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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 June 30, 2004
[ ] 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 an
accelerated filer (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 August 11, 2004
- ---------------------------------------------------------------------
Common Stock, $0.01 par 17,248,845 shares
value per share
Harris & Harris Group, Inc.
Form 10-Q, June 30, 2004
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..................... 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 22
Background and Overview........................................ 22
Results of Operations.......................................... 24
Financial Condition............................................ 26
Liquidity and Capital Resources................................ 27
Risk Factors................................................... 29
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 36
Item 4. Controls and Procedures............................... 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................... 37
Item 2. Changes in Securities and Use of Proceeds.............. 37
Item 3. Defaults Upon Senior Securities........................ 37
Item 4. Submission of Matters to a Vote of Security Holders.... 37
Item 5. Other Information...................................... 37
Item 6. Exhibits and Reports on Form 8-K....................... 38
Signature...................................................... 39
Exhibit Index to Form 10-Q..................................... 40
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. (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. 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. It is suggested that the
accompanying consolidated financial statements be read in
conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2003, contained
in our 2003 Annual Report.
On September 25, 1997, our Board of Directors approved a
proposal to seek qualification of us 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% 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% of our investment company taxable income
as a dividend. In addition to the requirement that we must
annually distribute at least 90% 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 4% excise tax to the extent we fail to
distribute at least 98% of our annual investment company taxable
income and would be subject to income tax to the extent we fail
to distribute 100% of our investment company taxable income.
Because of the specialized nature of our investment
portfolio and the size of our Company, prior to our recent
offerings of additional shares, we were able to satisfy certain
diversification requirements under Subchapter M of the Code only
if we received a certification from the Securities and Exchange
Commission (?SEC?) that we are "principally engaged in the
furnishing of capital to other corporations that are principally
engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not
previously generally available."
On June 15, 2004, we received SEC certification for 2003,
permitting us to qualify for RIC treatment for 2003 (as we had
for 1999-2002). Although the SEC certification for 2003 was
issued, there can be no assurance that we will qualify for or
receive such certification for subsequent years (to the extent we
need certification for any subsequent year) or that we will
actually qualify for Subchapter M treatment in any subsequent
year. 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.
1
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
June 30, 2004 December 31, 2003
(Unaudited)
Investments, at value
(Cost: $43,358,368 at 6/30/04,
$44,603,778 at 12/31/03).........$ 40,301,518 $ 42,227,062
Cash and cash equivalents.......... 291,104 425,574
Restricted funds (Note 5).......... 1,321,216 1,212,078
Interest receivable................ 61,882 450
Income tax receivable.............. 8,050 17,375
Prepaid expenses................... 53,015 6,841
Other assets, net of reserve of
$255,486 at 6/30/04.............. 305,645 225,748
------------- -----------------
Total assets.......................$ 42,342,430 $ 44,115,128
============= =================
LIABILITIES & NET ASSETS
Accounts payable and accrued
liabilities......................$ 2,370,373 $ 2,723,398
Deferred rent...................... 36,497 39,648
Deferred income tax liability
(Note 6)......................... 669,344 669,344
------------- -----------------
Total liabilities.................. 3,076,214 3,432,390
------------- -----------------
Net assets.........................$ 39,266,216 $ 40,682,738
============= =================
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,
25,000,000 shares authorized;
15,627,585 issued at 6/30/04
and 12/31/03..................... 156,276 156,276
Additional paid in capital
(Note 4)......................... 49,564,475 49,564,475
Accumulated net realized loss...... (3,147,235) (2,410,847)
Accumulated unrealized
depreciation of investments,
including deferred tax liability
of $844,918 at 6/30/04 and
12/31/03......................... (3,901,769) (3,221,635)
Treasury stock, at cost (1,828,740
shares at 6/30/04 and 12/31/03).. (3,405,531) (3,405,531)
------------- -----------------
Net assets.........................$ 39,266,216 $ 40,682,738
============= =================
Shares outstanding................. 13,798,845 13,798,845
============= =================
Net asset value per
outstanding share..................$ 2.85 $ 2.95
============= =================
The accompanying notes are an integral part of
these consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Investment income:
Interest from:
Fixed-income securities..........................$ 74,211 $ 32,009 $ 130,064 $ 78,255
Portfolio companies.............................. 5,020 0 5,703 0
Other income....................................... 0 18,555 0 36,985
------------ ------------ ------------ -------------
Total investment income.......................... 79,231 50,564 135,767 115,240
Expenses:
Salaries and benefits.............................. 495,107 361,703 965,182 723,899
Administration and operations...................... 186,776 143,590 346,075 238,702
Professional fees.................................. 78,878 150,136 157,939 217,294
Rent............................................... 38,918 71,441 72,655 119,318
Directors' fees and expenses....................... 41,177 33,680 93,623 90,045
Depreciation....................................... 9,665 10,150 18,948 20,130
Bank custody fees.................................. 3,294 2,222 5,794 4,409
Interest expense................................... 0 4,631 0 12,892
------------ ------------ ------------ -------------
Total expenses................................... 853,815 777,553 1,660,216 1,426,689
------------ ------------ ------------ -------------
Operating loss before income taxes................. (774,584) (726,989) (1,524,449) (1,311,449)
Income tax provision (Note 6)...................... 0 0 0 0
------------ ------------ ------------ -------------
Net operating loss................................... (774,584) (726,989) (1,524,449) (1,311,449)
Net realized gain on investments:
Realized gain on investments....................... 2,580 28,140 795,969 28,572
------------ ------------ ------------ -------------
Total realized gain.............................. 2,580 28,140 795,969 28,572
Income tax (provision) benefit (Note 6)............ (1,112) (14,349) (7,908) (17,322)
------------ ------------ ------------ -------------
Net realized gain (loss) on investments............ 1,468 13,791 788,061 11,250
------------ ------------ ------------ -------------
Net realized (loss) income........................... (773,116) (713,198) (736,388) (1,300,199)
Net increase (decrease) in unrealized
appreciation on investments:
Increase as a result of investment gain............ 0 0 915,118 0
Decrease as a result of investment gain............ 0 (18,031) 0 (18,031)
Increase on investments held....................... (397) 462,021 39,861 689,859
Decrease on investments held....................... (1,463,524) (275,501) (1,635,113) (1,131,465)
------------ ------------ ------------ ------------
Net change in unrealized appreciation
on investments................................... (1,463,921) 168,489 (680,134) (459,637)
Income tax benefit (Note 6)........................ 0 0 0 0
------------ ------------ ------------ ------------
Net increase (decrease) in unrealized
appreciation on investments...................... (1,463,921) 168,489 (680,134) (459,637)
------------ ------------ ------------ ------------
Net (decrease) increase in net assets
resulting from operations:
Total..............................................$ (2,237,037) $ (544,709) $ (1,416,522) $ (1,759,836)
============ ============ ============ ============
Per outstanding share..............................$ (0.16) $ (0.05) $ (0.10) $ (0.15)
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
Cash flows from operating activities:
Net decrease in net assets resulting
from operations.........................$ (1,416,522) $ (1,759,836)
Adjustments to reconcile net decrease in
net assets resulting from operations to
net cash used in operating activities:
Realized and unrealized gain (loss)
on investments........................ (115,835) 431,065
Depreciation............................ 18,948 20,130
Changes in assets and liabilities:
Restricted funds........................ (109,138) (245,359)
Receivable from investment company...... 0 786,492
Funds in escrow......................... 0 750,000
Interest receivable..................... (61,432) 171
Income tax receivable................... 9,325 (78,289)
Prepaid expenses........................ (46,174) 34,755
Other assets............................ (82,378) (105,763)
Accounts payable and accrued
liabilities........................... (353,025) 273,527
Payable to broker for unsettled trade... 0 (5,696,725)
Accrued profit sharing.................. 0 (13,710)
Current income tax liability............ 0 (857,656)
Deferred rent........................... (3,151) 22,123
---------------- --------------
Net cash used in operating activities... (2,159,382) (6,439,075)
Cash flows from investing activities:
Net (purchase) sale of short-term
investments and marketable securities.. 9,422,255 (4,385,459)
Proceeds from investments............... 2,504,545 15,709
Investment in private placements and
loans................................. (9,885,455) (2,945,618)
Purchase of fixed assets................ (16,433) (3,456)
---------------- --------------
Net cash provided by (used in)
investing activities.................. 2,024,912 (7,318,824)
Cash flows from financing activities:
Proceeds from note payable.............. 0 7,983,520
---------------- --------------
Net cash provided by financing
activities........................... 0 7,983,520
---------------- --------------
Net increase (decrease) in cash and
cash equivalents:
Cash and cash equivalents at beginning
of the period........................ 425,574 5,967,356
Cash and cash equivalents at end of
