HB 117 - ALASKA SCIENCE & TECHNOLOGY FOUNDATION Number 0101 CHAIRMAN ROKEBERG announced the committee's first order of business is HB 117, "An Act relating to grant procedures of the Alaska Science and Technology Foundation." Number 0116 REPRESENTATIVE CON BUNDE, Alaska State Legislature, sponsor, explained that there had been a legislative audit of the Alaska Science and Technology Foundation (ASTF) a year ago. In his opinion, that audit reflects concerns he has heard that funds used through ASTF aren't always accounted for with adequate due diligence. He suggested that it is time to examine all of Alaska's funding projects with close scrutiny. REPRESENTATIVE BUNDE noted that some wonder if the state should be competing with private venture capital, which is much of what ASTF does. If it is in that venture capital business, however, he believes it is important to restate that this is, indeed, the people's money, to be held to an even higher standard than in private enterprise - where one is accountable to stockholders or a board of directors - to ensure that the money is well-spent. REPRESENTATIVE BUNDE shared his perception that monies are made available to people who want to "take a flyer in business." He said this is a wonderful thing, if it works out for Alaska. If it doesn't work out, however, he believes that those using the funds should be held to the same standard as for a private institute, demanding some collateral and collecting on it if there is a failure to perform. "Even if it's only a nickel on the dollar, we certainly owe it to the people of the state to collect," he stated. REPRESENTATIVE BUNDE suggested that people who realize they won't be accountable, or won't lose the equipment they bought with state money, aren't as hungry and won't work as hard as others. Although those using ASTF funds do many things that the bill recommends, they don't have to, which is the crux of the matter. "We can't allow them to play Monopoly with the state's money," he added. He restated that HB 117 reflects the audit, including the need for an extremely high level of accountability and more diligence by those taking advantage of these programs. Without something like this, the program will continue to be under assault by those legislators who want to see the money put to other use. In passing this bill, however, he believes the legislature would be following the advice of its own counsel, the Legislative Budget and Audit Committee (LB&A). Number 0519 CHAIRMAN ROKEBERG asked if the audit recommends a certified financial statement on any of those cases. REPRESENTATIVE BUNDE said he believes it does. CHAIRMAN ROKEBERG pointed out that certified financial statements are prohibitively expensive, and could eat up half of a grant. He asked if Representative Bunde had looked at other alternatives, such as using a federal tax return. REPRESENTATIVE BUNDE indicated the LB&A members had discussed another option. He then asked whether the state should give money away, pointing out that a bank wouldn't do that. CHAIRMAN ROKEBERG asked what LB&A had recommended. Number 0600 PATTI SWENSON, Legislative Assistant to Representative Con Bunde, Alaska State Legislature, answered, "Submit an audited financial statement." CHAIRMAN ROKEBERG commented that it is almost the same thing. REPRESENTATIVE HALCRO referred to a memorandum of response, noting that ASTF said they agreed with LB&A's recommendation, but the person whom they had advertised to hire to conduct these was caught in the hiring freeze. He asked whether Representative Bunde had talked to ASTF about that. REPRESENTATIVE BUNDE said he hadn't. He then surmised that ASTF shouldn't object to legislation that endorses what they plan to do already. He pointed out that he hadn't received the response any sooner than the committee had. REPRESENTATIVE HARRIS noted that he hadn't read the entire LB&A report, then asked whether ASTF has had difficulty in getting repayments of its loans. REPRESENTATIVE BUNDE replied that to his understanding, ASTF gets very little repayment. REPRESENTATIVE HARRIS asked whether the reason for the bill is to try to ensure that there is a bigger percentage of repayment. REPRESENTATIVE BUNDE restated that even if it is only a nickel on the dollar, Alaskans are owed the assurance that ASTF, a state venture capital group, is being held to the same standard that private industry would be held to. Number 0748 REPRESENTATIVE HARRIS asked whether it will cause the department overseeing ASTF any increase in personnel, for example, to have security interests, patents, copyrights or things of that nature. REPRESENTATIVE BUNDE pointed out that there is a fiscal note. There was discussion regarding whether the fiscal note, $157,000, was for one-quarter of a position. He clarified that the fiscal note covered personnel. REPRESENTATIVE HALCRO turned to the provision requiring that ASTF own intellectual property. The response from ASTF points out that other states with similar programs don't mandate a state owning security interest in the funding project. Representative Halcro asked if this would set up a situation with expensive litigation regarding who owns what. REPRESENTATIVE BUNDE pointed to universities, in general, as a model because they have different ways to deal with intellectual rights. REPRESENTATIVE BRICE understood that the intent is to maintain the grant nature of ASTF to an extent. He asked if thought had been given to changing the program from a grant to a very low interest loan program. REPRESENTATIVE BUNDE stated that he didn't want to micromanage the program to that extent. He indicated that it would be an interesting discussion as to whether grants should be continued or should loans be offered as a subsidy or should they be competitive. Those are discussions for the legislature. If ASTF continues, it should be held to a higher standard. REPRESENTATIVE SANDERS stated his understanding that grants were grants. He asked if ASTF grants are repaid then wouldn't they then be an interest free loan. MS. SWENSON explained that there is statutory authority to receive repayment on the grants. REPRESENTATIVE BUNDE interjected that if the grant creates a successful business, then there is some repayment. MS. SWENSON noted that any equipment is disposed of and there is language speaking to the disposal in the audit. When these grants are given, there are seven to ten years between the research and development and the project. People don't respond to the repayment letters or information requests. Financial data is supposed