Battery, Inc.
|
533,239
|
|||
CFX
Battery, Inc.
|
1,000,000
|
|||
CFX
Battery, Inc.
|
300,000
|
|||
Cobalt
Technologies, Inc.
|
374,999
|
|||
Crystal
IS, Inc.
|
408,573
|
|||
Ensemble
Discovery Corporation
|
48,883
|
|||
Innovalight,
Inc.
|
721,090
|
|||
Laser
Light Engines, Inc.
|
890,000
|
|||
Laser
Light Engines, Inc.
|
500,000
|
|||
Mersana
Therapeutics, Inc.
|
200,000
|
|||
Mersana
Therapeutics, Inc.
|
250,000
|
|||
Metabolon,
Inc.
|
1,000,000
|
|||
NeoPhotonics
Corporation
|
87,364
|
|||
NeoPhotonics
Corporation
|
692,300
|
|||
Orthovita,
Inc.
|
99,808
|
|||
Orthovita,
Inc.
|
99,395
|
|||
PolyRemedy,
Inc.
|
121,706
|
|||
|
||||
Total
|
$12,334,051
|
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, 2009, and December 31,
2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Venture
capital investments,
|
||||||||
at
cost
|
$ | 92,389,907 | $ | 91,090,001 | ||||
Net
unrealized depreciation (1)
|
14,366,426 | 34,124,848 | ||||||
Venture
capital investments,
|
||||||||
at
value
|
$ | 78,023,481 | $ | 56,965,153 |
December 31,
|
||||||||
2009
|
2008
|
|||||||
U.S.
government obligations,
|
||||||||
at
cost
|
$ | 55,960,024 | $ | 52,956,288 | ||||
Net
unrealized (depreciation) appreciation(1)
|
(12,443 | ) | 27,652 | |||||
U.S.
government obligations,
|
||||||||
at
value
|
$ | 55,947,581 | $ | 52,983,940 |
(1)At
December 31, 2009, and December 31, 2008, the net accumulated unrealized
depreciation on investments was $14,378,869 and $34,097,196,
respectively.
59
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 ("NAV") 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
|
60
Cash
Flow
Year
Ended December 31, 2009
Net cash used in operating activities
for the year ended December 31, 2009, was $5,277,132, primarily reflecting the
payment of operating expenses.
Net cash used in investing
activities for the year ended December 31, 2009, was $15,433,826, primarily
reflecting venture capital investments of $12,344,051, less proceeds from the
sale of venture capital investments of $7,365.
Cash provided by financing activities
for the year ended December 31, 2009, was $21,686,090, resulting
from the issuance of 4,887,500 new shares of our common stock on October 9,
2009, in a public follow-on offering and exercise of stock options.
Year
Ended December 31, 2008
Net cash used in operating activities
for the year ended December 31, 2008, was $4,178,331, 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.
61
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.
Liquidity
and Capital Resources
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 December 31, 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.
We
believe that the market disruption that began in September of 2008 and continued
during 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. 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 December 31, 2009, our net asset value was $4.35 per share and our closing
market price was $4.57 per share. We do not currently have
shareholder approval to issue or sell shares below our net asset value per
share.
62
December
31, 2009
At December 31, 2009, and December 31,
2008, our total net primary liquidity was $57,868,628 and $53,645,843,
respectively.
Our net primary sources of liquidity,
which consist of cash, our investment in the publicly traded shares of
Orthovita, Inc., U.S. government obligations and receivables, are adequate to
cover our gross cash operating expenses. Our gross cash operating
expenses for 2009 and 2008 totaled $5,683,624 and $6,397,424,
respectively.
The increase in our primary
liquidity from December 31, 2008, to December 31, 2009, is primarily owing to
the proceeds received through the public follow-on offering, partially offset by
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 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.
On
October 9, 2009, we completed the sale of 4,887,500 shares of our common stock
at a price of $4.75 per share to the public for total gross proceeds of
$23,215,625; net proceeds of this offering, after placement agent fees and
offering costs of $1,951,485, were $21,264,140. We intend to use, and
have been using, 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,
2009, we have used $5,660,831 of the net proceeds from this offering for these
purposes.
On October 26, 2009, we filed a
post-effective amendment to our shelf registration statement on Form N-2 to
deregister 2,112,500 shares of common stock that were not sold in the public
offering that closed on October 9, 2009.
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 this location. The subleases expire on
April 29, 2010. Total rent expense for our office space in New York
City was $191,399 in 2009; $186,698 in 2008 and $178,167 in
2007. Future minimum sublease payments for the remaining term
are $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 $125,205 in 2009 and $51,525
in 2008. Future minimum lease payments in each of the following years
are: 2010 - $128,962; 2011 - $132,831; 2012 - $136,816 and 2013 -
$93,135.
63
On September 24, 2009, we signed a
ten-year lease for office space at 1450 Broadway, New York, New
York. The lease commenced on January 21, 2010, and this office space
replaced our corporate headquarters previously located at 111 West 57th Street
in New York City. 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. Future minimum lease payments in each of the following years
are: 2010 - $151,762; 2011 - $190,957; 2012 - $239,227; 2013 - $245,208; 2014 -
$251,338; and thereafter for the remaining term – an aggregate of
$1,477,248.
December
31, 2008
At December 31, 2008, and December 31,
2007, our total net primary liquidity was $53,645,843 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.
Critical
Accounting Policies
The Company's significant accounting
policies are described in Note 2 to the Consolidated Financial Statements and in
the Footnote to the Consolidated Schedule of Investments. Critical
accounting policies are those that are both important to the presentation of our
financial condition and results of operations and those that require
management’s most difficult, complex or subjective judgments. The
Company considers the following accounting policies and related estimates to be
critical:
Valuation of Portfolio
Investments
The most
significant estimate inherent in the preparation of our consolidated financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. As a BDC, we
invest in primarily illiquid securities that generally have no established
trading market.
Investments
are stated at "value" as defined in the 1940 Act and in the applicable
regulations of the SEC. Value, as defined in Section 2(a)(41) of the
1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) the fair value as determined in good
faith by, or under the direction of, the Board of Directors for all other
assets. (See "Valuation Procedures" in the "Footnote to Consolidated
Schedule of Investments.") As of December 31, 2009, our financial
statements include private venture capital investments valued at $77,797,086,
the fair values of which were determined in good faith by, or under the
direction of, the Board of Directors. As of December 31, 2009,
approximately 58 percent of our net assets represent investments in portfolio
companies valued at fair value by the Board of Directors.
64
Determining fair value requires that
judgment be applied to the specific facts and circumstances of each portfolio
investment, although our valuation policy is intended to provide a consistent
basis for determining fair value of the portfolio
investments. Factors that may be considered include, but are not
limited to, readily available public market quotations; the cost of the
Company’s investment; transactions in the portfolio company’s
securities or unconditional firm offers by responsible parties; the financial
condition and operating results of the company; the long-term potential of the
business and technology of the company; the values of similar securities issued
by companies in similar businesses; multiples to revenues, net income or EBITDA
that similar securities issued by companies in similar businesses receive; the
proportion of the company’s securities we own and the nature of any rights to
require the company to register restricted securities under the applicable
securities laws; the achievement of milestones; and the rights and preferences
of the class of securities we own as compared with other classes of securities
the portfolio has issued.
The
recent financial crisis continues to make it extremely difficult for many
companies to raise capital. Moreover, the cost of capital has
increased substantially. Historically, difficult venture capital
environments have resulted in weak companies not receiving financing and being
subsequently closed down with a loss of investment to venture investors, and/or
strong companies receiving financing but at significantly lower valuations than
the preceding venture rounds, leading to very deep dilution for those who do not
participate in the new rounds of investment. This economic and
financing environment has caused an increase in the non-performance risk for
venture capital-backed companies. Our best estimate of the
non-performance risk of our portfolio companies has been quantified and included
in the valuation of the companies at December 31, 2009.
All investments recorded at fair value
are categorized based upon the level of judgment associated with the inputs used
to measure their fair value. Hierarchical levels related to the
amount of subjectivity associated with the inputs to fair valuation of these
assets, are as follows:
·
|
Level 1:
Unadjusted quoted prices in active markets for identical assets or
liabilities.
|
·
|
Level 2: Quoted
prices in active markets for similar assets or liabilities, or quoted
prices for identical or similar assets or liabilities in markets that are
not active, or inputs other than quoted prices that are observable for the
asset or liability.
|
·
|
Level 3:
Unobservable inputs for the asset or
liability.
|
At
December 31, 2009, all of our private portfolio investments were classified as
Level 3 in the hierarchy, indicating a high level of judgment required in their
valuation.
65
The
values assigned to our assets are based on available information and do not
necessarily represent amounts that might ultimately be realized, as these
amounts depend on future circumstances and cannot be reasonably determined until
the individual investments are actually liquidated or become readily marketable.
Upon sale of investments, the values that are ultimately realized may be
different from what is presently estimated. This difference could be
material.
Stock-Based
Compensation
Determining the appropriate fair-value
model and calculating the fair value of share-based awards on the date of grant
requires judgment. Historically, we have used the
Black-Scholes-Merton option pricing model to estimate the fair value of employee
stock options. During the quarter ended March 31, 2009, we used the
Black-Scholes-Merton option pricing model and a binomial lattice option pricing
model to estimate the fair value of the two-year non-qualified stock options
"NQSOs" and the 10-year NQSOs, respectively, granted on March, 18,
2009. During the quarter ended June 30, 2009, we used the
Black-Scholes-Merton option pricing model to estimate the fair value of the
two-year and the 10-year NQSOs granted on May 13, 2009. During the
quarter ended December 31, 2009, we used the Black-Scholes-Merton option pricing
model to estimate the fair value of the five-year NQSOs granted on November 11,
2009.
Management
uses the Black-Scholes-Merton option pricing model in instances where we lack
historical data necessary for more complex models and when the share award terms
can be valued within the model. Other models may yield fair values
that are significantly different from those calculated by the
Black-Scholes-Merton option pricing model.
Management
uses a binomial lattice option pricing model in instances where it is necessary
to include a broader array of assumptions. We used the binomial
lattice model for the 10-year NQSOs granted on March 18, 2009. These
awards included accelerated vesting provisions that are based on market
conditions. At the date of the grant, management’s analysis concluded
that triggering of the market condition acceleration clause is
probable.
Option
pricing models require the use of subjective input assumptions, including
expected volatility, expected life, expected dividend rate, and expected
risk-free rate of return. Variations in the expected volatility or
expected term assumptions have a significant impact on fair value. As
the volatility or expected term assumptions increase, the fair value of the
stock option increases. The expected dividend rate and expected
risk-free rate of return are not as significant to the calculation of fair
value. A higher assumed dividend rate yields a lower fair value,
whereas higher assumed interest rates yield higher fair values for stock
options.