the period........................... 291,104 192,977
---------------- --------------
Net increase (decrease) in cash and
cash equivalents.....................$ (134,470) $ (5,774,379)
================= ==============
Supplemental disclosures of cash flow information:
Income taxes paid......................$ 0 $ 575,100
Interest paid..........................$ 0 $ 10,784
The accompanying notes are an integral part of
these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
Changes in net assets from operations:
Net operating loss................................$ (774,584) $ (726,989) $ (1,524,449) $ (1,311,449)
Net realized gain on investments.................. 1,468 13,791 788,061 11,250
Net (decrease) increase in unrealized
appreciation on investments as a
result of gain.................................. 0 (18,031) 915,118 (18,031)
Net (decrease) increase in unrealized
appreciation on investments held................ (1,463,921) 186,520 (1,595,252) (441,606)
------------- ------------- ------------- -------------
Net decrease in net assets
resulting from operations....................... (2,237,037) (544,709) (1,416,522) (1,759,836)
Net decrease in net assets.......................... (2,237,037) (544,709) (1,416,522) (1,759,836)
Net assets:
Beginning of the period........................... 41,503,253 26,040,919 40,682,738 27,256,046
------------ ------------- ------------- -------------
End of the period................................. $ 39,266,216 $ 25,496,210 $ 39,266,216 $ 25,496,210
============ ============= ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
5
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004
(UNAUDITED)
Method of Shares/
Valuation (3) Principal Value
Investments in Unaffiliated Companies
(8)(9)(10) -- 22.4% of total investments
Private Placement Portfolio (Illiquid)
- -- 22.4% of total investments
AlphaSimplex Group, LLC (2)(5) --
Investment management company
headed by Dr. Andrew W. Lo, holder
of the Harris & Harris Group Chair at
MIT
Limited Liability Company Interest.......(C) -- $ 125,000
Continuum Photonics, Inc. (1)(2)(6) --
Develops optical networking components
by merging cutting-edge materials, MEMS
and electronics technologies -- 4.23%
of fully diluted equity
Series B Convertible Preferred Stock.....(C) 2,000,000 776,119
Series C Convertible Preferred Stock.....(C) 2,689,103 839,000
-----------
1,615,119
Exponential Business Development
Company (1)(2)(5) -- Venture capital
partnership focused on early stage
companies
Limited Partnership Interest.............(A) -- 25,000
Heartware, Inc. (1)(2)(5)(6) -- Develops
ventricular assist devices -- 0% of
fully diluted equity
Series A-2 Non-Voting Preferred Stock....(B) 47,620 0
Molecular Imprints, Inc. (1)(2)(4)(5)
-- Develops nanoimprint lithography
capital equipment -- 2.09% of fully
diluted equity
Series B Convertible Preferred Stock.....(A) 1,333,333 2,000,000
Nanosys, Inc. (1)(2)(5)(6) -- Develops
nanotechnology-enabled systems
incorporating novel and patent-
protected zero and one-dimensional
nanometer-scale materials -- 1.58% of
fully diluted equity
Series C Convertible Preferred Stock.....(A) 803,428 1,500,000
Nantero, Inc. (1)(2)(5)(6) -- Develops a
high-density, nonvolatile, random
access memory chip, using nanotechnology
-- 3.35% of fully diluted equity
Series A Convertible Preferred Stock.....(C) 345,070 538,309
Series B Convertible Preferred Stock.....(C) 207,051 323,000
-----------
861,309
NeoPhotonics Corporation (1)(2)(6)(12)
-- Develops and manufactures planar
optical devices and components using
nanomaterials -- deposition technology
-- 3.80% of fully diluted equity
Common Stock.............................(C) 60,580 9,105
Series 1 Convertible Preferred Stock.....(A) 1,831,256 2,014,677
Warrants at $0.15 expiring 3/12/11.......(C) 30,426 304
-----------
2,024,086
Optiva, Inc. (1)(2)(6) -- Develops and
commercializes nanomaterials for
advanced applications -- 1.96% of fully
diluted equity
Series C Convertible Preferred Stock.....(B) 1,249,999 625,000
Starfire Systems, Inc. (1)(2)(4)(6) --
Develops and produces ceramic--
forming polymers -- 1.86% of fully
diluted equity
Common Stock.............................(A) 125,000 50,000
Series A-1 Convertible Preferred Stock...(A) 200,000 200,000
-----------
250,000
Total Unaffiliated Private Placement Portfolio
(cost: $9,707,897)...............................................$9,025,514
----------
Total Investments in Unaffiliated Companies (cost: $9,707,897)...$9,025,514
----------
The accompanying notes are an integral part of
this consolidated schedule.
6
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004
(UNAUDITED)
Method of Shares/
Valuation (3) Principal Value
Investments in Non-Controlled
Affiliated Companies (8)(9)(11) --
34.3% of total investments
Private Placement Portfolio (Illiquid)
- -- 34.3% of total investments
Agile Materials & Technologies, Inc.
(1)(2)(6) -- Develops and sells
variable integrated passive RF
electronic equipment components --
8.15% of fully diluted equity
Series A Convertible Preferred Stock.....(B) 3,732,736 $ 110,700
Convertible Bridge Note..................(B) $225,603 229,173
----------
339,873
Chlorogen, Inc. (1)(2)(5)(6) -- Develops
patented chloroplast technology to
produce plant-made proteins -- 9.74%
of fully diluted equity
Series A Convertible Preferred Stock.....(A) 4,478,038 785,000
CSwitch, Inc. (1)(2)(4)(6) -- Develops
next-generation, system-on-a-chip
solutions for communications-based
platforms -- 5.66% of fully diluted
equity
Series A Convertible Preferred Stock.....(A) 1,000,000 1,000,000
Experion Systems, Inc. (1)(2)(7) --
Develops and sells software to credit
unions -- 12.49% of fully diluted equity
Series A Convertible Preferred Stock.....(B) 294,118 262,406
Series B Convertible Preferred Stock.....(B) 35,294 31,226
Series C Convertible Preferred Stock.....(B) 222,184 417,706
Series D Convertible Preferred Stock.....(B) 64,501 121,262
----------
832,600
NanoGram Corporation (1)(2)(6) -- Develops
a broad suite of intellectual
property utilizing nanotechnology --
7.65% of fully diluted equity
Series I Convertible Preferred Stock.....(A) 63,210 21,672
Series II Convertible Preferred Stock....(A) 1,250,904 1,000,723
----------
1,022,395
NanoOpto Corporation (1)(2)(5)(6) --
Develops high performance, integrated
optical communications sub-components
on a chip by utilizing patented nano-
manufacturing technology -- 7.28% of
fully diluted equity
Series A-1 Convertible Preferred Stock...(C) 267,857 47,567
Series B Convertible Preferred Stock.....(C) 1,733,664 737,500
----------
785,067
Nanopharma Corp. (1)(2)(6) -- Develops
advanced nanoscopic drug delivery
vehicles and systems -- 14.39% of
fully diluted equity
Series A Convertible Preferred Stock.....(A) 684,516 700,000
Subordinated Convertible Bridge Note.....(A) $150,000 151,479
----------
851,479
Nanotechnologies, Inc. (1)(2)(6) --
Develops high-performance nanoscale
materials for industry -- 6.48% of
fully diluted equity
Series B Convertible Preferred Stock.....(B) 1,538,837 553,982
Series C Convertible Preferred Stock.....(B) 235,720 84,859
----------
638,841
NeuroMetrix, Inc. (1)(2)(5) -- Develops
and sells medical devices for
monitoring neuromuscular disorders --
12.42% of fully diluted equity
Series A Convertible Preferred Stock.....(C) 875,000 1,312,500
Series B Convertible Preferred Stock.....(C) 625,000 937,500
Series C-2 Convertible Preferred Stock...(C) 1,148,100 1,722,150
Series E Convertible Preferred Stock.....(C) 499,996 749,994
Series E-1 Convertible Preferred Stock...(C) 1,402,187 2,103,282
----------
6,825,426
The accompanying notes are an integral part of
these consolidated financial statements.
7
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004
(UNAUDITED)
Method of Shares/
Valuation (3) Principal Value
Questech Corporation (1)(2)(5) --
Manufactures and markets
proprietary metal decorative
tiles -- 6.73% of fully diluted
equity
Common Stock.............................(C) 646,954 724,588
Warrants at $5.00 expiring 10/25/04......(C) 1,966 0
Warrants at $1.50 expiring 11/16/05......(C) 1,250 0
Warrants at $1.50 expiring 08/03/06......(C) 8,500 0
Warrants at $1.50 expiring 11/21/07......(C) 3,750 0
Warrants at $1.50 expiring 11/19/08......(C) 5,000 0
-----------
724,588
Total Non-Controlled Private Placement Portfolio
(cost: $15,950,827)..............................................$13,805,269
-----------
Total Investments in Non-Controlled Affiliated Companies
(cost: $15,950,827)..............................................$13,805,269
-----------
U.S. Government and Agency Obligations ? 43.4% of total investments
U.S. Treasury Bills -- due date 07/22/04..(J) $5,000,000 $ 4,996,600
U.S. Treasury Bills -- due date 08/26/04..(J) 1,839,000 1,835,470
U.S. Treasury Notes -- due date
04/30/05, coupon 1.625%.................(H) 2,692,000 2,684,435
U.S. Treasury Notes -- due date
2/28/06, coupon 1.625...................(H) 2,000,000 1,970,620
U.S. Treasury Notes -- due date
2/15/07, coupon 2.25%...................(H) 2,000,000 1,961,260
U.S. Treasury Notes -- due date
05/15/08, coupon 2.625%.................(H) 1,999,000 1,936,531
U.S. Treasury Notes -- due date
03/15/09, coupon 2.625%.................(H) 2,192,000 2,085,819
-----------
Total Investments in U.S. Government and Agency Obligations
(cost: $17,699,644)..............................................$17,470,735
-----------
Total Investments -- 100% (cost: $43,358,368)....................$40,301,518
===========
The accompanying notes are an integral
part of this consolidated schedule.
8
CONSOLIDATED SCHEDULE OF INVESTMENTS AS OF JUNE 30, 2004
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
Asset Valuation Policy Guidelines.
(4) Initial investment was made during 2004.
(5) No changes in valuation occurred in these investments during the
three months ended June 30, 2004.
(6) These investments are development stage companies. A development
stage company is defined as a company that is devoting
substantially all of its efforts to establishing a new business,
and either it has not yet commenced its planned principal
operations, or it has commenced such operations but has not
realized significant revenue from them.
(7) Previously named MyPersonalAdvocate.com, Inc.
(8) Investments in unaffiliated companies consist of investments in
which we own less than 5% of the portfolio company. Investments
in non-controlled affiliated companies consist of investments in
which we own more than 5% but less than 25% of the portfolio
company. Investments in controlled affiliated companies consist
of investments in which we own more than 25% of the portfolio
company.
(9) The percentage ownership of each portfolio company disclosed in
the Consolidated Schedule of Investments expresses the potential
equity interest in each such portfolio company. The calculated
percentage represents the amount of the issuer?s equity
securities we own or can acquire as a percentage of the issuer?s
total outstanding equity securities plus equity securities
reserved for issued and outstanding warrants, convertible
securities and all authorized stock options, both granted and
ungranted.
