Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 2003

COMMISSION FILE NUMBER: 001-15941

UTEK CORPORATION
(Exact Name of Registrant as Specified in its Charter)

DELAWARE
(State or Jurisdiction of
Incorporation or Organization)

59-3603677
(IRS Employer
Identification No.)

202 S. Wheeler Street
Plant City, FL 33563
(Address of Principal Executive Offices)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 754-4330

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 periods as 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

On August 6, 2003, there were 4,263,172 shares outstanding of the Registrant’s common stock, $0.01 par value.

Page 1 of 36

Table of Contents

UTEK CORPORATION

FORM 10-Q INDEX

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002						3
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003
		and 2002 (unaudited)						4
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002
		(unaudited)						5
		Consolidated Statements of Changes in Net Assets for the Six Months Ended June 30, 2003
		and 2002 (unaudited)						6
		Financial Highlights for the Six Months Ended June 30, 2003 and 2002 (unaudited)						7
		Schedule of Investments as of June 30, 2003 (unaudited) and December 31, 2002						8
		Notes to Consolidated Financial Statements (unaudited)						12
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations							18
	Item 3. Quantitative and Qualitative Disclosures about Market Risk							29
	Item 4. Controls and Procedures							29
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings							30
	Item 2. Changes in Securities and Use of Proceeds							30
	Item 3. Defaults Upon Senior Securities							30
	Item 4. Submission of Matters to a Vote of Security Holders							30
	Item 5. Other Information							30
	Item 6. Exhibits and Reports on Form 8-K							30
	Signatures							32
	Exhibits

Page 2 of 36

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UTEK Corporation
Consolidated Balance Sheets

See accompanying notes

3 of 36

Table of Contents

UTEK Corporation
Consolidated Statements of Operations
(Unaudited)

See accompanying notes

4 of 36

Table of Contents

UTEK Corporation
Consolidated Statements of Cash Flows
(Unaudited)

See accompanying notes

5 of 36

Table of Contents

UTEK Corporation
Consolidated Statements of Changes in Net Assets
(Unaudited)

See accompanying notes

6 of 36

Table of Contents

UTEK Corporation
Financial Highlights
(Unaudited)

See accompanying notes

7 of 36

Table of Contents

UTEK CORPORATION
Schedule of Investments
June 30, 2003
(Unaudited)

Notes to Schedule of Investments:

8 of 36

Table of Contents

	•		The value of all securities for which there is no readily available market value is determined in good faith by the Board of Directors. In making its determination, the Board of Directors has considered valuation appraisals provided by an independent valuation service provider. (See Notes 1 and 2 to the consolidated financial statements).
	•		As of June 30, 2003, all of the securities that we own are “restricted securities,” as that term is defined under Rule 144 of the Securities Act of 1933. These securities may not be sold in the absence of registration under the Securities Act of 1933 or an exemption therefrom. As a result, our ability to sell or otherwise transfer the securities we hold in our portfolio is limited.
	•		The Company owns more than 10% of the outstanding common stock of each of the above investments with the exception of Full Circle Registry, Inc., Graphco Holdings Corp., Prime Pharmaceutical Corporation, Lexon, Inc., Voice and Wireless Corporation, Palladium Communications, Inc., Hydrogen Technology Applications, Inc., Innovative Medical Services, Inc., GloTech Industries, Inc., Sequiam Corporation, E Med Future, Inc., Sense Holdings, Inc., Advanced Recycling Sciences, Inc., Duraswitch Industries, Inc. and Group Management Corporation. As such, the Company is deemed to be an affiliate of these companies, as defined under Rule 144 of the Securities Act of 1933, except for those specifically noted.

See accompanying notes

9 of 36

Table of Contents

UTEK CORPORATION
Schedule of Investments
December 31, 2002

Notes to Schedule of Investments:

	•		The above investments with the exception of Rosbon, LLC are non-income producing. Equity investments that have not paid dividends within the last twelve months are considered non-income producing.
	•		The value of all securities for which there is no readily available market value is determined in good faith by the Board of Directors. In making its determination, the Board of Directors has considered valuation appraisals provided by an independent valuation service provider. (See Notes 1 and 2 to the consolidated financial statements).
	•		As of December 31, 2002, all of the securities that we own are “restricted securities,” as that term is defined under Rule 144 of the Securities Act of 1933. These securities may not be sold in the absence of registration under the Securities Act of 1933 or an exemption therefrom. As a result, our ability to sell or otherwise transfer the securities we hold in our portfolio is limited. The Company owns more than 10% of the outstanding common stock of each of the above investments with the exception of Full Circle Registry, Inc., Centrex, Inc., Graphco Technologies, Inc., Prime Pharmaceutical Corporation, Lexon, Inc., Voice and Wireless Corporation, Palladium Communications, Inc.,

10 of 36

Table of Contents

Hydrogen Technology Applications, Inc., Innovative Medical Services, Inc., Sense Holdings, Inc., Advanced Recycling Sciences, Inc. and Group Management Corporation. As such, the Company is deemed to be an affiliate of these companies, as defined under Rule 144 of the Securities Act of 1933, except for those specifically noted.

See accompanying notes

11 of 36

Table of Contents

UTEK Corporation
Notes to Consolidated Financial Statements

(Information as of June 30, 2003 and 2002 and for the three and six month
periods then ended is unaudited)

1.   Nature of Business and Significant Accounting Policies

Interim Financial Information

     The financial information for UTEK Corporation (the “Company”) as of June 30, 2003 and 2002, and for the three and six month periods then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals), which, in the opinion of management are necessary in order to make the financial statements not misleading at such dates and for those periods. These financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States. These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and related notes included in the Company’s Form 10-K for the year ended December 31, 2002. Operating results for the three or six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the entire year.

The Company

     We are a non-diversified, closed-end management investment company that has elected to be treated as a Business Development Company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”).

     We commenced operations in 1997 as UTEK Corporation (“UTEK Florida”), which was incorporated under the laws of the State of Florida in August 1996. UTEK Florida was engaged in the business of technology transfer. On December 31, 1998, we formed UTEK, LLC, a limited liability company organized under the laws of the State of Florida. Subsequent thereto, the shareholders of UTEK Florida exchanged their shares of common stock for membership units in UTEK, LLC. In July 1999, we formed UTEK Corporation under the laws of the State of Delaware and in October 1999, UTEK LLC was merged into UTEK Corporation.

     In September 2001, UTEK Corporation acquired 100% of the outstanding common stock of PAX Technology Transfer Ltd., a United Kingdom corporation, in a stock for stock transaction. In May 2002, UTEK Corporation acquired 100% of the outstanding common stock of Techex Acquisition Corporation (“TechEx”) in a stock for stock transaction. TechEx owned the TechEx.com website. The TechEx.com website, founded at Yale University, is used by many technology transfer and research professionals to efficiently exchange biomedical licensing opportunities and innovations available for partnering. The financial position and results of operation of PAX Technology Transfer Ltd. and TechEx have been consolidated into the financial position and results of operation of the Company since the dates of their respective acquisition.

     As a BDC, we must be primarily engaged in the business of furnishing capital and making available managerial assistance to companies that generally do not have ready access to capital through conventional financial channels. Such companies are termed “portfolio” companies.