to be submitted yearly to ASTF which, according to the audit, is not occurring. Therefore, HB 117 is making ASTF enforce its current policy. REPRESENTATIVE HALCRO quoted ASTF's response as follows: There are no instances of guarantees not cooperating and providing information to assess their obligation or refusal to pay. The standard repayment provision since the 1995 statute change is five percent of the gross revenue, one and a half times of the grant. In short, there is no problem to solve with this change. Representative Halcro pointed out that Representative Bunde is saying there is little repayment, but ASTF says there is no problem. REPRESENTATIVE BUNDE referred Representative Halcro to LB&A's audit report. Number 1134 MS. SWENSON referenced page 22 of the audit which speaks to repayment and the way in which it is ignored. That portion of the audit discusses the grant administrator's annual letter requesting update information. That letter doesn't refer to the grant agreement clause and often the grant recipients ignore it. Furthermore, no follow-up action occurs in these cases. Therefore, there is a problem. REPRESENTATIVE BUNDE referred to an electrical company which went bankrupt and left Alaska owing many back wages. The grant recipient moved out of state and continued to receive ASTF money. MS. SWENSON commented that she didn't think Representative Bunde believed ASTF to be a bad program, but there are poor business practicess needing improvement in statute. With regard to the fiscal notes, there is no need for more fiscal notes if ASTF already does these things, as they say. The report was released September 1998 therefore, ASTF could have come forward to discuss the need to hire an additional employee. This legislation doesn't do anything that ASTF really disagrees with, except for the intellectual property. Number 1343 JAMIE KENWORTHY, Alaska Science & Technolgy Foundation, began by saying that ASTF takes accountability seriously. There are technical reviews on all projects over $20,000 and the board reviews of projects under $20,000. Clear benchmarks are established in the proposal of performance. There is also a state audit requirement for sums spent in excess of $300,000 while ASTF requires an audit when over $50,000 and ASTF can also audit smaller projects. During the monitoring of the grant agreements, the project manager signs certified statements. Also the final 10 percent of every project is held. At the end of a project the equipment is disposed of. Often, the equipment is returned to the grantee to continue the business. He noted that ASTF had an evaluation this year of all the projects, in terms of their impact on the economy, which he offered to share with the committee. MR. KENWORTHY acknowledged that the audit did point out that ASTF should do a better job monitoring grant repayments, although it is not as sloppy as people may believe. He explained that an annual survey of every technology grant is performed. It is a matter of staff time and the ability to fill a position to be able to go back and do "shoe leather" in order to ensure that ASTF has all those grant obligations. Mr. Kenworthy informed the committee that he had brought in an audit firm to set up a tracking system for this. MR. KENWORTHY clarified the types of projects ASTF does. He said that he would not describe ASTF as performing venture capital, but rather seed capital. Venture capital is post sales, usually a product and prototype already exist, all equity, with a 40 to 50 percent return on the investment. He said that ASTF is involved in pre-prototype deals that may develop into venture capital later. Also 20 percent of ASTF's projects are science projects that are not proprietary and therefore, no money is returned to the state. He stressed that some of these science projects are very important for the state's development because no one else will fund the science. For example, there is a water quality project with a mining community, the Department of Environmental Conservation (DEC), the Department of Fish & Game, and the Environmental Protection Agency (EPA) regarding turbidity. Furthermore, about 25 percent of ASTF's funds go toward qualified university projects. He informed the committee of the grading program with lumberyards in Alaska. In this case, it is critical that ASTF offers such a service as grading dimensional lumber because sawmill owners in the state won't[can't] pay for it directly, although they are starting to pay for some of it. Number 1571 MR. KENWORTHY pointed out that in 1995 there was a statute change. Until that time, ASTF could only receive repayment based on royalties which result from doing a patent in a certain form. That was expanded to gross revenues because sometimes the technology is sold to a joint venture. He stated that ASTF wanted to attach the revenue stream from successful projects. The standard term and condition is 5 percent of gross revenues up to 1.5 times the amount of the grant. He said that ASTF does not have any statutory authority to do loans. He emphasized that ASTF is sharing technical risk with the private sector and therefore, the form of repayment is appropriate to the stage of development funded by ASTF. Mr. Kenworthy did not object to the language on the less than $20,000. He agreed with the LB&A audit that expressed the need for written reviews of grants less than $20,000 and since February those reviews have been documented. Mr. Kenworthy said, "Besides the issue of doing a better job which is a staff time issue with follow-up, I don't consider that there were major issues in the audit that would lead to the conclusion that we have sloppy practices." VICE CHAIRMAN HALCRO requested that Mr. Kenworthy speak to the instances in the audit that appear not to have had any follow-up with regards to payment. MR. KENWORTHY did not recall any particular case in which ASTF did not follow-up. Annual letters were sent out. He noted that ASTF has one position, a grant manger, who is responsible for monitoring the benchmark performance of all the projects. Regardless of ASTF's ability to hire another person or not, Mr. Kenworthy will shift some resources from working with entrepeneurs to do a better job reviewing repayment. Since the change, there have been about $100,000 in grant repayments. Although this may not sound like very much, he reiterated that it takes seven to ten years to move from idea to commercialization and a large portion of ASTF deals with science which doesn't have a proprietary component that can be taxed. He