UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended March 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-11576
HARRIS & HARRIS GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3119827
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 West 57th Street, New York, New York 10019
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 582-0900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2
of the Exchange Act).
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 8, 2006
- --------------------------------------------------------------------------------
Common Stock, $0.01 par value per share 20,756,345 shares
Harris & Harris Group, Inc.
Form 10-Q, March 31, 2006
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements................................. 1
Consolidated Statements of Assets and Liabilities.......................... 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Cash Flows...................................... 4
Consolidated Statements of Changes in Net Assets........................... 5
Consolidated Schedule of Investments....................................... 6
Notes to Consolidated Financial Statements................................. 15
Financial Highlights....................................................... 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 22
Background and Overview.................................................... 22
Results of Operations...................................................... 23
Financial Condition........................................................ 25
Liquidity.................................................................. 26
Capital Resources.......................................................... 27
Critical Accounting Policies............................................... 27
Recent Developments - Portfolio Companies.................................. 28
Forward Looking Statements................................................. 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 28
Item 4. Controls and Procedures........................................... 29
PART II. OTHER INFORMATION
Item 1A. Risk Factors...................................................... 31
Item 6. Exhibits.......................................................... 31
Signature.................................................................. 32
Exhibit Index.............................................................. 33
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
The information furnished in the accompanying consolidated financial
statements reflects all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim period presented.
Harris & Harris Group, Inc.(R) (the "Company," "us," "our" and "we"), is
an internally managed venture capital company that has elected to be treated as
a business development company under the Investment Company Act of 1940 (the
"1940 Act"). Certain information and disclosures normally included in the
consolidated financial statements in accordance with Generally Accepted
Accounting Principles have been condensed or omitted as permitted by Regulation
S-X and Regulation S-K. The accompanying consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2005, contained in our Annual
Report on Form 10-K for the year ended December 31, 2005.
On September 25, 1997, our Board of Directors approved a proposal to seek
qualification as a regulated investment company ("RIC") under Subchapter M of
the Internal Revenue Code (the "Code"). At that time, we were taxable under
Subchapter C of the Code (a "C Corporation"). In order to qualify as a RIC, we
must, in general (1) annually, derive at least 90 percent of our gross income
from dividends, interest, gains from the sale of securities and similar sources;
(2) quarterly, meet certain investment diversification requirements; and (3)
annually, distribute at least 90 percent of our investment company taxable
income as a dividend. In addition to the requirement that we must annually
distribute at least 90 percent of our investment company taxable income, we may
either distribute or retain our taxable net capital gains from investments, but
any net capital gains not distributed could be subject to corporate level tax.
Further, we could be subject to a four percent excise tax to the extent we fail
to distribute at least 98 percent of our annual investment company taxable
income and would be subject to income tax to the extent we fail to distribute
100 percent of our investment company taxable income.
Because of the specialized nature of our investment portfolio, we
generally can satisfy the diversification requirements under Subchapter M of the
Code only if we receive a certification from the Securities and Exchange
Commission ("SEC") that we are "principally engaged in the furnishing of capital
to other corporations which are principally engaged in the development or
exploitation of inventions, technological improvements, new processes, or
products not previously generally available."
On June 15, 2005, we received SEC certification for 2004, permitting us to
qualify for RIC treatment for 2004 (as we had for the years 1999 through 2003).
Although the SEC certification for 2004 was issued, there can be no assurance
that we will qualify for or receive such certification for subsequent years (to
the extent we need additional certification as a result of changes in our
portfolio) or that we will actually qualify for Subchapter M treatment in
subsequent years. In addition, under certain circumstances, even if we qualified
for Subchapter M treatment in a given year, we might take action in a subsequent
year to ensure that we would be taxed in that subsequent year as a C
Corporation, rather than as a RIC. On March 29, 2006, we filed for RIC
certification under Section 851(e) of the Code for 2005.
1
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
ASSETS
March 31, 2006 December 31, 2005
(Unaudited)
Investments, at value (Cost: $119,208,625 at 3/31/06,
$134,026,747 at 12/31/05)............................................. $ 113,731,480 $ 129,438,197
Cash and cash equivalents.................................................. 4,470,822 1,213,289
Restricted funds........................................................... 1,901,078 1,730,434
Receivable from portfolio company.......................................... 0 75,000
Interest receivable........................................................ 565,259 248,563
Prepaid expenses........................................................... 452,030 2,993
Other assets............................................................... 218,654 229,644
----------------- ----------------
Total assets............................................................... $ 121,339,323 $ 132,938,120
================= ================
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities................................... $ 3,410,979 $ 3,174,183
Accrued profit sharing (Note 4)............................................ 210,786 2,107,858
Deferred rent.............................................................. 29,302 31,003
Current taxes payable...................................................... 1,354,504 1,514,967
Taxes payable on behalf of shareholders (Note 6)........................... 0 8,122,367
----------------- ----------------
Total liabilities.......................................................... 5,005,571 14,950,378
----------------- ----------------
Net assets................................................................. $ 116,333,752 $ 117,987,742
================= ================
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, 30,000,000 shares authorized;
22,585,085 issued at 3/31/06 and 12/31/05............................. 225,851 225,851
Additional paid in capital (Note 7)........................................ 122,149,642 122,149,642
Accumulated net realized income............................................ 3,016,509 3,781,905
Accumulated unrealized depreciation of investments......................... (5,652,719) (4,764,125)
Treasury stock, at cost (1,828,740 shares at 3/31/06 and
12/31/05)............................................................. (3,405,531) (3,405,531)
----------------- ----------------
Net assets................................................................. $ 116,333,752 $ 117,987,742
================= ================
Shares outstanding......................................................... 20,756,345 20,756,345
================= ================
Net asset value per outstanding share...................................... $ 5.60 $ 5.68
================= ================
The accompanying notes are an integral part of these
consolidated financial statements.
2
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
Investment income:
Interest from:
Fixed income securities ................................................ $ 802,362 $ 221,498
Portfolio companies .................................................... 0 38,610
Miscellaneous income ................................................... 2,500 0
------------ ------------
Total investment income ................................................ 804,862 260,108
------------ ------------
Expenses:
Salaries and benefits ..................................................... 786,361 567,691
Administration and operations ............................................. 322,449 321,961
Profit-sharing provision (Note 4) ......................................... 0 (311,594)
Professional fees ......................................................... 289,887 272,465
Rent ...................................................................... 61,238 48,682
Directors' fees and expenses .............................................. 85,902 85,660
Depreciation .............................................................. 16,768 15,269
Custodian fees ............................................................ 10,000 5,564
------------ ------------
Total expenses ........................................................ 1,572,605 1,005,698
------------ ------------
Net operating loss ............................................................. (767,743) (745,590)
------------ ------------
Net realized income (loss) from investments:
Realized income (loss) from investments ................................... 11,953 (1,036,044)
Income tax expense (Note 6) ............................................... 9,606 4,217
------------ ------------
Net realized income (loss) from investments .................................... 2,347 (1,040,261)
------------ ------------
Net realized loss .............................................................. (765,396) (1,785,851)
------------ ------------
Net increase in unrealized
depreciation on investments:
Change as a result of investment sales .................................... 0 1,363,891
Change on investments held ................................................ (888,594) (1,811,487)
------------ ------------
Net increase in unrealized
depreciation on investments ........................................... (888,594) (447,596)
------------ ------------
Net decrease in net assets
resulting from operations:
Total ..................................................................... $ (1,653,990) $ (2,233,447)
============ ============
Per average outstanding share ............................................. $ (0.08) $ (0.13)
============ ============
Average outstanding shares ................................................ 20,756,345 17,248,845
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
Cash flows from operating activities:
Net decrease in net assets
resulting from operations .......................... $ (1,653,990) $ (2,233,447)
Adjustments to reconcile net decrease in net
assets resulting from operations to net cash (used in)
provided by operating activities:
Net realized and unrealized loss on investments .... 876,641 1,483,640
Depreciation and amortization ...................... (295,811) 15,269
Changes in assets and liabilities:
Restricted funds ................................... (170,644) (7,014)
Receivable from portfolio company .................. 75,000 (7,100)
Interest receivable ................................ (316,696) (105,467)
Income tax receivable .............................. 0 11
Prepaid expenses ................................... (449,037) 121,142
Other assets ....................................... 0 6,142
Accounts payable and accrued liabilities ........... 236,796 (41,828)
Accrued profit sharing ............................. (1,897,072) (311,594)
Deferred rent ...................................... (1,701) (1,701)
Current income tax liability ....................... (8,282,830) 0
------------ ------------
Net cash (used in) operating activities ............ (11,879,344) (1,081,947)
------------ ------------
Cash flows from investing activities:
Net sale of short-term investments and
marketable securities .......................... 24,534,942 4,287,322
Investment in private placements and loans ......... (9,412,764) (3,782,686)
Proceeds from sale of investments .................. 20,688 355,684
Purchase of fixed assets ........................... (5,989) (16,749)
------------ ------------
Net cash provided by investing activities .......... 15,136,877 843,571
------------ ------------
Net increase (decrease) in cash and cash equivalents:
Cash and cash equivalents at beginning of the year . 1,213,289 650,332
Cash and cash equivalents at end of the year ....... 4,470,822 411,956
------------ ------------
Net increase (decrease) in cash and cash
equivalents ........................................ $ 3,257,533 $ (238,376)
============ ============
Supplemental disclosures of cash flow information:
Income taxes paid .................................. $ 8,291,973 $ 3,750
The accompanying notes are an integral part of these
consolidated financial statements.