     The Company invests in portfolio companies that management believes are positioned to benefit from the acquisition of new technology. The Company’s investments in portfolio companies generally are used by the portfolio companies to acquire the license rights to new technologies developed at universities and government research facilities. The Company offers to provide portfolio companies with managerial assistance primarily related to technology transfer. Technology transfer is the process by which technologies developed by universities or research laboratories are licensed to companies for commercial use. The Company also may make additional investments to fund continued research and development of the acquired technologies.

     Usually we have executed or will execute our investments in portfolio companies through the creation and capitalization of a subsidiary to acquire a new technology, which subsidiary will then be merged with a portfolio company in a non-taxable exchange of shares of the portfolio company. In connection with such transaction, we receive shares of common stock in the portfolio company in exchange for the securities of our subsidiary company. In addition to holding a license to a new technology, our subsidiary company may also hold cash and other assets. The portfolio companies frequently have little or no prior operating history.

     To establish on-going consulting engagements with its clients, The Company has also developed strategic alliance consulting services. UTEK’s strategic alliances are designed to help technology companies rapidly enhance their new product pipeline through the acquisition of proprietary intellectual capital from universities and federal laboratories. Some of our strategic alliance clients engage us to find others to license their existing proprietary technologies.

12 of 36

Table of Contents

Investments

     Pursuant to the requirements of the 1940 Act, our Board of Directors is responsible for determining, in good faith, the fair value of our securities and assets for which market quotations are not readily available. In making its determination, the Board of Directors has considered valuation appraisals provided by an independent valuation service provider. With respect to equity securities in privately owned companies, each investment is valued using industry valuation benchmarks, and then the value is assigned a discount reflecting the illiquid nature of the investment as well as our minority, non-control position. When an external event such as a purchase transaction, public offering, or subsequent equity sale occurs, the pricing indicated by the external event is used to corroborate our private equity valuation. Equity securities in public companies that carry certain restrictions on sale are generally valued at a discount from the market value of the securities as quoted on the stock exchanges. In addition, restricted and unrestricted publicly traded stocks may also be valued at further discounts due to the size of our investment or market liquidity concerns.

     The Board of Directors bases its determination upon, among other things, applicable quantitative and qualitative factors. These factors may include, but are not limited to, type of securities, nature of business, marketability, market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly-traded companies in the same or similar industries, current financial conditions and operating results, sales and earnings growth, operating revenues, competitive conditions and current and prospective conditions in the overall stock market.

     Without a readily available market value, the value of our portfolio of equity securities may differ significantly from the values that would be placed on the portfolio if there existed a ready market for such equity securities. All equity securities owned at June 30, 2003 and December 31, 2002 (74.7% and 84.5% of net assets, respectively) are stated at fair value as determined by the Board of Directors, in the absence of readily ascertainable fair values. The Company uses the first-in, first-out (FIFO) method of accounting for sales of its investments.

Revenue Recognition

     Sale of Technology Rights

     The Company recognizes revenue from the sale of technology rights upon the exchange of the shares of its subsidiary companies with unrelated portfolio companies. The Company records revenue, based on the fair value as determined by the Board of Directors, of the consideration received. In most cases, the consideration received for the rights is unregistered shares of common stock of the purchaser. The common stock received is recorded as an investment at fair value as determined by the Board of Directors.

     Consulting and Other Services

     Revenue derived from consulting services is generally paid in unregistered shares of common stock of the client. When unregistered shares of common stock are received from the client, revenue is recognized as earned, ratably over the term of the underlying consulting agreements. The unregistered shares of common stock received are recorded as an investment at fair value as determined by the Board of Directors. In some cases, the Company is paid a fee in connection with a technology transfer transaction. In these instances, revenue is recognized upon consummation of the transaction.

     In addition to technology transfer merger transactions, we offer strategic alliance consulting services. A method of technology transfer already being used by PAX Technology Transfer Ltd., strategic alliance services are performed pursuant to service agreements (usually one year in length) in which the Company provides consulting services by identifying and evaluating technology acquisition opportunities in exchange for unregistered shares of the company, or cash. These agreements are cancelable at any time.

     Revenues from strategic alliance agreements in which unregistered shares of common stock are received before they are earned, are deferred and recognized over the term of each agreement. For strategic alliance agreements in which the stock is received ratably over the agreement, revenue is recognized as earned. The common stock received as payment is recorded as an investment at fair value as determined by the Board of Directors.

     The Company’s consolidated subsidiary, PAX Technology Transfer, Ltd., derives its revenue primarily from consulting contracts with third parties. Revenue from consulting contracts is recognized ratably over the term of the contract, typically ninety days. These contracts are generally paid in the form of cash.

     Revenue from the sale of subscriptions to the TechEx.com website, generally is received in the form of cash, and initially is deferred and subsequently recognized ratably over the term of the subscription.

13 of 36

Table of Contents

Research and Development

     Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at discovery of new knowledge that will be useful in developing new products or processes. The Company expenses all research and development costs as they are incurred. During the periods ended June 30, 2003 and 2002, the Company incurred no such costs.

Foreign currency translation

     The Company translates the assets and liabilities of its non-U.S. functional currency subsidiary into dollars at the current rates of exchange in effect at the end of each reporting period. Revenues and expenses are translated using rates that approximate those in effect during the period. Translation adjustments are included in the Consolidated Balance Sheets under the caption “Foreign currency translation adjustment.”

Stock-Based Compensation

     At June 30, 2003, the Company had the following two stock-based equity compensation plans: The UTEK Corporation Stock Option Plan and 2000 Non-Qualified Stock Option Plan of UTEK Corporation. The Company accounts for these plans and related grants thereunder using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees”. However, pro forma information regarding net income and earnings per share as required by Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”, (SFAS 123) was provided in our annual report on Form 10-K for the year ended December 31, 2003; and was determined as if we had accounted for our employee and non-employee director stock options under the fair value method of SFAS 123.

     Outstanding options as of June 30, 2003 had a weighted average remaining contractual life of 3.7 years. The per share weighted average fair value of options granted during the three months ended June 30, 2003 and 2002 was $2.33 and $2.38, respectively.

     Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if we had accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value method set forth in SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Under the fair value method of accounting prescribed under SFAS 123, employee compensation cost related to stock options, net of related income tax effects, would have been $76,842 and $68,088 for the quarters ended June 30, 2003 and 2002, respectively, and $101,855 and $100,773 for the six months ended June 30, 2003 and 2002, respectively. The pro forma net increase (decrease) in net assets from operations and basic and diluted earnings per share for the three and six months ended June 30, 2003 and 2002 would have been as follows:

14 of 36

Table of Contents

2.   Investments

     All equity securities at June 30, 2003 and December 31, 2002, (74.7% and 84.5% of net assets, respectively) were valued at fair value as determined by the Board of Directors, with the assistance of valuation appraisals provided by an independent valuation service provider, in the absence of readily available market values.

     The values assigned to these securities are based upon available information and may not reflect amounts that could be realized if the Company found it necessary to immediately sell such securities, or amounts that ultimately may be realized. Accordingly, the fair values included in the accompanying schedule of investments may differ from the values that would have been used had a ready market existed for these securities and such differences could be significant.

     As of June 30, 2003 and December 31, 2002, the Company had established three and four subsidiary companies, respectively, with $-0- net assets.