stressed that there has not been a pattern of people not giving full information; there has not been a lack of cooperation, but rather staff follow-up. Mr. Kenworthy noted that ASTF has had a flat operating budget for five years. REPRESENTATIVE SANDERS asked if Mr. Kenworthy's reference to lack of cooperation meant lack of communication or repayment. MR. KENWORTHY replied, both. For instance, ASTF will call and request the lastest audit from a business in order to check the gross proceeds from the technologhy. That is a matter of cooperation. There have not been people saying they will not provide the information so that the assessment can't be done. Mr. Kenworthy provided a copy of the standard grant agreement which every grantee signs. The agreement basically says that ASTF has the right to inspection and the right to require an audit. Therefore, ASTF has the tools if there is no cooperation. Number 1797 MR. KENWORTHY specified concern with the requirement in HB 117 that ASTF will have security interest in the technology and that ASTF will own the technology. That will confuse the public and private sector as well as decision making. He pointed out that ASTF does have the power to issue a security interest and that has been done only twice in the last year. The size of the deal and the risk involved made it necessary to take a security interest in the technology. If ASTF is mandated to take ownership of intellectual property, the initiative is then shifted from the business person to the state. Such a mandate would place Mr. Kenworthy in the position of a manger. "I like, as a manger, to hold them accountable and have strong measures to use if you need to, but they make the decision. Because if I start making decisions for a business person, how am I going to hold them responsible for the results?" VICE CHAIRMAN HALCRO asked if, due to the pre patent and post patent work, this would set ASTF up for possible litigation. MR. KENWORTHY responded yes. He informed the committee that sometines entrepeneurs come to ASTF after filing a patent and sometimes they are halfway through the work and need documentation and ASTF and the entrepeneur are jointly paying patent expenses. Therefore, the first need is to assess the state of the technology when the entrepeneur came to ASTF for funding in order to determine if ASTF owns it or has a subsequent patent position. There would also be issues with regard to how much expense and protection to patent for the identified market. Often, an entrepeneur asks ASTF for advice. However, ASTF does not want to make the final decision as a manger; ASTF wants to review and work with the entrepeneur's decisions. Mr. Kenworthy believed the provision in HB 117 concerns the next stage of investors. REPRESENTATIVE CISSNA requested more explanation of intellectual property. If one holds a patent, does that mean that person is ultimately responsible for the development of the patent. MR. KENWORTHY clarified that the issue of a patent's ownership and development are separate issues. If entrepenuer A files a patent, that could either be assigned to ASTF for ownership or ASTF can file a security interest. A security interest acts as a lien and only the owner of the entity with a security interest can license that patent. With regard to the development of a patent, any business person can use that to develop or infringe on a patent in which case the owner of the patent would have the responsibility to take legal action. Mr. Kenworthy informed the committee that out of perhaps ten patents, only one ever earns revenue. It is much easier to get a patent than to receive money from the technology. Number 2046 JACK HARRISON, Alaska Frontier Archery, Grantee of ASTF, testified via teleconference from Anchorage. As a grantee, Mr. Harrison has received substantial monies and currently, possesses three patents as well as a pending patent. He felt that HB 117 is redundant because ASTF already has the mechanisms in place necessary to continue the program. He emphasized that when he signed with ASTF he received a grant, not a loan, which he matched with personal money and bank loans. Mr. Harrison stated that he is at the point where the patents are on the verge of being viable venture capital. He said that he was attempting to bring money to the state. If Mr. Harrison can get his patents licensed, then he can pay back ASTF a portion of the grants under the payment program he signed. Mr. Harrison opposed HB 117. RICHARD SEWELL, President and Founder, Iceberg Seafood Company, testified next via teleconference from Anchorage. He informed the committee that his company is a grantee of ASTF who provided $227,000 which he matched with $201,000 with follow-on equity financing of $250,000. He noted that his was a distribution technology which will allow the distribution of live crabs to global markets. His grant agreement requires 1.5 times the return on the grant which his accountant says is not really a grant or a loan. MR. SEWELL emphasized that the ASTF grant is a critical bridge between concept development and bringing in outside equity financing. He informed the committee that he had shopped his business plan and the stock offering before going to ASTF and people felt it was too risky to enter at that point. Most indicated the possibility of interest once the technology can be proven. When the ownership of the technology is clouded to the possibility of state ownership of the technology right, it is troubling. He doubted that he would have pursued this if that had been the deal. Therefore, if the focus is on economic development, job creation, and new capital entering the state, HB 117 is not the appropriate path. With regard to ongoing certified financial statements, Mr. Sewell believed it would be a heavy burden. If a higher level of monitoring is desired, that would seem to be a personnel and management issue rather than a regulatory or statutory issue. Number 2325 EDEN LARSON, Southcentral Coordinator, Alaska InvestNet, testifying via teleconference from Anchorage, explained that Alaska InvestNet is designed to introduce entrepeneurs to private investors. This role has led to much research into what attracts investors to entrepeneurs. She noted that she is a former private consultant and former Executive Director of Alaska Inventors and Entrepeneurs Association. She also noted that she has had significant experience with ASTF. Ms. Larson agreed with all of Mr. Kenworthy's comments. However, she expressed additional concern. Over the past years, ASTF has worked hard in