(10) The aggregate cost for federal income tax purposes of
investments in unaffiliated companies is $9,707,897. The gross
unrealized appreciation based on the tax cost for these
securities is $166,498. The gross unrealized depreciation based
on the tax cost for these securities is $848,881.
(11) The aggregate cost for federal income tax purposes of
investments in non-controlled affiliated companies is
$15,950,827. The gross unrealized appreciation based on the tax
cost for these securities is $2,414,044. The gross unrealized
depreciation based on the tax cost for these securities is
$4,559,602.
(12) NeoPhotonics filed for bankruptcy on November 17, 2003. We
sold our investment in its Series D Preferred Stock in January
2004. NeoPhotonics emerged from bankruptcy, as a newly
reorganized company, after obtaining financing from us and other
investors.
The accompanying notes are an integral part of
this consolidated schedule.
9
FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS
ASSET VALUATION POLICY GUIDELINES
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
5) ALL OTHER INVESTMENTS
The Investment Company Act of 1940 (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 at least 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 carried at fair value 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.
10
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.
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. We discount market value for securities that are
subject to significant legal or contractual transfer
restrictions. 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.
INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR 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.
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.
11
G. Private Market: The private market method uses actual
third-party investments in 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. 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. Fixed-Income Securities for which market quotations are
not readily available are carried at fair value using one or more
of the following basic methods of valuation:
Independent pricing services that provide quotations based
primarily on quotations from dealers and brokers, market
transactions, and other sources.
Fair value as determined in good faith by the Valuation
Committee.
SHORT-TERM FIXED-INCOME INVESTMENTS
J. Short-Term Fixed-Income Investments are valued at
market value at the time of valuation. Short-term debt with
remaining maturity of 60 days or less is valued at amortized
cost.
ALL OTHER INVESTMENTS
K. All Other Investments are reported at fair value as
determined in good faith by the Valuation Committee.
The reported values of securities for which market
quotations are not readily available and for other assets
reflect the Valuation Committee's judgment of fair values as of
the valuation date using the outlined basic methods of
valuation. They do not necessarily represent an amount of money
that would be realized if we had to sell the securities 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.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company," "us," "our" and
"we"), is a venture capital company operating as a business
development company ("BDC") under the Investment Company Act of
1940 ("1940 Act"). We operate as an internally managed company
whereby our officers and employees, under the general supervision
of our Board of Directors, conduct our operations.
We elected to become a BDC on July 26, 1995, after receiving
the necessary 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 at fair value as defined in 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. ("Enterprises"), is a 100%
wholly owned subsidiary of the Company. Enterprises held a lease
for office space until the lease expired on July 31, 2003, which
office space it sublet to the Company and an unaffiliated party;
is a partner in Harris Partners I, L.P., and is taxed as a C
corporation. Harris Partners I, L.P., is a limited partnership
and owned, until December 31, 2002, a 20% limited partnership
interest in PHZ Capital Partners L.P. Currently, Harris Partners
I, L.P., 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 2000-2003. There can be no assurance that we
will qualify as a RIC for 2004 and subsequent years or that if we
do qualify, we will continue to qualify for 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 factors, distribute at least 90% of our
investment company taxable income and may either distribute or
retain our realized net capital gains on investments.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting
policies followed in the preparation of the consolidated
financial statements:
Principles of Consolidation. The consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States 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.
Cash and Cash Equivalents. Cash and cash equivalents
include money market instruments with maturities of less than
three months.
13
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) for all other assets is as determined
in good faith by, or under the direction of, the Board of
Directors. (See "Asset Valuation Policy Guidelines" in the
"Footnote to Consolidated Schedule of Investments.")
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. 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 provision
of Statement of Financial Accounting Standards No. 109.
Accordingly, deferred tax liabilities had been established to
reflect temporary differences between the recognition of income
and expenses for financial reporting and tax purposes; the most
significant such difference relates to our unrealized
appreciation on investments.
The June 30, 2004, consolidated financial statements include
a provision for deferred taxes on the remaining net built-in
gains as of December 31, 1998, net of the unutilized operating
and capital loss carryforwards incurred by us through December
31, 1998.
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.")
Estimates by Management. The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of June 30, 2004,
and December 31, 2003, and the reported amounts of revenues and
expenses for the three months ended June 30, 2004, and June 30,
2003. The most significant estimates relate to the fair
valuations of certain of our investments. Actual results could
differ from these estimates.
NOTE 3. 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) provides for profit
sharing by our officers and employees equal to 20% of our
"qualifying income" for that plan year. For the purposes of the
2002 Plan, qualifying income is defined as net realized income as
reflected on our consolidated statements of operations for that
year, less nonqualifying gains, if any.
For purposes of the 2002 Plan, our net realized income
includes investment income, realized gains and losses, and
operating expenses (including taxes paid or payable by us), but
is calculated without including dividends paid or distributions
made to shareholders, payments under the Plan, unrealized gains
and losses, and loss carry-overs from other years. The
proportion of net after-tax realized gains attributable to asset
values as of September 30, 1997, is considered nonqualifying
gain, which reduces qualifying income.
On October 15, 2002, our shareholders approved the
performance goals under the 2002 Plan in accordance with Section
162(m) of the Code, effective as of January 1, 2003. The Code
generally provides that a public company such as we may not
deduct compensation paid to its chief executive officer or to any
of its four most highly compensated officers to the extent that
the compensation paid to the officer/employee exceeds $1,000,000
in any tax year, unless payment is made upon the attainment of
objective performance goals that are approved by our
shareholders.
14
Under the 2002 Plan, our net realized income, which we refer
to as qualifying income, includes investment income, realized
qualifying gains and losses, and operating expenses (including
taxes paid or payable by us), but is calculated without including
dividends paid or loss carry-overs from other years. As soon as
practicable following the year-end audit, the Compensation
Committee will determine whether, and if so how much, qualifying
income exists for a plan year. Once determined, 90% of the
qualifying income will be paid out to 2002 Plan participants
pursuant to the distribution percentages set forth in the 2002
Plan. The remaining 10% will be paid out after we have filed our
federal tax return for that plan year.
Under the 2002 Plan, awards previously granted to four
current Participants (Messrs. Harris and Melsheimer and Ms.
Shavin and Ms. Matthews, herein referred to as the ?grandfathered
participants?) will be reduced by 10% with respect to ?Non-Tiny
Technology Investments? (as defined in the 2002 Plan) and by 25%
with respect to ?Tiny Technology Investments? (as defined in the
2002 Plan) and will become permanent. These reduced awards are
herein referred to as ?grandfathered participations.? The amount
by which the awards are reduced will be allocable and reallocable
each year by the Compensation Committee among current and new
participants as awards under the 2002 Plan. The grandfathered
participations will be honored by us whether or not the
grandfathered participant is still employed by us or is still
alive (in the event of death, the grandfathered participations
will be paid to the grandfathered participant?s estate), unless
the grandfathered participant is dismissed for cause, in which
case all awards, including the grandfathered participations, will
be immediately cancelled and forfeited. With regard to new
investments and follow-on investments made after the date on
which the first new employee begins participating in the 2002
Plan, both current and new participants will be required to be
employed by us at the end of a plan year in order to participate
in profit-sharing on our investments with respect to that year.
Notwithstanding any provisions of the 2002 Plan, in no event
may the aggregate amount of all awards payable for any Plan Year
during which we remain a ?business development company? within
the meaning of the 1940 Act be greater than 20% 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 exceed that
amount, the awards will be reduced pro rata.
The 2002 Plan may be modified, amended or terminated by the
Compensation Committee at any time. Notwithstanding the
foregoing, the grandfathered participations may not be further
modified. Nothing in the 2002 Plan will preclude the
Compensation Committee from naming additional participants in the
2002 Plan or, except for grandfathered participations, changing
the Award Percentage of any Participant (subject to the overall
percentage limitations contained in the 2002 Plan). Currently,
under the 2002 Plan, the distribution amounts for non-
grandfathered investments for each officer and employee are:
Charles E. Harris, 7.790%; Mel P. Melsheimer, 3.733%; Douglas W.
Jamison, 3.5%; Daniel V. Leff, 3.0%; Helene B. Shavin, 1.524%;
and Jacqueline M. Matthews, 0.453%, which together equal 20%. In
one case, for a former employee who left other than due to
termination for cause, any amount earned will be accrued and may
subsequently be paid to the participant.
The grandfathered participations are set forth below:
Grandfathered Participations
-----------------------------------------------
Name of Officer/Employee Non-Tiny Technology (%) Tiny Technology (%)
- ------------------------ ----------------------- -------------------
Charles E. Harris 12.41100 10.34250
Mel P. Melsheimer 3.80970 3.17475
Helene B. Shavin 1.37160 1.14300
Jacqueline M. Matthews 0.40770 0.33975
TOTAL 18.00000 15.00000
15
Accordingly, an additional 2% of Qualifying Income with
respect to grandfathered Non-Tiny Technology Investments, 5% of
Qualifying Income with respect to grandfathered Tiny Technology
Investments and the full 20% of Qualifying Income with respect to
non-grandfathered investments are available for allocation and
reallocation from year to year. Currently, Douglas W. Jamison
and Daniel V. Leff are each allocated 0.80% of the Non-Tiny
Technology Grandfathered Participations and 2% of the Tiny
Technology Grandfathered Participations.
During 2003, we made no accrual for profit sharing. At June
30, 2004, we have no accrual for profit sharing.
NOTE 4. CAPITAL TRANSACTIONS
In 1998, the Board of Directors approved that effective
January 1, 1998, 50% 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.