     On January 11, 2002, the Company entered into a strategic alliance agreement with Circle Group Holdings, Inc. (formerly Circle Group Internet, Inc.). The agreement provides for a total of 48,000 unregistered shares of Circle Group Holdings, Inc.’s common stock to be distributed to the Company pro rata during the term of the agreement. The Company has recognized consulting fees in relation to 48,000 unregistered shares of Circle Group Holdings, Inc. The strategic alliance was renewed in February 2003.

     On January 21, 2002, the Company received 114,276 unregistered shares of Group Management Corporation’s common stock in connection with a strategic alliance agreement. The Company recognized consulting fees related to 47,615 shares. The strategic alliance was cancelled in June 2002 and 66,661 shares were returned to Group Management Corporation.

     On February 11, 2002, the Company entered into a strategic alliance agreement with Voice and Wireless Corporation. The agreement provides for a total of 540,000 unregistered shares of Voice and Wireless Corporation’s common stock to be distributed to the Company pro rata during the term of the agreement. The Company recognized consulting fees related to 315,000 shares. The strategic alliance was cancelled in August 2002.

     On April 2, 2002, the Company received 48,000 unregistered shares of common stock from Hydrogen Technology Applications, Inc. in a strategic alliance agreement. As of June 30, 2003, the Company has recognized consulting fees to date relating to 48,000 shares.

     On May 7, 2002, the Company sold its Nitrone Scientific, Inc. subsidiary company to Prime Pharmaceutical Corporation for 683,550 shares of Prime Pharmaceutical Corporation’s common stock in a non-taxable exchange.

     On May 7, 2002, the Company sold its Digital Image Enhancement Technologies, Inc. subsidiary company to Image Analysis, Inc. for 465,000 unregistered shares of Image Analysis, Inc.’s common stock in a non-taxable exchange.

     On May 31, 2002, the Company received 30,000 unregistered shares of common stock from FullCircle Registry, Inc. in a strategic alliance agreement. The Company has recognized consulting fees relating to 30,000 shares.

     On June 11, 2002, the Company sold its Energy Management Technologies, Inc. subsidiary company to Voice and Wireless Corporation for 318,750 unregistered shares of Voice and Wireless Corporation’s common stock in a non-taxable exchange.

     On June 12, 2002, the Company sold its Electronic Luminescent Technologies, Inc. subsidiary company to FullCircle Registry, Inc. for 68,250 unregistered shares of FullCircle Registry, Inc.’s common stock in a non-taxable exchange.

     On August 27, 2002, the Company sold its Fiber-Gel Technologies, Inc. subsidiary company to Circle Group Holdings, Inc. (formerly Circle Group Internet, Inc.) for 2,800,000 unregistered shares of Circle Group Holdings, Inc.’s common stock and a warrant to purchase an additional 500,000 shares of its common stock at $0.36 per share in a non-taxable exchange.

     On September 27, 2002, the Company sold its Spoken Data Technologies, Inc. subsidiary company to FullCircle Registry, Inc. for 157,500 unregistered shares of FullCircle Registry, Inc.’s common stock in a non-taxable exchange.

15 of 36

Table of Contents

     On September 12, 2002, the Company received 120,000 unregistered shares of common stock from Innovative Medical Services, Inc. in a strategic alliance agreement. As of June 30, 2003, the Company has recognized consulting fees to date relating to 95,922 shares.

     On December 24, 2002, the Company received 231,000 unregistered shares of common stock from FullCircle Registry, Inc. at $.86 in connection with a consulting agreement. The Company has recognized consulting fees relating to 231,000 shares.

     On January 15, 2003, the Company received 83,478 unregistered shares of common stock from Duraswitch Industries, Inc. in a strategic alliance agreement. The Company has recognized consulting fees relating to 34,782 shares. The strategic alliance was cancelled in June 2003 and 48,696 shares were returned to Duraswitch Industries, Inc.

     On February 5, 2003, the Company entered into a strategic alliance agreement with Circle Group Holdings, Inc. (formerly Circle Group Internet, Inc.). The agreement provides for a total of 48,000 unregistered shares of Circle Group Holdings, Inc.’s common stock to be distributed to the Company pro rata during the term of the agreement. As of June 30, 2003, the Company has received and recognized to date consulting fees in relation to 20,000 unregistered shares of Circle Group Holdings, Inc.

     On March 18, 2003, the Company received 160,000 unregistered shares of common stock from Sequiam Corporation in a strategic alliance agreement. The Company has recognized consulting fees relating to 45,778 shares.

     On March 26, 2003, the Company received 35,294 unregistered shares of common stock from Graphco Technologies, Inc. in a strategic alliance agreement. The Company has recognized consulting fees to date relating to 9,307 shares.

     On March 26, 2003, the Company received 821,429 unregistered shares of common stock from Circle Group Holdings, Inc. at $.32 per share in connection with an assignment of license. The Company has recognized technology transfer income to date relating to the 821,429 shares received.

     On April 11, 2003, the Company received 68,571 unregistered shares of common stock from GloTech Industries, Inc. in a strategic alliance agreement. The Company has recognized consulting fees to date relating to 14,856 shares.

     On June 17, 2003, the Company received 34,000 unregistered shares of common stock from E Med Future, Inc. in a strategic alliance agreement. The Company has recognized consulting fees to date relating to 1,228 shares.

     On June 23, 2003, the Company sold its Advanced Illumination Technologies, Inc. subsidiary company to GloTech Industries, Inc. for 1,000,000 unregistered shares of GloTech Industries, Inc.’s common stock in a non-taxable exchange.

3.   Commitments and Contingencies

     From time to time, some of the Company’s portfolio companies may receive correspondence or other notices of alleged breach of the license agreement. Some of these correspondences and notices provide for a period of time in which to cure the alleged breach. The failure of the portfolio companies to cure the alleged breach may have a material adverse impact on the Company’s results of operations and financial position.

4.   Note Payable

     In April 2003, the Company obtained a loan for $1,000,000 at 12% per annum. The loan is due April 7, 2005, and no principal payments are required prior to maturity. The loan is non-recourse except with respect to 360,360 unissued shares of common stock of UTEK Corporation pledged as collateral to secure the loan. The net amount received by the Company was $760,000 after the prepayment of the total interest due for the two-year period.

5.   Valuations

     The Board of Directors bases its determination of fair value upon, among other things, applicable quantitative and qualitative factors. These factors may include, but are not limited to, type of securities, nature of business, marketability, market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly-traded companies in the same or similar industries, current financial conditions and operating results, sales and earnings growth, operating revenues, competitive conditions and current and prospective conditions in the overall stock market.

6.   Recent Accounting Pronouncements

     In January 2003, the FASB issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities.” This interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. This interpretation defines the concept of “variable interests” and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse the risks among the parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when this interpretation becomes effective, the enterprise shall disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We do not believe this interpretation will have a material impact on our financial position or results of operations.

16 of 36

Table of Contents

7. Subsequent Events

     On July 23, 2003, UTEK acquired the worldwide exclusive license to a Nutritional Analysis Tool (NAT) website developed by the Department of Food Science and Human Nutrition at the University of Illinois. The Company has assigned the license to Circle Group Holdings, Inc. in a stock transaction. The Company received 130,208 shares of Circle Group Holdings, Inc common stock in the transaction valued at approximately $107,000.