response to legislative concerns regarding its funding. She pointed out that when she worked with the Alaska Inventors and Entrepeneurs Association she saw inventors in the early stages of an idea seeking ASTF funding while those going to ASTF now have business concepts, identified markets, and a different level of management skills. Should this legislation move forward, Ms. Larson felt the latter entrepeneur described would not be inclined to work with ASTF. In other words, this legislation would revert back to attracting uneducated inventors rather than educated entrepeneurs who have a better chance of repaying the debt to ASTF. If entrepeneurs were required to give up their intellectual property from the beginning in order to receive seed money, those entrepeneurs that didn't walk away would not be set up to attract additional private capital. MEAD TREADWELL, Treadwell Development; Board member, ASTF, testified next via teleconference from Anchorage. He informed the committee that during his time on the board he has advocated for stronger intellectual provisions which he believed ASTF is following. He stressed that every deal ASTF does is different in this area. TAPE 99-52, SIDE B MR. TREADWELL commented that not only will there be problems as addressed by Mr. Kenworthy and others, there will likely be obligation of ownership problems. There are many issues that could arise on a deal by deal basis. He compared HB 117 to a straightjacket rather than a protection of the state's interests. Mr. Treadwell said that in the last few years ASTF has tried to increase the capacity in Alaska to do the next steps. The Alaska Investment Project has tried to get "angel" in Alaska to take on these ventures and bring more venture capital into the state. This legislation would be an impediment to that goal. VICE CHAIRMAN HALCRO acknowledged that Mr. Treadwell has a financial background. He asked if Mr. Treadwell, as a board member, could speak to comments in the audit refering to the grants to Alaska Power Systems and Distributed Systems LLC. The audit concluded that those grants were questionable in nature and benchmarking was not followed. Number 0099 MR. TREADWELL commented that he believed there to be no question that the intellectual property constraints, that may be asked for by this legislation, were followed. Perhaps, what is necessary to make that a successful project is flexibility. He said that is about all he can comment due to the confidentiality requirements of the grant. With regard to the benchmarks, Mr. Treadwell acknowledged that some of the benchmarks were changed after the grant was made. Those changes were done to reflect the situation. For major grants of that size, the board has decided to spend additional funds to hire a part-time position to watch such large grants in the future. With this particular grant, it was a highly fluid situation. The flexibility utilized was meant to keep the technology in Alaska. This grant received much scrutiny because it was a controversial grant. Number 0174 WALTER GORE, Petro Star Incorporated, testified via teleconference from Anchorage. He informed the committee that currently, he is working on an ASTF funded project on behalf of his employer. Petro Star is the only Alaska-owned refiner. The project being worked on focuses on developing a means of de-sulphurizing diesel fuel that is feasible for Alaska. With regard to HB 117, the proposed amendment would require ASTF to take a security interest and own intellectual property developed with grant assistance. Mr. Gore viewed ASTF as helping to develop technology in Alaska, not to own intellectual property. Therefore, making state ownership a requirement of ASTF grants would create a severe disincentive to program participation. If ownership and patents had been part of ASTF grants, Petro Star probably wouldn't have applied with ASTF. J.P. GODFREY, Business Consultant, Godfrey & Associates, testifying via teleconference from Anchorage, informed the committee that he has worked in business development throughout Alaska for over 30 years. He noted that he was one of the original circuit riders for ASTF and worked with a number of proposers and grantees. With regard to the requirement in HB 117 for the security interest and the discussion of ownership, that would probably deter some of the best proposers and projects that ASTF wants to do business with. These are private sector companies, already in business with managments and markets in place, who are attempting to develop a new technology in order to expand their business activities in the market place in Alaska and beyond. From his experience with such proposers, he felt that he would have walked away if this provision was in the ASTF statutes. Therefore, Mr. Godfrey predicted that if these changes move forward, some of the best clients for ASTF will be lost. These are clients that are in the best position to succeed. Number 0377 CHARLES NORTHRIP, Executive Director, Juneau Economic Development Council, informed the committee that the council operates a business assistance program as well as a revolving loan fund. The council also operates Alaska InvestNet which is a statewide capital matching network. All of the aforementioned work is done with private entrepeneurs and investors. He addressed Section 1 of HB 117 with the phrase, "If it ain't broke, don't fix it." The larger problem exists in Section 2 of HB 117. If Section 2 were enacted, it would have a detrimental effect on private investment in ASTF-assisted ventures. As mentioned, Alaska InvestNet attempts to bring private entrepeneurs into contact with and financial support to Alaska ventures. He pointed out that intellectual property makes hi-tech ventures attractive to entrepeneurs and investors. If that incentive is eliminated, those investor dollars will go elsewhere and the entrepeneurs are also likely to look elsewhere, even outside of Alaska. Usually, the venture goes where the investment comes from. Mr. Northrip pointed out that current ASTF procedures allow it to pursue ownership when in the best interest of the state, "without compromising that vital entrepeneurial energy that is necessary to develop these technologies we've been talking about." In closing, Mr. Northrip emphasized that ASTF exists to use investment to build private enterprise that stays in Alaska, creates jobs and pays taxes. Therefore, the state would benefit in an indirect way. REPRESENTATIVE CISSNA asked if Mr. Gates [Bill Gates, Microsoft] was raised in Alaska, what relationship would he have had