4
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Three Months Ended Year Ended
March 31, 2006 December 31, 2005
(Unaudited)
Changes in net assets from operations:
Net operating loss ............................... $ (767,743) $ (5,465,761)
Net realized income on investments ............... 2,347 14,208,789
Net (increase) in unrealized depreciation
on investments as a result of sales .......... 0 (23,181,420)
Net (increase) decrease in unrealized depreciation
on investments held .......................... (888,594) 19,790,298
Net change in deferred taxes ..................... 0 1,364,470
------------- -------------
Net (decrease) increase in net assets
resulting from operations ........................ (1,653,990) 6,716,376
------------- -------------
Changes in net assets from capital
stock transactions:
Proceeds from sale of stock ...................... 0 35,075
Additional paid in capital on common stock issued 0 36,491,492
------------- -------------
Net increase in net assets resulting from
capital stock transactions ....................... 0 36,526,567
------------- -------------
Net (decrease) increase in net assets ................. (1,653,990) 43,242,943
------------- -------------
Net assets:
Beginning of the period .......................... 117,987,742 74,744,799
------------- -------------
End of the period ................................ $ 116,333,752 $ 117,987,742
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
5
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Unaffiliated Companies (6)(7) - 13.4% of net assets
Private Placement Portfolio (Illiquid) - 13.4% of net assets
AlphaSimplex Group, LLC (2) -- Investment management company headed by
Dr. Andrew W. Lo, holder of the Harris & Harris Group Chair at MIT
Limited Liability Company Interest...........................................(B) -- $ 4,058
----------
Crystal IS, Inc. (1)(2)(5) -- Developing a technology to grow
single-crystal boules of aluminum nitride for gallium nitride
electronics
Series A Convertible Preferred Stock.........................................(A) 274,100 199,983
----------
Exponential Business Development Company (1)(2) -- Venture capital partnership
focused on early stage companies
Limited Partnership Interest.................................................(B) -- 0
----------
Molecular Imprints, Inc. (1)(2) -- Manufacturing nanoimprint lithography
capital equipment
Series B Convertible Preferred Stock.........................................(A) 1,333,333 2,000,000
Series C Convertible Preferred Stock.........................................(A) 1,250,000 2,500,000
Warrants at $2.00 expiring12/31/11...........................................(B) 125,000 0
----------
4,500,000
Nanosys, Inc. (1)(2)(5) -- Developing zero and one-dimensional
inorganic nanometer-scale materials for use in nanotechnology-
enabled systems
Series C Convertible Preferred Stock.........................................(C) 803,428 2,370,113
Series D Convertible Preferred Stock.........................................(C) 1,016,950 3,000,003
----------
5,370,116
Nantero, Inc. (1)(2)(5) -- Developing a high-density, nonvolatile, random
access memory chip, using nanotechnology
Series A Convertible Preferred Stock.........................................(C) 345,070 1,046,908
Series B Convertible Preferred Stock.........................................(C) 207,051 628,172
Series C Convertible Preferred Stock.........................................(C) 188,315 571,329
----------
2,246,409
The accompanying notes are an integral part of these
consolidated financial statements.
6
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Unaffiliated Companies (6)(7) - 13.4% of net assets (cont.)
Private Placement Portfolio (Illiquid) - 13.4% of net assets (cont.)
NeoPhotonics Corporation (1)(2) -- Developing and manufacturing
planar optical devices and components
Common Stock ................................................................(C) 716,195 $ 67,736
Series 1 Convertible Preferred Stock..........................................(C) 1,831,256 2,014,677
Series 2 Convertible Preferred Stock..........................................(C) 741,898 878,120
Warrants at $0.15 expiring 01/26/10...........................................(C) 16,364 164
Warrants at $0.15 expiring 12/05/10...........................................(C) 14,063 140
-----------
2,960,837
Polatis, Inc. (1)(2)(5)(10) -- Developing optical networking components
by merging materials, MEMS and electronics technologies
Series A-1 Convertible Preferred Stock.......................................(B) 16,775 47,828
Series A-2 Convertible Preferred Stock.......................................(B) 71,611 204,172
-----------
252,000
Total Unaffiliated Private Placement Portfolio (cost: $15,461,334) .............................................. $15,533,403
-----------
Total Investments in Unaffiliated Companies (cost: $15,461,334) .................................................. $15,533,403
-----------
The accompanying notes are an integral part of these
consolidated financial statements.
7
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Non-Controlled Affiliated Companies (6)(8) - 20.7% of net assets
Private Placement Portfolio (Illiquid) - 20.7% of net assets
BridgeLux, Inc. (1)(2)(11) -- Manufacturing high-power light
emitting diodes
Series B Convertible Preferred Stock.........................................(A) 1,861,504 $1,000,000
----------
Cambrios Technologies Corporation (1)(2)(5) -- Developing commercially relevant
materials by evolving biomolecules to express control over nanostructure
synthesis
Series B Convertible Preferred Stock.........................................(A) 1,294,025 1,294,025
----------
Chlorogen, Inc. (1)(2)(5) -- Developing patented chloroplast technology
to produce plant-made proteins
Series A Convertible Preferred Stock.........................................(A) 4,478,038 785,000
Series B Convertible Preferred Stock.........................................(A) 2,077,930 364,261
----------
1,149,261
CSwitch, Inc. (1)(2)(5) -- Developing next-generation, system-on-a-chip
solutions for communications-based platforms
Series A Convertible Preferred Stock.........................................(C) 1,000,000 500,000
Series B Convertible Preferred Stock.........................................(C) 5,700,000 2,850,000
----------
3,350,000
Kereos, Inc. (1)(2)(5) -- Developing molecular imaging agents
and targeted therapeutics to image and treat cancer and
cardiovascular disease
Series B Convertible Preferred Stock.........................................(A) 349,092 960,000
----------
Kovio, Inc. (1)(2)(5) -- Developing semiconductor products
using printed electronics and thin-film technologies
Series C Convertible Preferred Stock.........................................(A) 2,500,000 3,000,000
----------
Mersana Therapeutics, Inc. (1)(2)(5)(12) -- Developing advanced
polymers for drug delivery
Series A Convertible Preferred Stock..........................................(C) 68,452 136,904
Series B Convertible Preferred Stock..........................................(C) 616,500 1,233,000
Warrants at $2.00 expiring 10/21/10...........................................(B) 91,625 0
----------
1,369,904
Metabolon, Inc. (1)(2)(4)(5) - Discovering biomarkers through
the use of metabolomics
Series B Convertible Preferred Stock.........................................(A) 2,173,913 2,500,000
NanoGram Corporation (1)(2)(5) -- Developing a broad suite of intellectual
property utilizing nanotechnology
Series I Convertible Preferred Stock.........................................(C) 63,210 64,259
Series II Convertible Preferred Stock........................................(C) 1,250,904 1,271,670
Series III Convertible Preferred Stock.......................................(C) 1,242,144 1,262,764
----------
2,598,693
The accompanying notes are an integral part of these
consolidated financial statements.
8
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Non-Controlled Affiliated Companies (6)(8) - 20.7% of net assets
(cont.)
Private Placement Portfolio (Illiquid) - 20.7% of net assets (cont.)