17 of 36

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

The following discussion should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that these projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. You should understand that our reported operating results, financial condition and changes in financial condition depend on estimates and assumptions we use in applying these significant accounting policies. On a regular basis, management reviews these estimates and assumptions including those related to revenue recognition and the valuation of investments.

     Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

     Revenue Recognition

     The Company recognizes revenue from the sale of technology rights upon the exchange of the shares our subsidiaries with unrelated merger partners. In most cases, the consideration received for the rights is the common stock of the purchaser. The common stock received is recorded as an investment at fair value as determined by the Board of Directors. Revenue derived from consulting services, in which shares of common stock are received from the client is recognized as earned, over the life of the underlying consulting agreements. The common stock received is recorded as an investment at fair value as determined by the Board of Directors. In some cases, the Company is paid a fee in connection with a technology transfer transaction. In these instances, revenue is recognized upon consummation of the transaction.

     Revenue from strategic alliance agreements in which shares of common stock are received before they are earned, is deferred and recognized over the term of each agreement, typically twelve months. For strategic alliance agreements in which the stock is received ratably over the agreement, revenue is recognized as earned. The common stock received is recorded as an investment at fair value as determined by the Board of Directors. These agreements are cancelable at any time.

     The Company’s consolidated subsidiary, PAX Technology Transfer, Ltd., derives its revenue primarily from consulting contracts with third parties. Revenue from consulting contracts are deferred and recognized ratably over the term of the contract, typically ninety days.

     Valuation of Investments

     The income that we derive from the sale of technology rights and the provision of consulting services consists of both cash and equity securities that we receive. The value of the equity securities that we receive makes up most of our revenues. Pursuant to the requirements of the 1940 Act, our Board of Directors is responsible for determining in good faith the fair value of our securities and assets for which market quotations are not readily available. In making its determination, the Board of Directors may consider valuation appraisals provided by independent valuation service providers. With respect to private equity securities, each investment is valued using industry valuation benchmarks, and then the value is assigned a discount reflecting the illiquid nature of the investment as well as our minority, non-control position. When an external event such as a purchase transaction, public offering, or subsequent equity sale occurs, the pricing indicated by the external event is used to corroborate our private equity valuation. Equity securities in public companies that carry certain restrictions on sale are generally valued at a discount from the public market value of the securities.

     The Board of Directors bases its determination of fair value upon, among other things, applicable quantitative and qualitative factors. These factors may include, but are not limited to, type of securities, nature of business, marketability, market price of

18 of 36

Table of Contents

unrestricted securities of the same issue (if any), comparative valuation of securities of publicly-traded companies in the same or similar industries, current financial conditions and operating results, sales and earnings growth, operating revenues, competitive conditions and current and prospective conditions in the overall stock market.

     We have retained Bolten Financial Consulting, Inc., to provide us with valuations of our investments (the securities we own), and also updated valuations as of each quarter end. We pay Bolten Financial Consulting, Inc. a fee each time it values our investments. For the six months ended June 30, 2003 and 2002, we paid Bolten Financial Consulting, Inc. a total of $46,539 and $39,997, respectively, for its valuation services.

General

     Our primary business is to invest in companies that possess or will likely identify emerging and established technologies and markets for those technologies. Our primary investment objective is to increase our net assets by exchanging stock in our subsidiary companies for cash and other assets, which we will use to acquire licenses to additional technologies. We believe that we will be able to achieve our objectives by concentrating on investments in companies which we believe are likely to benefit from our management’s expertise in technology transfer.

     Our expenses include salaries and wages, professional fees, sales and marketing costs as well as general and administrative costs. Sales and marketing costs include license and sponsored research fees, as well as advertising, commissions, travel and other expenses that vary with revenues. General and administrative costs include rent, depreciation, office, investor relations and other overhead costs.

Financial Condition

     The Company’s total assets were $6,650,325 and its net assets were $5,316,180 at June 30, 2003, compared to $7,863,140 and $7,346,057 at December 31, 2002, respectively.

     Net asset value per share (“NAV”) was $1.25 at June 30, 2003, compared to $1.87 at December 31, 2002. Net assets decreased by $2,029,877 in the six months ended June 30, 2003 and decreased by $1,462,462 in the six months ended June 30, 2002.

     The net decrease in total assets, net assets and net asset value during the three months ended June 30, 2003 were primarily attributable to:

•		One technology transfer valued at approximately $300,000 and strategic alliance agreements and other consulting agreements with earned revenue of approximately $304,000.
•		A loss on sale, net of income tax benefit, of approximately $6,929, as result of sales of the Company’s investments of $15,171.
•		An increase of approximately $605,000 in the value of the Company’s investments.
•		The completion of a private placement and loan proceeds, net of expenses and prepaid interest, of $1,650,500 in cash to fund the Company’s operations.

     The net decrease in total assets, net assets and net asset value during the three months ended June 30, 2002 were primarily attributable to:

•		Four technology transfers valued at approximately $1,623,000 and strategic alliance agreements and other consulting agreements with earned revenue of approximately $310,000.
•		A decline of approximately $1,489,000 in the value of the Company’s investments.
•		A loss on sale, net of income tax benefit of approximately $75,000, as a result of sales of the Company’s investments of $263,000

     The Company’s common shares outstanding as of June 30, 2003 and December 31, 2002 were 4,255,672 and 3,925,672, respectively.

     The Company’s financial condition is dependent on a number of factors including the ability to effectuate technology transfers and the performance of the equity investments that we receive. The Company has invested a substantial portion of its assets in private development stage or start-up companies. These private businesses are thinly capitalized, thinly traded unproven, small companies that lack management depth, are dependent on new, commercially unproven technologies and have no history of operations. At June 30, 2003, $3,589,776 or 54% of the Company’s total assets consisted of investments at fair value in thinly traded public companies, of which net unrealized depreciation was $2,149,025; an additional $382,377 or 6%

19 of 36

Table of Contents

of the Company’s total assets consisted of non-publicly traded securities at fair value of which net unrealized depreciation was $1,493,826.

     At December 31, 2002, $5,719,445 or 73% of the Company’s total assets consisted of investments at fair value in thinly traded public companies, of which net unrealized depreciation, was $70,334; an additional $488,645 or 7% of the Company’s total assets consisted of non-publicly traded securities at fair value, of which net unrealized depreciation was $2,021,654.

     The net decrease in the value of publicly traded securities from $5,719,445 to $3,589,776 in the six months ended June 30, 2003 is primarily due to the following events:

•		During the six months ended June 30, 2003, the Company completed two technology transfer transactions with publicly traded companies. A transaction was completed with Circle Group Holdings, Inc. and added $262,857 in initial value of investments, as well as a transaction with GloTech Industries, Inc., which added $300,000 in initial value of investments. Transactions of this nature result in an increase in the value of publicly traded securities.
•		During the six months ended June 30, 2003, the Company sold all of its shares in Centrex, Inc. and a portion of its shares in Sense Holdings, Inc. and Circle Group Holdings, Inc. As a result of these sales, the value of the publicly traded securities decreased by approximately $317,000. Transactions of this nature result in a decrease in the value of publicly traded securities.
•		During the six months ended June 30, 2003, the Company experienced an overall decrease in the fair market value of its publicly traded securities. This decrease is primarily attributable to a decrease in the value of Stealth MediaLabs, Inc. of approximately $4,586,000 partially offset by an increase in value of Circle Group Holdings, Inc. of approximately $2,794,000. The Company’s other investments in publicly traded companies also experienced significant declines in their fair market value. The Company’s investments can decrease due to factors that are specific to these investments (inability to obtain additional capital, inability to execute their business model, termination of their technology licenses, etc.) or to general marketplace factors. As a result of these conditions, the value of our portfolio decreased by $2,507,000 of this total decrease, $1,937,000 was related to publicly traded companies.

