A Publicly Traded Venture Capital Company Investing in Tiny Technology

 

 

SECOND QUARTER REPORT 2005

 

Fellow Shareholders:

 

On August 23, 2005, we completed our previously announced public offering of 3,050,000 shares of our common stock at $11.25 per share, for estimated net proceeds of approximately $31,913,750 after deducting underwriting discounts and commissions and estimated expenses payable by the Company. We have granted an option to the underwriters to purchase up to an additional 457,000 shares of our common stock at $11.25 per share through September 16, 2005, to cover over-allotments, if any. All of the shares of common stock were sold by us pursuant to an effective shelf registration statement filed with the Securities and Exchange Commission. ThinkEquity Partners LLC acted as the sole book runner for the offering. Punk, Ziegel & Company acted as co-manager for the offering. This offering was essentially the balance of a 7,000,000 share shelf registration that we had filed with the Securities and Exchange Commission in February of 2004. We had previously sold 3,450,000 shares at $11.25 per share in an offering underwritten by the same two firms on June 30, 2004.

 

The Company has made significant progress on multiple fronts over the last 13 months since our June 30, 2004, public offering. During that period:

 

          Owing primarily to the successful initial public offering of NeuroMetrix, Inc., and its subsequent price appreciation, and to the anti-dilutive effect of our 3,450,000 share June 30, 2004, stock offering at $11.25 per share, our net asset value per share increased from $2.85 on June 29, 2004, to $5.07 on August 17, 2005.

 

          We reviewed over 300 investment opportunities.

 

          We completed eight new investments in tiny technology companies.

 

          We completed 15 follow-on investments in our tiny technology portfolio companies.

 

          Altogether, we invested $12,467,726 in tiny technology companies, with pre-emptive rights to make follow-on investments in future rounds of financing in these companies.

 

          NeuroMetrix (Nasdaq: NURO) completed a successful initial public offering.

 

          We hired six new employees (two investment professionals, two accounting professionals, a general counsel and chief compliance officer and an administrative assistant), for a net increase of four in our number of full-time employees, to a current total of 10.

 

These additional employees include Patricia N. Egan and Thomas M. McCarthy. Ms. Egan joined us as Chief Accounting Officer and Vice President during the quarter ended June 30, 2005. Prior to joining us, she was a Manager in the Financial Services Group of PricewaterhouseCoopers, LLP. She was graduated from Georgetown University. Thomas M. McCarthy joined our team following the close of the June quarter as Controller. Mr. McCarthy was a Manager in the Global Capital Markets group at PricewaterhouseCoopers, LLP. He was graduated from the University of Minnesota.

 

In the first half of the year, we invested a total of $5,644,076 in tiny technology. Of this total, $3,300,000 was in three new investments, and $2,344,076 was in six follow-on investments. (Please see page 26 of our Quarterly Report on Form 10-Q for the period ended June 30, 2005, for more details.)

 

At June 30, 2005, the value of our venture capital portfolio totaled $45,421,482. Since the close of the first half of 2005 to the date of this Letter to Shareholders, we have invested an additional $1,083,000 in two follow-on investments. Our last 24 initial investments, dating back to 2001, have been in tiny technology.

 

At June 30, 2005, approximately half of the value of our venture capital portfolio was in our 1,137,570 shares of NeuroMetrix, Inc. (Nasdaq: NURO), a company in which we were the seed investor that went public in July of 2004. Although our lock-up period with respect to the sale of these shares ended in January of this year, as of the date of this letter, we have chosen not to sell any of this holding. Because NeuroMetrix is the last of our significant non-tiny technology investments, once we sell our interest in it, our Company's portfolio will be essentially composed only of tiny technology companies.

As our fellow shareholders, we are appreciative of your understanding of the cyclical nature of the venture capital industry, as well as your shared vision of the commercial significance of tiny technology, particularly nanotechnology. We welcome our new shareholders and the additional capital that you have provided to us.

 

Charles E. Harris Douglas W. Jamison

Chairman and Chief Executive Officer President and Chief Operating Officer

Managing Director Managing Director

Daniel V. Leff Alexei A. Andreev

Executive Vice President Executive Vice President

Managing Director Managing Director

 

 

August 24, 2005


 


Unaudited Schedule of Investments*

 

(As of June 30, 2005)

 

 

Shares/

 

 

 

Principal

Value

 

Investment

 

AlphaSimplex Group, LLC

 

 

      Limited Liability Company Interest

      --

$     125,000

 

 

 

Cambrios Technologies Corporation

 

 

      Series B Convertible Preferred

1,294,025

    1,294,025

 

 

 

Chlorogen, Inc.

 

 

      Series A Convertible Preferred

4,478,038

       785,000

 

 

 

Continuum Photonics, Inc.

 

 

      Series B Convertible Preferred Stock

2,000,000

        57,865

      Series C Convertible Preferred Stock

2,689,103

      199,635

 

 

       257,500

Crystal IS, Inc.

 

 

      Series A Convertible Preferred

   274,100

       199,983

 

 

 

CSwitch, Inc.

 

 

      Series A Convertible Preferred Stock

1,000,000

    1,000,000

 

 

 

eLite Optoelectronics Inc.

 

 

      Series B Convertible Preferred Stock

1,861,504

    1,000,000

 

 

 

Experion Systems, Inc.