Nanomix, Inc. (1)(2)(5) -- Producing nanoelectronic sensors that
integrate carbon nanotube electronics with silicon microstructures
Series C Convertible Preferred Stock..........................................(A) 9,779,181 $ 2,500,000
-----------
NanoOpto Corporation (1)(2)(5) -- Manufacturing discrete and integrated optical
communications sub-components on a chip by utilizing nano manufacturing
technology
Series A-1 Convertible Preferred Stock........................................(C) 267,857 32,490
Series B Convertible Preferred Stock..........................................(C) 3,819,935 1,110,073
Series C Convertible Preferred Stock..........................................(C) 1,932,789 842,503
Warrants at $0.4359 expiring 03/15/10.........................................(B) 193,279 0
-----------
1,985,066
Nextreme Thermal Solutions, Inc. (1)(2)(5) -- Developing thin-film
thermoelectric devices
Series A Convertible Preferred Stock..........................................(A) 500,000 500,000
-----------
Questech Corporation (1)(2) -- Manufacturing and marketing
proprietary metal and stone decorative tiles
Common Stock.................................................................(C) 646,954 724,588
Warrants at $1.50 expiring 08/03/06..........................................(B) 8,500 0
Warrants at $1.50 expiring 11/21/07..........................................(B) 3,750 0
Warrants at $1.50 expiring 11/19/08..........................................(B) 5,000 0
Warrants at $1.50 expiring 11/19/09..........................................(B) 5,000 0
-----------
724,588
Solazyme, Inc. (1)(2)(5) -- Developing energy-harvesting
machinery of photosynthetic microbes to produce industrial
and pharmaceutical molecules
Series A Convertible Preferred Stock.........................................(C) 988,204 385,400
-----------
Starfire Systems, Inc. (1)(2)(5) --Producing ceramic-forming polymers
Common Stock.................................................................(A) 375,000 150,000
Series A-1 Convertible Preferred Stock.......................................(C) 600,000 600,000
-----------
750,000
Zia Laser, Inc. (1)(2)(5) -- Developing quantum dot semiconductor lasers
Series C Convertible Preferred Stock.........................................(B) 1,500,000 0
-----------
Total Non-Controlled Private Placement Portfolio (cost: $28,849,560) ......................................... $24,066,937
-----------
Total Investments in Non-Controlled Affiliated Companies (cost: $28,849,560) ................................. $24,066,937
-----------
The accompanying notes are an integral part of these
consolidated financial statements.
9
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Method of Shares/
Valuation (3) Principal Value
Investments in Controlled Affiliated Companies (6)(9) - 2.4% of net assets
Private Placement Portfolio (Illiquid) - 2.4% of net assets
Evolved Nanomaterial Sciences, Inc. (1)(2)(4)(5) -- Developing
nanotechnology-enhanced approaches for the resolution of
chiral molecules
Series A Convertible Preferred Stock.........................................(A) 5,870,021 $ 2,800,000
Total Controlled Private Placement Portfolio (cost: $2,800,000).................................................$ 2,800,000
-----------
Total Investments in Controlled Affiliated Companies (cost: $2,800,000).........................................$ 2,800,000
-----------
U.S. Government and Government Agency Securities - 61.3% of net assets
U.S. Treasury Bills -- due date 08/31/06 .................................. (J) 15,640,000 $15,343,622
U.S. Treasury Notes -- due date 11/30/07, coupon 4.25%....................... (H) 6,500,000 6,437,795
U.S. Treasury Notes -- due date 02/15/08, coupon 3.375%...................... (H) 9,000,000 8,765,820
U.S. Treasury Notes -- due date 05/15/08, coupon 3.75%....................... (H) 9,000,000 8,806,680
U.S. Treasury Notes -- due date 09/15/08, coupon 3.125%...................... (H) 5,000,000 4,805,100
U.S. Treasury Notes -- due date 01/15/09, coupon 3.25%....................... (H) 3,000,000 2,877,900
U.S. Treasury Notes -- due date 02/15/09, coupon 4.50%....................... (H) 5,100,000 5,055,783
U.S. Treasury Notes -- due date 04/15/09, coupon 3.125%...................... (H) 3,000,000 2,857,500
U.S. Treasury Notes -- due date 07/15/09, coupon 3.625%...................... (H) 3,000,000 2,891,490
U.S. Treasury Notes -- due date 10/15/09, coupon 3.375%...................... (H) 3,000,000 2,859,720
U.S. Treasury Notes -- due date 01/15/10, coupon 3.625%...................... (H) 3,000,000 2,876,010
U.S. Treasury Notes -- due date 04/15/10, coupon 4.00%....................... (H) 3,000,000 2,909,190
U.S. Treasury Notes -- due date 07/15/10, coupon 3.875%...................... (H) 3,000,000 2,891,250
U.S. Treasury Notes -- due date 10/15/10, coupon 4.25%....................... (H) 2,000,000 1,953,280
Total Investments in U.S. Government and Government Agency
Securities (cost: $72,097,731).......................................................................... $71,331,140
-----------
Total Investments (cost: $119,208,625)....................................................................... $113,731,480
============
The accompanying notes are an integral part of these
consolidated financial statements.
10
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF MARCH 31, 2006
(Unaudited)
- --------------------------------------------------------------------------------
Notes to Consolidated Schedule of Investments
(1) Represents a non-income producing security. Equity investments that have
not paid dividends within the last 12 months are considered to be
non-income producing.
(2) Legal restrictions on sale of investment.
(3) See Footnote to Schedule of Investments for a description of the Valuation
Procedures.
(4) Initial investment was made during 2006.
(5) These investments are development stage companies. A development stage
company is defined as a company that is devoting substantially all of its
efforts to establishing a new business, and either it has not yet
commenced its planned principal operations, or it has commenced such
operations but has not realized significant revenue from them.
(6) Investments in unaffiliated companies consist of investments in which we
own less than five percent of the voting shares of the portfolio company.
Investments in non-controlled affiliated companies consist of investments
in which we own five percent or more, but less than 25 percent, of the
voting shares of the portfolio company or where we hold one or more seats
on the portfolio company's Board of Directors. Investments in controlled
affiliated companies consist of investments in which we own 25 percent or
more of the voting shares of the portfolio company.
(7) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $15,461,334. 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
$1,660,125.
(8) The aggregate cost for federal income tax purposes of investments in
non-controlled affiliated companies is $28,849,560. The gross unrealized
appreciation based on the tax cost for these securities is $313,534. The
gross unrealized depreciation based on the tax cost for these securities
is $5,096,157.
(9) The aggregate cost for federal income tax purposes of investments in
controlled affiliated companies is $2,800,000. 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 $0.
(10) Continuum Photonics, Inc., merged with Polatis, Ltd., to form Polatis,
Inc.
(11) BridgeLux, Inc., was previously named eLite Optoelectronics, Inc.
(12) Mersana Therapeutics, Inc., was previously named Nanopharma Corp.
The accompanying notes are an integral part of this
consolidated schedule.
11
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS
(Unaudited)
- --------------------------------------------------------------------------------
VALUATION PROCEDURES
Our investments can be classified into five broad categories for valuation
purposes:
1) Equity-Related Securities;
2) Investments in Intellectual Property or Patents or Research and
Development in Technology or Product Development;
3) Long-Term Fixed-Income Securities;
4) Short-Term Fixed-Income Investments; and
5) All Other Investments.
The 1940 Act requires periodic valuation of each investment in our
portfolio to determine our net asset value. Under the 1940 Act, unrestricted
securities with readily available market quotations are to be valued at the
current market value; all other assets must be valued at "fair value" as
determined in good faith by or under the direction of the Board of Directors.
Our Board of Directors is responsible for (1) determining overall
valuation guidelines and (2) ensuring that our investments are valued within the
prescribed guidelines.
Our Valuation Committee, comprised of three or more independent Board
members, is responsible for reviewing and approving the valuation of our assets
within the guidelines established by the Board of Directors. The Valuation
Committee receives information and recommendations from management.
Fair value is generally defined as the amount that an investment could be
sold for in an orderly disposition over a reasonable time. Generally, to
increase objectivity in valuing our assets, external measures of value, such as
public markets or third-party transactions, are utilized whenever possible.
Valuation is not based on long-term work-out value, nor immediate liquidation
value, nor incremental value for potential changes that may take place in the
future.