with ASTF. MR. NORTHRIP pointed out that in the early stages of Mr. Gates' venture if he had been an Alaskan, MicroSoft may have had a campus in Anchorage instead of Seattle. The problem for Alaska is that it is not a capital rich state and therefore, many of Alaska's intellectual ideas are moved to where the money is. He echoed Mr. Kenworthy's comments regarding ASTF providing the seed capital well before commercial investors would be prepared to invest which keeps that venture in the state. He commented that more people are turned down by ASTF than receive funding. Number 0682 REPRESENTATIVE CISSNA inquired as to the course if Mr. Gates' intellectual property was owned by the state. MR. NORTHRIP said that he didn't believe Mr. Gates would have ever given over control of the intellectual property portion of his venture. The intellectual property is what the entrepeneur holds onto at the highest cost because the ownership interest will make the money in the long run. He noted that Mr. Gates benefited from the manufacture of it as well as selling the license to others. If that had happened here, the sale of the licenses would have come to Alaskan firms. VICE CHAIRMAN HALCRO agreed with Mr. Northrip's comments regarding the original purpose of ASTF which was to, according to statute: (1) promote and enhance, through basic and applied research and the development comercialization of technology, (A) economic development and technological innovation in Alaska; (B) public health; (C) telecommunications; and (D) sustained growth and development of Alaskan scientific and engineering capabilities; VICE CHAIRMAN HALCRO noted that the statute doesn't refer to providing a return to the state. He asked if the bill's provision requiring peer review with grants under $20,000 was of concern for Mr. Kenworthy. MR. KENWORTHY replied no because ASTF is currently doing that. Number 0804 VICE CHAIRMAN HALCRO surmised that the provisions regarding intellectual property are of concern. He asked if Mr. Kenworthy could speak to the fiscal note regarding the cost to enforce this provision. MR. KENWORTHY noted that ASTF attorney Terry Turner, who is under contract with the Department of Law, has particular expertise in intellectual property and patent law. Mr. Turner estimates that it will roughly cost $2,500 per project to register a security interest and file patents. There is the issue of how often is that cost effective not to mention that the filing fees have to be spread over three years. Therefore, that would result in $2,500 times the 63 projects that are now in the process. Additionally, some ASTF time will be spent managing that intellectual property because the state would be making patent decisions. The fiscal note presents the lowest cost scenario. Mr. Kenworthy stated that the alternative could be to have a nearly full-time position that is not an attorney. The legal work could be overseen by Mr. Turner who estimated the cost for legal work to be $500 and $500 out of pocket filing expenses. The cost would be significant. VICE CHAIRMAN HALCRO commented that the sponsor seems to be interested in the return on the investment and the monitoring of grants. If that is the concern, how will the cost of intellectual property be repaid? Where is the return in a project that does not do well? MR. KENWORTHY stated that the statute, under HB 117, would require investment in intellectual property whether ASTF felt it economic or not. Currently, ASTF has the authority to do a security interest which creates $10,000 to $12,000 in legal expenses from ASTF and more than that from the entrepeneur. He noted that ASTF has only utilized a security interest twice. Rarely, does the cost justify doing so. Under HB 117, he believed the wrong person to be making the decision. REPRESENTATIVE HARRIS requested examples of projects that were started with ASTF grants that have developed. MR. KENWORTHY commented that ASTF has probably spent more money in seafood than in any other arena. For instance, the Arctic Alaska North Pacific Processors salmon in the pouch process modified tuna processing equipment in order to sell ready to eat salmon in a meal pouch. Also a new surimi process was developed in conjuction with the Kodiak Chamber of Commerce. The surimi process was only a $45,000 or $60,000 ASTF investment that led to an over $1 million investment to turn out surimi at a lower cost and higher quality. Mr. Kenworthy turned to wood products and pointed out that there is a mill in Tyonek which makes bridge materials that are sold in the Mat-Su Valley. There will be a second mill in Nenana based on a perservative process that a professor at the university discovered. In the arena of hi-tech, Tim Newton of Integrated Power Technologies, Incorporated has a surge protector for large utilities which has been licensed and for which ASTF is receiving a royalty. Mr. Kenworthy noted that the Anchorage Daily News did a survey of hi-tech firms in Anchorage of which half were original ideas that ASTF backed. Furthermore, the ASTF program is creating about 130 jobs a year in the base. Although that may not sound like many jobs, these are direct jobs in early stage firms which start small and tend to grow. He touched on the timber industry for which ASTF received funding to do a wood grading program in which a grader talks to sawmill owners about dimensional lumber. This illustrates how an entire segment of industry can be helped to attack technical issues that individually they can't address. REPRESENTATIVE HARRIS asked if ASTF receives any payment. MR. KENWORTHY clarified that with knowledge projects such as the grading service of the Anchorage Seismology projects, there is no proprietary technology to protect. Therefore, there is no repayment. When there is proprietary technology, a particular invention with patent protection or trade secrets, those are technology grants which are eligible for grant repayment. Mr. Kenworthy agreed with Mr. Northrip's comments regarding the primary purpose of ASTF, to grow the economic base of the state not to return on investments to ASTF. Currently, ASTF is involved in a paralytic shell fish poisoning test kit. That is a public health issue rather than trying to earn a return as a product. By statute, all repayments go to the principal and the legislature annually appropriates earnings from the principal for ASTF and non-ASTF purposes. Number 1203 REPRESENTATIVE HARRIS inquired as to the procedural problems that ASTF had with Alaska Power Systems. MR. KENWORTHY said that ASTF did a number of