In the
Black-Scholes-Merton model, we use the simplified calculation of expected term
as described in the SEC’s Staff Accounting Bulletin 107 because of the lack of
historical information about option exercise patterns. In the
binomial lattice model, we use an expected term that assumes the options will be
exercised at two-times the strike price because of the lack of option exercise
patterns. Future exercise behavior could be materially different than
that which is assumed by the model.
66
Expected volatility is based on the
historical fluctuations in the Company's stock. The Company's stock
has historically been volatile, which increases the fair value of the underlying
share-based awards.
GAAP requires us to develop an estimate
of the number of share-based awards that will be forfeited owing to employee
turnover. Quarterly changes in the estimated forfeiture rate can have
a significant effect on reported share-based compensation, as the effect of
adjusting the rate for all expense amortization after the grant date is
recognized in the period the forfeiture estimate is changed. If
the actual forfeiture rate proves to be higher than the estimated forfeiture
rate, then an adjustment will be made to increase the estimated forfeiture rate,
which would result in a decrease to the expense recognized in the financial
statements. If the actual forfeiture rate proves to be lower
than the estimated forfeiture rate, then an adjustment will be made to decrease
the estimated forfeiture rate, which would result in an increase to the expense
recognized in the financial statements. Such adjustments would affect
our operating expenses and additional paid-in capital, but would have no effect
on our net asset value.
Pension and Post-Retirement
Benefit Plan Assumptions
The
Company provides a Retiree Medical Benefit Plan for employees who meet certain
eligibility requirements. Several statistical and other factors that
attempt to anticipate future events are used in calculating the expense and
liability values related to our post-retirement benefit plans. These
factors include assumptions we make about the discount rate, the rate of
increase in healthcare costs, and mortality, among others.
The
discount rate reflects the current rate at which the post-retirement benefit
liabilities could be effectively settled considering the timing of expected
payments for plan participants. In estimating this rate, we consider
the Citigroup Pension Liability Index in the determination of the appropriate
discount rate assumptions. The weighted average rate we utilized to
measure our post retirement medical benefit obligation as of December 31,
2009, and to calculate our 2010 expense was 5.72 percent. A rate of
6.55 percent was used in determining the 2008 expense and a rate of 5.71 percent
was used in calculating the 2008 benefit obligation. We used a
discount rate of 5.75 percent to calculate our pension obligation.
Recent
Developments — Portfolio Companies
On January 15, 2010, we made a
$250,000 new investment in ABS Materials, Inc., a privately held tiny
technology company.
On January 19 and February 19, 2010, we
made two follow-on investments totaling $171,975 in a privately held tiny
technology portfolio company.
On January 20 and February 10, 2010, we
made two follow-on investments totaling $4,564 by exercising our warrants
to purchase shares of common stock of NeoPhotonics Corporation, a privately held
tiny technology portfolio company.
67
On February 5, 2010, we made a $98,427
follow-on investment in Orthovita, Inc., a publicly traded tiny technology
portfolio company.
On February 10, 2010, we made a
$500,000 follow-on investment in a privately held tiny technology portfolio
company.
On February 24, 2010, CFX Battery,
Inc., changed its name to Contour Energy Systems, Inc.
On March 8, 2010, we made a $99,957 new
investment in Satcon Technology Corporation, a publicly traded tiny technology
company.
On March 10, 2010, we made
a $250,041 follow-on investment in a privately held tiny technology
portfolio company.
On December 31, 2009, we valued the
shares of one of our privately held tiny technology portfolio companies at
$0.9696 per share. On March 10, 2010, that company raised additional
funding from a third party, independent financial investor at the equivalent of
$1.26 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,
2010. A valuation calculated based on this input alone could increase
the value of this portfolio company at March 31, 2010, ranging from $0 to
approximately $1,400,000, or $0 to approximately $0.05 per share, from the value
at December 31, 2009. 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, 2010.
One of our portfolio companies has
engaged an investment banker for purposes of filing for an IPO in
2010. There can be no assurance that this portfolio company will file
for an IPO in 2010, and a variety of factors, including stock market and general
business conditions, legal considerations and audit results, could lead it to
terminate such consideration.
Item
6A. Quantitative and Qualitative Disclosures
About Market Risk.
Our business activities
contain elements of risk. We consider the principal types of market
risk to be valuation risk, interest rate risk and foreign currency
risk. Although we are risk-seeking rather than risk-averse in our
investments, we consider the management of risk to be essential to our
business.
Valuation
Risk
Value, as defined in Section 2(a)(41)
of the 1940 Act, is (i) the market price for those securities for which market
quotations are readily available and (ii) fair value as determined in good faith
by, or under the direction of, the Board of Directors for all other
assets. (See the "Valuation Procedures" in the "Footnote to
Consolidated Schedule of Investments" contained in "Item 7. Consolidated
Financial Statements and Supplementary Data.")
68
Because there is typically no public
market for our interests in the small privately held companies in which we
invest, the valuation of the equity interests in that portion of our portfolio
is determined in good faith by our Valuation Committee, comprised of the
independent members of our Board of Directors, in accordance with our Valuation
Procedures. In the absence of a readily ascertainable market value,
the determined value of our portfolio of equity interests may differ
significantly from the values that would be placed on the portfolio if a ready
market for the equity interests existed. Any changes in valuation are
recorded in our Consolidated Statement of Operations as "Net decrease (increase)
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.
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.
Interest
Rate Risk
We generally also invest in both short
and long-term U.S. government and agency securities. To the extent that we
invest in short and long-term U.S. government and agency securities, changes in
interest rates result in changes in the value of these obligations that result
in an increase or decrease of our net asset value. The level of
interest rate risk exposure at any given point in time depends on the market
environment, the expectations of future price and market
movements, and the quantity and duration of long-term U.S.
government and agency securities held by the Company, and it will vary from
period to period. If the average interest rate on U.S. government
securities at December 31, 2009, were to increase by 25, 75 and 150 basis
points, the average value of these securities held by us at December 31, 2009,
would decrease by approximately $130,438, $391,313 and $782,625, respectively,
and our net asset value would decrease correspondingly.
In
addition, in the future, we may from time to time opt to borrow money to make
investments. Our net investment income will be dependent upon the
difference between the rate at which we borrow funds and the rate at which we
invest such funds. As a result, there can be no assurance that a
significant change in market interest rates and the current credit crisis will
not have a material adverse effect on our net investment income in the event we
choose to borrow funds for investing purposes.
Foreign
Currency Risk
Most of our investments are denominated
in U.S. dollars. We currently have one investment denominated in
Canadian dollars. We are exposed to foreign currency risk related to
potential changes in foreign currency exchange rates. The potential
loss in fair value on this investment resulting from a 10 percent adverse change
in quoted foreign currency exchange rates is $309,762 at December 31,
2009.
69
Item
7. Consolidated Financial
Statements and Supplementary Data.
HARRIS
& HARRIS GROUP, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The
following reports and consolidated financial schedules of Harris & Harris
Group, Inc. are filed herewith and included in response to Item 7.
Documents
Page
|
|
Management's
Report on Internal Control Over
|
|
Financial
Reporting
|
71
|
Report
of Independent Registered Public Accounting Firm
|
72
|
Consolidated Financial
Statements
|
|
Consolidated
Statements of Assets and Liabilities
|
|
as
of December 31, 2009, and 2008
|
74
|
Consolidated
Statement of Operations for the
|
|
years
ended December 31, 2009, 2008, and 2007
|
75
|
Consolidated
Statements of Cash Flows for the
|
|
years
ended December 31, 2009, 2008, and 2007
|
76
|
Consolidated
Statements of Changes in Net Assets for the
|
|
years
ended December 31, 2009, 2008, and 2007
|
77
|
Consolidated
Schedule of Investments as of December 31, 2009
|
78-88
|
Consolidated
Schedule of Investments as of December 31, 2008
|
89-100
|
Footnote
to Consolidated Schedule of Investments
|
101-104
|
Notes
to Consolidated Financial Statements
|
105-123
|
Financial
Highlights for the years ended December 31, 2009,
|
|
2008,
and 2007
|
124
|
Schedules
other than those listed above have been omitted because they are not applicable
or the required information is presented in the consolidated financial
statements and/or related notes.
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 Exchange Act 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, 2009. 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, 2009, 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 72 of this Annual Report on Form
10-K.
71
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, 2009 and December 31, 2008, and the results of their
operations, their cash flows, the changes in their net assets, and the financial
highlights for each of the three years in the period ended December 31,
2009 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, 2009 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 71 of the 2009 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 $77,797,086 (58% of net
assets) at December 31, 2009, 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.
72
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 15,
2010
73
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF ASSETS AND
LIABILITIES
|
December 31, 2009
|
December 31, 2008
|
|||||||
ASSETS
|
||||||||
Investments,
in portfolio securities at value:
|
||||||||
Unaffiliated
privately held companies
|
||||||||
(cost:
$26,977,200 and $24,208,281, respectively)
|
$ | 21,656,436 | $ | 12,086,503 | ||||
Unaffiliated
publicly traded securities
|
||||||||
(cost:
$298,827 and $0, respectively)
|
226,395 | 0 | ||||||
Non-controlled
affiliated privately held companies
|
||||||||
(cost:
$54,864,948 and $60,796,720, respectively)
|
50,297,220 | 39,650,187 | ||||||
Controlled
affiliated privately held companies (cost: $10,248,932
|
||||||||
and
$6,085,000, respectively)
|
5,843,430 | 5,228,463 | ||||||
Total,
investments in private portfolio companies and
|
||||||||
public
securities at value
|
||||||||
(cost:
$92,389,907 and $91,090,001, respectively)
|
$ | 78,023,481 | $ | 56,965,153 | ||||
Investments,
in U.S. Treasury obligations at value
|
||||||||
(cost:
$55,960,024 and $52,956,288, respectively)
|
55,947,581 | 52,983,940 | ||||||
Cash
|
1,611,465 | 636,333 | ||||||
Restricted
funds (Note 7)
|
2,000 | 191,955 | ||||||
Receivable
from portfolio company
|
28,247 | 0 | ||||||
Interest
receivable
|
25,832 | 56 | ||||||
Prepaid
expenses
|
94,129 | 484,567 | ||||||
Other
assets
|
376,366 | 365,597 | ||||||
Total
assets
|
$ | 136,109,101 | $ | 111,627,601 | ||||
LIABILITIES & NET
ASSETS
|
||||||||
Post
retirement plan liabilities (Note 7)
|
$ | 1,369,843 | $ | 1,399,048 | ||||
Accounts
payable and accrued liabilities
|
579,162 | 689,300 | ||||||
Deferred
rent
|
1,838 | 8,140 | ||||||
Total
liabilities
|
1,950,843 | 2,096,488 | ||||||
Net
assets
|
$ | 134,158,258 | $ | 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
|
||||||||
12/31/09
and 12/31/08; 32,688,333 issued at
|
||||||||
12/31/09
and 27,688,313 issued at 12/31/08
|
326,884 | 276,884 | ||||||
Additional
paid in capital (Note 10)
|
205,977,117 | 181,251,507 | ||||||
Accumulated
net operating and realized loss
|
(54,361,343 | ) | (34,494,551 | ) | ||||
Accumulated
unrealized depreciation of investments
|
(14,378,869 | ) | (34,097,196 | ) | ||||
Treasury
stock, at cost (1,828,740 shares at 12/31/09 and
|
||||||||
12/31/08)
|
(3,405,531 | ) | (3,405,531 | ) | ||||
Net
assets
|
$ | 134,158,258 | $ | 109,531,113 | ||||
Shares
outstanding
|
30,859,593 | 25,859,573 | ||||||
Net
asset value per outstanding share
|
$ | 4.35 | $ | 4.24 |
The
accompanying notes are an integral part of these consolidated financial
statements.