The values assigned to these investments are based on available
information and do not necessarily represent amounts that might ultimately be
realized, as such amounts depend on future circumstances and cannot reasonably
be determined until the individual investments are actually liquidated or become
readily marketable.
Our valuation policy with respect to the five broad investment categories
is as follows:
EQUITY-RELATED SECURITIES
Equity-related securities are valued using one or more of the following
basic methods of valuation:
A. Cost: The cost method is based on our original cost. This method is
generally used in the early stages of a company's development until significant
positive or negative events occur subsequent to the date of the original
investment that dictate a change to another valuation method. Some examples of
these events are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a meaningful public
market for a company's common stock; and (5) significant positive or negative
changes in a company's business.
12
B. Analytical Method: The analytical method is generally used to value an
investment position when there is no established public or private market in the
company's securities or when the factual information available to us dictates
that an investment should no longer be valued under either the cost or private
market method. This valuation method is inherently imprecise and ultimately the
result of reconciling the judgments of our Valuation Committee members, based on
the data available to them. The resulting valuation, although stated as a
precise number, is necessarily within a range of values that vary depending upon
the significance attributed to the various factors being considered. Some of the
factors considered may include the financial condition and operating results of
the company, the long-term potential of the business of the company, the values
of similar securities issued by companies in similar businesses, 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.
C. Private Market: The private market method uses actual, executed,
historical transactions in a company's securities by responsible third parties
as a basis for valuation. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
D. Public Market: The public market method is used when there is an
established public market for the class of a company's securities held by us or
into which our securities are convertible. Securities for which market
quotations are readily available, and which are not subject to substantial legal
or contractual and transfer restrictions, are carried at market value as of the
time of valuation. Market value for securities traded on securities exchanges or
on the Nasdaq National Market is the last reported sales price on the day of
valuation. For other securities traded in the over-the-counter market and listed
securities for which no sale was reported on that day, market value is the mean
of the closing bid price and asked price on that day. This method is the
preferred method of valuation when there is an established public market for a
company's securities, as that market provides the most objective basis for
valuation. If, for any reason, the Valuation Committee determines that market
quotations are not reliable, such securities shall be fair valued by the
Valuation Committee in accordance with these valuation procedures. We discount
market value for securities that are subject to significant legal or contractual
transfer restrictions.
INVESTMENTS IN INTELLECTUAL PROPERTY, PATENTS, RESEARCH AND DEVELOPMENT IN
TECHNOLOGY OR PRODUCT DEVELOPMENT
Such investments are carried at fair value using the following basic
methods of valuation:
E. Cost: The cost method is based on our original cost. This method is
generally used in the early stages of commercializing or developing intellectual
property or patents or research and development in technology or product
development until significant positive or adverse events occur subsequent to the
date of the original investment that dictate a change to another valuation
method.
13
F. Analytical Method: The analytical method is used to value an investment
after analysis of the best available outside information where the factual
information available to us dictates that an investment should no longer be
valued under either the cost or private market method. This valuation method is
inherently imprecise and ultimately the result of reconciling the judgments of
our Valuation Committee members. The resulting valuation, although stated as a
precise number, is necessarily within a range of values that vary depending upon
the significance attributed to the various factors being considered. Some of the
factors considered may include the results of research and development, product
development progress, commercial prospects, term of patent, projected markets,
and other subjective factors.
G. Private Market: The private market method uses actual third-party
investments in the same or substantially similar intellectual property or
patents or research and development in technology or product development as a
basis for valuation, using actual executed historical transactions by
responsible third parties. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
LONG-TERM FIXED INCOME SECURITIES
H. Readily Marketable: Long-term fixed-income securities for which market
quotations are readily available are carried at market value as of the time of
valuation using the most recent bid quotations when available.
I. Not Readily Marketable: Long-term fixed-income securities for which
market quotations are not readily available are carried at fair value as
determined in good faith by the Valuation Committee on the basis of available
data, which may include credit quality, and interest rate analysis as well as
quotations from broker-dealers or, where such quotations are not available,
prices from independent pricing services that the Board believes are reasonably
reliable and based on reasonable price discovery procedures and data from other
sources.
SHORT-TERM FIXED-INCOME INVESTMENTS
J. Short-Term Fixed-Income Investments are valued in the same manner as
long-term fixed income securities until the remaining maturity is 60 days or
less, after which time such securities may be valued at amortized cost if there
is no concern over payment at maturity.
ALL OTHER INVESTMENTS
K. All Other Investments are reported at fair value as determined in good
faith by the Valuation Committee.
For all other investments, the reported values shall reflect the Valuation
Committee's judgment of fair values as of the valuation date using the outlined
basic methods of valuation or any other method of valuation within the
prescribed guidelines that the Valuation Committee determines after review and
analysis is more appropriate for the particular kind of investment. They do not
necessarily represent an amount of money that would be realized if we had to
sell such assets in an immediate liquidation. Thus, valuations as of any
particular date are not necessarily indicative of amounts that we may ultimately
realize as a result of future sales or other dispositions of investments we
hold.
14
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1. THE COMPANY
Harris & Harris Group, Inc.(R) (the "Company," "us," "our" and "we"), is a
venture capital company operating as a business development company ("BDC")
under the Investment Company Act of 1940 ("1940 Act"). We operate as an
internally managed company whereby our officers and employees, under the general
supervision of our Board of Directors, conduct our operations.
We elected to become a BDC on July 26, 1995, after receiving the necessary
governmental approvals. From September 30, 1992, until the election of BDC
status, we operated as a closed-end, non-diversified investment company under
the 1940 Act. Upon commencement of operations as an investment company, we
revalued all of our assets and liabilities in accordance with the 1940 Act.
Prior to September 30, 1992, we were registered and filed under the reporting
requirements of the Securities and Exchange Act of 1934 as an operating company
and, while an operating company, operated directly and through subsidiaries.
Harris & Harris Enterprises, Inc.SM ("Enterprises"), is a 100 percent
wholly owned subsidiary of the Company. Enterprises 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 owns our
interest in AlphaSimplex Group, LLC. The partners of Harris Partners I, L.P.,
are Enterprises (sole general partner) and Harris & Harris Group, Inc. (sole
limited partner).
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 2004. On March 29, 2006, we filed for RIC certification under Section
851(e) of the Code for 2005, however, there can be no assurance that we will
qualify as a RIC for 2005 or subsequent 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.
NOTE 2. INTERIM FINANCIAL STATEMENTS
Our interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X and in conformity
with generally accepted accounting principles applicable to interim financial
information. Accordingly, they do not include all information and disclosures
necessary for a presentation of our financial position, results of operations
and cash flows in conformity with generally accepted accounting principles in
the United States of America. In the opinion of management, these financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of our financial position, results
of operations and cash flows for such periods. The results of operations for any
interim period are not necessarily indicative of the results for the full year.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
15
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of the consolidated financial statements:
Principles of Consolidation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for investment companies and include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and liabilities
as of March 31, 2006, and December 31, 2005, and the reported amounts of
revenues and expenses for the three months ended March 31, 2006 and March 31,
2005. The most significant estimates relate to the fair valuations of certain of
our investments. Actual results could differ from these estimates.
Cash and Cash Equivalents. Cash and cash equivalents include money market
instruments with maturities of less than three months.
Portfolio Investment Valuations. Investments are stated at "value" as
defined in the 1940 Act and in the applicable regulations of the Securities and
Exchange Commission. Value, as defined in Section 2(a)(41) of the 1940 Act, is
(i) the market price for those securities for which a market quotation is
readily available and (ii) the fair value as determined in good faith by, or
under the direction of, the Board of Directors for all other assets. (See
"Valuation Procedures" in the "Footnote to Consolidated Schedule of
Investments.") At March 31, 2006, our financial statements include private
venture capital investments valued at $42,400,340, the fair values of which were
determined in good faith by, or under the direction, of the Board of Directors.
Upon sale of investments, the values that are ultimately realized may be
different from what is presently estimated. The difference could be material.
Securities Transactions. Securities transactions are accounted for on the
date the securities are purchased or sold (trade date); dividend income is
recorded on the ex-dividend date; and interest income is accrued as earned. The
Company ceases accruing interest when securities are determined to be non-income
producing and writes off any previously accrued interest. Realized gains and
losses on investment transactions are determined by specific identification for
financial reporting and tax reporting.