     A summary of the Company’s investment portfolio is as follows:

     Following an initial investment in a portfolio company, the Company may make additional investments in such portfolio company or subsequent acquirer in order to: (1) increase its ownership percentage; (2) exercise warrants or options that were acquired in a prior financing; (3) preserve the Company’s proportionate ownership in a subsequent financing; (4) transfer additional technologies to enhance the portfolio company’s intellectual capital or (5) attempt to preserve or enhance the value of the Company’s investment. Such additional investments are referred to as “follow-on” investments. There can be no assurance that the Company will make follow-on investments or have sufficient funds to make additional investments. The failure to make such follow-on investments could jeopardize the viability of the portfolio company, and the Company’s investment or could result in a missed opportunity for the Company to participate to a greater extent in a portfolio company’s successful operations. The Company attempts to maintain adequate liquid capital to make follow-on investments in its private portfolio companies. However, there can be no assurance that the Company will have liquid capital. The Company may elect not to make a follow-on investment either because it does not want to increase its concentration of risk, because it prefers other opportunities, or because it is inhibited by compliance with Business Development Company (BDC) requirements, even though the follow-on investment opportunity appears attractive.

Results of Operations

     The Company accounts for its operations under generally accepted accounting principles for investment companies. On this basis, the principal measure of a Company’s financial performance is the “Net increase (decrease) in net assets from operations” which is the sum of three elements. The first element is “Net income (loss) from operations,” which is the difference between the Company’s income from technology transfers, consulting fees, interest, dividends, fees and other income and its operating expenses, net of applicable income tax provision. The second element is “Net realized gain (loss) on investment,” which is the difference between the proceeds received from dispositions of portfolio securities and their stated cost, net of applicable income tax provision. The third element, “Increase (decrease) in unrealized appreciation on investments,” is the net change in the fair value of the Company’s investment portfolio, net of increase (decrease) in deferred

20 of 36

Table of Contents

income taxes that would become payable if the unrealized appreciation were realized through the sale or other disposition of the investment portfolio.

Three months ended June 30, 2003 compared to the three months ended June 30, 2002.

     Income from operations. Income from operations decreased 69% to $606,635 for the three months ended June 30, 2003 from $1,957,260 for the three months ended June 30, 2002. For the three months ended June 30, 2003, approximately 63% of our income from operations (revenue) was received in the form of equity securities, which was received for the sale of technology rights and for providing consulting services. The decrease in income from operations resulted from a decline in the number of technology rights transactions for the quarter ended June 30, 2003. During the three months ended June 30, 2003, we completed one technology rights transaction valued at $300,000, compared to four transactions valued at $1,623,104 for the three months ended June 30, 2002. During the three months ended June 30, 2003, we completed one technology transfer transaction with Glotech Industries, Inc. in which we received 1,000,000 shares valued at $.30 per share. Our Board of Directors determines the fair value of the shares we receive in the absence of readily ascertainable market values. In making its determination, the Board of Directors has considered valuation appraisals provided by an independent financial expert.

     Expenses. Total operating expenses for the three months ended June 30, 2003 were $699,909 consisting of salaries and wages of $164,104, professional fees of $122,149, sales and marketing expenses of $97,102, and general and administrative expenses of $316,554. These expenses compared to the $1,132,500 reported for the three months ended June 30, 2002, consisting of salaries and wages of $208,013, professional fees of $154,519, sales and marketing expenses of $344,463, and general and administrative expenses of $425,505. The 38% decrease in total operating expenses was due a decreased number of employees, fewer technology transfer costs, and an ongoing effort to cut overhead costs. The 72% decrease in sales and marketing expenses was due to lower costs related to completing fewer technology rights transactions. The 21% decrease in salaries and wages reflects a reduction of two full-time employees, including the full time CFO. The 21% decrease in professional fees is due to a reduction in accounting fees associated with an acquisition in the quarter ended June 30, 2002. The 26% decrease in general and administrative costs is largely due to an overall planned reduction in overhead, more specifically the reduction in costs associated with the annual stockholders’ meeting and board meeting, annual report printing costs, telephone and investor relation costs, in addition a reduction of those administrative costs related to a reduction in staff.

     Income from operations can vary substantially on a quarterly basis due to the small number and wide range of value of the transactions. Therefore, quarterly income from operations should not be annualized to predict expected annual results.

     Net Realized and Unrealized Gains (Losses) and Income Taxes. Net realized losses on investments (net of deferred taxes) amounted to $6,929 for the three months ended June 30, 2003 and related to the sale of 12,000 shares of Circle Group Holdings, Inc. for $9,685 in cash and 34,000 shares of Sense Holdings, Inc. for $5,834 in cash. Net realized losses on investments amounted to $74,540 for the three months ended June 30, 2002 and related to sale of 23,000 shares of Advanced Recycling Sciences, Inc. common stock for $9,260 in cash and the sale of 180,854 shares of Torvec, Inc. common stock for $253,374 in cash during the reporting period.

     The net unrealized depreciation of investments (net of deferred taxes) decreased by $885,061 for the three months ended June 30, 2003, versus an increase in unrealized depreciation of $1,489,108 for the three months ended June 30, 2002. The net unrealized gains for June 30, 2003 consisted of a net increase in the fair value resulting from the Board of Directors’ valuation of the Company’s assets for the three months ended June 30, 2003. There were increases in value related to all of our investments with the exception of our investments in Graphco Technologies, Inc., Advanced Recycling Sciences, Inc., Stealth MediaLabs, Inc., Sense Holdings, Inc., Voice and Wireless Corporation, FullCircle Registry, Inc., Rosbon, Inc., GloTech Industries, Inc. and Innovative Medical Services, Inc. which had decreases in value for the quarter ended June 30, 2003.

     On a quarterly basis, net realized and unrealized gains and losses can vary substantially, due to a variety of factors. Therefore, quarterly net realized and unrealized gains and losses should not be annualized to predict expected annual results, and may not be indicative of future performance.

Six months ended June 30, 2003 compared to the six months ended June 30, 2002.

     Income from operations. Income from operations decreased 50% to $1,110,906 for the six months ended June 30, 2003 from $2,227,214 for the six months ended June 30, 2002. The decrease in income from operations resulted from completing two technology rights transactions as compared with four transactions for the six months ended June 30, 2002. As described below, in the six months ended June 30, 2003 we completed two sales of technology rights valued at $562,857, compared to four sales of technology rights valued at $1,623,104 for the six months ended June 30, 2002. During the six months ended June 30, 2003, we completed sale of technology rights transactions with Circle Group Holdings, Inc. in which we received 821,429 shares of common stock of that were valued at $.32 per share and Glotech Industries, Inc. in which we received 1,000,000

21 of 36

Table of Contents

shares valued at $.30 per share. Our Board of Directors determines the fair value of the shares we receive in the absence of readily available market values. In making its determination, the Board of Directors has considered valuation appraisals provided by an independent financial expert.