74
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||
Investment
income:
|
||||||||||||
Interest
from:
|
||||||||||||
Fixed-income
securities and bridge notes
|
$ | 214,760 | $ | 1,971,178 | $ | 2,705,597 | ||||||
Miscellaneous
income
|
33,088 | 16,169 | 39 | |||||||||
Total
investment income
|
247,848 | 1,987,347 | 2,705,636 | |||||||||
Expenses:
|
||||||||||||
Salaries,
benefits and stock-based
|
||||||||||||
compensation
(Note 5)
|
6,327,467 | 10,090,658 | 11,435,329 | |||||||||
Administration
and operations
|
1,125,266 | 1,160,025 | 1,432,653 | |||||||||
Professional
fees
|
767,077 | 694,007 | 902,911 | |||||||||
Rent
|
316,604 | 276,023 | 235,998 | |||||||||
Directors'
fees and expenses
|
338,227 | 367,383 | 435,060 | |||||||||
Depreciation
|
50,965 | 54,795 | 63,113 | |||||||||
Custody
fees
|
83,457 | 31,607 | 28,115 | |||||||||
Total
expenses
|
9,009,063 | 12,674,498 | 14,533,179 | |||||||||
Net
operating loss
|
(8,761,215 | ) | (10,687,151 | ) | (11,827,543 | ) | ||||||
Net
realized (loss) gain from investments:
|
||||||||||||
Realized
(loss) gain from:
|
||||||||||||
Unaffiliated
companies
|
(2,264,330 | ) | 3,588 | 119,082 | ||||||||
Non-controlled
affiliated companies
|
(8,841,675 | ) | (6,509,404 | ) | 0 | |||||||
Controlled
affiliated companies
|
0 | (2,893,487 | ) | 0 | ||||||||
U.S.
Treasury obligations/other
|
(325 | ) | 1,109,790 | (945 | ) | |||||||
Realized
(loss) gain from investments
|
(11,106,330 | ) | (8,289,513 | ) | 118,137 | |||||||
Income
tax (benefit) expense (Note 8)
|
(753 | ) | 34,121 | 87,975 | ||||||||
Net
realized (loss) gain from investments
|
(11,105,577 | ) | (8,323,634 | ) | 30,162 | |||||||
Net
decrease (increase) in unrealized
|
||||||||||||
depreciation
on investments:
|
||||||||||||
Change
as a result of investment sales
|
11,090,579 | 8,292,072 | 0 | |||||||||
Change
on investments held
|
8,627,748 | (38,462,784 | ) | 5,080,936 | ||||||||
Net
decrease (increase) in unrealized
|
||||||||||||
depreciation
on investments
|
19,718,327 | (30,170,712 | ) | 5,080,936 | ||||||||
Net
decrease in net assets resulting
|
||||||||||||
from
operations
|
$ | (148,465 | ) | $ | (49,181,497 | ) | $ | (6,716,445 | ) | |||
Per
average basic and diluted outstanding share
|
$ | (0.01 | ) | $ | (1.99 | ) | $ | (0.30 | ) | |||
Average
outstanding shares
|
27,025,995 | 24,670,516 | 22,393,030 |
The
accompanying notes are an integral part of these consolidated financial
statements.
75
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||
Cash
flows (used in) provided by operating activities:
|
||||||||||||
Net
decrease in net assets resulting from operations
|
$ | (148,465 | ) | $ | (49,181,497 | ) | $ | (6,716,445 | ) | |||
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
|
(8,611,997 | ) | 38,460,225 | (5,199,073 | ) | |||||||
Depreciation
of fixed assets, amortization of premium
|
||||||||||||
or
discount on U.S. government securities, and
|
||||||||||||
bridge
note interest
|
12,363 | (179,809 | ) | (60,009 | ) | |||||||
Stock-based
compensation expense
|
3,089,520 | 5,965,769 | 8,050,807 | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Restricted
funds
|
189,955 | 2,475,065 | (517,235 | ) | ||||||||
Receivable
from portfolio company
|
(28,247 | ) | 524 | (524 | ) | |||||||
Interest
receivable
|
35,365 | 621,856 | (21,965 | ) | ||||||||
Prepaid
expenses
|
390,438 | 4,100 | (477,722 | ) | ||||||||
Other
receivables
|
(7,454 | ) | 0 | 819,905 | ||||||||
Other
assets
|
(52,965 | ) | 88,936 | (152,012 | ) | |||||||
Post
retirement plan liabilities
|
(29,205 | ) | 102,210 | 124,171 | ||||||||
Accounts
payable and accrued liabilities
|
(110,138 | ) | (2,529,325 | ) | 275,992 | |||||||
Accrued
profit sharing
|
0 | 0 | (261,661 | ) | ||||||||
Deferred
rent
|
(6,302 | ) | (6,385 | ) | (6,801 | ) | ||||||
Net
cash used in operating activities
|
(5,277,132 | ) | (4,178,331 | ) | (4,142,572 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Purchase
of U.S. government securities
|
(208,875,156 | ) | (133,032,933 | ) | (60,744,292 | ) | ||||||
Sale
of U.S. government securities
|
205,769,329 | 140,831,769 | 60,508,538 | |||||||||
Investment
in venture capital investments
|
(12,334,051 | ) | (17,779,462 | ) | (20,595,161 | ) | ||||||
Proceeds
from sale of investments
|
7,365 | 136,837 | 174,669 | |||||||||
Purchase
of fixed assets
|
(1,313 | ) | (21,969 | ) | (41,640 | ) | ||||||
Net
cash used in investing activities
|
(15,433,826 | ) | (9,865,758 | ) | (20,697,886 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Gross
proceeds from public offering (Note 10)
|
23,215,625 | 15,651,750 | 14,027,000 | |||||||||
Gross
expenses for public offering (Note 10)
|
(1,951,485 | ) | (1,268,253 | ) | (1,033,832 | ) | ||||||
Proceeds
from stock option exercises (Note 5)
|
421,950 | 0 | 10,105,511 | |||||||||
Net
cash provided by financing activities
|
21,686,090 | 14,383,497 | 23,098,679 | |||||||||
Net
increase (decrease) in cash:
|
||||||||||||
Cash
at beginning of the year
|
636,333 | 296,925 | 2,038,704 | |||||||||
Cash
at end of the year
|
1,611,465 | 636,333 | 296,925 | |||||||||
Net
increase (decrease) in cash
|
$ | 975,132 | $ | 339,408 | $ | (1,741,779 | ) | |||||
Supplemental
disclosures of cash flow information:
|
||||||||||||
Income
taxes paid
|
$ | 2,179 | $ | 45,765 | $ | 80,236 |
The
accompanying notes are an integral part of these consolidated financial
statements.
76
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN NET
ASSETS
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||
Changes
in net assets from operations:
|
||||||||||||
Net
operating loss
|
$ | (8,761,215 | ) | $ | (10,687,151 | ) | $ | (11,827,543 | ) | |||
Net
realized (loss) gain on investments
|
(11,105,577 | ) | (8,323,634 | ) | 30,162 | |||||||
Net
decrease in unrealized depreciation
|
||||||||||||
on
investments as a result of sales
|
11,090,579 | 8,292,072 | 0 | |||||||||
Net
decrease (increase) in unrealized
|
||||||||||||
depreciation
on investments held
|
8,627,748 | (38,462,784 | ) | 5,080,936 | ||||||||
Net
decrease in net assets resulting
|
||||||||||||
from
operations
|
(148,465 | ) | (49,181,497 | ) | (6,716,445 | ) | ||||||
Changes
in net assets from
|
||||||||||||
capital
stock transactions:
|
||||||||||||
Issuance
of common stock upon the
|
||||||||||||
exercise
of stock options
|
1,125 | 0 | 9,996 | |||||||||
Issuance
of common stock on offering
|
48,875 | 25,450 | 13,000 | |||||||||
Additional
paid in capital on common
|
||||||||||||
stock
issued
|
21,636,090 | 14,358,047 | 23,075,683 | |||||||||
Stock-based
compensation expense
|
3,089,520 | 5,965,769 | 8,050,807 | |||||||||
Net
increase in net assets resulting
|
||||||||||||
from
capital stock transactions
|
24,775,610 | 20,349,266 | 31,149,486 | |||||||||
Net
increase (decrease) in net assets
|
24,627,145 | (28,832,231 | ) | 24,433,041 | ||||||||
Net
Assets:
|
||||||||||||
Beginning
of the year
|
109,531,113 | 138,363,344 | 113,930,303 | |||||||||
End
of the year
|
$ | 134,158,258 | $ | 109,531,113 | $ | 138,363,344 |
The
accompanying notes are an integral part of these consolidated financial
statements.