Income Taxes. Prior to January 1, 1999, we recorded income taxes using the
liability method in accordance with the provisions of Statement of Financial
Accounting Standards No. 109. Accordingly, deferred tax liabilities had been
established to reflect temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases; the most significant such difference related to our unrealized
appreciation on investments.
We pay federal, state and local income taxes on behalf of our wholly owned
subsidiary, Harris & Harris Enterprises, which is a C corporation. (See "Note 6.
Income Taxes.")
16
Restricted Funds. The Company maintains a rabbi trust for the purposes of
accumulating funds to satisfy the obligations incurred by us for the
Supplemental Executive Retirement Plan ("SERP") under the employment agreement
with Charles E. Harris.
Property and Equipment. Property and equipment are included in "Other
Assets" and are carried at cost, less accumulated depreciation. Depreciation is
provided using the straight-line method over the estimated useful lives of the
premises and equipment.
NOTE 4. EMPLOYEE PROFIT SHARING PLAN
As of January 1, 2003, we implemented the Amended and Restated Harris &
Harris Group, Inc. Employee Profit-Sharing Plan, which we refer to as the 2002
Plan.
The 2002 Plan (and its predecessor) provided for profit sharing by our
officers and employees equal to 20 percent of our "qualifying income" for that
plan year. For the purposes of the 2002 Plan, qualifying income was defined as
net realized income as reflected on our Consolidated Statements of Operations
for that year (excluding the profit-sharing expense), less nonqualifying gains,
if any.
For purposes of the 2002 Plan, our net realized income included investment
income, realized gains and losses, and operating expenses (including taxes paid
or payable by us on behalf of shareholders), but was calculated without
including dividends paid or distributions made to shareholders, payments under
the Plan, accruals for profit sharing, unrealized gains and losses, and loss
carry-overs from other years, which net realized income we refer to as
qualifying income. The proportion of net after-tax realized gains attributable
to asset values as of September 30, 1997, was considered nonqualifying gain,
which reduced qualifying income. As soon as practicable following the year-end,
the Compensation Committee determined whether, and if so how much, qualifying
income existed for a plan year. Ninety percent of the amount determined by the
Compensation Committee was then paid out to Plan participants pursuant to the
distribution percentages set forth in the 2002 Plan. The remaining 10 percent
was paid out after we filed our federal tax return for that plan year.
Under the 2002 Plan, awards previously granted to four individuals who
were participants at that time (Charles Harris, Mel Melsheimer, Helene Shavin
and Jacqueline Matthews, herein referred to as the "grandfathered participants")
were reduced by 10 percent with respect to "Non-Tiny Technology Investments" (as
defined in the 2002 Plan) and by 25 percent with respect to "Tiny Technology
Investments" (as defined in the 2002 Plan), and these reduced awards became
permanent. We refer to these reduced awards as "grandfathered participations."
Grandfathered participations covered only investments made prior to the time the
2002 Plan was adopted and did not affect awards related to any investments made
after that date. The amount by which the awards of the grandfathered
participants were reduced were allocable and reallocable each year by the
Compensation Committee among current and new participants as awards under the
2002 Plan.
Notwithstanding any provisions of the 2002 Plan, in no event would the
aggregate amount of all awards payable for any Plan Year during which we
remained a "business development company" within the meaning of the 1940 Act be
greater than 20 percent of our "net income after taxes" within the meaning of
Section 57(n)(1)(B) of the 1940 Act. In the event the awards as calculated
exceeded that amount, the 2002 Plan required that the awards be reduced on a pro
rata basis.
17
Each quarter, we performed a calculation to determine the accrual for
profit-sharing. We calculated 20 percent of qualifying income (i.e. realized
income) pursuant to the terms of the 2002 Plan and estimated the amount of
additional qualifying income, if any, that would result from selling all the
portfolio investments that were valued above cost (i.e., that were in an
unrealized appreciation position). Although the accrual would fluctuate as a
result of changes in qualifying income and changes in unrealized appreciation,
payments were made only to the extent that qualifying income existed. At March
31, 2006 and December 31, 2005, we accrued $210,786 and $2,107,858,
respectively, for profit sharing as a result of net realized gains. On March 1,
2006, the Company paid $1,897,072 to plan participants (employees and former
employees), which represented 90 percent of the total estimated profit sharing
payment for 2005. The balance of $210,786 is expected to be paid in September
2006. Once the balance of $210,786 is paid in September, the Company has no
further obligations under the 2002 Plan.
On March 23 2006, Board of Directors of the Company voted to terminate the
Profit Sharing Plan and established the Harris & Harris Group, Inc. 2006 Equity
Incentive Plan (the "Stock Plan"), both subject to shareholder approval. These
proposals were approved at the May 4, 2006 Annual Meeting of Shareholders. The
Stock Plan provides for the grant of equity-based awards of restricted stock and
stock options to our directors, officers, employees, advisors and consultants
who are selected by our Compensation Committee for participation in the plan and
subject to compliance with the 1940 Act. If the SEC provides exemptive relief to
that effect, our Compensation Committee may also authorize awards under the
Stock Plan to selected former employees of the Company.
A maximum of 20 percent of our total shares of our common stock issued and
outstanding, calculated on a fully diluted basis, will be available for awards
under the Stock Plan. Under the Stock Plan, no more than 25 percent of the
shares of stock reserved for the grant of the awards under the Stock Plan may be
restricted stock awards at any time during the term of the Stock Plan. If any
shares of restricted stock are awarded, such awards will reduce on a percentage
basis the total number of shares of stock for which options may be awarded. If
the Company does not receive exemptive relief from the SEC to issue restricted
stock, all shares granted under the Stock Plan may be subject to stock options.
If the Company does receive such exemptive relief and issues 25 percent of
the shares of stock reserved for grant under the Stock Plan as restricted stock,
no more than 75 percent of the shares granted under the Stock Plan may be
subject to stock options. No more than 1,000,000 shares of our common stock may
be made subject to awards under the Stock Plan to any individual in any year.
The terms and conditions of stock options granted under the Stock Plan
will be determined by the Compensation Committee and set forth in an award
agreement between the Company and the award recipient. The exercise price of an
option granted under the plan will not be less than the fair market value of our
common stock on the date of grant. The vesting of a stock option will be subject
to such conditions as the Compensation Committee may determine.
The terms and conditions of awards of restricted stock granted under the
Stock Plan will be determined by the Compensation Committee and set forth in an
award agreement between the Company and the award recipient. The Compensation
Committee may determine that the holder of restricted stock may receive
dividends, including deemed dividends, that may be deferred during the
restricted period applicable to these awards.
18
Unless earlier terminated by our Board of Directors, the Stock Plan will
expire on the 10th anniversary of the date on which it was adopted. 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.
We will account for the Stock Plan in accordance with the provisions of
SFAS 123(R), "Share-Based Payments," which requires us to record the fair value
of the stock-based compensation arrangements on the date they are granted to
employees as a liability or as a component of equity, depending on whether the
obligations can be settled in cash or stock. Regardless of treatment as
liabilities or equity, these amounts must be expensed over the vesting period of
the compensation arrangements. Under SFAS 123(R), we will be required to select
a valuation technique or option-pricing model that meets the criteria as stated
in the standard.
NOTE 5. DISTRIBUTABLE EARNINGS
As of December 31, 2005, and March 31, 2006, there were no distributable
earnings. The difference between the book basis and tax basis components of
distributable earnings is primarily nondeductible deferred compensation and net
operating losses.
NOTE 6. INCOME TAXES
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.
During 2005, we sold our investment in NeuroMetrix, Inc., realized the
Built-In Gains, and utilized all of our loss carryforwards.
At March 31, 2006 and December 31, 2005, we had no deferred tax asset or
liability.
To the extent that we retain capital gains and declare a deemed dividend
to shareholders, the dividend is taxable to the shareholders. We would pay tax
on behalf of shareholders, at the corporate rate, on the distribution, and the
shareholders would receive a tax credit equal to their proportionate share of
the tax paid. We took advantage of this rule for 2005. Included in net realized
income from investments for the year ended December 31, 2005, were net realized
gains before taxes of $23,862,037, which consisted primarily of a net realized
long term capital gain on the sale of our investment in Neurometrix, Inc.,
offset by realized net long term capital losses on the sales of Agile Materials
& Technologies, Inc., Experion Systems, Inc., Nanotechnologies Inc., and Optiva,
Inc. We applied $140,751 of our capital loss carryforwards and $501,640 of our
pre-1999 loss carryforwards on Built-In Gains to these gains.