On July 8, 2002, we filed a final prospectus under Rule 497
of the Securities Act of 1933 with the SEC for the issuance of
transferable rights to our shareholders. The rights allowed the
shareholders to subscribe for a maximum of 2,954,743 new shares
of our common stock, of which 2,634,614 new shares were
subscribed for pursuant to the rights offering. The actual
amount of gross proceeds raised upon completion of the offer was
$5,927,882; net proceeds were $5,643,470, after expenses of
$284,412. We have invested all of the net proceeds raised from
the offering in accordance with our investment objectives and
policies.
On December 24, 2003, we filed a final prospectus, under
Rule 497 of the Securities Act of 1933 with the SEC, for issuance
of 2,000,000 shares of our common stock plus 300,000 additional
shares if the underwriter exercised its over-allotment option.
All of the 2,300,000 shares were sold. The actual amount of net
proceeds raised upon completion of the offering was $17,296,000;
net proceeds of the offering, less offering costs of $664,038,
were $16,631,962. We intend to use 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. For these
purposes, from the completion of the offering through June 30,
2004, we have used $11,449,085 of the $16,631,962.
On February 17, 2004, we filed a registration statement with
the Securities and Exchange Commission, on Form N-2, with respect
to 3,000,000 shares of our Common Stock to be sold at prices and
on terms to be set forth in one or more supplements to the
prospectus from time to time. On May 24, 2004, we filed an
amendment to this registration statement to increase the size of
the proposed registration from 3,000,000 to 7,000,000 shares. On
June 30, 2004, we priced a follow-on public offering of 3,000,000
shares of our common stock, plus 450,000 additional shares of our
common stock to cover over-allotments. All of the 3,450,000
shares were sold. The actual amount of net proceeds raised upon
completion of the offering on July 7, 2004, was $36,501,000; net
proceeds of the offering, less estimated offering costs of
$368,850, were $36,132,150. We intend to use 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. The
remaining 3,550,000 shares may be sold at prices and on terms to
be set forth in one or more supplements to the prospectus from
time to time.
16
As of December 31, 2003, there are no distributable
earnings. The difference between the book basis and tax basis
components of distributable earnings is primarily attributed to
Built-In Gains existing at the time of our qualification as a RIC
(see Note 6. ?Income Taxes?), nondeductible deferred compensation
and net operating losses.
Beginning with the Consolidated Statements of Assets and
Liabilities at December 31, 2003, additional paid-in capital and
common stock warrants have been combined and are reported as
additional paid-in capital. There have been no common stock
warrants outstanding since March 2000.
NOTE 5. EMPLOYEE BENEFITS
On October 19, 1999, Charles E. Harris signed an Employment
Agreement with us (disclosed in a Form 8-K filed on October 27,
1999) (the "Employment Agreement"), which superseded an
employment agreement that was about to expire on December 31,
1999. The Employment Agreement shall terminate on December 31,
2004 ("Term") subject to either an earlier termination or an
extension in accordance with the terms; on January 1, 2000 and on
each day thereafter, the Term extends automatically by one day
unless at any time we or Mr. Harris, by written notice, decide
not to extend the Term, in which case the Term will expire five
years from the date of the written notice.
During the period of employment, Mr. Harris shall serve as
our Chairman and Chief Executive Officer; be responsible for the
general management of our affairs and all our subsidiaries,
reporting directly to our Board of Directors; serve as a member
of the Board for the period of which he is and shall from time to
time be elected or reelected; and serve, if elected, as our
President and as an officer and director of any subsidiary or
affiliate of us.
Mr. Harris is to receive compensation under his Employment
Agreement in the form of base salary of $208,315 for 2000, with
automatic yearly adjustments to reflect inflation. In addition,
the Board may increase such salary, and consequently decrease it,
but not below the level provided for by the automatic adjustments
described above. Mr. Harris is also entitled to participate in
our Profit-Sharing Plan as well as in all compensation or
employee benefit plans or programs, and to receive all benefits,
perquisites, and emoluments for which salaried employees are
eligible. Under the Employment Agreement, we will furnish Mr.
Harris with certain perquisites which include a company car,
membership in certain clubs and up to a $5,000 annual
reimbursement for personal, financial or tax advice.
The Employment Agreement provides Mr. Harris with life
insurance for the benefit of his designated beneficiaries in the
amount of $2,000,000; provides reimbursement for uninsured
medical expenses, not to exceed $10,000 per annum, adjusted for
inflation, over the period of the contract; provides Mr. Harris
and his spouse with long-term care insurance; and with disability
insurance in the amount of 100% of his base salary. These
benefits are for the term of the Employment Agreement.
The Employment Agreement provides for us to adopt a
supplemental executive retirement plan (the "SERP") for the
benefit of Mr. Harris. Under the SERP, we will cause an amount
equal to one-twelfth of Mr. Harris's current annual salary to be
credited each month (a "Monthly Credit") to a special account
maintained for this purpose on our books for the benefit of Mr.
Harris (the "SERP Account"). The amounts credited to the SERP
Account will be deemed invested or reinvested in such mutual
funds or U.S. Government securities as determined by Mr. Harris.
The SERP Account will be credited and debited to reflect the
deemed investment returns, losses and expenses attributed to such
deemed investments and reinvestments. Mr. Harris's benefit under
the SERP will equal the balance in the SERP Account and such
benefit will always be 100% vested (i.e., not forfeitable). Mr.
Harris will determine the form and timing of the distribution of
the balance in the SERP Account; provided, however, in the event
17
of the termination of his employment, the balance in the SERP
Account will be distributed to Mr. Harris or his beneficiary, as
the case may be, in a lump-sum payment within 30 days of such
termination. We will establish a rabbi trust for the purpose of
accumulating funds to satisfy the obligations incurred by us
under the SERP. The restricted funds for the SERP Plan total
$1,321,216 at June 30, 2004. Mr. Harris's rights to benefits
pursuant to this SERP will be no greater than those of a general
creditor of us.
The Employment Agreement provides severance pay in the event
of termination without cause or by constructive discharge and
also provides for certain death benefits payable to the surviving
spouse equal to the executive's base salary for a period of two
years.
In addition, Mr. Harris is entitled to receive severance pay
pursuant to the severance compensation agreement that he entered
into with us, effective August 15, 1990. The severance
compensation agreement provides that if, following a change in
our control, as defined in the agreement, such individual's
employment is terminated by us without cause or by the executive
within one year of such change in control, the individual shall
be entitled to receive compensation in a lump sum payment equal
to 2.99 times the individual's average annualized compensation
and payment of other welfare benefits. If Mr. Harris's
termination is without cause or is a constructive discharge, the
amount payable under the Employment Agreement will be reduced by
the amounts paid pursuant to the severance compensation
agreement.
As of January 1, 1989, we adopted an employee benefits
program covering substantially all of our employees under a
401(k) Plan and Trust Agreement. As of January 1, 1999, we
adopted the Harris & Harris Pension Plan and Trust, a money
purchase plan which would allow us to stay compliant with the
401(k) top-heavy regulations and deduction limitation
regulations. In 2001, Congress enacted the Economic Growth and
Tax Relief Reconciliation Act of 2001 which has increased the
deduction limits for plans such as the 401(k) Plan. This Act
eliminates the need for us to maintain two separate plans.
Effective December 31, 2001, the Pension Plan merged into the
401(k) Plan, with the 401(k) Plan being the surviving plan.
Contributions to the plan are at our discretion.
On June 30, 1994, we adopted a plan to provide medical and
dental insurance for retirees, their spouses and dependents who,
at the time of their retirement, have ten years of service with
us and have attained 50 years of age or have attained 45 years of
age and have 15 years of service with us. On February 10, 1997,
we amended this plan to include employees who "have seven full
years of service and have attained 58 years of age." The
coverage is secondary to any government provided or subsequent
employer provided health insurance plans. The annual premium
cost to us with respect to the entitled retiree shall not exceed
$12,000, subject to an index for inflation. Based upon actuarial
estimates, we provided an original reserve of $176,520 that was
charged to operations for the period ending June 30, 1994. As of
June 30, 2004, we had a reserve of $578,965 for the plan. Recent
changes to the Medicare program may affect our costs under this
plan. In accordance with FASB Staff Position 106-1, our
estimates of the obligation under this standard do not reflect
these changes. Specific authoritative guidance regarding these
changes is pending and when issued, could require us to change
previously reported information.
18
We are making the following disclosures about our plan to
provide medical and dental insurance for retirees.
Reconciliation of Accumulated
Postretirement Benefit Obligations
Projected accumulated postretirement
benefit obligation at January 1, 2004 $ 525,288
Service cost 31,976
Interest cost 15,696
-----------
Projected accumulated postretirement
benefit obligation at June 30, 2004 $ 572,960
===========
On March 20, 2003, in order to begin planning for eventual
management succession, the Board of Directors voted to establish
a mandatory retirement plan for individuals who are employed by
us in a bona fide executive or high policy-making position.
There are currently two such individuals, the Chairman and CEO,
and the President and COO. Under this plan, mandatory retirement
will take place effective December 31 of the year in which the
eligible individuals attain the age of 65. On an annual basis
beginning in the year in which the designated individual attains
the age of 65, a committee of the Board consisting of non-
interested directors may determine to postpone the mandatory
retirement date for that individual for one additional year for
our benefit.
Under applicable law prohibiting discrimination in
employment on the basis of age, we can impose a mandatory
retirement age of 65 for our executives or employees in high
policy-making positions only if each employee subject to the
mandatory retirement age is entitled to an immediate retirement
benefit at retirement age of at least $44,000 per year. The
benefits payable at retirement to Charles E. Harris, our Chairman
and Chief Executive Officer, and Mel P. Melsheimer, our
President, Chief Operating Officer and Chief Financial Officer,
under our existing retirement plans do not equal this threshold.
Mr. Harris has offered, for our benefit, to waive his right to
exclude certain other benefits from this calculation, which makes
it unlikely that any provision will have to be made for him in
order for us to comply with this threshold requirement. For Mr.
Melsheimer, however, a new plan was established to provide him
with the difference between the benefit required under the age
discrimination laws and that provided under our existing plans.