77
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of
|
|||||||||
net
assets at value
|
|||||||||
Private
Placement Portfolio (Illiquid) – 16.1% of net assets
|
|||||||||
at
value
|
|||||||||
BioVex
Group, Inc. (5)(6)(7)(8) — Developing novel biologics
|
|||||||||
for
treatment of cancer and infectious disease
|
|||||||||
Series
E Convertible Preferred Stock
|
(M)
|
2,799,552 | $ | 1,042,862 | |||||
Series
G Convertible Preferred Stock
|
(M)
|
3,738,004 | 627,985 | ||||||
Warrants
at $0.21 expiring 11/5/16
|
( I
)
|
285,427 | 20,836 | ||||||
1,691,683 | |||||||||
Cobalt
Technologies, Inc. (5)(6)(7)(9) — Developing processes for
|
|||||||||
making
biobutanol through biomass fermentation
|
|||||||||
Series
C Convertible Preferred Stock
|
(M)
|
352,112 | 375,000 | ||||||
D-Wave
Systems, Inc. (5)(6)(7)(10) — Developing high-
|
|||||||||
performance
quantum computing systems
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
1,144,869 | 907,612 | ||||||
Series
C Convertible Preferred Stock
|
(M)
|
450,450 | 357,101 | ||||||
Series
D Convertible Preferred Stock
|
(M)
|
1,533,395 | 1,215,622 | ||||||
2,480,335 | |||||||||
Molecular
Imprints, Inc. (5)(6) — Manufacturing nanoimprint
|
|||||||||
lithography
capital equipment
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
1,333,333 | 2,999,999 | ||||||
Series
C Convertible Preferred Stock
|
(M)
|
1,250,000 | 2,812,500 | ||||||
Warrants
at $2.00 expiring 12/31/11
|
( I
)
|
125,000 | 163,625 | ||||||
5,976,124 | |||||||||
Nanosys,
Inc. (5)(6) — 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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
78
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of
|
|||||||||
net
assets at value (Cont.)
|
|||||||||
Private
Placement Portfolio (Illiquid) – 16.1% of net assets
|
|||||||||
at
value (Cont.)
|
|||||||||
Nantero,
Inc. (5)(6)(7) — 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 (5)(6)(11) — Developing and manufacturing
|
|||||||||
optical
devices and components
|
|||||||||
Common
Stock
|
(M)
|
1,100,013 | 739,209 | ||||||
Series
1 Convertible Preferred Stock
|
(M)
|
1,831,256 | 1,230,604 | ||||||
Series
2 Convertible Preferred Stock
|
(M)
|
741,898 | 498,555 | ||||||
Series
3 Convertible Preferred Stock
|
(M)
|
2,750,000 | 1,848,000 | ||||||
Series
X Convertible Preferred Stock
|
(M)
|
8,923 | 1,427,680 | ||||||
Warrants
at $0.15 expiring 01/26/10
|
( I
)
|
16,364 | 11,291 | ||||||
Warrants
at $0.15 expiring 12/05/10
|
( I
)
|
14,063 | 9,703 | ||||||
5,765,042 | |||||||||
Polatis,
Inc. (5)(6)(7) — 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. (5)(6)(7) — Developing a robotic
|
|||||||||
manufacturing
platform for wound treatment patches
|
|||||||||
Series
B-1 Convertible Preferred Stock
|
(M)
|
287,647 | 46,933 | ||||||
Series
B-2 Convertible Preferred Stock
|
(M)
|
676,147 | 60,853 | ||||||
107,786 |
The
accompanying notes are an integral part of these consolidated financial
statements.
79
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF
INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Unaffiliated Companies (2)(3)(4) – 16.3% of
|
|||||||||
net
assets at value (Cont.)
|
|||||||||
Private
Placement Portfolio (Illiquid) – 16.1% of net assets
|
|||||||||
at
value (Cont.)
|
|||||||||
Siluria
Technologies, Inc. (5)(6)(7) — Developing next-generation
|
|||||||||
nanomaterials
|
|||||||||
Series
S-2 Convertible Preferred Stock
|
(M)
|
612,061 | $ | 204,000 | |||||
TetraVitae
Bioscience, Inc. (5)(6)(7)(12) — 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:
$26,977,200)
|
$ | 21,656,436 | |||||||
Publicly
Traded Portfolio (Liquid) – 0.2% of net assets
|
|||||||||
at
value
|
|||||||||
Orthovita,
Inc. (6)(13) — Developing materials and devices
|
|||||||||
for
orthopedic medical implant applications
|
|||||||||
Common
Stock
|
(M)
|
64,500 | 226,395 | ||||||
Total
Unaffiliated Publicly Traded Portfolio (cost: $298,827)
|
$ | 226,395 | |||||||
Total
Investments in Unaffiliated Companies (cost: $27,276,027)
|
$ | 21,882,831 |
The
accompanying notes are an integral part of these consolidated financial
statements.
80
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Non-Controlled Affiliated Companies (2)(14) –
|
|||||||||
37.5%
of net assets at value
|
|||||||||
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets
|
|||||||||
at
value
|
|||||||||
Adesto
Technologies Corporation (5)(6)(7) — Developing low-power,
|
|||||||||
high-performance
memory devices
|
|||||||||
Series
A Convertible Preferred Stock
|
(M)
|
6,547,619 | $ | 2,420,000 | |||||
Series
B Convertible Preferred Stock
|
(M)
|
5,952,381 | 2,200,000 | ||||||
4,620,000 | |||||||||
BridgeLux,
Inc. (5)(6) — Manufacturing high-power light
|
|||||||||
emitting
diodes (LEDs) and arrays
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
1,861,504 | 1,804,914 | ||||||
Series
C Convertible Preferred Stock
|
(M)
|
2,130,699 | 2,065,926 | ||||||
Series
D Convertible Preferred Stock
|
(M)
|
833,333 | 807,999 | ||||||
Warrants
at $0.7136 expiring 12/31/14
|
( I
)
|
163,900 | 98,995 | ||||||
Warrants
at $1.50 expiring 8/26/14
|
( I
)
|
124,999 | 55,375 | ||||||
4,833,209 | |||||||||
Cambrios
Technologies Corporation (5)(6)(7) — 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 | ||||||
Series
D Convertible Preferred Stock
|
(M)
|
515,756 | 257,878 | ||||||
1,554,891 | |||||||||
CFX
Battery, Inc. (5)(6)(7)(15) — Developing batteries using
|
|||||||||
nanostructured
materials
|
|||||||||
Series
A Convertible Preferred Stock
|
(M)
|
2,565,798 | 2,822,378 | ||||||
Series
B Convertible Preferred Stock
|
(M)
|
812,500 | 1,300,000 | ||||||
4,122,378 | |||||||||
Crystal
IS, Inc. (5)(6) — Developing single-crystal
|
|||||||||
aluminum
nitride substrates for light-emitting diodes
|
|||||||||
Common
Stock
|
(M)
|
2,585,657 | 0 | ||||||
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 | ||||||
0 |
The
accompanying notes are an integral part of these consolidated financial
statements.
81
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Non-Controlled Affiliated Companies (2)(14) –
|
|||||||||
37.5%
of net assets at value (Cont.)
|
|||||||||
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets
|
|||||||||
at
value (Cont.)
|
|||||||||
Ensemble
Discovery Corporation (5)(6)(16) — Developing DNA-
|
|||||||||
Programmed
ChemistryTM
for the discovery of new classes of
|
|||||||||
therapeutics
and bioassays
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
1,449,275 | $ | 1,500,000 | |||||
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
$ | 299,169 | 325,506 | |||||
1,825,506 | |||||||||
Enumeral
Technologies, Inc. (5)(6)(7)(13) — Developing high-value
|
|||||||||
opportunities
in immunology including therapeutic discovery,
|
|||||||||
immune
profiling and personalized medicine
|
|||||||||
Unsecured
Convertible Bridge Note (including interest)
|
(M)
|
$ | 250,000 | 250,438 | |||||
Innovalight,
Inc. (5)(6)(7) — Developing solar power
|
|||||||||
products
enabled by silicon-based nanomaterials
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
16,666,666 | 2,969,667 | ||||||
Series
C Convertible Preferred Stock
|
(M)
|
5,810,577 | 1,276,457 | ||||||
Series
D Convertible Preferred Stock
|
(M)
|
4,046,974 | 721,090 | ||||||
4,967,214 | |||||||||
Kovio,
Inc. (5)(6) — Developing semiconductor products
|
|||||||||
using
printed electronics and thin-film technologies
|
|||||||||
Series
C Convertible Preferred Stock
|
(M)
|
2,500,000 | 609,943 | ||||||
Series
D Convertible Preferred Stock
|
(M)
|
800,000 | 195,182 | ||||||
Series
E Convertible Preferred Stock
|
(M)
|
1,200,000 | 1,500,000 | ||||||
Warrants
at $1.25 expiring 12/31/12
|
( I
)
|
355,880 | 291,466 | ||||||
2,596,591 | |||||||||
Mersana
Therapeutics, Inc. (5)(6)(7) — Developing treatments for
|
|||||||||
cancer
based on novel drug delivery polymers
|
|||||||||
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)
|
$ | 650,000 | 708,165 | |||||
Warrants
at $2.00 expiring 10/21/10
|
( I
)
|
91,625 | 16,218 | ||||||
1,659,334 |
The
accompanying notes are an integral part of these consolidated financial
statements.
82
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Non-Controlled Affiliated Companies (2)(14) –
|
|||||||||
37.5%
of net assets at value (Cont.)
|
|||||||||
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets
|
|||||||||
at
value (Cont.)
|
|||||||||
Metabolon,
Inc. (5)(6) — Developing service and diagnostic products
|
|||||||||
through
the use of a metabolomics, or biochemical, profiling
platform
|
|||||||||
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 | 112,092 | ||||||
2,559,778 | |||||||||
NanoGram
Corporation (5)(6) — Developing solar power products
|
|||||||||
enabled
by silicon-based nanomaterials
|
|||||||||
Series
I Convertible Preferred Stock
|
(M)
|
63,210 | 0 | ||||||
Series
II Convertible Preferred Stock
|
(M)
|
1,250,904 | 0 | ||||||
Series
III Convertible Preferred Stock
|
(M)
|
1,242,144 | 0 | ||||||
Series
IV Convertible Preferred Stock
|
(M)
|
432,179 | 0 | ||||||
0 | |||||||||
Nextreme
Thermal Solutions, Inc. (5)(6) — 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 (5)(6) — Manufacturing and marketing
|
|||||||||
proprietary
metal and stone decorative tiles
|
|||||||||
Common
Stock
|
(M)
|
655,454 | 425,390 | ||||||
Solazyme,
Inc. (5)(6)(7) — 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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
83
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Non-Controlled Affiliated Companies (2)(14) –
|
|||||||||
37.5%
of net assets at value (Cont.)
|
|||||||||
Private Placement
Portfolio (Illiquid) – 37.5% of net
assets
|
|||||||||
at
value (Cont.)
|
|||||||||
Xradia,
Inc. (5)(6) — Designing, manufacturing and selling
ultra-high
|
|||||||||
resolution
3D x-ray microscopes and fluorescence imaging systems
|
|||||||||
Series
D Convertible Preferred Stock
|
(M)
|
3,121,099 | $ | 5,723,215 | |||||
Total
Non-Controlled Private Placement Portfolio (cost:
$54,864,948)
|
$ | 50,297,220 | |||||||
Total
Investments in Non-Controlled Affiliated Companies (cost:
$54,864,948)
|
$ | 50,297,220 |
The
accompanying notes are an integral part of these consolidated financial
statements.