 

 

      Series A Convertible Preferred Stock

   187,500

                  0

      Series B Convertible Preferred Stock

     22,500

                  0

      Series C Convertible Preferred Stock

   222,184

                  0

      Series D Convertible Preferred Stock

     64,501

0

 

 

        0

Exponential Business Development Company

 

 

      Limited Partnership Interest

         --

                  0

 

 

 

Heartware, Inc.

 

 

      Series A-2 Non-Voting Preferred Stock

     47,620

                  0

 

 

 

Kereos, Inc.

 

 

      Series B Convertible Preferred Stock

   290,910

       800,000

 

 

 

Molecular Imprints, Inc.

 

 

      Series B Convertible Preferred Stock

1,333,333

    2,000,000

 

 

 

NanoGram Corporation

 

 

      Series I Convertible Preferred Stock

     63,210

         21,672

      Series II Convertible Preferred Stock

1,250,904

    1,000,723

 

 

    1,022,395

Nanomix, Inc.

 

 

      Series C Convertible Preferred Stock

9,779,181

    2,500,000

 

 

 

NanoOpto Corporation

 

 

      Series A-1 Convertible Preferred Stock

   267,857

         32,490

      Series B Convertible Preferred Stock

3,819,935

    1,110,073

      Series C Convertible Preferred Stock

1,932,789

       842,503

      Warrants at $0.4359 expiring 03/15/10

   193,279

                  0

 

 

    1,985,066

Nanopharma Corp.

 

 

      Series A Convertible Preferred Stock

   684,516

       136,903

      Secured Convertible Bridge Note with 25 % Warrants

$650,000

       650,000

 

 

       786,903

Nanosys, Inc.

 

 

      Series C Convertible Preferred Stock

   803,428

    1,500,000

 

 

 

Nantero, Inc.

 

 

      Series A Convertible Preferred Stock

   345,070

    1,046,908

      Series B Convertible Preferred Stock

   207,051

       628,172

      Series C Convertible Preferred Stock

   188,315

       571,329

 

 

    2,246,409

NeoPhotonics Corporation

 

 

      Common Stock

     60,580

           9,105

      Series 1 Convertible Preferred Stock

1,831,256

    2,014,677

      Warrants at $0.15 expiring 01/26/10

     16,364

              164

      Warrants at $0.15 expiring 12/05/10

     14,063

              140

 

 

    2,024,086

NeuroMetrix, Inc.

 

 

      Common Stock

1,137,570

  22,785,527

 

 

 

Nextreme Thermal Solutions, Inc.

 

 

      Series A Convertible Preferred Stock

   500,000

       500,000

 

 

 

Optiva, Inc.

 

 

      Series C Convertible Preferred Stock

1,249,999

                  0

      Secured Convertible Bridge Note with 50% Preferred

          Stock Warrant coverage

 

 $150,000

 

         75,000

 

 

         75,000

Questech Corporation

 

 

      Common Stock

   646,954

       724,588

      Warrants at $1.50 expiring 11/16/05

       1,250

                  0

      Warrants at $1.50 expiring 08/03/06

       8,500

                  0

      Warrants at $1.50 expiring 11/21/07

       3,750

                  0

      Warrants at $1.50 expiring 11/19/08

       5,000

                  0

      Warrants at $1.50 expiring 11/19/09

       5,000

                  0

 

 

       724,588

Solazyme, Inc.

 

 

      Convertible Promissory Note

 $310,000

       310,000

 

 

 

Starfire Systems, Inc.

 

 

      Common Stock

   375,000

       150,000

      Series A-1 Convertible Preferred Stock

   600,000

       600,000

 

 

       750,000

Zia Laser, Inc.

 

 

      Series C Convertible Preferred Stock

1,500,000

       750,000

Total

 

$45,421,482

 

*Selected quarterly financial information. The information contained herein does not include the full unaudited quarterly financial information. Please see the Company's report on Form 10-Q for the quarter ended June 30, 2005 for the unaudited financial information and notes thereto.


 


HARRIS & HARRIS GROUP, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES*

ASSETS

 

 

June 30, 2005

December 31, 2004

 

(Unaudited)

 

 

Cash, U.S. Government and Government Agency Securities and cash equivalents

$   55,386,507

$45,273,054

Investments, at value

     45,421,482

  31,621,960

Restricted funds

       1,617,185

    1,591,971

Funds in escrow

          999,999

                  0

Receivable from portfolio company

                    0

         10,000

Interest receivable

           70,278

         58,960

Income tax receivable

             7,891

          2,480

Prepaid expenses

         232,353

      542,489

Other assets, net of reserve of $255,486 at 12/31/04

         258,530

      260,537

Total assets

$103,994,225

$79,361,451

 

============

============

 

LIABILITIES & NET ASSETS

 

Accounts payable and accrued liabilities

$    2,775,400

$  2,905,658

Broker payable

    18,297,158

                  0

Accrued profit sharing

      2,012,465

       311,594

Deferred rent

           31,529

         34,930

Deferred income tax liability

      1,364,470

     1,364,470

Total liabilities

    24,481,022

     4,616,652

 

 

 

Net assets

$  79,513,203

===========

$ 74,744,799

===========

 

<td width=108 valign=top style='width:81.0pt;padding:0in 5.4pt

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 at 6/30/05 and 25,000,000

 

 

      shares authorized at 12/31/04; 19,077,585 issued at 6/30/05 and 12/31/04

         190,776

       190,776

Additional paid in capital

    85,658,150

  85,658,150

Accumulated net realized loss