things with that grant due to the controversy surrounding it. For instance, ASTF hired a third party consultant to provide a report due to the claim that it wasn't new technology. Also Alaska Power System was requested to make public their technology plans. "The board believed that digital technology has such a potential to take costs out of rural power, ... there's villages out there getting eight to ten killowatts a gallon which is just very low efficiency. If we could have digital controls where you could ... sit in an Anchorage office and be able to monitor from sensors, ..., when the machine is going to blow up because of oil or calibrate the which ones will go on to get the peak loading and get most efficiency that would save a lot of money." The controversy arises from the issue of competition in rural utilities and whether rural utilities want technology. That technology has since been licensed and the company has left the state. Mr. Kenworthy predicted that the technology will show up in Alaska some day, but "the issue that that technology will show up in Alaska may be later rather than sooner and deployed other places is partly an issue of how we regulate utilities and how much competition is allowed." He emphasized that in order to separate the issue of the technology and the company that was providing utility services, ASTF required a completely separate company to be established. The utility company has left, but the technology has been licensed and will be imbedded in other project products. REPRESENTATIVE BRICE inquired as to what would happen with grants that are currently administered by ASTF if HB 117, which does not have an effective date, passes. MS. SWENSON explained that under HB 117, ASTF would have to review grants for which it has not received repayment or adequate reporting. The records would have to be brought up to standard. REPRESENTATIVE BRICE asked what that would mean in terms of the workload for ASTF to bring every outstanding ASTF grant in compliance with HB 117. Number 1449 MR. KENWORTHY stated that currently, there are 63 technology projects. From the bill's language, he could not tell if he would be required to implement this retroactively and implement a security interest in existing grants. Mr. Kenworthy noted that he did not have a legal opinion on that matter, but if ASTF were to do this retroactively the fiscal note estimates the cost. MS. SWENSON commented that she did not believe that Representative Bunde envisioned ASTF actually taking hold of intellectual property and other property that are in existing grants. She did not imagine that the sponsor meant for ASTF to act retroactively on the 63 projects. If the desire is to set a date specific for this to occur, she indicated that would be acceptable. However, the other recommendations included from the LB&A audit should be followed and placed in statute. VICE CHAIRMAN HALCRO referred to the sponsor's opening statement which spoke to the notion that the accountability on certain grants was questionable. He inquired as to where in the findings and summary it suggests that the legislature mandate that ASTF should take a security interest in patents or copyrights. MS. SWENSON said that she didn't believe there was a direct recommendation. She indicated that Representative Bunde wanted that because he knew of a project in Mat-Su where a large amount of equipment was purchased with grant money, the project went under, but that person still holds the equipment. Therefore, he wanted a security interest or ownership taken. VICE CHAIRMAN HALCRO indicated that ASTF shouldn't be required to take a security interest in everything, only those projects that fail should the state maintain the right to seize the equipment. He understood the audit to say,"that the disposal of equipment--sort of the practice of allowing grantees to keep the equipment was reasonable." MS. SWENSON responded that Representative Bunde would probably agree with that. She was certain that Representative Bunde did not want anyone to keep equipment purchased with ASTF grants once the business goes under; the equipment should technically become state property that the state should dispose of. Furthermore, she didn't believe that Representative Bunde envisioned the entire process requiring taking ownership or a security interest in intellectual property. He was addressing machinery and materials. Ms. Swenson commented that she didn't know his thoughts about intellectual property. However, he would probably agree with returning whatever was received. REPRESENTATIVE CISSNA asked if the project to which Ms. Swenson had referred was an ASTF project. MS. SWENSON replied yes. MR. KENWORTHY surmised she was referring to Mr. Harrison's wood project. Mr. Harrison has put over $200,000 into the project to make it a success. Mr. Harrison has a partner who has relocated to Kenai and is shipping wood out of Kake to complete the process. The project has not been abandoned. Mr. Kenworthy explained that Mr. Harrison had not decided to do a licensing deal with an individual who then asked ASTF for the intellectual property. That is an example of how this can get off track. The gavel was returned to Chairman Rokeberg who called an at-ease at 4:45 p.m. The committee was called back to order at 4:49 p.m. CHAIRMAN ROKEBERG announced that the committee would not address HB 183 today. He returned to discussion regarding HB 117. Chairman Rokeberg asked Mr. Kenworthy if he would prefer on page 2, line 7 of HB 117 "shall" to be changed to "may." MR. KENWORTHY responded that he saw no need to change the existing statute. CHAIRMAN ROKEBERG stated that he would entertain a motion for conceptual Amendment 1. Number 1955 REPRESENTATIVE HALCRO moved that the committee adopt Amendment 1: Page 2, line 7 Delete "shall" Insert "may" There being no objection, conceptual Amendment 1 was adopted. CHAIRMAN ROKEBERG referred to page 2, lines 11-12 which requires grantees to submit certified financial statements. The auditor believed that could be "toned down." He noted that he brought the high cost of certification to Representative Bunde's attention. Is it legal for ASTF to ask its grantees to provide their federal tax returns? MR. KENWORTHY answered yes. Under provision 29 of ASTF's standard grant agreement, ASTF has the right to site and records inspection. No additional authority is necessary for ASTF to have audit and inspection rights because the grantee agrees to that when the grant is accepted. CHAIRMAN ROKEBERG asked if requiring grantees to submit annual