84
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
||||||||
Valuation (1)
|
Principal
|
Value
|
|||||||
Investments
in Controlled Affiliated Companies (2)(17) –
|
|||||||||
4.40%
of net assets at value
|
|||||||||
Private Placement
Portfolio (Illiquid) – 4.40%
of
|
|||||||||
net
assets at value
|
|||||||||
Ancora
Pharmaceuticals Inc. (5)(6)(7) — Developing synthetic
|
|||||||||
carbohydrates
for pharmaceutical applications
|
|||||||||
Series
B Convertible Preferred Stock
|
(M)
|
1,663,808 | $ | 17,374 | |||||
Series
C Convertible Preferred Stock
|
(M)
|
2,066,051 | 1,239,632 | ||||||
1,257,006 | |||||||||
Laser
Light Engines, Inc. (5)(6)(7) — Manufacturing solid-state
light
|
|||||||||
sources
for digital cinema and large-venue projection displays
|
|||||||||
Series
A Convertible Preferred Stock
|
(M)
|
7,499,062 | 1,000,000 | ||||||
Secured
Convertible Bridge Note (including interest)
|
(M)
|
$ | 1,390,000 | 1,434,116 | |||||
2,434,116 | |||||||||
SiOnyx,
Inc. (5)(6)(7) — 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: $10,248,932)
|
$ | 5,843,430 | |||||||
Total
Investments in Controlled Affiliated Companies (cost:
$10,248,932)
|
$ | 5,843,430 | |||||||
Total
Private Placement and Publicly Traded Portfolio (cost:
$92,389,907)
|
$ | 78,023,481 |
The
accompanying notes are an integral part of these consolidated financial
statements.
85
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Method
of
|
Shares/
|
|||||||||
Valuation (1)
|
Principal
|
Value
|
||||||||
U.S.
Government Securities (18) – 41.7% of net assets at value
|
||||||||||
U.S.
Treasury Bill
|
—
due date 04/22/10
|
(M)
|
$ | 10,000,000 | $ | 9,997,600 | ||||
U.S.
Treasury Bill
|
—
due date 06/17/10
|
(M)
|
42,175,000 | 42,139,151 | ||||||
U.S.
Treasury Notes
|
—
due date 02/28/10, coupon 2.000%
|
(M)
|
3,800,000 | 3,810,830 | ||||||
Total
Investments in U.S. Government Securities (cost:
$55,960,024)
|
$ | 55,947,581 | ||||||||
Total
Investments (cost: $148,349,931)
|
$ | 133,971,062 |
The
accompanying notes are an integral part of these consolidated financial
statements.
86
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
Notes to
Consolidated Schedule of Investments
(1)
|
See
Footnote to Consolidated Schedule of Investments on page 101 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 or less than
five percent of the common shares of the publicly traded
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 private companies is $26,977,200. The gross
unrealized appreciation based on the tax cost for these securities is
$2,338,205. The gross unrealized depreciation based on the tax cost for
these securities is $7,658,969.
|
(4)
|
The
aggregate cost for federal income tax purposes of investments in
unaffiliated publicly traded companies is $298,827. 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 $72,432.
|
(5)
|
Legal
restrictions on sale of investment.
|
(6)
|
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.
|
(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 IPO. The ability to exercise this warrant is therefore
contingent on BioVex completing successfully an IPO before the expiration
date of the warrant on September 27, 2012. The exercise price
of this warrant shall be 110 percent of the IPO
price.
|
(9)
|
Cobalt
Technologies, Inc., does business as Cobalt
Biofuels.
|
The
accompanying notes are an integral part of this consolidated
schedule.
87
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2009
|
(10)
|
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."
|
(11)
|
We
exercised NeoPhotonics Corporation warrants in January and February
2010. See "Note 12. "Subsequent
Events."
|
(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.
|
(13)
|
Initial
investment was made during 2009.
|
(14)
|
The
aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $54,864,948. The gross
unrealized appreciation based on the tax cost for these securities is
$10,648,525. The gross unrealized depreciation based on the tax
cost for these securities is
$15,216,253.
|
(15)
|
On February 28, 2008,
Lifco, Inc., merged with CFX Battery, Inc. The surviving entity
is CFX Battery,
Inc.
|
(16)
|
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 $149,539.57
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
$89.86.
|
(17)
|
The
aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $10,248,932. 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 $4,405,502.
|
(18)
|
The
aggregate cost for federal income tax purposes of our U.S. government
securities is $55,960,024. The gross unrealized appreciation on the tax
cost for these securities is $0. The gross unrealized depreciation on the
tax cost of these securities is
$12,443.
|
The
accompanying notes are an integral part of this consolidated
schedule.
88
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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
89
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.)
|
|||||||||
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 | 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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
90
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.)
|
|||||||||
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.
91
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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
92
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.)
|
|||||||||
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 | |||||||||
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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
93
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.)
|
|||||||||
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 | |||||||||
|
|||||||||
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 |
The
accompanying notes are an integral part of these consolidated financial
statements.
94
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.)
|
|||||||||
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.
95
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.
96
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.
97
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 101 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 IPO. The ability to exercise this warrant is therefore
contingent on BioVex completing successfully an IPO before the expiration
date of the warrant on September 27, 2012. The exercise price
of this warrant shall be 110 percent of the IPO
price.
|
The
accompanying notes are an integral part of this consolidated
schedule.
98
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2008
|
(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.
|
(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.
|
The
accompanying notes are an integral part of this consolidated
schedule.
99
HARRIS
& HARRIS GROUP, INC.
CONSOLIDATED
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31,
2008
|
(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.
100
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 when that investment is sold, 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
Accounting Standards Codification Topic
820, "Fair Value Measurements and Disclosures," ("ASC 820") defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). In effect, ASC 820 applies fair value
terminology to all valuations whereas the 1940 Act applies market value
terminology to readily marketable assets and fair value terminology to other
assets.
The main
approaches to measuring fair value utilized are the market approach and the
income approach.
·
|
Market
Approach: 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).
|
101
·
|
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.
|
ASC Topic
820 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
|
|
·
|
All
other securities.
|
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:
102
|
§
|
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:
|
103
|
·
|
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.
|
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;
|
|
·
|
Commercial
prospects;
|
|
·
|
Term
of patent;
|
|
·
|
Projected
markets; and
|
|
·
|
Other
subjective factors.
|
E. ALL
OTHER SECURITIES
All Other
Securities are reported at fair value as determined in good faith by the
Valuation Committee using the approaches for determining valuation as described
above.
For all other securities, the reported
values shall reflect the Valuation Committee's judgment of fair values as of the
valuation date using the outlined basic approaches of valuation discussed in
Section 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.
104
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.
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 year ended December 31, 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. 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 generally accepted accounting principles ("GAAP")
and include the accounts of the Company and its wholly owned
subsidiary. All significant inter-company accounts and transactions
have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform to the current year presentation.
Use of
Estimates. The preparation of the consolidated financial
statements in conformity with GAAP 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 our investments.
Cash and Cash
Equivalents. Cash and cash equivalents includes demand
deposits. Cash and cash equivalents are carried at cost which
approximates value.
105
Portfolio Investment
Valuations. Investments are stated at "value" as defined in
the 1940 Act and in the applicable regulations of the SEC and in accordance with
GAAP. 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, 2009, our financial statements include
private venture capital investments and one publicly traded venture capital
investment valued at $77,797,086 and $226,395, respectively. The fair
values of our private venture capital investments were determined in good faith
by, or under the direction, of the Board of Directors. Upon sale of
investments, the values that are ultimately realized may be different from what
is presently estimated. The difference could be
material.
Foreign Currency
Translation. The accounting records of the Company are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of
valuation. For the twelve months ended December 31, 2009, included in
the net decrease in unrealized depreciation on investments was a $469,809 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 twelve months ended December 31, 2009, the
Company earned $135,536 in interest on U.S. government securities and
interest-bearing accounts. During the twelve months ended December
31, 2009, the Company recorded, net of write-offs, $79,224 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 records these amounts as an expense in the
Consolidated Statement of Operations over the vesting period with a
corresponding increase to our additional paid-in capital. For the
years ended December 31, 2009, 2008 and 2007, the increase to our operating
expenses was offset by the increase to our additional paid-in capital, resulting
in no net impact to our net asset value. Additionally, the Company
does not record the tax benefits associated with the expensing of stock options,
because the Company currently intends to qualify as a RIC under Subchapter M of
the Code. The amount of non-cash, stock-based compensation expense
recognized in the Consolidated Statement 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
5. Stock-Based Compensation" for further discussion.
106
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 8. Income
Taxes."
Restricted
Funds. The Company maintained 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. At December 31, 2009,
we held $2,000 in restricted funds as a security deposit for a
sublessor.
Property and
Equipment. Property and equipment are included in "Other
Assets" and are carried at $69,528 and $119,180 at December 31, 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.
Post Retirement Plan
Liabilities. Unrecognized actuarial gains and losses are
recognized as net periodic benefit cost pursuant to the Company's historical
accounting policy for amortizing such amounts. Actuarial gains and
losses that arise that are not recognized as net periodic benefit cost in the
same periods will be recognized as a component of net
assets.
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 guidance for
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. It provides additional guidance for fair value
measures 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 this guidance did not have a material impact
on the Company's consolidated financial statements.
Effective
July 1, 2009, the FASB’s Accounting Standards Codification ("ASC" or
"Codification") became the single official source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with
GAAP. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The FASB will no longer issue new standards in the form
of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, the FASB will issue Accounting Standards Updates. Accounting
Standards Updates will not be authoritative in their own right as they will only
serve to update the Codification. These changes and the Codification
itself do not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the Company’s consolidated financial statements.
107
NOTE 3. BUSINESS
RISKS AND UNCERTAINTIES
We have invested a substantial portion
of our assets in privately held companies, the securities of which are
inherently illiquid. We also seek to invest in small publicly traded
companies that we believe have exceptional growth potential. Although
these companies are publicly traded, their stock may not trade at high volumes
and prices can be volatile, which may restrict our ability to sell our
positions. These privately held and publicly traded businesses tend
to lack management depth, to have limited or no history of operations and to not
have attained profitability. 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 all 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 Statement of Operations as "Net decrease (increase)
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.
