SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of the
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Harris & Harris Group Logo
Venture Capital for Tiny Technology
FELLOW SHAREHOLDERS:
In the year ended December 31, 2005, our Company's net asset
value (NAV) increased by 57.9 percent, from $74,744,799 to
$117,987,742. Net asset value per share increased in the same
period by 31.2 percent, from $4.33 to $5.68. These increases in
net assets and net asset value per share were driven by the sale
of 3,507,500 shares of our common stock at $11.25 per share in
an underwritten follow-on offering in August for net proceeds of
approximately $36,526,567; and by our sale of 1,137,570 shares
of common stock of NeuroMetrix, Inc. (Nasdaq: NURO), for net
proceeds of $34,591,136, versus our cost of $4,411,374. We had
been the seed investor in NeuroMetrix, and NeuroMetrix was our
last remaining, significant, non-tiny technology investment.
We also declared a deemed dividend to shareholders of
$23,206,763, or approximately $1.12 per share, which entailed
our paying a federal income tax on behalf of shareholders in the
amount of $8,122,367, or approximately $0.39 per share. The
$8,122,367 tax reduced our NAV by this same amount, but our
declaration of the deemed dividend and payment of this tax at
the corporate level generated significant net tax benefits to
our shareholders of record on December 31, 2005. (Please see
pages 11 to 13 of this Annual Report on Form 10-K for more
complete discussion of deemed dividends in general and our 2005
deemed dividend in particular.)
Since August of 2001, all of our initial equity investments
have been in companies enabled by tiny technology, primarily in
companies working at the nanoscale. In 2005, as a result of
both new and follow-on investments, our cumulative investment in
tiny technology grew rapidly: We made four initial investments
and 11 follow-on investments for a total of $16,251,339.
Altogether, from August of 2001 through March 16, 2006, we have
now invested $51,058,170 in tiny technology-enabled companies.
And our pace has been accelerating, partly because we are making
larger investments as our capital base expands. From January 1,
2006, through March 16, 2006, we have made two new and two
follow-on investments for a total of $9,412,764.
Inevitably, new, early stage, venture-capital investments in
companies developing novel technologies do not always work out.
In fact, over the years, we have lost money about 60 percent of
the time on such investments. (We have closed out a total of 44
private equity investments. Twenty-five lost money, 19 made
money. Our total proceeds from these sales were $143,593,693,
versus our total cost of $51,144,319.) Moreover, losing
investments tend to manifest themselves before the winners do,
which leads to the so-called J-curve phenomenon, about which we
have written to shareholders previously. Although any loss is
painful, we expect to continue to have to write down and write
off investments as time goes on. Unfortunately, recognition of
losses is part of the process of separating the often early
ripening lemons from the often late ripening plums.
Our balance sheet is quite liquid. At December 31, 2005,
we had no indebtedness, and our holdings of cash and government
securities totalled $97,464,153. Yet, as we pointed out in our
most recent Letter to Shareholders for the third quarter of
2005, "Assuming that we continue to enjoy a robust deal flow,
one of the biggest questions that we put to ourselves internally
is, how will we finance our future investments? If we can earn
high enough net returns on our existing investments, we could
continue to finance our new investments in part by selling more
shares of our own common stock from time to time and still
produce an attractive rate of growth in our net asset value per
share. But the optimal rate of growth in our net asset value
per share would be produced if we could finance entirely through
retained earnings continued rapid growth in our cumulative
investment in tiny technology. To achieve entirely self-
financed rapid growth, we would need to experience some timely
combination of acquisitions and initial public offerings of
companies in our portfolio."
The sale in the fourth quarter of 2005 of our holdings in
NeuroMetrix and the retention of the net after-tax proceeds of
that sale in our Company was a good step in the direction of our
goal of being able to self-finance our Company's growth. But
our deal flow will soon outstrip our financial capacity to take
full advantage of our opportunities, unless more of our
portfolio companies are either acquired or taken public. Absent
such near-term acquisitions or initial public offerings, we will
soon have to choose between slowing our pace of investment or
raising capital externally. And, as we wrote in our Letter to
Shareholders for the third quarter of 2005, "We think that it is
even more important to try to maintain our leadership position
than it is to finance all of our growth internally, if we are
forced to choose between the two alternatives."
At this writing, although the year is of course still
young, the current market for venture-backed initial public
offerings (IPOs) is lackluster. We are not aware at this
writing of any potential blockbuster nanotechnology IPOs, either
from our portfolio or elsewhere, that are being scheduled for
2006. Meanwhile, in the real world of commercial development,
the wheat is being winnowed from the chaff. Could 2007 be a
different IPO story, as the nanotechnology-enabled companies
that are emerging as commercially viable continue to progress
and mature? As always, much will depend on the conditions in
the capital markets.
Most of us have a tendency, as busy people, to toss proxy
statements in the trash can without bothering to read them
closely or to vote them -- on the assumption that the brokers
vote for us, therefore we are not impeding the progress of a
company in which we own stock if we do not take the time and
trouble to vote our proxies. THIS YEAR, THOUGH, IT IS
ESPECIALLY IMPORTANT TO HARRIS & HARRIS GROUP THAT YOU TAKE THE
TIME TO VOTE YOUR PROXY. In particular, in Proposal 4 in the
proxy statement, we are asking you to support the recommendation
of the Board of Directors that we change our Company's incentive
compensation plan from its current format, which provides for 20
percent of the Company's net after-tax profits to be paid in
cash to our employees, to a stock-based incentive compensation
plan, which would instead award options and restricted shares of
the Company's stock. Please read the proxy statement, mailed
with this Annual Report, carefully for details. This change
will require approval by a majority of the votes cast in order
to be implemented. SO PLEASE VOTE YOUR PROXY.
The Board's reasons for asking you to change our Company's
employee incentive plan from cash to stock include not only more
closely aligning shareholder and employee interests, but also
potentially putting our Company in a better position to continue
to attract and retain highly qualified venture-capital
personnel. Moreover, substituting a stock-based plan for a
cash-based plan would conserve our Company's cash and increase
our Company's rate of reinvestment of profits, thus giving us
higher growth potential.
In closing, we are striving to keep our Company in the
forefront of venture capital participation in the
commercialization of nanotechnology. As always, we appreciate
your strong support in this endeavor!
/s/ Charles E. Harris /s/ Douglas W. Jamison
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Charles E. Harris Douglas W. Jamison
Chairman and President and Chief
Chief Executive Officer Operating Officer
Managing Director Managing Director
/s/ Daniel V. Leff /s/ Alexei A. Andreev
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Daniel V. Leff Alexei A. Andreev
Executive Vice President Executive Vice President
Managing Director Managing Director
March 27, 2006
This letter may contain statements of a forward-looking nature
relating to future events. These forward-looking statements are
subject to the inherent uncertainties in predicting future
results and conditions. These statements reflect the Company's
current beliefs, and a number of important factors could cause
actual results to differ materially from those expressed in this
letter. Please see the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005, filed with the
Securities and Exchange Commission, for a more detailed
discussion of the risks and uncertainties associated with the
Company's business, including but not limited to the risks and
uncertainties associated with venture capital investing and
other significant factors that could affect the Company's actual
results. Except as otherwise required by Federal securities
laws, Harris & Harris Group, Inc.(R), undertakes no obligation to
update or revise these forward-looking statements to reflect new
events or uncertainties. The reference to the website
www.TinyTechVC.com has been provided as a convenience, and the
information contained on such website is not incorporated by
reference into this letter.
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