The expense to us of providing the benefit under this new plan is
currently estimated to be $450,000. This benefit will be
unfunded, and the expense is being amortized over the fiscal
periods through the year ended December 31, 2004.
NOTE 6. INCOME TAXES
Provided that a proper election is made, a corporation
taxable under Subchapter C of the Internal Revenue Code (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. Prior to
1999, we incurred ordinary and capital losses from operations.
After our election of RIC status, those losses remained available
to be carried forward to subsequent taxable years. We have
previously used loss carryforwards to offset Built-In Gains. As
of January 1, 2004, we had $501,640 of pre-1999 loss
carryforwards remaining and $4,663,457 of unrealized Built-In
Gains remaining.
19
Continued qualification as a RIC requires us to satisfy
certain investment asset diversification requirements in future
years. Our ability to satisfy those requirements may not be
controllable by us. There can be no assurance that we will
qualify as a RIC in subsequent years.
We pay federal, state and local taxes on behalf of our
wholly owned subsidiary, Harris & Harris Enterprises, Inc., which
is taxed as a C Corporation.
For the three and six months ended June 30, 2004, and 2003,
our income tax provision was allocated among various types of
realized and unrealized gain or loss as follows:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30,2003
Net operating loss.....$ 0 $ 0 $ 0 $ 0
Net realized gain
(loss) on investments.. 1,112 14,349 7,908 17,322
Net increase in
unrealized appreciation
on investments......... 0 0 0 0
------------- ------------- ------------- ------------
Total income tax
(benefit) provision....$ 1,112 $ 14,349 $ 7,908 $ 17,322
============= ============= ============= ============
The above tax (benefit) provision consists of the following:
Current................$ 1,112 $ 14,349 $ 7,908 $ 17,322
Deferred -- Federal.... 0 0 0 0
------------- ------------- ------------- ------------
Total income tax
provision..............$ 1,112 $ 14,349 $ 7,908 $ 17,322
============= ============= ============= ============
The Company's net deferred tax liability at June 30, 2004,
and December 31, 2003, consists of the following:
June 30, 2004 December 31, 2003
Tax on unrealized appreciation
on investments...................$ 844,918 $ 844,918
Net operating loss and
capital carryforward............. (175,574) (175,574)
------------- -----------------
Net deferred income
tax liability....................$ 669,344 $ 669,344
============= =================
NOTE 7. COMMITMENTS
During 1993, we signed a 10-year lease for office space,
which lease expired on July 31, 2003. On April 17, 2003, we
signed a seven-year sublease for office space at 111 West 57th
Street in New York City to replace the expired lease. Total rent
expense was $200,711 for 2003. Future minimum sublease payments
in each of the following years are: 2004 -- $134,816; 2005 --
$138,187; 2006 -- $141,641; 2007 -- $145,182; 2008 -- $148,811;
and thereafter, for the remaining term -- $203,571.
20
NOTE 8. ASSET ACCOUNT LINE OF CREDIT
On November 19, 2001, we established an asset account line
of credit. The asset account line of credit is secured by
government and government agency securities. Under the asset
account line of credit, we may borrow up to 95% of the current
value of the government and government agency securities with
which we secure the line. Our available line of credit at June
30, 2004, was $14,853,503. Our outstanding balance under the
asset account line of credit at June 30, 2004, and June 30,
2003, was $0 and $7,983,520, respectively. The asset account
line of credit bears interest at a rate of the Broker Call Rate
plus 50 basis points.
NOTE 9. SUBSEQUENT EVENTS
On July 7, 2004, we closed on our June 30, 2004, offering of
3,000,000 common shares plus 450,000 additional shares of common
stock for over-allotments. All of the 3,450,000 shares were
sold. The actual amount of net proceeds raised upon completion
of the offering was $36,501,000; net proceeds of the offering,
less estimated offering costs of $368,850, were $36,132,150.
On July 8, 2004, we made a $401,536 follow-on investment in
the form of a Convertible Bridge Note of a privately held
portfolio company.
On July 20, 2004, we made an $887,500 follow-on equity
investment in NanoOpto Corporation.
On July 21, 2004, we made a $75,670 follow-on investment in
the form of a Secured Convertible Bridge Note of a privately held
portfolio company.
On July 27, 2004, NeuroMetrix, Inc., closed on its initial
public offering. All of our preferred stock was converted into
1,137,570 shares of common stock, that are subject to a 180-day
lock-up.
NOTE 10. OTHER
We have a total of $255,486 of funds in escrow as a result
of the merger of NanoGram Devices Corporation and a wholly owned
subsidiary of Wilson Greatbatch Technologies, Inc. The funds are
being held for one year, in an interest-bearing escrow account,
to secure the indemnification obligations of the former
stockholders of NanoGram Devices Corporation. We set up a
reserve of 100% of the $255,486.
NOTE 11. INTERIM FINANCIAL STATEMENTS
Our interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulations S-X. 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,
2003.
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 our June 30, 2004, Consolidated Financial
Statements, and our year-end 2003 Consolidated Financial
Statements and the 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. (?Otisville?),
which also completed an initial public offering later that year.
In 1984, Charles E. Harris purchased a controlling interest in
us, thereby also becoming 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 ("Alliance"), 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. In 1994, we made our
first nanotechnology investment. Since August 2001, we have made
initial investments exclusively in tiny technology, including our
last 16 initial investments.
Since our investment in Otisville in 1983, we have made a
total of 58 venture capital investments, including four private
investments in public equities. We have sold 38 of these 58
investments, realizing total proceeds of $108,159,142 on our
invested capital of $40,094,851. Seventeen of these 38
investments were profitable. As measured from first dollar in to
last dollar out, the average and median holding periods for these
38 investments were 3.5 years and 3.2 years, respectively. As
measured from investment in to investment out, the average and
median holding periods for the 122 separate investment tranches
were 2.8 years and 2.4 years, respectively. At June 30, 2004, we
valued the 20 venture capital investments remaining in our
portfolio at $22,830,783, or 58.1% of our net assets, net of
unrealized depreciation of $2,827,941. At June 30, 2004, from
first dollar in, the average and median holding periods for our
20 current venture capital investments are 2.9 years and 2.1
years, respectively.
We have invested a substantial portion of our assets in
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 June
30, 2004, $22,830,783, or 58.1%, of our net assets, consisted of
venture capital investments at fair value, net of unrealized
depreciation of $2,827,941. At December 31, 2003, $15,106,576,
or 37.1% of our net assets, consisted of venture capital
investments at fair value, of which net unrealized depreciation
was $2,375,303. At December 31, 2002, $12,036,077, or 44.2%, of
our net assets consisted of venture capital investments at fair
value, of which net unrealized appreciation was $2,718,389.
22
Because none of our current venture capital investments have
readily available market values, we value our investments each
quarter at fair value, as determined in good faith by our
Valuation Committee, 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 broad 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 do earn interest income
from fixed-income securities, including U.S. government and
government agency obligations. The amount of interest income we
earn varies with the average balance of our fixed-income
portfolio and the average yield on this portfolio and is not
expected to be material to our results of operations.
General business and capital markets conditions in 2003 were
adverse for the venture capital industry. There were few
opportunities to take venture capital-backed companies public or
sell them to established companies. During this period, it was
difficult to finance venture capital-backed companies privately
and in general, for venture capital funds themselves to raise
capital. General business and capital markets conditions in the
first half of 2004 improved for the venture capital industry from
those prevailing in 2003, then began deteriorating again through
the date of this filing.
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 Gain / (Loss) on Investments - the difference
between the net proceeds of sales of portfolio securities
and their stated cost.
Net Increase / (Decrease) in Unrealized Appreciation on
Investments - the net change in the fair value of our
investment portfolio.
Because of 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 in the past 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 of our investments are unpredictable, we attempt to
maintain adequate working capital to provide for fiscal periods
when we have no sales of investments.
23
Results of Operations
Three months ended June 30, 2004, as compared to the three months
ended June 30, 2003
We had a net decrease in net assets resulting from
operations of $2,237,037 and $544,709 in the three months ended
June 30, 2004, and June 30, 2003, respectively.
Investment Income and Expenses:
- ------------------------------
We had net operating losses of $774,584 and $726,989, for
the three months ended June 30, 2004, and June 30, 2003,
respectively.
Operating expenses were $853,815 and $777,553, for the three
months ended June 30, 2004, and June 30, 2003, respectively. In
the three months ended June 30, 2004, versus the three months
ended June 30, 2003, salaries and benefits increased by $133,404,
or 36.9%, primarily as a result of an additional employee and a
change in accruing expenses for our retiree medical benefits plan
from annually to quarterly. Professional fees decreased by
$71,258, or 47.5% primarily as a result of the work performed by
the additional employee.
Realized Gains and Losses on Portfolio Securities:
- -------------------------------------------------
During the three months ended June 30, 2004, and June 30,
2003, we realized gains of $2,580 and $28,140, respectively.
Unrealized Appreciation and Depreciation of Portfolio Securities:
- ----------------------------------------------------------------
Net unrealized depreciation on investments increased by
$1,463,921, or 91.9%, during the three months ended June 30,
2004, from $1,592,929 at March 31, 2004, to $3,056,850 at June
30, 2004.
During the three months ended June 30, 2004, we recorded a
net increase of $1,264,290 in unrealized depreciation of our
venture capital investments, primarily owing to increases in
unrealized depreciation of Nanotechnologies, Inc., and Optiva,
Inc., of $638,840 and $625,000, respectively.
Six Months ended June 30, 2004, as compared to the six months
ended June 30, 2003
We had net decreases in net assets resulting from operations
of $1,416,522 and $1,759,836, in the six months ended June 30,
2004, and June 30, 2003, respectively.
24
Investment Income and Expenses:
- ------------------------------
We had net operating losses of $1,524,449 and $1,311,449,
for the six months ended June 30, 2004, and June 30, 2003,
respectively. In the six months ended June 30, 2004, our net
operating loss reflected an increase to expenses primarily
related to increases in salaries and benefits and in
administration and operations, offset by decreases in
professional fees and rent expense.