108
NOTE
4. INVESTMENTS
At
December 31, 2009, our financial assets were categorized as follows in the fair
value hierarchy:
Fair Value Measurement at Reporting Date
Using:
|
||||||||||||||||
Description
|
December 31,
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
|
$ | 55,947,581 | $ | 52,136,751 | $ | 3,810,830 | $ | 0 | ||||||||
Private
Portfolio Companies:
|
||||||||||||||||
Preferred
Stock
|
$ | 73,134,661 | $ | 0 | $ | 0 | $ | 73,134,661 | ||||||||
Bridge
Notes
|
$ | 2,718,225 | $ | 0 | $ | 0 | $ | 2,718,225 | ||||||||
Common
Stock
|
$ | 1,164,599 | $ | 0 | $ | 0 | $ | 1,164,599 | ||||||||
Warrants
|
$ | 779,601 | $ | 0 | $ | 0 | $ | 779,601 | ||||||||
$ | 77,797,086 | |||||||||||||||
Publicly
Traded
|
||||||||||||||||
Portfolio
Companies
|
$ | 226,395 | $ | 226,395 | $ | 0 | $ | 0 | ||||||||
Total
|
$ | 133,971,062 | $ | 52,363,146 | $ | 3,810,830 | $ | 77,797,086 |
The
following chart shows the components of change in the financial assets
categorized as Level 3, for the twelve months ended December 31,
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
|
(11,106,005)
|
|||
Total
unrealized gains included in change in net assets
|
19,830,852
|
|||
Investments
in private placements and interest on bridge notes
|
12,212,789
|
|||
Disposals
and write-offs of bridge note interest
|
(105,703)
|
|||
Ending
Balance, December 31, 2009
|
$77,797,086
|
|||
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
|
$8,786,290
|
109
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, 2009, 2008, and 2007, the Compensation Committee of the Board of Directors
of the Company approved 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 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, 2009, 2008, and 2007 were as
follows:
Grant Date
|
No. of Options
Granted
|
Option Type
|
Vesting Period
|
Exercise Price1
|
|||||
November
11, 2009
|
200,000
|
NQSO
|
11/10
to 11/12
|
$4.49
|
|||||
May
13, 2009
|
200,000
|
NQSO
|
11/09
to 05/13
|
$4.46
|
|||||
March
18, 2009
|
329,999
|
NQSO
|
03/10
to 03/13
|
$3.75
|
|||||
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
|
1 The exercise price for
the November 11, 2009, May 13, 2009, and March 18, 2009, grants was the closing
price of our shares of common stock as quoted on the Nasdaq Global Market on the
date of grant. The exercise price for the August 13, 2008, March 19, 2008, and
June 27, 2007, grants was the volume weighted average price as quoted on the
Nasdaq Global Market on the date of the grant.
110
The 2009
option 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 all or substantially all of the Company's assets. Upon exercise,
the shares would be issued from our previously authorized but unissued
shares. In addition, with respect to the grant on March 18, 2009, the
awards were to 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 reached
$6.00 per share at the close of business on three consecutive trading days on
the Nasdaq Global Market or (2) the Board of Directors accepted an offer for the
sale of substantially all of the Company's assets.
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. Accordingly, the vesting schedule
accelerated and all 329,999 options became immediately vested and
exercisable. The remaining compensation cost of $364,839 was
recognized in the quarter ended September 30, 2009. 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.
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.
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 options 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.
111
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 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:
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
|||||||||||||||
of Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
|||||||||||||||
Type of Award
|
Term
|
Granted
|
in Yrs
|
Factor
|
Yield
|
Rates
|
Per Share
|
|||||||||||||
Non-qualified
stock options
|
1.5
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
during 2008 using the Black-Scholes-Merton model for the contract term were as
follows:
Weighted
|
|||||||||||||||||||||
Average
|
|||||||||||||||||||||
Number
|
Expected
|
Expected
|
Expected
|
Risk-free
|
Fair
|
||||||||||||||||
of Options
|
Term
|
Volatility
|
Dividend
|
Interest
|
Value
|
||||||||||||||||
Type of Award
|
Term
|
Granted
|
in Yrs
|
Factor
|
Yield
|
Rates
|
Per Share
|
||||||||||||||
Non-qualified
stock options
|
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
|
|
The
assumptions used in the calculation of fair value using the Black-Scholes model
for each contract term for grants in 2009 were as follows:
112
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
|
2
Years
|
394,570
|
Ranging
from
1.375
to
1.5
|
Ranging
from
71.7%
to
105.5%
|
0%
|
Ranging
from
0.52%
to
0.71%
|
Ranging
from
$1.29
to
$2.08
|
|
|||||||||||||
|
|||||||||||||||||||||
Non-qualified
stock options
|
5
Years
|
200,000
|
3.5
|
64.6%
|
0%
|
1.64%
|
$2.11
|
||||||||||||||
|
|||||||||||||||||||||
Non-qualified
stock options
|
10
Years
|
51,200
|
6.25
|
60.6%
|
0%
|
2.35%
|
$2.60
|
||||||||||||||
Total
|
645,770
|
For the March 2009 grant of 10-year
stock options, we used a Lattice model to calculate fair value. The
assumptions used in the lattice model for the March 2009 grant of 10-year stock
options were as follows:
Number
|
Expected
|
Expected
|
Risk-free
|
Fair
|
||||||||||||||||
Contractual
|
of Options
|
Suboptimal
|
Volatility
|
Dividend
|
Interest
|
Value
|
||||||||||||||
Type of Award
|
Term
|
Granted
|
Factor
|
Factor
|
Yield
|
Rate
|
Per Share
|
|||||||||||||
Non-qualified
stock options
|
10
Years
|
84,229
|
|
2
|
73.1%
|
0%
|
2.59%
|
$1.97
|
For the
years ended December 31, 2009, December 31, 2008, and December 31, 2007, the
Company recognized $3,089,520, $5,965,769 and $8,050,807 of compensation expense
in the Consolidated Statement of Operations, respectively. As of
December 31, 2009, there was approximately $5,835,486 of unrecognized
compensation cost related to unvested stock option awards. This cost
is expected to be recognized over a weighted-average period of approximately two
years.
For the
year ended December 31, 2009, a total of 112,520 options were exercised for
total proceeds to the Company of $421,950. 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.
The grant
date fair value of options vested during the years ended December 31, 2009,
December 31, 2008, and December 31, 2007, was $3,821,871, $6,779,996 and
$6,851,874, respectively.
For the years ended December 31, 2009,
December 31, 2008, and December 31, 2007, 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.
113
A summary of the changes in outstanding
stock options for the year ended December 31, 2009, is as follows:
Weighted
|
||||||||||||||||||||
Weighted
|
Weighted
|
Average
|
||||||||||||||||||
Average
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||||||
Exercise
|
Grant Date
|
Contractual
|
Intrinsic
|
|||||||||||||||||
Shares
|
Price
|
Fair Value
|
Term (Yrs)
|
Value
|
||||||||||||||||
Options
Outstanding at January 1, 2009
|
4,638,213 | $ | 9.30 | $ | 4.83 |
6.03
|
$ | 0 | ||||||||||||
Granted
|
729,999 | $ | 4.15 | $ | 1.85 |
3.74
|
||||||||||||||
Exercised
|
(112,520 | ) | $ | 3.75 | $ | 1.32 | ||||||||||||||
Forfeited
or Expired
|
(1,071,189 | ) | $ | 10.66 | $ | 3.32 | ||||||||||||||
Options
Outstanding at December 31, 2009
|
4,184,503 | $ | 8.20 | $ | 4.79 |
6.24
|
$ | 216,333 | ||||||||||||
Options
Exercisable at December 31, 2009
|
2,442,349 | $ | 8.94 | $ | 5.13 |
5.54
|
$ | 186,517 | ||||||||||||
Options
Exercisable and Expected to be Exercisable at December 31,
2009
|
4,125,952 | $ | 8.17 | $ | 4.75 |
6.24
|
$ | 216,333 |
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 $4.57 on the last trading day of 2009 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, 2009.
At December 31, 2009, there were
1,742,155 unvested options with a weighted average grant date fair value of
$4.31. At December 31, 2008, there were 2,170,626 unvested options
with a weighted average grant date fair value of $4.60. At December
31, 2007, there were 2,250,619 unvested options with a weighted average grant
date fair value of $5.02
During the year ended December 31,
2009, a total of 1,158,471 options vested having a weighted average grant date
fair value of $3.30
114
For the twelve months ended December
31, 2009, the aggregate intrinsic value of the 112,520 options exercised was
$295,671. No options were exercised during 2008. For the
twelve months ended December 31, 2007, the aggregate intrinsic value of the
999,556 options exercised was $1,700,552.
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, 2009, December 31,
2008, and December 31, 2007, 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, 2009, 2008 or 2007.
NOTE 7. EMPLOYEE
BENEFITS
SERP
The Company maintained 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.
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, 2009, the Compensation Committee approved a 100 percent
match which amounted to $181,200. The 401(k) Company match for the
years ended December 31, 2008, and 2007 was $180,500 and $176,873,
respectively.
115
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 introduced 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
until the expiration of their term, if such retiree executes a post-termination
non-solicitation agreement in a form reasonably acceptable to the
Company.
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:
2009
|
2008
|
|||||||
Accumulated
Postretirement Benefit Obligation at Beginning of Year
|
$ | 853,679 | $ | 628,745 | ||||
Service
Cost
|
113,450 | 86,497 | ||||||
Interest
Cost
|
47,629 | 39,972 | ||||||
Actuarial
(Gain)/Loss
|
7,285 | 109,312 | ||||||
Benefits
Paid
|
(28,402 | ) | (10,847 | ) | ||||
Accumulated
Postretirement Benefit Obligation at End of Year
|
$ | 993,641 | $ | 853,679 |
116
In accounting for the plan, the
assumption made for the discount rate was 5.72 percent and 5.71 percent for the
years ended December 31, 2009, and 2008, respectively. The assumed
health care cost trend rates in 2009 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 2008 were nine
percent grading to six percent over three years for medical and five 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
|
$ | 123,514 | $ | 161,079 | $ | 212,783 | ||||||
Accumulated
Postretirement Benefit Obligation
|
$ | 816,630 | $ | 993,641 | $ | 1,225,828 |
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, 2009, 2008, and 2007:
2009
|
2008
|
2007
|
||||||||||
Service
Cost
|
$ | 113,450 | $ | 86,497 | $ | 102,676 | ||||||
Interest
Cost on Accumulated Postretirement Benefit Obligation
|
47,629 | 39,972 | 33,935 | |||||||||
Amortization
of Transition Obligation
|
0 | 0 | 0 | |||||||||
Amortization
of Net (Gain)/Loss
|
(4,103 | ) | (11,215 | ) | (6,234 | ) | ||||||
Net
Periodic Post Retirement Benefit Cost
|
$ | 156,976 | $ | 115,254 | $ | 130,377 |
The Company estimates the following
benefits to be paid in each of the following years:
2010
|
$ | 20,120 | |
2011
|
$ | 22,025 | |
2012
|
$ | 23,985 | |
2013
|
$ | 25,969 | |
2014
|
$ | 27,951 | |
2015
through 2019
|
$ | 181,669 |
117
For the year ended December 31, 2009,
net unrecognized actuarial losses, which resulted from the decrease in the
discount rate referred to above, decreased by $11,388, which represents $7,285
of actuarial losses arising during the year, net of a $4,103 reclassification
adjustment which increased the net periodic benefit cost for the
year.