19
In December 2005, we declared a deemed dividend on net taxable realized
long-term capital gains of $23,206,763. The Company recorded a tax payable on
its Consolidated Statements of Assets and Liabilities of $8,122,367 for taxes
payable on behalf of its shareholders. This distribution of $8,122,367 was also
recorded as an income tax expense on the Consolidated Statements of Operations
for the year ended December 31, 2005. Shareholders of record at December 31,
2005, received a tax credit of $0.39131971 per share. The balance of $15,084,396
was retained by the Company. The Company paid $8,122,367 of taxes on behalf of
its shareholders on January 30, 2006.
We pay federal, state and local taxes on behalf of our wholly owned
subsidiary, Harris & Harris Enterprises, Inc., which is taxed as a C
Corporation. For the three months ended March 31, 2006, and 2005, our income tax
expense for Harris & Harris Enterprises, Inc, was $9,606 and $4,217,
respectively.
Continued qualification as a RIC requires us to satisfy certain investment
asset diversification requirements in future years. Our ability to satisfy those
requirements may not be controllable by us. There can be no assurance that we
will qualify as a RIC in subsequent years.
NOTE 7. CAPITAL TRANSACTIONS
In 1998, the Board of Directors approved that effective January 1, 1998,
50 percent of all Directors' fees be used to purchase our common stock from us.
However, effective March 1, 1999, the Board of Directors approved that Directors
may purchase our common stock in the open market, rather than from us.
Since 1998, we have repurchased a total of 1,859,047 of our shares for a
total of $3,496,388, including commissions and expenses, at an average price of
$1.88 per share. These treasury shares were reduced by the purchases made by the
Directors. On July 23, 2002, because of our strategic decision to invest in tiny
technology, the Board of Directors reaffirmed its commitment not to authorize
the purchase of additional shares of stock in the foreseeable future.
In September of 2005, we completed the sale of an additional 3,507,500
shares for gross proceeds of $37,091,813; net proceeds of the offering, after
offering costs of $565,246, were $36,526,567. We intend to use, and have been
using, the net proceeds of the offering, less offering costs, to make new
investments in tiny technology as well as follow-on investments in our existing
venture capital investments, and for working capital.
NOTE 8. SUBSEQUENT EVENTS
On April 10, 2006, we made a $500,000 follow-on investment in Nextreme
Thermal Solutions, Inc.
On April 19, 2006, we made a $1,750,547 new investment in a privately
held, tiny technology company.
On April 20, 2006, we made a $2,500,000 new investment in privately held
Innovalight, Inc.
On May 5, 2006, we made a $59,403 follow-on investment in a privately
held, tiny technology portfolio company.
- --------------------------------------------------------------------------------
HARRIS & HARRIS GROUP, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------
2006 2005
--------------- --------------
Per Share Operating Performance
Net asset value per share, beginning of period $ 5.68 $ 4.33
Net operating income (loss)* (0.04) (.04)
Net realized income (loss) on investments* (0.00) (.06)
Net increase (decrease) in unrealized appreciation
(depreciation) as a result of sales* (0.00) .08
Net increase (decrease) in unrealized appreciation
(depreciation) on investments held*
(0.04) (.11)
--------------- --------------
Total from investment operations* (0.08) (.13)
--------------- --------------
Net decrease as a result of deemed
dividend shareholder tax credit 0 0
--------------- --------------
Total distributions 0 0
Net increase as a result of stock offering 0 0
--------------- --------------
Total increase from capital stock transactions 0 0
--------------- --------------
Net asset value per share, end of period $ 5.60 $ 4.20
=============== ==============
Stock price per share, end of period $ 13.95 $ 12.04
Total return based on stock price (1) 0.36% (26.5%)
Supplemental Data:
Net assets, end of period $ 116,333,752 $ 72,511,352
Ratio of expenses to average net assets (1) 1.3% 1.4%
Ratio of net operating loss to average net assets (1) (0.7%) (1.01%)
Cash dividends paid per share $ 0 $ 0
Deemed dividend per share $ 0 $ 0
Number of shares outstanding, end of period 20,756,345 17,248,845
*Based on Average Shares Outstanding.
(1) Not Annualized
The accompanying notes are an integral part of
this schedule.
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information contained in this section should be read in conjunction
with the unaudited March 31, 2006, Consolidated Financial Statements and the
Company's 2005 audited Consolidated Financial Statements and notes thereto.
Background and Overview
We incorporated under the laws of the state of New York in August 1981. In
1983, we completed an initial public offering and invested $406,936 in Otisville
BioTech, Inc., which also completed an initial public offering later that year.
In 1984, Charles E. Harris purchased a controlling interest in us and became the
control person in Otisville. We then divested our other assets and became a
financial services company, with the investment in Otisville as the initial
focus of our business activity. We hired new management for Otisville, and
Otisville acquired new technology targeting the development of a human blood
substitute.
By 1988, we operated two insurance brokerages and a trust company as
wholly-owned subsidiaries. In 1989, Otisville changed its name to Alliance
Pharmaceutical Corporation, and by 1990, we had completed selling our $406,936
investment in Alliance for total proceeds of $3,923,559.
In 1992, we sold our insurance brokerage and trust company subsidiaries to
their respective managements and registered as an investment company under the
1940 Act, commencing operations as a closed-end, non-diversified investment
company. In 1995, we elected to become a business development company subject to
the provisions of Sections 55 through 65 of the 1940 Act. Throughout our
corporate history, we have made early stage venture capital investments in a
variety of industries. We define venture capital investments as investments in
start-up firms and small businesses with exceptional growth potential. In 1994,
we made our first tiny technology investment. From August 2001 through March 31,
2006, all 27 of our initial investments have been exclusively in tiny
technology.
Since our investment in Otisville in 1983 through March 31, 2006, we have
made a total of 69 venture capital investments, including four private placement
investments in securities of publicly traded companies. We have sold 44 of these
69 investments, realizing total proceeds of $143,614,382 on our invested capital
of $51,144,319. Eighteen of these 44 investments were profitable. As measured
from first dollar in to last dollar out, the average and median holding periods
for these 44 investments were 3.63 years and 3.18 years, respectively. As
measured by the 149 separate rounds of investment within these 44 investments,
the average and median holding periods for the 149 separate rounds of investment
were 2.85 years and 2.53 years, respectively. At March 31, 2006, we valued the
25 venture capital investments remaining in our portfolio at $42,400,340, or
36.4 percent of our net assets, including net unrealized depreciation of
$4,710,554. At March 31, 2006, from first dollar in, the average and median
holding periods for these 25 venture capital investments were 2.92 years and
1.90 years, respectively. As measured by the 60 separate rounds of investment
within these 25 investments, the average and median holding periods for the 60
separate rounds of investment were 2.45 years and 1.78 years, respectively.
We have invested a substantial portion of our assets in venture capital
investments of private, development stage or start-up companies. These private
businesses tend to be thinly capitalized, unproven, small companies that lack
management depth, have little or no history of operations and are developing
unproven technologies. At March 31, 2006, $42,400,340, or 36.4 percent, of our
net assets at fair value consisted of private venture capital investments, net
of unrealized depreciation of $4,710,554. At December 31, 2005, $33,187,333, or
28.1 percent, of our net assets at fair value consisted of private venture
capital investments, net of unrealized depreciation of $4,519,009.
22
We value our private venture capital investments each quarter as
determined in good faith by our Valuation Committee, a committee of independent
directors, within guidelines established by our Board of Directors in accordance
with the 1940 Act. (See "Footnote to Consolidated Schedule of Investments"
contained in "Consolidated Financial Statements.")
We have discretion in the investment of our capital. However, we invest
primarily in illiquid equity securities of private companies. Generally, these
investments take the form of preferred stock, are subject to restrictions on
resale and have no established trading market. Our principal objective is to
achieve long-term capital appreciation. Therefore, a significant portion of our
investment portfolio provides little or no income in the form of dividends or
interest. We earn interest income from fixed-income securities, including U.S.
government and government agency securities. The amount of interest income we
earn varies with the average balance of our fixed-income portfolio and the
average yield on this portfolio. Interest income is secondary to capital gains
and losses in our results of operations.