     Expenses. Total operating expenses for the six months ended June 30, 2003 were $1,515,257 consisting of salaries and wages of $341,416, professional fees of $383,010, sales and marketing expenses of $188,566, and general and administrative expenses of $602,265. These expenses compared to the $1,824,406 reported for the six months ended June 30, 2002, consisting of salaries and wages of $418,977, professional fees of $311,761, sales and marketing expenses of $440,143, and general and administrative expenses of $653,525. The 17% decrease in total operating expenses was due to a decreased number of employees, less cost due to fewer sales of technology rights, and an ongoing effort to reduce overhead costs. The 57% decrease in sales and marketing expenses was due to lower costs related to fewer sales of technology rights. The 19% decrease in salaries and wages reflects the reduction of two full-time employees in the second quarter. The 23% increase in professional fees is largely due to the costs associated with a specific first quarter project. The 8% decrease in general and administrative costs is largely due to ongoing effort to reduce overhead costs, more specifically the costs associated with the annual stockholders’ meeting and board meeting costs, annual report printing costs, telephone and investor relation costs, in addition a reduction of those administrative costs related to a reduction in staff.

     Income from operations can vary substantially on a quarterly basis due to the small number and wide range of value of the transactions. Therefore, quarterly income from operations should not be annualized to predict expected annual results.

     Net Realized and Unrealized Gains (Losses) and Income Taxes. Net realized losses on investments (net of deferred taxes) amounted to $175,440 for the six months ended June 30, 2003 and were related to sales as follows:

     The net unrealized depreciation of investments, net of taxes, increased by $2,134,394 for the six months ended June 30, 2003, compared to an increase of net unrealized depreciation of $1,702,931 for the six months ended June 30, 2002. The net unrealized losses resulted from a decline in the value of the Company’s assets for the six months ended June 30, 2003 and 2002. There was an increase in value in the six months ended June 30, 2003 in our investments in Clean Water Technologies, Inc., Circle Group Holdings, Inc., Prime Pharmaceutical Corporation, Primapharm Funding Corporation, Duraswitch Industries, Inc., Sequiam Corp, and Innovative Medical Services, Inc. However, this was fully offset by a decline in value related to our investments in Rosbon, Inc., Advanced Recycling Sciences, Inc., Stealth MediaLabs, Inc., Sense Holdings, Inc., Voice and Wireless, Inc., FullCircle Registry, Inc. and Graphco Technologies, Inc. Stealth MediaLabs, Inc. had a significant decline in value during the six months ended June 30, 2003 due to publicly-disclosed information about its financial condition and agreement to sell a substantial number of shares for eight cents per share.

     Net realized and unrealized gains can vary substantially, due to a variety of factors, on a quarterly basis. Therefore, quarterly net realized and unrealized gains should not be annualized to predict expected annual results, and may not be indicative of future performance.

Liquidity and Capital Resources

     Net assets decreased 28% to $5,316,180 at June 30, 2003 from $7,346,057 at December 31, 2002, attributable to a significant decline in the value of our investments, as well as realized losses related to operations and sales of investments.

     Our primary source of liquidity and capital for the three months ended June 30, 2003 was from the completion of a private placement of our securities and loan proceeds, as described below. Our income from operations consists primarily of the sale of technology rights and consulting income from strategic alliances for equity securities rather than cash.

     On June 30, 2003 and December 31, 2002, we had $1,619,204 and $745,926, respectively, in cash and cash equivalents.

     In April 2003, the Company completed a private placement transaction of 330,000 shares of its common stock at $3.00 per share. The purchasers of the shares of common stock agreed not to sell or otherwise transfer the shares for a period of one-year

22 of 36

Table of Contents

after the completion of the private placement transaction. In addition, the purchasers of the shares of common stock were granted certain piggyback registration rights, which will allow them to include their shares in a registered offering initiated by the Company within the next twelve months.

     In April 2003, the Company also obtained a loan for $1,000,000 at 12% per annum with interest paid in advance. The term of the loan is two years and is non-recourse except with respect to 360,360 unissued shares of common stock of the Company pledged as collateral under the loan.

     The total net proceeds of these transactions to UTEK Corporation, after deducting investment banking fees and prepaid interest, was $1,650,500.

Recent Developments

     Currently, our income from operations consists primarily of the sale of technology rights and the consulting income from strategic alliances for equity securities rather than cash. The equity securities that we receive are generally illiquid and subject to restrictions on resale or transferability. Thus, we have decided to focus on growing the amount of cash we generate from our operations. To augment our current business, we may seek to grow the amount of cash generated from our operations through the acquisition of businesses, whether or not complementary to our business, with proven cash flow revenue streams. In this regard, we believe that there may be a number of opportunities to accomplish our goal through the acquisition of businesses in the real estate service industry, including title insurance companies, and other related businesses. We intend to finance most acquisitions through the issuance of our equity securities. There can be no assurance that we will be able to identify and make acquisitions on acceptable terms or that we will be able to obtain financing for such acquisitions on acceptable terms. Even if we complete acquisitions, we may experience:

•		delays in realizing the benefits of any acquired company or product lines;
•		diversion of our management’s time and attention from our business;
•		adverse market reaction;
•		difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions; or
•		additional risks we may assume in connection with our acquisitions.

Risk Factors

     Investing in the Company involves a number of significant risks relating to its business and investment objective. As a result, there can be no assurance that the Company will achieve its investment objective. In addition to the risk factors described below, other factors that could cause actual results to differ materially include:

•		the ongoing global economic downturn;
•		risks associated with possible disruption in the Company’s operations due to terrorism;
•		future regulatory actions and conditions in the Company’s operating areas; and
•		other risks and uncertainties as may be detailed from time to time in the Company’s public announcements and SEC filings.

     The Company’s financial results are presently dependent upon the performance of Circle Group Holdings, Inc.

23 of 36

Table of Contents

     The Company’s financial results are presently dependent upon the performance of Circle Group Holdings, Inc. As of June 30, 2003, the value of its investment in Circle Group Holdings, Inc. was approximately $2.8 million or 54% of its net assets.

     Our quarterly and annual results could fluctuate significantly.

     The Company’s quarterly and annual operating results could fluctuate significantly due to a number of factors. These factors include the small number and range of values of the transactions that are completed each quarter, fluctuations in the values of our investments, the timing of the recognition of unrealized gains and losses, the degree to which we encounter competition in our markets, the volatility of the stock market and its impact on our unrealized gains and losses, as well as other general economic conditions. As a result of these factors, quarterly and annual results are not necessarily indicative of the Company’s performance in future quarters and years.

     Our investment model is highly speculative in nature and our history of investments using the model is limited.

     Our investment model is highly speculative since it involves making investments in new development stage companies and having those companies invest in new, untested technology. Furthermore, we have only been using our investment model for a relatively short period of time and have little or no historical information upon which to judge whether or not the model is successful. We cannot assure you that our investment model will be successful or that any of our investments will be successful.

     Our portfolio companies are development stage companies dependent upon the successful commercialization of new technologies. Each of our investments in portfolio companies is subject to a high degree of risk and we may lose all of our investment in a portfolio company if it is not successful.