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: Douglas W. Jamison, the
Chairman and Chief Executive Officer, Daniel B. Wolfe, the President, Charles E.
Harris, the former Chairman and Chief Executive Officer, and Mel P. Melsheimer,
the former President. 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 January 1, 2009,
the benefit under the plan is paid to the qualifying individual in the form of a
lump sum within 60 days after the participant's separation from
service.
At
December 31, 2009, and 2008, we had accrued $222,958 and $380,737, respectively,
for benefits under this plan. At December 31, 2009, $222,958 was
accrued for Mr. Melsheimer and $0 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 2009, 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 mandatory benefit was $151,443 and was paid as a
lump sum on July 10, 2009.
118
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
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 since 1999,
including for 2008, 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
2006 through 2009 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 2005 through 2009 tax years remain open for
examination by the tax authorities under a four year statute of
limitations.
During
2009, the Company recorded a consolidated benefit of $753 in federal, state and
local income taxes. At December 31, 2009, we had $0 accrued for
federal, state and local taxes payable by the Company.
119
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, 2009, 2008, and 2007,
our income tax (benefit) expense for Harris & Harris Enterprises, Inc., was
$(2,960), $16,528 and $3,231, respectively.
Tax
(benefit) expense included in the Consolidated Statement of Operations consists
of the following:
2009
|
2008
|
2007
|
||||||||||
Current
|
$ | (753 | ) | $ | 34,121 | $ | 87,975 | |||||
Total
income tax (benefit) expense
|
$ | (753 | ) | $ | 34,121 | $ | 87,975 |
For the years ended December 31, 2009,
2008, and 2007, we paid $0, $706 and $74,454, respectively, in interest and
penalties. At December 31, 2009, we had capital loss carryforwards of
$17,994,765, of which $5,386,947 expire in 2016 and $12,607,818 expire in
2017. As of December 31, 2009, we also had post-October capital loss
deferrals of $6,415,550.
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 this location. The subleases expire on
April 29, 2010. Total rent expense for our office space in New York
City was $191,399 in 2009, $186,698 in 2008 and $178,167 in
2007. Future minimum sublease payments for the remaining term are
$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 $125,205 in 2009 and $51,525
in 2008. Future minimum lease payments in each of the following years
are: 2010 - $128,962; 2011 - $132,831; 2012 - $136,816 and 2013 -
$93,135.
On September 24, 2009, we entered into
a lease agreement for approximately 6,900 square feet of office space located at
1450 Broadway, New York, New York. The lease commenced on January 21,
2010, with these offices replacing our corporate headquarters previously located
at 111 West 57th Street
in New York City. 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. Future minimum lease payments in each of the following years
are: 2010 - $151,762; 2011 - $190,957; 2012 - $239,227; 2013 - $245,208; 2014 -
$251,338; and thereafter for the remaining term – an aggregate of
$1,477,248.
120
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.
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, 2009, and 2008, we believe our estimated
exposure is minimal, and accordingly we have no liability recorded.
NOTE 10. CAPITAL
TRANSACTIONS
On June 25, 2007, we completed the sale
of 1,300,000 shares of our common stock for gross proceeds of $14,027,000; net
proceeds of this offering, after placement agent fees and offering costs of
$1,033,832, were $12,993,168.
On June 20, 2008, we completed the sale
of 2,545,000 shares of our common stock for gross proceeds of $15,651,750; net
proceeds of this offering, after placement agent fees and offering costs of
$1,268,253, were $14,383,497.
On
October 9, 2009, we closed a public follow-on offering of 4,887,500 shares of
our common stock at a price of $4.75 per share to the public. The net
proceeds of this offering, after deducting underwriting discounts and offering
costs of $1,951,485, were $21,264,140.
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, 2009, 2008, and
2007.
2009
|
2008
|
2007
|
||||||||||
Numerator
for decrease in net assets per share
|
$ | (148,465 | ) | $ | (49,181,497 | ) | $ | (6,716,445 | ) | |||
Denominator
for basic and diluted weighted average shares
|
27,025,995 | 24,670,516 | 22,393,030 | |||||||||
Basic
and diluted net decrease in net assets per share resulting from
operations
|
(0.01 | ) | (1.99 | ) | $ | (0.30 | ) |
121
NOTE
12. SUBSEQUENT EVENTS
On
January 15, 2010, we made a $250,000 new investment in ABS Materials, Inc.,
a privately held tiny technology company.
On January 19 and February 19, 2010, we
made two follow-on investments totaling $171,975 in a privately held tiny
technology portfolio company.
On January 20 and February 10, 2010, we
made two follow-on investments totaling $4,564 by exercising our warrants
to purchase shares of common stock of NeoPhotonics Corporation, a privately held
tiny technology portfolio company.
On February 5, 2010, we made a $98,427
follow-on investment in Orthovita, Inc., a publicly traded tiny technology
portfolio company.
On February 10, 2010, we made a
$500,000 follow-on investment in a privately held tiny technology portfolio
company.
On February 24, 2010, CFX Battery,
Inc., changed its name to Contour Energy Systems, Inc.
On March 8, 2010, we made a $99,957 new
investment in Satcon Technology Corporation, a publicly traded tiny technology
company.
On March 10, 2010, we made
a $250,041 follow-on investment in a privately held tiny technology
portfolio company.
On December 31, 2009, we valued the
shares of one of our privately held tiny technology portfolio companies at
$0.9696 per share. On March 10, 2010, that company raised additional
funding from a third party, independent financial investor at the equivalent of
$1.26 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,
2010. A valuation calculated based on this input alone could increase the value
of this portfolio company at March 31, 2010, ranging from $0 to approximately
$1,400,000, or $0 to approximately $0.05 per share, from the value at December
31, 2009. 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, 2010.
One of our portfolio companies has
engaged an investment banker for purposes of filing for an IPO in
2010. There can be no assurance that this portfolio company will file
for an IPO in 2010, and a variety of factors, including stock market and general
business conditions, legal considerations and audit results, could lead it to
terminate such consideration.
122
NOTE 13. SELECTED
QUARTERLY DATA (UNAUDITED)
2009
|
||||||||||||||||
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|||||||||||||
Total
investment (loss) income
|
$ | (23,561 | ) | $ | 83,834 | $ | 105,677 | $ | 81,898 | |||||||
Net
operating loss
|
$ | (2,098,879 | ) | $ | (1,998,271 | ) | $ | (2,242,953 | ) | $ | (2,421,112 | ) | ||||
Net
(decrease) increase in net assets resulting from
operations
|
$ | (951,424 | ) | $ | 421,367 | $ | (296,319 | ) | $ | 677,911 | ||||||
Net
(decrease) increase in net assets resulting from operations per average
outstanding share
|
$ | (0.04 | ) | $ | 0.02 | $ | (0.01 | ) | $ | 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 | ) |
123
HARRIS
& HARRIS GROUP, INC.
FINANCIAL
HIGHLIGHTS
|
Year Ended
|
Year Ended
|
Year Ended
|
||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||
Per
Share Operating Performance
|
||||||||||||
Net
asset value per share, beginning of year
|
$ | 4.24 | $ | 5.93 | $ | 5.42 | ||||||
Net
operating loss*
|
(0.32 | ) | (0.43 | ) | (0.53 | ) | ||||||
Net
realized (loss) income on investments*
|
(0.42 | ) | (0.34 | ) | 0.00 | |||||||
Net
decrease in unrealized depreciation as a result of sales*
|
0.41 | 0.34 | 0.00 | |||||||||
Net
decrease (increase) in unrealized depreciation on
investments held*(1)
|
0.32 | (1.49 | ) | 0.23 | ||||||||
Total
from investment operations*
|
(0.01 | ) | (1.92 | ) | (0.30 | ) | ||||||
Net
increase as a result of stock- based compensation expense*
|
0.11 | 0.24 | 0.36 | |||||||||
Net
increase as a result of proceeds from exercise of options
|
0.00 | 0.00 | 0.19 | |||||||||
Net
increase (decrease) as a result of stock offering, net of offering
expenses
|
0.01 | (0.01 | ) | 0.26 | ||||||||
Total
increase from capital stock transactions
|
0.12 | 0.23 | 0.81 | |||||||||
Net
asset value per share, end of year
|
$ | 4.35 | $ | 4.24 | $ | 5.93 | ||||||
Stock
price per share, end of year
|
$ | 4.57 | $ | 3.95 | $ | 8.79 | ||||||
Total
return based on stock price
|
15.7 | % | (55.06 | )% | (27.3 | )% | ||||||
Supplemental
Data:
|
||||||||||||
Net
assets, end of year
|
$ | 134,158,258 | $ | 109,531,113 | $ | 138,363,344 | ||||||
Ratio
of expenses to average net assets
|
7.8 | % | 9.6 | % | 11.6 | % | ||||||
Ratio
of net operating loss to average net assets
|
(7.6 | )% | (8.1 | )% | (9.5 | )% | ||||||
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
|
30,859,593 | 25,859,573 | 23,314,573 |
*Based on
average shares outstanding.
(1) Net unrealized gains
(losses) includes rounding adjustments to reconcile change in net asset value
per share. See Item 6. "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.
124
Item
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
Item
8A. Controls and Procedures.
Disclosure Controls and
Procedures
As of the end of the period covered by
this report, the Company’s management, under the supervision and with the
participation of our chief executive officer and chief financial officer,
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as required by Rules 13a-15 of the Exchange
Act). Disclosure controls and procedures means controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the issuer's management, as appropriate, to
allow timely decisions regarding required disclosures. As of December
31, 2009, based upon this evaluation of our disclosure controls and procedures,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective.