Operating expenses were $1,660,216 and $1,426,689 for the
six months ended June 30, 2004, and June 30, 2003, respectively.
Salaries and benefits increased by $241,283, or 33.3%, primarily
as a result of the addition of an employee and increases in
salary and benefits for existing employees. Administration and
operations increased by $107,373, or 45%, primarily as a result
of an increase in travel and entertainment expenses for due
diligence work on potential portfolio companies, and the cost of
the preparation of our proxy statement, offset by decreases in
professional fees and rent expense.
Realized Gains and Losses on Portfolio Securities:
- -------------------------------------------------
During the six months ended June 30, 2004, and June 30,
2003, we realized gains of $795,969 and $28,572, respectively.
During the six months ended June 30, 2004, our realized net
gains of $795,969 consisted primarily of a realized gain of
$1,681,259, resulting form the sale of our investment in NanoGram
Devices Corporation, offset by a realized loss of $915,108
resulting from the sale of our shares of Series D Convertible
Preferred Stock in NeoPhotonics Corporation.
During the six months ended June 30, 2003, we neither sold
nor liquidated any venture capital investments.
Unrealized Appreciation and Depreciation of Portfolio Securities:
- ----------------------------------------------------------------
Net unrealized depreciation on investments increased by
$680,134, or 28.6%, during the six months ended June 30, 2004,
from $2,376,716 at December 31, 2003, to $3,056,850 at June 30,
2004.
During the six months ended June 30, 2004, we recorded a net
increase of $452,638 in unrealized depreciation of our venture
capital investments, primarily as a result of an increase in
unrealized depreciation of Nanotechnologies, Inc., of $638,840
and Optiva, Inc., of $625,000, offset by the realization of the
loss of $915,108 on the sale of our shares of Series D
Convertible Preferred stock in NeoPhotonics Corporation.
25
Financial Condition
Six Months ended June 30, 2004
Our total assets and net assets were $42,342,430 and
$39,266,216, respectively, at June 30, 2004, compared with
$44,115,128 and $40,682,738 at December 31, 2003.
Net asset value per share ("NAV") was $2.85 at June 30,
2004, versus $2.95 at December 31, 2003. Our shares outstanding
remained unchanged during the six months ended June 30, 2004.
The increase in the value of our venture capital
investments, from $15,106,576 at December 31, 2003, to
$22,830,783 at June 30, 2004, resulted primarily from four new
venture capital investments and seven follow-on investments,
partially offset by a net decrease in the net value of our
previous venture capital investments, reflecting in large part
the sale of NanoGram Devices.
The decrease in the value of our investment in U.S.
government and government obligations, from $27,120,486 at
December 31, 2003, to $17,470,735 at June 30, 2004, resulted
primarily from our use of sales of those obligations for four new
venture capital investments and seven follow-on investments, as
well as for working capital.
The following table is a summary of additions to our
portfolio of venture capital investments during the six months
ended June 30, 2004:
New Investment Amount
------------------------------------ ----------
CSwitch, Inc. $1,000,000
Molecular Imprints, Inc. $2,000,000
NeoPhotonics Corporation $1,937,092
Starfire Systems, Inc. $ 250,000
Follow-on Investment
------------------------------------
Agile Materials & Technologies, Inc. $ 225,602
Continuum Photonics, Inc. $ 839,000
Experion Systems, Inc. $ 121,262
NanoGram Corporation $1,000,000
NanoOpto Corporation $ 612,500
Nanopharma Corp. $ 150,000
NeuroMetrix, Inc. $1,749,999
----------
Total $9,885,455
==========
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 June 30,
2004, December 31, 2003, and December 31, 2002:
June 30, December 31,
2004 2003 2002
----------- ------------------------
Venture capital
investments,
at cost $25,658,724 $17,481,879 $14,754,466
Unrealized
depreciation(1) 2,827,941 2,375,303 2,718,389
----------- ----------- -----------
Venture capital
investments,
at fair value $22,830,783 $15,106,576 $12,036,077
=========== =========== ===========
March 31, December 31,
2004 2003 2002
----------- ------------------------
U.S. Government
and Agency
Obligations, at
cost $17,699,644 $27,121,899 $15,452,469
Unrealized
depreciation(1) 228,909 1,413 1,724
----------- ----------- -----------
U.S. Government
and Agency
Obligations, at
fair value $17,470,735 $27,120,486 $15,450,745
=========== =========== ===========
(1)At June 30, 2004, December 31, 2003, and December 31, 2002, the
accumulated unrealized depreciation on investments, including
deferred taxes, was $3,901,768, $3,221,635 and $3,565,032,
respectively.
The following table summarizes the fair value composition of
our venture capital investment portfolio at June 30, 2004,
December 31, 2003, and December 31, 2002:
June 30, December 31,
Category 2004 2003 2002
------------------- --------- ------------------------
Tiny Technology 65.8% 60.7% 49.0%
Other Venture
Capital Investments 34.2% 39.3% 51.0%
------ ------- -------
Total Venture
Capital Investments 100.0% 100.0% 100.0%
====== ====== ======
Liquidity and Capital Resources
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. As of June 30, 2004, we do
not have restricted securities of companies that are publicly
traded, and we had none in 2003.
Six Months ended June 30, 2004
At June 30, 2004, and December 31, 2003, our total net
primary liquidity was $17,831,771 and $27,563,886, respectively.
27
The decrease in our primary source of liquidity from
December 31, 2003, to June 30, 2004, is primarily owing to the
receipt of the proceeds from the sale of our investment in
NanoGram Devices Corporation offset by our investments in Agile
Materials & Technologies, Inc., Continuum Photonics, Inc.,
CSwitch, Inc., Experion Systems, Inc., Molecular Imprints, Inc.,
NanoGram Corporation, NanoOpto Corporation, Nanopharma Corp.,
NeoPhotonics Corporation, NeuroMetrix, Inc., and Starfire
Systems, Inc., and use of funds for net operating expenses.
Critical Accounting Policies
Critical accounting policies are those that are both
important to the presentation of our financial condition and
results of operations and require management's most difficult,
complex or subjective judgments. Our critical accounting
policies are those applicable to the valuation of investments.
Valuation of Portfolio Investments
As a business development company, we invest primarily in
illiquid securities, including debt and equity securities of
private companies. The 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. The Valuation Committee, comprised of at least three
or more independent Board members, reviews and approves the
valuation of our investments within the guidelines 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.
Recent Developments
On July 7, 2004, we closed on our June 30, 2004, offering of
3,000,000 common shares plus 450,000 additional shares of common
stock for over-allotments. All of the 3,450,000 shares were
sold. The actual amount of net proceeds raised upon completion
of the offering was $36,501,000; net proceeds of the offering,
less estimated offering costs of $368,850, were $36,132,150.
On July 8, 2004, we made a $401,536 follow-on investment in
the form of a Convertible Bridge Note of a privately held
portfolio company.
On July 20, 2004, we made an $887,500 follow-on equity
investment in NanoOpto Corporation.
On July 21, 2004, we made a $75,670 follow-on investment in
the form of a Secured Convertible Bridge Note of a privately held
portfolio company.
On July 27, 2004, NeuroMetrix, Inc., closed on its initial
public offering. All of our preferred stock was converted into
1,137,570 shares of common stock that are subject to a 180-day
lock-up. On August 10, 2004, the closing price of NeuroMetrix
common stock was $7.85 per share on the Nasdaq National market.
28
RISK FACTORS
Investing in our common stock involves a number of
significant risks relating to our business and investment
objective. You should carefully consider the risks and
uncertainties described below before you purchase any of our
common stock. These risks and uncertainties are not the only ones
we face. Unknown additional risks and uncertainties, or ones that
we currently consider immaterial, may also impair our business.
If any of these risks or uncertainties materialize, our business,
financial condition or results of operations could be materially
adversely affected. In this event, the trading price of our
common stock could decline, and you could lose all or part of
your investment.
Risks related to the companies in our portfolio.
- ------------------------------------------------
Investing in small, private companies involves a high degree of
risk and is highly speculative.
We have invested a substantial portion of our assets in
privately held development stage or start-up companies. These
businesses tend to lack management depth, to have limited or no
history of operations and to have not attained profitability.
Tiny technology companies are especially risky, involving
scientific, technological and commercialization risks. Because of
the speculative nature of these investments, these securities
have a significantly greater risk of loss than traditional
investment securities. Some of our venture capital investments
are likely to be complete losses or unprofitable, and some will
never realize their potential. We have been and will continue to
be risk seeking rather than risk averse in our approach to
venture capital and other investments. Neither our investments
nor an investment in our common stock is intended to constitute a
balanced investment program.
We may invest in companies working with technologies or
intellectual property that currently have few or no proven
commercial applications.
Nanotechnology, in particular, is a developing area of
technology, of which much of the future commercial value is
unknown, difficult to estimate and subject to widely varying
interpretations. There are as of yet relatively few
nanotechnology products commercially available. The timing of
additional future commercially available nanotechnology products
is highly uncertain.
Our portfolio companies working with tiny technology may be
particularly susceptible to intellectual property litigation.
Research and commercialization efforts in tiny technology
are being undertaken by a wide variety of government, academic
and private corporate entities. As additional commercially viable
applications of tiny technology begin to emerge, ownership of
intellectual property on which these products are based may be
contested. Any litigation over the ownership of, or rights to,
any of our portfolio companies' technologies or products would
have a material adverse affect on those companies' values and may
have a material adverse effect on the value of our common stock.
Our portfolio companies may not successfully market their
products.
Even if our portfolio companies are able to develop
commercially viable products, the market for new products and
services is highly competitive, rapidly changing and especially
sensitive to adverse general economic conditions. Commercial
success is difficult to predict, and the marketing efforts of our
portfolio companies may not be successful.
29
Unfavorable economic conditions could result in the inability of
our portfolio companies to access additional capital, leading to
financial losses in our portfolio.