We present the financial results of our operations utilizing accounting
principles generally accepted in the United States for investment companies. On
this basis, the principal measure of our financial performance during any period
is the net increase/(decrease) in our net assets resulting from our operating
activities, which is the sum of the following three elements:
Net Operating Income / (Loss) - the difference between our income from
interest, dividends and fees and our operating expenses.
Net Realized Income / (Loss) on Investments - the difference between the
net proceeds of sales of portfolio securities and their stated cost, plus income
from interests in limited liability companies.
Net Increase / (Decrease) in Unrealized Appreciation or Depreciation on
Investments - the net unrealized change in the value of our investment
portfolio.
Owing to the structure and objectives of our business, we generally expect
to experience net operating losses and seek to generate increases in our net
assets from operations through the long-term appreciation of our venture capital
investments. We have relied, and continue to rely, on proceeds from sales of
investments, rather than on investment income, to defray a significant portion
of our operating expenses. Because such sales are unpredictable, we attempt to
maintain adequate working capital to provide for fiscal periods when there are
no such sales.
Results of Operations
Three months ended March 31, 2006, as compared to the three months ended March
31, 2005
In the three months ended March 31, 2006, and March 31, 2005, we had net
decreases in net assets resulting from operations of $1,653,990 and $2,233,447,
respectively.
23
Investment Income and Expenses:
We had net operating losses of $767,743 and $745,590 for the three months
ended March 31, 2006, and March 31, 2005, respectively. The variation in these
results is primarily owing to the changes in investment income and operating
expenses. During the three months ended March 31, 2006, and 2005, total
investment income was $804,862 and $260,108, respectively. During the three
months ended March 31, 2006, and 2005, total operating expenses were $1,572,605
and $1,005,698, respectively.
During the first three months of 2006, as compared with the same period in
2005, investment income increased owing to an increase in our holdings of U.S.
Government and Government Agency securities and an increase in interest rates.
At March 31, 2006, our holdings of such securities were $71,331,140 as compared
with $40,191,188 at March 31, 2005.
The increase in operating expenses for the three months ended March 31,
2006, as compared to the three months ended March 31, 2005, was primarily owing
to increases in salaries and benefits, profit sharing provision and rental
expense. Salaries and benefits increased by $218,670, or 38.5 percent, through
March 31, 2006, as compared to March 31, 2005. The increase in salaries and
benefits reflects expenses associated with ten full-time employees and one
part-time employee during the first quarter of 2006, as compared with eight
full-time employees during the first quarter of 2005. Profit sharing expense was
$0 for the first quarter of 2006, as compared with a reversal of $(311, 594) in
2005. This reversal served to reduce operating expenses by $311,594 during the
first quarter of 2005. Rent expense increased by $12,556, or 25.8 percent, owing
primarily to the additional rent expense for the Palo Alto, California, office.
Realized Income and Losses from Investments:
During the three months ended March 31, 2006, we realized net gains on
investments of $11,953. During the three months ended March 31, 2005, we
realized net losses on investments of $1,036,044.
During the three months ended March 31, 2006, we realized net gains of
$11,953, consisting primarily of proceeds received from the liquidation of
Optiva, Inc., offset by losses realized on our investment in AlphaSimplex Group,
LLC. During 2005, we deemed the securities we held in Optiva, Inc., worthless
and recorded the proceeds received and due to us on the liquidation of our
bridge notes, realizing a loss of $1,619,245. At December 31, 2005, we recorded
a $75,000 receivable for estimated proceeds from the final payment on the
Optiva, Inc., bridge notes. During the first quarter of 2006, we received
payment of $95,688 from these bridge notes, resulting in the realized gain of
$20,688 on Optiva, Inc. These gains were offset by losses of $12,257 on our
investment in AlphaSimplex Group, LLC.
During the three months ended March 31, 2005, we realized net losses of
$1,036,044, consisting primarily of a realized loss of $1,358,286 from the sale
of our investment in Agile Materials & Technologies, Inc., offset by a realized
gain of $255,486 resulting from the receipt of funds that were held in escrow
for one year from the March 2004 merger of NanoGram Devices Corporation and a
wholly owned subsidiary of Wilson Greatbatch Technologies, Inc. In March 2004,
we set up a reserve for the escrow of $255,486, by a charge to realized income
from investments. On March 16, 2005, the funds were released from escrow to us,
and we released the reserve and recorded the realized income.
24
Net Unrealized Appreciation and Depreciation of Portfolio Securities:
During the three months ended March 31, 2006, net unrealized depreciation
on total investments increased by $888,594, or 19.4 percent, from net unrealized
depreciation of $4,588,550 at December 31, 2005, to net unrealized depreciation
of $5,477,145 at March 31, 2006. Net unrealized depreciation on investments
increased by $447,596, or 37.4 percent, during the three months ended March 31,
2005, from $1,197,428 at December 31, 2004, to $1,645,024 at March 31, 2005.
During the three months ended March 31, 2006, net unrealized depreciation
on our venture capital investments increased by $191,545 from $4,519,009 to
$4,710,554, owing primarily to a decrease in the valuation of our investment in
Zia Laser, Inc. Unrealized depreciation on our U.S. Government and Government
Agency Securities portfolio increased from $69,541 at December 31, 2005, to
$766,591 at March 31, 2006.
During the three months ended March 31, 2005, net unrealized depreciation
on our venture capital investments increased by $309,439, from $874,645 to
$1,184,084, primarily owing to a decrease in the valuation of our investment in
NeuroMetrix, Inc., of $2,250,029, offset by an increase in the valuation of our
investment in Nantero, Inc., of $813,771. In addition, unrealized depreciation
decreased by $1,364,081 as a result of the loss realized on the sale of Agile
Materials & Technologies, Inc.
Financial Condition
Three Months ended March 31, 2006
At March 31, 2006, our total assets and net assets were $121,339,323 and
$116,333,752, respectively, compared with $132,938,120 and $117,987,742 at
December 31, 2005, respectively.
At March 31, 2006, net asset value per share ("NAV") was $5.60, as
compared with $5.68 at December 31, 2005. Our shares outstanding remained
unchanged during the three months ended March 31, 2006.
Significant developments in the three months ended March 31, 2006, were an
increase in the value of our venture capital investments of $9,213,007 and a
decrease in the value of our investment in U.S. government and agency
obligations of $24,919,724. The increase in the value of our venture capital
investments, from $33,187,333 at December 31, 2005, to $42,400,340 at March 31,
2006, resulted primarily from two new and two follow-on investments, partially
offset by a net decrease of $199,757 in the net value of our previous venture
capital investments. The decrease in the value of our U.S. government and agency
obligations, from $96,250,864 at December 31, 2005, to $71,331,140 at March 31,
2006, is primarily owing to the use of funds for investments totaling
$9,412,764, tax payments of $8,291,973, profit sharing payments of $1,897,072,
and net operating expenses. In addition, cash increased from $1,213,289 at
December 31, 2005, to $4,470,822 at March 31, 2006, primarily owing to the
maturity of a Treasury Bill on March 31, 2006.
25
The following table is a summary of additions to our portfolio of venture
capital investments during the three months ended March 31, 2006:
New Investment Amount
-------------- -------------
Evolved Nanomaterial Sciences, Inc. $2,800,000
Metabolon, Inc. $2,500,000
Follow-on Investment
CSwitch Corporation $2,850,000
NanoGram Corporation $1,262,764
----------
Total $9,412,764
==========
The following tables summarize the fair values of our portfolios of
venture capital investments and U.S. government and agency obligations, as
compared with their cost, at March 31, 2006, and December 31, 2005:
March 31, 2006 December 31, 2005
-------------- -----------------
Venture capital investments,
at cost $47,110,894 $37,706,342
Net unrealized depreciation (1) 4,710,554 4,519,009
----------- -----------
Venture capital investments,
at fair value $42,400,340 $33,187,333
=========== ===========
March 31, 2006 December 31, 2005
-------------- -----------------
U.S. government and agency
obligations, at cost $72,097,731 $96,320,405
Net unrealized depreciation(1) 766,591 69,541
----------- -----------
U.S. government and agency
obligations, at fair value $71,331,140 $96,250,864
=========== ===========
1)At March 31, 2006, and December 31, 2005, the net accumulated unrealized
depreciation on investments, including deferred taxes, was $5,652,719 and
$4,764,125, respectively.