Internal Control Over
Financial Reporting
Management's Report on Internal Control
Over Financial Reporting and the Report of Independent Registered Public
Accounting Firm, on the Company’s internal control over financial reporting, is
included in Item 7 of this Annual Report on Form 10-K.
Changes in Internal Control
Over Financial Reporting
There have not been any changes in the
Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter
of 2009 to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
8B. Other Information.
None.
125
PART
III
Item
9. Directors, Executive Officers and
Corporate Governance.
The information set forth under the
captions "Nominees," "Executive Officers," "Section 16(a) Beneficial Ownership
Reporting Compliance" and "Audit Committee" in our Proxy Statement for the
Annual Meeting of Shareholders to be held May 6, 2010, to be filed pursuant to
Regulation 14A under the Exchange Act (the "2010 Proxy Statement"), is herein
incorporated by reference.
We have adopted a Code of Conduct for
Directors and Employees, which also applies to our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller and
is posted on our website at
http://www.hhvc.com/shareholder_information/Code_of_Conduct.html.
The Board of Directors has determined
that Dugald A. Fletcher, James E. Roberts and Richard P. Shanley are all "Audit
Committee Financial Experts" serving on our Audit Committee. Messrs.
Fletcher, Roberts and Shanley are independent as defined under Section 2(a)(19)
of the 1940 Act and under the rules of the Nasdaq Stock Market.
Item
10. Executive Compensation.
The information set forth under the
captions "Executive Compensation," "Compensation Committee Interlocks and
Insider Participation" and "Compensation Committee Report on Executive
Compensation" in the 2010 Proxy Statement is herein incorporated by
reference.
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The information set forth under the
caption "How Many Shares Do the Company's Principal Shareholders, Directors and
Executive Officers Own?" in the 2010 Proxy Statement is herein incorporated by
reference. The "Equity Compensation Plan Information" chart is
set forth herein under Item 4.
Item
12. Certain Relationships and Related Transactions, and
Director Independence.
The information set forth under the
captions "Nominees" and "Related Party Transactions" in the 2010 Proxy Statement
is herein incorporated by reference.
Item
13. Principal Accountant Fees and Services.
The information set forth under the
captions "Audit Committee's Pre-Approval Policies" and "Fees Paid to PwC for
2009 and 2008" in the 2010 Proxy Statement is herein incorporated by
reference.
126
PART
IV
Item
14. Exhibits and Financial Statements
Schedules.
(a)
|
The
following documents are filed as a part of this
report:
|
(1)
|
Listed
below are the financial statements which are filed as part of this
report:
|
·
|
Consolidated
Statements of Assets and Liabilities as of December 31, 2009, and
2008;
|
·
|
Consolidated
Statement of Operations for the years ended December 31, 2009, 2008, and
2007;
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007;
|
·
|
Consolidated
Statements of Changes in Net Assets for the years ended December 31, 2009,
2008, and 2007;
|
·
|
Consolidated
Schedule of Investments as of December 31,
2009;
|
·
|
Consolidated
Schedule of Investments as of December 31,
2008;
|
·
|
Footnote
to Consolidated Schedule of
Investments;
|
·
|
Notes
to Consolidated Financial Statements;
and
|
·
|
Financial
Highlights for the years ended December 31, 2009, 2008, and
2007.
|
(2)
|
No
financial statement schedules are required to be filed herewith because
(i) such schedules are not required or (ii) the information has been
presented in the above financial
statements.
|
(3)
|
The
following exhibits are filed with this report or are incorporated herein
by reference to a prior filing, in accordance with Rule 12b-32 under the
Exchange Act.
|
3.1(a)
|
Restated
Certificate of Incorporation of Harris & Harris Group, Inc., dated
September 23, 2005, incorporated by reference as Exhibit 99 to Form 8-K
(File No. 814-00176) filed on September 27,
2005.
|
3.1(b)
|
Certificate
of Amendment of the Certificate of Incorporation of Harris & Harris
Group, Inc., dated May 19, 2006, incorporated by reference as Exhibit 3.1
to the Company's Form 10-Q (File No. 814-00176) filed on August 9,
2006.
|
3.2
|
Restated
By-laws, incorporated by reference as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2008 (File No.
814-00176) filed on March 16,
2009.
|
127
|
4
|
Form
of Specimen Certificate of Common Stock, incorporated by reference as
Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2008 (File No. 814-00176) filed on March 16,
2009.
|
|
10.1
|
Harris
& Harris Group, Inc. Form of Custody Agreement with The Bank of New
York Mellon, incorporated by reference as Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2008 (File No.
814-00176) filed on March 16, 2009.
|
|
10.2
|
Form
of Indemnification Agreement which has been established with all directors
and executive officers of the Company, incorporated by reference as
Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 (File No. 814-00176) filed on March 16,
2009.
|
|
10.3
|
Harris
& Harris Group, Inc. Amended and Restated Employee Profit-Sharing
Plan, incorporated by reference as Exhibit 10.8 to the Company's Form 10-K
for the year ended December 31, 2007 (File No. 814-00176) filed on March
13, 2008.
|
|
10.4
|
Harris
& Harris Group, Inc. 2006 Equity Incentive Plan, incorporated by
reference as Appendix B to the Company's Proxy Statement for the 2006
Annual Meeting of Shareholders filed on April 3,
2006.
|
|
10.5
|
Form
of Incentive Stock Option Agreement incorporated by reference as Exhibit
10.1 to the Company's Form 8-K (File No. 814-00176) filed on June 26,
2006.
|
|
10.6
|
Form
of Non-Qualified Stock Option Agreement, incorporated by reference as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 (File No. 814-00176) filed on March 16,
2009.
|
|
10.7
|
Amended
and Restated Harris & Harris Group, Inc. Executive Mandatory
Retirement Benefit Plan, dated November 5, 2009, incorporated by reference
as Exhibit 10.1 to the Company’s Form 8-K (File No. 814-00176) filed on
November 12, 2009.
|
|
10.8
|
Agreement
of Sub-Sublease, dated April 18, 2003, by and between Prominent USA, Inc.
and Harris & Harris Group, Inc., incorporated by reference as Exhibit
10.17 to the Company's Form 10-K for the year ended December 31, 2007
(File No. 814-00176) filed on March 13,
2008.
|
|
10.9
|
Amendment
to Agreement of Sub-Sublease, dated May 9, 2003, by and between Prominent
USA, Inc., and Harris & Harris Group, Inc., incorporated by reference
as Exhibit 10.18 to the Company's Form 10-K for the year ended December
31, 2007 (File No. 814-00176) filed on March 13,
2008.
|
128
|
10.10
|
Assignment
and Assumption, Modification and Extension of Sublease Agreement, dated
December 17, 2004, by and among the Economist Newspaper Group, Inc.,
National Academy of Television Arts & Sciences, and Harris &
Harris Group, Inc., incorporated by reference as Exhibit 10.19 to the
Company's Form 10-K for the year ended December 31, 2007 (File No.
814-00176) filed on March 13, 2008.
|
10.11
|
Lease
dated July 1, 2008 by and between Jack Rominger, Tommie Plemons and Dale
Denson as Lessor and Harris & Harris Group, Inc., a New York
corporation, as Lessee, incorporated by reference as
Exhibit 10.1 to the Company's Form 10-Q (File No. 814-00176)
filed on November 7, 2008.
|
|
10.12
|
Lease
Agreement, dated September 24, 2009, between Rosh 1450 Properties LLC and
Harris & Harris Group, Inc., incorporated by reference as Exhibit 10.1
to the Company’s Form 8-K (File No. 814-00176) filed on September 24,
2009.
|
10.13
|
Nonsolicitation
and Noncompetition Agreement between the Company and Charles E. Harris,
dated July 31, 2008, incorporated by reference as Exhibit 10 to the
Company's Form 8-K (File No. 814-00176) filed on August 1,
2008.
|
10.14*
|
Harris
& Harris Group, Inc. Employee Stock Purchase
Plan.
|
|
14.1*
|
Code
of Conduct for Directors and Employees of Harris & Harris Group,
Inc.
|
|
14.2*
|
Code
of Ethics Pursuant to Rule 17j-1.
|
31.01*
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.02*
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.01*
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*Filed
herewith
129
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HARRIS
& HARRIS GROUP, INC.
|
||
Date:
March 15, 2010
|
By:
|
/s/ Douglas W. Jamison
|
Douglas
W. Jamison
|
||
Chairman
of the Board and
|
||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signatures
|
Title
|
Date
|
||
/s/ Douglas W. Jamison
|
Chairman
of the Board
|
March
15, 2010
|
||
Douglas
W. Jamison
|
and
Chief Executive Officer
|
|||
/s/ Daniel B. Wolfe
|
Chief
Financial Officer
|
March
15, 2010
|
||
Daniel
B. Wolfe
|
||||
/s/ Patricia N. Egan
|
Chief
Accounting Officer
|
March
15, 2010
|
||
Patricia
N. Egan
|
and
Senior Controller
|
|||
/s/ W. Dillaway Ayres, Jr.
|
Director
|
March
15, 2010
|
||
W.
Dillaway Ayres, Jr.
|
||||
/s/ C. Wayne Bardin
|
Director
|
March
15, 2010
|
||
C.
Wayne Bardin
|
130
/s/ Phillip A. Bauman
|
Director
|
March
15, 2010
|
||
Phillip
A. Bauman
|
||||
/s/ G. Morgan Browne
|
Director
|
March
15, 2010
|
||
G.
Morgan Browne
|
||||
/s/ Dugald A. Fletcher
|
Director
|
March
15, 2010
|
||
Dugald
A. Fletcher
|
||||
/s/ Lori D. Pressman
|
Director
|
March
15, 2010
|
||
Lori
D. Pressman
|
||||
/s/ Charles E. Ramsey
|
Director
|
March
15, 2010
|
||
Charles
E. Ramsey
|
||||
/s/ James E. Roberts
|
Director
|
March
15, 2010
|
||
James
E. Roberts
|
||||
/s/ Richard P. Shanley
|
Director
|
March
15, 2010
|
||
Richard
P. Shanley
|
131
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
10.14
|
Harris
& Harris Group, Inc. Employee Stock Purchase Plan
|
|
14.1
|
Code
of Conduct for Directors and Employees of Harris & Harris Group,
Inc.
|
|
14.2
|
Code
of Ethics Pursuant to Rule 17j-1.
|
|
31.01
|
Certification
of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.02
|
Certification
of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.01
|
|
Certification
of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
132