     We invest in development stage companies that our management believes can benefit from our expertise in technology transfer. Development stage companies are subject to all of the risks associated with new businesses. In addition, our portfolio companies are also subject to the risks associated with research and development of new technologies. These risks include the risk that new technologies cannot be identified, developed or commercialized, may not work, or become obsolete. Our portfolio companies must successfully acquire licenses to new technologies, and in some cases further develop new technologies. We cannot assure you that any of our investments in our portfolio companies will be successful. Our portfolio companies will be competing with larger, established companies, with greater access to, and resources for, further development of these new technologies. We may lose our entire investment in any or all of our portfolio companies.

     Our portfolio companies depend upon the research and development activities of universities and research laboratories, over which neither our portfolio companies nor we have any control.

     Our portfolio companies depend upon the research activities of universities and government research facilities. Neither we, nor our portfolio companies, have any control over the research activities of universities and research laboratories. As neither we, nor our portfolio companies provide supervision of any university or laboratory research, we cannot warrant that the research will be done properly and that the results, which we may license will be reproducible. In addition, we have no control over what types of research are presented to us by universities and government research facilities for evaluation and commercial development. Further, the licenses to technologies that our portfolio companies obtain may be non-exclusive. In the event that we make an investment in a portfolio company, and we are unable to locate a new technology to be acquired by the portfolio company, we could lose our entire investment.

     Technologies acquired by our portfolio companies may become obsolete before we can sell their securities.

     Neither our portfolio companies nor we have any control over the pace of technology development. There is a significant risk that a portfolio company could acquire the rights to a technology that is currently or is subsequently made obsolete by other technological developments. We cannot assure you that any of our portfolio companies will successfully acquire, develop and transfer any new technology.

     The patents on the technologies that our portfolio companies’ license may infringe upon the rights of others and patent applications that the universities have submitted may not be granted.

     Many of our portfolio companies rely upon patents to protect the technologies that they license. If the patents on technologies that they license are found to infringe upon the rights of others, or are held to be invalid, then the licenses to such technologies will have little or no value to our portfolio companies. In addition, if a patent licensed by a portfolio company is found to infringe upon the rights of others, the portfolio company may be liable for monetary damages. Our portfolio companies are dependent upon the universities or government research facilities to file, secure and protect patents on licensed technologies. In the event that a patent is challenged or violated, our portfolio companies may not have the financial resources

24 of 36

Table of Contents

to defend the patent either in the preliminary stages of litigation or in court. In addition, if our portfolio companies acquire licenses to technologies with patents pending, we cannot assure you that such patents will be granted.

     Technologies that have been developed with funding from the United States government may have limits on their use, which could affect the value of the technology to a portfolio company.

     Technologies developed with funds provided by the United States government have restrictions regarding where they may be sold and have limits on exclusivity. A portfolio company that acquires a technology developed with federal funding may be limited as to where it can sell the technology. The technology may only be allowed to be sold or manufactured within the United States. In addition, under Section 23 of the United States Code, the U.S. government has the right to use technologies that it has funded regardless of whether the technology has been licensed to a third party. Such regulations may limit the marketability of a technology and therefore reduce the value of the technology to our portfolio companies.

     We may need to make additional cash investments in our portfolio companies to provide them with capital to further develop licensed technologies.

     We may have to make additional cash investments in our portfolio companies to protect our overall investment value in the particular company. We retain the discretion to make any additional investments as our management determines. The failure to make such additional investments may jeopardize the continued viability of a portfolio, and our initial (and subsequent) investments. Moreover, additional investments may limit the number of companies in which we can make initial investments. We have no established criteria in determining whether to make an additional investment except that our management will exercise its business judgment and apply criteria similar to those used when making the initial investment. We cannot assure you that we will have sufficient funds to make any necessary additional investments, which could adversely affect our success and result in the loss of a substantial portion or all of our investment in a portfolio company.

     We may be unable or decide not to make additional investments in our portfolio companies which could result in our losing our initial investment if the portfolio company fails. Our ownership and control may be diluted if a portfolio company obtains additional funds from third-party investors.

     Our agreement with third-party investors restricts the size of our investment in any single portfolio company and, as a result, could prohibit an additional investment in a portfolio company in the event that our initial investment represented 10% or more of our assets. Even if we are able to make an additional investment in a portfolio company within the prescribed limits, we may elect not to make an additional investment in a portfolio company in order to limit the size of our investment, which is at risk. It is also our policy not to make loans to our portfolio companies that in the aggregate exceed 25% of our net assets. Therefore, if a portfolio company requires additional funds to continue operating, and we cannot or choose not to make an additional investment, our investment in the portfolio company may decline in value. In addition, to the extent that a portfolio company seeks additional financing from third parties, our ownership interest and control of the portfolio company may be diluted.

     The securities we hold in our portfolio companies are subject to restriction on resale and we may not be able to sell the securities we hold for amounts equal to their recorded value, if at all.

     Our portfolio companies are all private entities or thinly traded public companies and we acquire securities in our portfolio company in private transactions. As a result, all of the securities we hold in our portfolio companies are restricted securities, as defined under the Securities Act of 1933, and are subject to restrictions on resale. Furthermore, we do not anticipate that a highly liquid public market will exist for any of the securities we hold in our portfolio companies. Therefore, we cannot assure you that we will be able to sell our portfolio company securities for amounts equal to the values that we have ascribed to them or at the time we desire to sell.

     We are dependent on merger transactions, structured as tax-free exchanges to sell our subsidiary companies. A change in the Internal Revenue Code affecting tax-free exchanges could reduce our ability to sell our subsidiary companies.

     We do not anticipate selling any of our subsidiary companies, except in connection with merger transactions. We anticipate that most, if not all, of such merger transactions will be structured as tax-free exchanges under Section 368 of the Internal Revenue Code. If Section 368 were to be amended so that we were no longer able to structure our merger transactions as tax-free exchanges, we may not be able to sell our subsidiary companies on commercially reasonable terms. If we are unable to successfully sell our subsidiary companies in a merger transaction, we may lose our investment.

     We have been dependent on a small number of companies, several of which are controlled by the same investor group for the purchase of our subsidiary companies. We have only limited experience selling our subsidiary companies

25 of 36

Table of Contents

and of the twenty-three transactions that we have completed, seven have been to companies controlled by the same group of investors.

     As of June 30, 2003, we have completed only twenty-three transactions, including twenty-two mergers and one stock sale, wherein we merged our subsidiary with a portfolio company and seven of these mergers have been made to companies that are controlled by the same investor group. As of June 30, 2003, the same investor group had control of Lexon, Inc., Image Analysis, Inc., Centrex, Inc. and Nubar, Inc. As a result, we have only had the benefit and experience of negotiating such agreements with a small number of investors. We cannot assure you that we will be able to successfully negotiate merger transactions in the future.

     The agreements we have with universities do not guarantee that the universities will grant licenses to our subsidiary companies.

     The agreements that we have entered into with universities provide us with the ability to evaluate the commercial potential for technologies at an early stage of development. These agreements, however, do not provide us with any guarantee that following our evaluation, a university will grant us a license. As a result, we may expend time and resources evaluating a technology and not be able to secure a license to such technology for one of our subsidiary companies.

     We are dependent upon our management’s ability to identify portfolio companies to acquire our subsidiary companies.

     Our investment strategy is based upon selling our subsidiary companies in stock for stock exchanges to portfolio companies that wish to acquire the technologies owned by our subsidiary companies but which they may be neither operating nor established. We do not expect to sell any securities of our subsidiary companies to the public. Therefore, if we fail to identify a portfolio company to acquire a subsidiary company, our entire investment could be lost.