Most of the companies in which we have made or will make
investments are susceptible to economic slowdowns or recessions.
An economic slowdown or adverse capital or credit market
conditions may affect the ability of a company in our portfolio
to raise additional capital from venture capital or other sources
or to engage in a liquidity event such as an initial public
offering or merger. These conditions may lead to financial
losses in our portfolio, which could have a material adverse
effect on the value of our common stock.
The value of our portfolio and the value of our common stock
could be adversely affected if the technologies utilized by our
portfolio companies are found to cause health or environmental
risks.
Our portfolio companies work with new technologies, which
could have potential environmental and health impacts. Tiny
technology in general and nanotechnology in particular are
currently the subject of health and environmental impact
research. If health or environmental concerns about tiny
technology or nanotechnology were to arise, our portfolio
companies may incur additional research, legal and regulatory
expenses, might have difficulty raising capital or could be
forced out of business. Such adverse health and environmental
effects would have an adverse effect on the value of our
portfolio and on the value of our common stock.
Risks related to the illiquidity of our investments.
- ----------------------------------------------------
We invest in illiquid securities and may not be able to dispose
of them when it is advantageous to do so, or ever.
Most of our investments are or will be equity or equity-
linked securities acquired directly from small companies. These
equity securities are generally subject to restrictions on resale
or otherwise have no established trading market. The illiquidity
of most of our portfolio of equity securities may adversely
affect our ability to dispose of these securities at times when
it may be advantageous for us to liquidate these investments. We
may never be able to dispose of these securities.
Unfavorable economic conditions could impair our ability to
engage in liquidity events.
Our business of making private equity investments and
positioning our portfolio companies for liquidity events may be
adversely affected by current and future capital markets and
economic conditions. The public equity markets currently provide
less opportunity for liquidity events than at times in the past
when there was more robust demand for initial public offerings,
even for more mature technology companies than those in which we
typically invest. The potential for public market liquidity
could further decrease and could lead to an inability to realize
potential gains or could lead to financial losses in our
portfolio and a decrease in our revenues, net income and assets.
Recent government reforms affecting stock markets, investment
banks and securities research practices may make it more
difficult for privately held companies to complete successful
initial public offerings of their equity securities. Slowdowns
in initial public offerings may also have an adverse effect on
the frequency and valuations of acquisitions of privately held
companies. The lack of opportunities to sell investments in
privately held companies also has an adverse effect on the
ability of these companies to raise capital from private sources.
30
Even if our portfolio companies complete initial public
offerings, the returns on our investments may be uncertain.
When companies in which we have invested as private entities
complete initial public offerings of their securities, these
newly issued securities are by definition unseasoned issues.
Unseasoned issues tend to be highly volatile and have uncertain
liquidity, which may negatively affect their price. In addition,
we are typically subject to lock-up provisions which prohibit us
from selling our investment into the public market for specified
periods of time after initial public offerings. The market price
of securities that we hold may decline substantially before we
are able to sell these securities. Most initial public offerings
of technology companies are listed on the Nasdaq National Market.
Recent government reforms of the Nasdaq National Market have
made market making by broker-dealers less profitable, which has
caused broker-dealers to reduce their market-making activities,
thereby making the market for unseasoned stocks less liquid.
Risks related to our company.
- -----------------------------
Because there is generally no established market in which to
value our investments, our Valuation Committee's value
determinations may differ materially from the values that a ready
market or third party would attribute to these investments.
There is generally no public market for the equity
securities in which we invest. Pursuant to the requirements of
the Investment Company Act of 1940, which we refer to as the 1940
Act, we value substantially all of the equity securities in our
portfolio at fair value as determined in good faith by the
Valuation Committee of our Board of Directors within the
guidelines established by the Board of Directors. As a result,
determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment
pursuant to specified valuation principles and processes. We are
required by the 1940 Act to value specifically each individual
investment on a quarterly basis and record unrealized
depreciation for an investment that we believe has become
impaired. Conversely, we must record unrealized appreciation if
we believe that the underlying portfolio company has appreciated
in value. Without a readily ascertainable market value and
because of the inherent uncertainty of valuation, the fair value
that we assign to our investments may differ from the values that
would have been used had a ready market existed for the
investments, and the difference could be material. Any changes in
fair value are recorded in our consolidated statements of
operations as a change in the "Net (decrease) increase in
unrealized appreciation on investments."
Because we are a non-diversified company with a relatively
concentrated portfolio, the value of our business is subject to
greater volatility than the value of companies with more broadly
diversified investments.
As a result of being able to invest all of our assets in the
securities of a small number of issuers, we are classified as a
non-diversified company. We may be more vulnerable to events
affecting a single issuer or industry and therefore subject to
greater volatility than a company whose investments are more
broadly diversified. Accordingly, an investment in our common
stock may present greater risk to you than an investment in a
diversified company.
We may be obligated to pay substantial amounts under our profit
sharing plan.
Our employee profit-sharing plan requires us to distribute
to our officers and employees 20% of any net after-tax realized
income as reflected on our consolidated statements of operations
for that year, less any non-qualifying gain. These distributions
may have a significant effect on the amount of distributions made
to our shareholders, if any.
31
Approximately 30% of the net asset value attributable to our
venture capital investment portfolio, or 17% of our net asset
value, as of June 30, 2004, is concentrated in one company,
NeuroMetrix, Inc., which is not a tiny technology company.
At June 30, 2004, we valued our investment in NeuroMetrix,
Inc., which is not a tiny technology company, at $6,825,426,
which represents 29.90% of the net asset value attributable to
our venture capital investment portfolio, or 17.38% of our net
asset value. Any downturn in the business outlook of
NeuroMetrix, Inc., or any failure of the products of NeuroMetrix,
Inc., to receive widespread acceptance in the marketplace, would
have a significant effect on our specific investment in
NeuroMetrix, Inc., and the overall value of our portfolio.
Approximately 34% of the net asset value attributable to our
venture capital investment portfolio, or 20% of our net asset
value, as of June 30, 2004, is not invested in tiny technology.
Although all 16 of our investments added since August 2001
have been in tiny technology companies and although we consider
15 of the companies in our venture capital investment portfolio
to be tiny technology companies, at June 30, 2004, only 65.80% of
the net asset value attributable to our venture capital
investment portfolio, or 38.26% of our net asset value, was
invested in tiny technology companies, which may limit our
ability to achieve our investment objective.
We are dependent upon key management personnel for future
success.
We are dependent for the selection, structuring, closing and
monitoring of our investments on the diligence and skill of our
senior management and other key advisers. We utilize lawyers and
outside consultants, including two of our directors, Dr. Kelly S.
Kirkpatrick and Lori D. Pressman, to assist us in conducting due
diligence when evaluating potential investments. There is
generally no publicly available information about the companies
in which we invest, and we rely significantly on the diligence of
our employees and advisers to obtain information in connection
with our investment decisions. Our future success to a
significant extent depends on the continued service and
coordination of our senior management team, and particularly
depends on our Chairman and Chief Executive Officer, Charles E.
Harris. The departure of any of our executive officers, key
employees or advisers could materially adversely affect our
ability to implement our business strategy. We do not maintain
for our benefit any key man life insurance on any of our officers
or employees. Our President, Chief Operating Officer and Chief
Financial Officer, Mel P. Melsheimer, is scheduled to retire on
December 31, 2004, pursuant to the Mandatory Retirement Plan. We
could be adversely affected by his retirement.
We will need to hire additional employees as the size of our
portfolio increases.
We anticipate that it will be necessary for us to add
investment professionals with expertise in venture capital and/or
tiny technology to accommodate the increasing size of our
portfolio. We may need to provide additional scientific,
business or investment training for our hires. There is
competition for highly qualified personnel, and we may not be
successful in our efforts to recruit and retain highly qualified
personnel.
32
The market for venture capital investments, including tiny
technology investments, is highly competitive.
We face substantial competition in our investing activities
from many competitors, including but not limited to: private
venture capital funds; investment affiliates of large industrial,
technology, service and financial companies; small business
investment companies; wealthy individuals; and foreign investors.
Our most significant competitors typically have significantly
greater financial resources than we do. Many sources of funding
compete for a small number of attractive investment
opportunities. Hence, we face substantial competition in sourcing
good investment opportunities on terms of investment that are
commercially attractive.
In addition to the difficulty of finding attractive investment
opportunities, our status as a regulated business development
company may hinder our ability to participate in investment
opportunities or to protect the value of existing investments.
We are required to disclose on a quarterly basis the names
and business descriptions of our portfolio companies and the
value of any portfolio securities. Most of our competitors are
not subject to these disclosure requirements. Our obligation to
disclose this information could hinder our ability to invest in
some portfolio companies. Additionally, other current and future
regulations may make us less attractive as a potential investor
than a competitor not subject to the same regulations.
Our failure to make follow-on investments in our portfolio
companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we
may make additional investments in that portfolio company as
"follow-on" investments, in order to: (1) increase or maintain in
whole or in part our ownership percentage; (2) exercise warrants,
options or convertible securities that were acquired in the
original or subsequent financing; or (3) attempt to preserve or
enhance the value of our investment. Recently, "pay to play"
provisions have become common in venture capital transactions.
These provisions require proportionate investment in subsequent
rounds of financing in order to preserve preferred rights such as
anti-dilution protection or to prevent preferred shares from
being converted to common shares.
We may elect not to make follow-on investments or otherwise
lack sufficient funds to make those investments. We have the
discretion to make any follow-on investments, subject to the
availability of capital resources. The failure to make follow-on
investments may, in some circumstances, jeopardize the continued
viability of a portfolio company and our initial investment, or
may result in a missed opportunity for us to increase our
participation in a successful operation, or may cause us to lose
some or all preferred rights pursuant to "pay to play"
provisions. Even if we have sufficient capital to make a desired
follow-on investment, we may elect not to make a follow-on
investment because we may not want to increase our concentration
of risk, because we prefer other opportunities or because we are
inhibited by compliance with business development company
requirements or the desire to maintain our tax status.