tax returns and/or financial statements would raise the standard and provide more information. MR. KENWORTHY noted that as a matter of course annual tax returns are not requested, but ASTF has inspection rights. Therefore, statements of revenue are provided. Mr. Kenworthy said that the language would not change ASTF's practice because only if there are questions does ASTF perform more diligence looking for records. There have not been situations in which people hide revenue. MS. SWENSON commented that sometimes more diligence leads to more questions. MR. KENWORTHY, in response to Chairman Rokeberg, stated that this provision will not require paperwork. He reiterated that the provision will not change the current practice. When ASTF looks for audited financial statements, sales or rather the gross revenue which comes out of the product sales is reviewed. The auditing of sales is easier to audit than profit. CHAIRMAN ROKEBERG pointed out that this provision requires annual certified financial statements. MR. KENWORTHY expressed concern with the certification requirement because of the high cost of certification. For example, a $20,000 project would result in a price tag of about $3,500 for an audit. He informed the committee that the board includes the President of the National Bank of Alaska. The board discussed ASTF's fiduciary responsibility; "what expense should we be jointly under with our grantees in these struggling businesses?" It was decided to audit everything over $50,000 which is a higher standard than state law. Sometimes ASTF audits below $50,000 based upon whether there is the feeling something is missing. Therefore, ASTF requires self certification. CPA certification is required if ASTF feels it is necessary. Mr. Kenworthy did not believe that the committee would want to establish a rule that applied to all cases because that would result in money being wasted. Number 2243 CHAIRMAN ROKEBERG inquired as to what Mr. Kenworthy would view as acceptable with regard to the reporting of financial conditions. MR. KENWORTHY indicated that for those grantees with a repayment obligation, requirements of annual financial statements and other records may be appropriate. He reiterated that ASTF has fairly broad power to review financial records which is evidenced in Section 29 of the ASTF standard grant agreement. CHAIRMAN ROKEBERG asked if it would be appropriate then to on page 2, line 11, delete "certified" and require that ASTF receive an annual report. MR. KENWORTHY explained that currently, ASTF requires grantees to maintain records for five years in order for ASTF to monitor repayment obligation. That authority is included under the grant agreement. He said that changing "shall" to "may" and deleting "certified" on page 2 would allow cost-effective decisions to be made. However, it is the committee's decision as to whether the change is necessary. REPRESENTATIVE HALCRO moved that the committee adopt the following conceptual amendment labelled Amendment 2: Page 2, line 11 Delete "certified" There being no objection, Amendment 2 was adopted. TAPE 99-53, SIDE A REPRESENTATIVE HALCRO asked if ASTF requests the attorney general's help when there is no response from the grantee. MR. KENWORTHY said that there has not been such a case. Regardless of whether the statute is changed, Mr. Kenworthy felt that he would approach the attorney general if he felt someone was "stiffing the state." Such action has been discussed in one situation. Mr. Kenworthy believed that he already has that authority. REPRESENTATIVE MURKOWSKI commented that it already appears that ASTF has the authority to approach the attorney general for assistance in a collection effort. Therefore, is it necessary to include the last sentence in Section 2 of the bill? MR. KENWORTHY answered that he did not think so and added that he did not believe Section 2 in its entirety, with the word "may", is necessary. Mr. Kenworthy pointed out that page 2, line 12 reads, "until repayment has occurred." Currently, ASTF requires records to be kept for five years; this is a requirement in perpetuity. He read the language to mean that the requirement would be in perpetuity. If full repayment has not occurred, then audits would be required. Mr. Kenworthy agreed that continuing audits for those who owe ASTF money is necessary, but he highlighted that the audits should occur only if it is a viable enterprise. He was not sure that he had discretion. CHAIRMAN ROKEBERG said that he believed it was implicit that if it is a defunct business, a report would not be required. Chairman Rokeberg indicated that this could be amended if the committee saw fit. He announced that his objective was to accommodate Mr. Kenworthy and move HB 117 out of committee. MR. KENWORTHY agreed with Representative Cissna that the language "until repayment has occurred" is the problem. He pointed out that the repayment is 1.5 percent times the amount of the grant in perpetuity. "The question is if you're going to require audits and then LB&A is going come audit me to see whether I have an audit that says there were no assets there that I can tax at that five percent. What's the cost-effectiveness of doing that?" Number 0355 CHAIRMAN ROKEBERG offered a conceptual amendment labelled Amendment 3: Page 2, line 12, after "until" Insert "the obligation is satisfied or ceases to exist." REPRESENTATIVE HALCRO commented that ASTF has been in existence for 11 years and the statute has never been addressed with regard to bankruptcy. Has there been a case where bankruptcy occurred and if so, what did ASTF do? MR. KENWORTHY said that he didn't recall any bankruptcy while ASTF was funding a project. Alaska Power Systems may be considered in bankruptcy, but that is the utility company not the technology company that ASTF required to be split from the utility service. He acknowledged that companies do cease to be operating entities and go through bankruptcy afterwards. In reference to Amendment 3, Mr. Kenworthy asked if the language "ceases to exist" refers to the obligation or the business. CHAIRMAN ROKEBERG replied both. He asked if there was objection to Amendment 3. There being no objection, Amendment 3 was adopted. REPRESENTATIVE BRICE expressed the need to clarify that the provisions in HB 117 would not take effect on current grants, but will effect those grants awarded after the effective date. Representative Brice so moved REPRESENTATIVE HALCRO asked if that would only apply to the reporting obligations. REPRESENTATIVE BRICE specified that it refers to the provisions