     We are dependent upon and have little or no control over the efforts of portfolio companies to successfully commercialize the acquired technologies or to retain the license to the technology.

     We receive common stock from the portfolio company based upon the mutually agreed upon values of the subsidiary company, its licensed technology and the portfolio company. We then intend to sell the securities that we acquire in exchange for our subsidiary companies at some time in the future. Therefore, our ability to profit from an investment is ultimately dependent upon the price we receive for the shares of the portfolio company. In most cases, the companies that acquire our subsidiary companies will be dependent upon successfully commercializing the technologies they acquire. We do not have control over the portfolio companies that acquire our subsidiary companies. These portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive research and development, manufacturing, marketing and service capabilities and a greater number of qualified and experienced managerial and technical personnel. They may face additional risks of product and technological obsolescence and government regulation over which we will have little or no control. They may need additional financing which they are unable to secure and we are unable or unwilling to provide or they may be subject to adverse developments unrelated to the technologies they acquire. They may lose the rights granted to them for the technology for failure to comply with the license agreement. We cannot assure you that any of the portfolio companies will be successful, that we will be able to sell the securities we receive at a profit or for sufficient amounts to even recover our initial investment in the portfolio companies or that our portfolio companies will not take actions that could be detrimental to us.

     Our investments are in development stage companies and, as a result, the value of the securities that we receive in such merger transactions is subject to significant fluctuations.

     Historically we have merged, and we intend to continue to merge, our subsidiary companies with companies in related fields that are development stage companies. In addition, the companies for which we render services in connection with strategic alliances are development stage companies. As a result, the securities that we receive in such transactions are subject to all of the risks associated with securities of development stage companies. The values of these securities may be subject to significant fluctuations. We cannot assure you that when we sell these securities we will receive the value ascribed to the securities either at the time of acquisition or during subsequent valuation periods.

     Our investments in our portfolio companies may be concentrated in one or more industries and if these industries should decline or fail to develop as expected our investments will be lost.

     Our investments in our portfolio companies may be concentrated in one or more industries. This concentration will mean that our investments will be particularly dependent on the development and performance of those industries. Accordingly, our investments may not benefit from any advantages, which might be obtained with greater diversification of the industries in

26 of 36

Table of Contents

which our portfolio companies operate. If those industries should decline or fail to develop as expected, our investments in our portfolio companies in those industries will be subject to loss.

     We generally receive equity securities as payment for the services we render, rather than cash. The securities that we receive will be subject to restrictions on resale, which will limit our ability to sell these securities and attain liquidity.

     The securities that we receive are subject to restrictions on resale, which will limit our ability to sell these securities. As of June 30, 2003, all of the securities we have received are “restricted securities,” as such term is defined under Rule 144 of the Securities Act of 1933. These shares are restricted securities because they were issued in private transactions not involving a public offering and may not be sold in the absence of registration other than in accordance with Rule 144 under the Securities Act of 1933 or another exemption from registration. As a result of such restrictions, our ability to sell or otherwise transfer the securities will be limited. We cannot assure you that we will be able to receive upon resale, the recorded value of our portfolio company securities.

     We may not be able to merge our subsidiary companies with publicly traded entities and so we may receive non-publicly traded securities in exchange for our subsidiary companies. We may be required to sell the securities we receive at a substantial discount to their fair value if no public market exists.

     At June 30, 2003, we have completed twenty-three sales of subsidiary companies. Of these sales, fifteen have been to companies that are currently publicly traded, and the remaining transactions have been with privately-owned companies. We are substantially dependent upon the ability of non-public acquirers of our subsidiary companies to implement a plan, which would facilitate a trading market for their securities, or other strategy, which would allow for the potential sale of our ownership interest. In addition, to the extent that we own more than 10% of portfolio company’s shares, we may be deemed to be an affiliate of the portfolio company which would limit our ability to dispose of securities we receive for our subsidiary companies. Further, our ability to sell the securities we receive for our subsidiary companies may be limited by, and subject to, the lack of or limited nature of a trading market for the securities and the volatility of the stock market as a whole. Such limitations could prevent or delay any sale of our investments or significantly reduce the amount of proceeds, if any that might otherwise be realized therefrom.

     Substantially all of our portfolio investments are recorded at fair value as determined in good faith by our board of directors and, as a result, there is uncertainty regarding the value of our portfolio investments.

     At June 30, 2003 and December 31, 2002, respectively, investments amounting to $3,972,153 or 74.7% of net assets and $6,208,090 or 84.5% of net assets, have been valued at fair value as determined by our Board of Directors. Pursuant to the requirements of the 1940 Act, the Board of Directors is responsible for determining in good faith the fair value of our investments for which market quotations are not readily available. Since there is typically no readily available market value for the investments in our portfolio, our board of directors determines in good faith the fair value of these investments pursuant to a valuation policy and a consistently applied valuation process. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If we were required to sell any of such investments, there is no assurance that the fair value, as determined by the Board of Directors, would be obtained. If we were unable to obtain fair value for such investments, there would be an adverse effect on our net asset value and on the price of our common stock.

     We adjust quarterly the valuation of our portfolio to reflect the board of directors’ determination of the fair value of each investment in our portfolio. Any charges in fair value are recorded in our statement of operations as “Change in unrealized appreciation (depreciation) of non-controlled affiliate investments.”

     Your ownership interest and the value of the shares of our common stock may be diluted by the exercise of stock options and warrants we have granted or may grant in the future.

     We have adopted two stock option plans under which certain of our employees, officers and directors may be granted options. As of June 30, 2003, we have granted options to purchase 650,017 shares of our common stock to certain officers and employees. We have also reserved an additional 99,983 shares of our common stock for issuance under our two stock option plans to key employees and directors. In addition, we have issued warrants to the underwriter of our initial public offering, upon payment of the purchase price of $.0003 per warrant, to purchase 100,000 shares of common stock at an exercise price of $9.90 per share. The warrants expire on October 25, 2005. The issuance and sale of these shares of common stock will dilute the ownership interest of investors and may have an adverse effect on the price of our common stock.

     Our business depends on key personnel.

     We rely, and will continue to be substantially dependent upon, the continued services of our management, principally our Chief Executive Officer and Chairman of the Board, Clifford M. Gross. Our management team is responsible for the review of potential investments by and the provision of advice to our portfolio companies regarding the acquisition of technologies and additional research and development. We also depend upon our management’s key contacts with universities, to maintain our access to new technologies, and their relationships with companies in the private sector in order to effectuate the sale of our subsidiaries.

27 of 36

Table of Contents

     We may need to undertake additional financings to continue our operations.

     We anticipate that cash revenue from our operations for the foreseeable future will not be sufficient to meet our operating and capital requirements. As a result, we will likely be required to undertake additional financings to continue or expand our operations. We have no formal commitments for any financings, and there can be no assurance that any such commitments can be obtained on terms acceptable to us, if at all. Any equity financing may be dilutive to our stockholders, and debt financing, if available, may involve restrictive covenants with respect to raising future capital and other financial and operational matters. If we are unable to obtain financing as needed, we may be required to reduce the scope of our operations, which could have a material adverse effect on us.

     We have been prohibited from selling our investment in Advanced Recycling Sciences, Inc. and the failure to remove such prohibition would have a material adverse impact on our financial condition and results of operation.