Bank borrowing or the issuance of debt securities or preferred
stock by us to fund investments in portfolio companies or to fund
our operating expenses would make our total return to common
shareholders more volatile.
Use of debt or preferred stock as a source of capital
entails two primary risks. The first risk is that the use of debt
leverages our available common equity capital, magnifying the
impact on net asset value of changes in the value of our
investment portfolio. For example, a business development company
that uses 33% leverage (that is, $50 of leverage per $100 of
common equity) will show a 1.5% increase or decline in net asset
value for each 1% increase or decline in the value of its total
33
assets. The second risk is that the cost of debt or preferred
stock financing may exceed the return on the assets the proceeds
are used to acquire, thereby diminishing rather than enhancing
the return to common shareholders. To the extent that we utilize
debt or preferred stock financing for any purpose, these two
risks would likely make our total return to common shareholders
more volatile. In addition, we might be required to sell
investments, in order to meet dividend, interest or principal
payments, when it may be disadvantageous for us to do so.
As provided in the 1940 Act and subject to some exceptions,
we can issue debt or preferred stock so long as our total assets
immediately after the issuance, less some ordinary course
liabilities, exceed 200% of the sum of the debt and any preferred
stock outstanding. The debt or preferred stock may be convertible
in accordance with SEC guidelines, which may permit us to obtain
leverage at more attractive rates. The requirement under the 1940
Act to pay, in full, dividends on preferred shares or interest on
debt before any dividends may be paid on our common stock means
that dividends on our common stock from earnings may be reduced
or eliminated. An inability to pay dividends on our common stock
could conceivably result in our ceasing to qualify as a regulated
investment company, or RIC, under the tax Code, which would in
most circumstances be materially adverse to the holders of our
common shares.
We are authorized to issue preferred stock, which would convey
special rights and privileges to its owners.
We are currently authorized to issue up to 2,000,000 shares
of preferred stock, under terms and conditions determined by our
Board of Directors. These shares would have a preference over
our common stock with respect to dividends and liquidation. The
statutory class voting rights of any preferred shares we would
issue could make it more difficult for us to take some actions
that may, in the future, be proposed by the Board and/or holders
of common stock, such as a merger, exchange of securities,
liquidation or alteration of the rights of a class of our
securities if these actions were perceived by the holders of the
preferred shares as not in their best interests. The issuance of
preferred shares convertible into shares of common stock might
also reduce the net income and net asset value per share of our
common stock upon conversion. These effects, among others, could
have an adverse effect on your investment in our common stock.
Loss of status as a RIC would reduce our net asset value and
distributable income.
We currently qualify as a RIC for 2003 under the tax Code.
As a RIC, we do not have to pay federal income taxes on our
income (including realized gains) that is distributed to our
shareholders. Accordingly, we are not permitted under accounting
rules to establish reserves for taxes on our unrealized capital
gains. If we failed to qualify for RIC status, to the extend
that we had unrealized gains, we would have to establish reserves
for taxes, which would reduce our net asset value, net of a
reduction in the reserve for employee profit sharing,
accordingly. To the extent that we, as a RIC, were to decide to
make a deemed distribution of net realized capital gains and
retain the net realized capital gains, we would have to establish
appropriate reserves for taxes upon making that decision.
We operate in a regulated environment.
We are subject to substantive SEC regulations as a business
development company. Securities and tax laws and regulations
governing our activities may change in ways adverse to our and
our shareholders' interests, and interpretations of these laws
and regulations may change with unpredictable consequences. Any
change in the laws or regulations that govern our business could
have an adverse impact on us or on our operations. Also, as
business and financial practices continue to evolve, they may
render the regulations under which we operate less appropriate
and more burdensome than they were when originally imposed.
34
Quarterly results fluctuate and are not indicative of future
quarterly performance.
Our quarterly operating results fluctuate as a result of a
number of factors. These factors include, among others,
variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we and our
portfolio companies encounter competition in our markets and
general economic and capital markets conditions. As a result of
these factors, results for any one quarter should not be relied
upon as being indicative of performance in future quarters.
To the extent that we do not realize income or retain after-tax
realized capital gains, we may have a greater need for additional
capital to fund our investments and operating expenses.
As a RIC, we must annually distribute at least 90% of our
investment company taxable income as a dividend and may either
distribute or retain our realized net capital gains from
investments. As a result, these earnings may not be available to
fund investments. If we fail to generate net realized capital
gains or to obtain funds from outside sources, it would have a
material adverse effect on our financial condition and results of
operations as well as our ability to make follow-on and new
investments. Because of the structure and objectives of our
business, we generally expect to experience net operating losses
and rely on proceeds from sales of investments, rather than on
investment income, to defray a significant portion of our
operating expenses. These sales are unpredictable and may not
occur. In addition, as a business development company, we are
generally required to maintain a ratio of at least 200% of total
assets to total borrowings, which may restrict our ability to
borrow to fund such requirements.
Investment in foreign securities could result in additional
risks.
The Company may invest in foreign securities, although we
currently have no investments in foreign securities. If we
invest in securities of foreign issuers, we may be subject to
risks not usually associated with owning securities of U.S.
issuers. These risks can include fluctuations in foreign
currencies, foreign currency exchange controls, social, political
and economic instability, differences in securities regulation
and trading, expropriation or nationalization of assets, and
foreign taxation issues. In addition, changes in government
administrations or economic or monetary policies in the United
States or abroad could result in appreciation or depreciation of
our securities and could favorably or unfavorably affect our
operations. It may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made
by us must be made in compliance with U.S. and foreign currency
restrictions and tax laws restricting the amounts and types of
foreign investments.
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.
35
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Our business activities contain elements of risk. We
consider a principal type of market risk to be valuation risk.
Investments are stated at " value" as defined in the 1940 Act and
in the applicable regulations of the SEC. Value, as defined in
Section 2(a)(41) of the 1940 Act, is (i) the market price for
those securities for which a market quotation is readily
available and (ii) for all other assets is as determined in good
faith by, or under the direction of, the Board of Directors.
(See the "Asset Valuation Policy Guidelines" in the "Footnote to
Consolidated Schedule of Investments" contained in "Item 1.
Consolidated Financial Statements.")
Neither our investments nor an investment in us is intended
to constitute a balanced investment program. We have exposure to
public-market price fluctuations to the extent of our publicly
traded portfolio, which portfolio may be composed primarily or
entirely of highly risky, volatile securities.
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.
Because there is typically no public market for the equity
interests of the small privately held companies in which we
invest, the valuation of the equity interests in that portion of
our portfolio is subject to the determination of our Board of
Directors in accordance with our Asset Valuation Policy
Guidelines. 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 invest in short-term money market instruments, both
short and long-term U.S. Government and Agency Obligations, and
from time to time borrow amounts on a line of credit. 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.
Item 4. Controls and Procedures
As of the end of the period covered by this report, our
Chief Executive Officer and our Chief Financial Officer conducted
an evaluation of our disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act
of 1934). Based upon this evaluation, our Chief Executive
Officer and our Chief Financial Officer during such period
concluded that our disclosure controls and procedures are
effective in timely alerting them of any material information
relating to us that is required to be disclosed by us in the
reports it files or submits under the Securities Exchange Act of
1934.
There have not been any significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 2004, we held our Annual Meeting of Shareholders
to elect directors of the Company and to approve a proposal to
authorize the Company to offer long-term rights to purchase
shares of the Company's common stock. At the close of business
on the record date (March 26, 2004), an aggregate of 13,798,845
shares of common stock were issued and outstanding.
All of the nominees at the May 12, 2004 Annual Meeting were
elected directors:
Nominees For Withheld
------------------------ ---------- --------
Dr. C. Wayne Bardin 12,612,545 38,953
Dr. Phillip A. Bauman 12,612,815 38,683
G. Morgan Browne 12,611,270 40,228
Dugald A. Fletcher 12,610,245 41,253
Charles E. Harris 12,613,485 38,013
Dr. Kelly S. Kirkpatrick 12,613,761 37,737
Mark A. Parsells 12,612,009 39,489
Lori D. Pressman 12,614,113 37,385
Charles E. Ramsey 11,994,006 657,492
James E. Roberts 12,613,965 37,533
With respect to proposal number two, described as a
proposal "to authorize the Company to offer long-term rights to
purchase shares of the Company's common stock at an exercise
price that, at the time such rights are issued, will not be
less than the greater of the market value of the Company's
common stock or the net asset value of the Company's common
stock. Such rights may be part of or accompanied by other
securities of the Company (such as convertible preferred stock
or convertible debt)." The affirmative votes cast were
4,186,780, the negative votes cast were 903,597, those
abstaining were 96,305 and the broker non-votes were 7,464,816.
Item 5. Other Information
Not Applicable
37
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1(a) Restated Certificate of Incorporation,
incorporated by reference as Exhibit 2.a to Pre-
Effective Amendment No. 1 to the Registration
Statement on Form N-2 dated March 22, 2004.
3.1(b) Restated By-Laws, incorporated by reference as
Exhibit 2.b to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-2 dated March
22, 2004.
10.2 Amendment No. 1 to Deferred Compensation
Agreement.
11.0* Computation of per share earnings. See
Consolidated Statements of Operations.
31.1* Certification of CEO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2* Certification of CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1* Certification of CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2* Certification of CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2004
The Company filed a report on Form 8-K on April 22, 2004,
concerning NAV at March 31, 2004 and on May 4, 2004,
concerning adoption of a company-wide code of ethics.
_____________
*filed herewith
38
SIGNATURE
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 as Vice President and as its chief accounting
officer.
Harris & Harris Group, Inc.
/s/ Helene B. Shavin
---------------------------
By: Helene B. Shavin, Vice President
and Controller
Date: August 12, 2004
39
EXHIBIT INDEX TO FORM 10-Q
31.1 Certification of CEO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
40