of this Act. REPRESENTATIVE HALCRO understood the impetus for HB 117 to be the LB&A audit which recommended that ASTF enforce post grant reporting requirements, et cetera. Therefore, it would apply to existing grants. REPRESENTATIVE BRICE pointed out that there are currently 63 grants which would have to be reviewed to make changes and provisions. MR. KENWORTHY said that if "may" is utilized he would review those grants in which situations it would make sense to do so. He believed that has already been done with the cases in which ASTF took the legal expenses to file security interests (indisc.). If the committe wanted to insert a date that would be specific. REPRESENTATIVE BRICE clarified that he believed that the dicussion was regarding provisions under subsection (l) which deal with the ownership of equipment. There may be some grants that clearly stipulate to the contrary of subsection (l). MS. SWENSON pointed out that with the change in language to "may" there does not need to be an insertion of an effective anything. REPRESENTATIVE CISSNA agreed with Ms. Swenson that the language change leaves the retrospective aspect to the discretion of ASTF. REPRESENTATIVE MURKOWSKI clarified that the "may" language only refers to taking a security interest. There is "shall" language which refers to the repayment obligations, financial statements, et cetera. Therefore, it would depend upon how retroactive it is intended. REPRESENTATIVE HALCRO informed the committee that his aide, Jonathon Lack, had informed him that grants are contracts and cannot be retroactively changed. Therefore, the terms and conditions of the current 63 grants could not arbitrarely be changed. REPRESENTATIVE BRICE commented that conflicting statutes are being established because subsections (i) and (l) are not submissive to subsection (g). Furthermore, there could be conflicts between the contracts and the statutes. Number 0989 MR. KENWORTHY explained that ASTF's existing practice is to require a detailed budget which lists each piece of equipment. When the final audit occurs, ASTF sees what was purchased and ASTF owns that equipment until the final report. At the final report, the board receives a full report of what the project did. The board then makes an action to dispose of the equipment. Mr. Kenworthy identified one issue as the need for the equipment in order for the business to continue. Complications occur when ASTF holds the equipment after the final report when other investors are being sought. Furthermore, a piece of equipment could have been paid for by the entrepeneur, ASTF, and an investor which makes it more difficult to dissemble. Mr. Kenworthy pointed out that LB&A didn't identify any problems with what equipment ASTF owns and the process by which equipment is disposed. REPRESENTATIVE BRICE inquired as to why then is the committee addressing that part. REPRESENTATIVE MURKOWSKI asked if ASTF takes a UCC filing on the equipment. MR. KENWORTHY answered that in some cases a UCC filing is taken, but that is an issue of cost effectiveness. CHAIRMAN ROKEBERG asked if in Section 4, the sponsor of HB 117 was expressing the need for ASTF to go after something more aggressively. Chairman Rokeberg surmised that Section 4 is trying to tell ASTF to go after grantees that have not made repayments and ASTF has not gone after the equipment. REPRESENTATIVE HALCRO interjected that the example given wasn't even relative because it is still an ongoing concern. MS. SWENSON stated that the aforementioned situation with Mr. Harrison has changed since their first knowledge of it. CHAIRMAN ROKEBERG asked if all of ASTF's grantees are still in existence. MR. KENWORTHY said that some grantees are inactive. He commented that ASTF is taking more risk than the commercial private sector, but less risk than the university with commercialization. He reiterated that ASTF is more involved in seed capital than venture capital. He reiterated that ASTF is involved in the early stage capital and taking the appropriate amount of risk for that stage. CHAIRMAN ROKEBERG asked if ASTF is a venture capitalist by taking mandatory security interest. MR. KENWORTHY expressed the need to review this more closely. However, this could be an administrative problem at the end of the final report when if an equipment decision is not made, there would be an ongoing relationship that has to be administered. This would be occuring as the company is attempting to find further investment and partners; the company would have to show that the state still owns its equipment. Mr. Kenworthy didn't believe that the desire would be to create barriers to increased investment in start up ventures. MS. SWENSON suggested that perhaps this issue be left and allow the bill to move in order for Mr. Kenworthy to obtain more information and the issue of the fiscal notes to be addressed in the House Finance Committee. CHAIRMAN ROKEBERG commented that could be one strategy. He asked Mr. Kenworthy if the language on page 2, line 22 "in part" was of concern with regard to multiple owners of equipment. MR. KENWORTHY pointed out that the problem is that often a piece of equipment is used to create a new piece of equipment which creates a different ownership pattern. "Imagine trying to get someone to invest in a business where you have different ownership patterns with a components of a machine." Number 1296 REPRESENTATIVE BRICE withdrew Amendment 3. REPRESENTATIVE BRICE moved that the committee adopt the following amendment: Page 2, Delete lines 15-25 CHAIRMAN ROKEBERG clarified that Sections 3 and 4 are amended or new sections. REPRESENTATIVE BRICE specified his intention to remove the proposed changes. Therefore, on page 2, line 17 "Subject to (l) of this section, at" would be removed and "At" inserted and all of Section 4 would be deleted. CHAIRMAN ROKEBERG asked if there was objection to Representative Brice's amendment. There being no objection, it was so ordered. Number 1478 REPRESENTATIVE BRICE moved to report HB 117 as amended out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE HALCRO objected. He emphasized that the committee seems to have spent the last two hours fixing a problem that did not need to be fixed. MS. SWENSON commented that Representative Bunde intended for the statute to contain the remedies for these recommendations. REPRESENTATIVE HALCRO withdrew his objection. Therefore, there being no objection, CSHB 117(L&C) was reported from the House Labor & Commerce Standing Committee. The committee took a brief at-ease from 5:23 p.m. to 5:28 p.m.