The following table summarizes the fair value composition of our
venture capital investment portfolio at March 31, 2006, and December 31, 2005.
March 31, 2006 December 31, 2005
-------------- -----------------
Category
Tiny Technology 99.9% 99.9%
Other Venture Capital Investments 0.1% 0.1%
----------- -----------
Total Venture Capital Investments 100.0% 100.0%
=========== ===========
Liquidity
Our primary sources of liquidity are cash, receivables and freely
marketable securities, net of short-term indebtedness. Our secondary sources of
liquidity are restricted securities of companies that are publicly traded.
26
At March 31, 2006, and December 31, 2005, our total net primary liquidity
was $76,377,187 and $97,797,219, respectively, and our secondary liquidity was
$0 and $0, respectively.
The decrease in our primary liquidity from December 31, 2005, to March 31,
2006, is primarily owing to the use of funds for investments, profit sharing and
tax payments, as well as net operating expenses.
Capital Resources
In 2004, we registered with the Securities and Exchange Commission for the
sale of up to 7,000,000 shares of our common stock from time to time. In July
2004, we sold 3,450,000 common shares for gross proceeds of $36,501,000; net
proceeds of the offering, after offering costs of $372,825, were $36,128,175. In
September 2005, we completed the sale of 3,507,500 common shares, for total
gross proceeds of $37,091,813. Net proceeds, after offering costs of $565,246,
were $36,526,567. We intend to use, and have been using, the net proceeds of the
offerings to make new investments in tiny technology as well as follow-on
investments in our existing venture capital investments, and for working
capital. Through March 31, 2006, we have used $34,400,685 from these two
offerings for these purposes.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 3 to
the Consolidated Financial Statements and in the Footnote to the Consolidated
Schedule of Investments. Critical accounting policies are those that are both
important to the presentation of our financial condition and results of
operations and those that require management's most difficult, complex or
subjective judgments. The Company considers the following accounting policies
and related estimates to be critical:
Valuation of Portfolio Investments
As a business development company, we invest in illiquid securities
including debt and equity securities of private companies. These investments are
generally subject to restrictions on resale and generally have no established
trading market. We value substantially all of our equity investments at fair
value as determined in good faith by our valuation committee on a quarterly
basis. The valuation committee, comprised of three or more non-interested board
members, reviews and approves the valuation of our investments within the
valuation procedures established by the board of directors. Fair value is
generally defined as the amount that an investment could be sold for in an
orderly disposition over a reasonable time. Generally, to increase objectivity
in valuing our assets, external measures of value, such as public markets or
third party transactions, are utilized whenever possible. Valuation is not based
on long term work-out value, nor immediate liquidation value, nor incremental
value for potential changes that may take place in the future. Upon sale of
investments, the values that are ultimately realized may be different from what
is presently estimated. This difference could be material.
Pension and Post-Retirement Benefit Plan Assumptions
The Company provides a Retirement Healthcare 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.
27
The discount rate reflects the current rate at which the post retirement
benefit liabilities could be effectively settled considering the timing of
expected payments for plan participants. In estimating this rate, we consider
rates of return on high quality fixed-income investments included in published
bond indexes. We consider the Moody's Aa Corporate Bond Index and the Citigroup
Pension Liability Index in the determination of the appropriate discount rate
assumptions. The weighted average rate we utilized to measure our post
retirement benefit obligation as of December 31, 2005, and calculate our 2006
expense was 5.5 percent, which is a decrease from 5.75 percent used in
determining the March 2005 expense.
Recent Developments -- Portfolio Companies
On April 10, 2006, we made a $500,000 follow-on investment in Nextreme
Thermal Solutions, Inc.
On April 19, 2006, we made a $1,750,547 new investment in a privately
held, tiny technology company.
On April 20, 2006, we made a $2,500,000 new investment in privately held
Innovalight, Inc.
On May 5, 2006, we made a $59,403 follow-on investment in a privately
held, tiny technology portfolio company.
Forward-Looking Statements
The information contained herein contains certain forward-looking
statements. These statements include the plans and objectives of management for
future operations and financial objectives, portfolio growth and availability of
funds. These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions. Certain factors that
could cause actual results and conditions to differ materially from those
projected in these forward-looking statements are set forth herein. Other
factors that could cause actual results to differ materially include the
uncertainties of economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that
the assumptions underlying the forward-looking statements included herein are
reasonable, any of the assumptions could be inaccurate and therefore there can
be no assurance that the forward-looking statements included or incorporated by
reference herein will prove to be accurate. Therefore, the inclusion of such
information should not be regarded as a representation by us or any other person
that our plans will be achieved.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our business activities contain elements of risk. We consider the
principal types of market risk to be valuation risk and the risk associated with
fluctuations in interest rates. Although we are risk-seeking rather than
risk-averse in our investments, we consider the management of risk to be
essential to our business.
Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market
price for those securities for which a market quotation is readily available and
(ii) fair value as determined in good faith by, or under the direction of, the
Board of Directors for all other assets . (See the "Valuation Procedures" in the
"Footnote to Consolidated Schedule of Investments" contained in "Item 1.
Consolidated Financial Statements.")
28
Neither our investments nor an investment in us is intended to constitute
a balanced investment program.
We have invested a substantial portion of our assets in private
development stage or start-up companies. These private businesses tend to be
based on new technology and to be thinly capitalized, unproven, small companies
that lack management depth and have not attained profitability or have no
history of operations. Because of the speculative nature and the lack of a
public market for these investments, there is significantly greater risk of loss
than is the case with traditional investment securities. We expect that some of
our venture capital investments will be a complete loss or will be unprofitable
and that some will appear to be likely to become successful but never realize
their potential. Even when our private equity investments complete initial
public offerings (IPOs), we are normally subject to lock-up agreements for a
period of time, and thereafter, the market for the unseasoned publicly traded
securities may be relatively illiquid.
Because there is typically no public market for the equity interests of
many of 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 Board of Directors in accordance with our Valuation Procedures. In
the absence of a readily ascertainable market value, the determined value of our
portfolio of equity interests may differ significantly from the values that
would be placed on the portfolio if a ready market for the equity interests
existed. Any changes in valuation are recorded in our consolidated statements of
operations as "Net increase (decrease) in unrealized appreciation on
investments."
We also invest in short-term money market instruments, and both short and
long-term U.S. government and agency obligations. To the extent that we invest
in short and long-term U.S. government and agency obligations, changes in
interest rates may result in changes in the value of these obligations which
would 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 both the short and long-term U.S. government and agency
obligations held by the Company, and it will vary from period to period. If the
average interest rate on U. S. government and agency obligations at March 31,
2006, were to increase by 25, 75 and 150 basis points, the weighted average
value of these securities held by us at March 31, 2006, would decrease by
approximately $421,130, $1,263,390 and $2,526,780, 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 in the future. Our net investment income will be dependent
upon the difference between the rate at which we borrow funds and the rate at
which we invest such funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net investment income in the event we choose to borrow funds for
investing purposes.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company's management, under the supervision and with
the participation of our chief executive officer and chief financial officer,
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as required by Rules 13a-15 of the
Securities Exchange Act of 1934 (the "1934 Act")). Disclosure controls and
procedures means controls and other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized
and reported, within time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the issuer's
management, as appropriate, to allow timely decisions regarding required
disclosures. As of March 31, 2006, 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.
29
(b) Changes in Internal Control Over Financial Reporting. There have been
no changes in our internal control over financial reporting that occurred during
the first quarter of 2006 to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
30
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Investing in our shares of common stock involves significant risks
relating to our business and investment objective. You should carefully consider
the risks and uncertainties described in our Annual Report on Form 10-K for the
year ended December 31, 2005, before you purchase any of our shares of common
stock. The risks described in our Annual Report on Form 10-K are not the only
risks facing our Company. Additional risks and uncertainties not currently known
to us or that we currently deem immaterial also may materially adversely affect
our business, financial condition and/or operating results.
Item 6. Exhibits
31.01* Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.02* Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.01* 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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on behalf of the Registrant and as its chief
accounting officer.
Harris & Harris Group, Inc.
/s/ Douglas W. Jamison
-------------------------------------
By: Douglas W. Jamison, President
and Chief Financial Officer
/s/ Patricia N. Egan
-------------------------------------
By: Patricia N. Egan
Chief Accounting Officer
and Vice President
Date: May 8, 2006
32
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.01 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.02 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.01 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.
33