SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
____ 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 (I.R.S. Employer
incorporation or organization) Identification No.)
One Rockefeller Plaza
Suite 1430
New York, New York 10020
----------------------------
(Address of principal executive offices)
(212) 332-3600
-----------------------------------------
(Registrant 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of
common stock, par value $.01 per share, outstanding on November 13, 1996 was
10,564,889.
1
Harris & Harris Group, Inc.
Form 10Q, September 30, 1996
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . 3
Statement of Assets and Liabilities . . . . . . . . . . . . . . 4
Statement of Operations . . . . . . . . . . . . . . . . . . . . 5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . 6
Statement of Changes in Net Assets. . . . . . . . . . . . . . . 7
Schedule of Investments . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements . . . . . . . . . . . . . . . . . 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition . . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations . . . . . . . . . . . . . . . . . . . . . 23
Liquidity and Capital Resources . . . . . . . . . . . . . . . . 24
Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . 26
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . 26
item 4. Submission of Matters to a Vote of Security Holders . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 26
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 27
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2
Harris & Harris Group, Inc.
Form 10-Q, September 30, 1996
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The information furnished in the accompanying financial statements reflects
all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results for the interim period presented.
On June 30, 1994, the Company's shareholders approved a proposal to allow the
Company to make an election to become a Business Development Company ("BDC")
under the Investment Company Act of 1940, as amended. The Company made such
election on July 26, 1995. Certain information and disclosures normally
included in the 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
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1995 contained in
the Company's 1995 Annual Report.
3
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
ASSETS
<S> <C> <C>
September 30, 1996 December 31, 1995
(Unaudited) (Audited)
Investments, at value (See accompanying
schedule of investments and notes). . . $ 37,442,714 $ 35,929,289
Cash. . . . . . . . . . . . . . . . . . 172,916 364,354
Receivable from brokers . . . . . . . . 0 205,789
Interest receivable . . . . . . . . . . 61,432 300,718
Taxes receivable (Note 5) . . . . . . . 1,040,388 367,929
Prepaid expenses. . . . . . . . . . . . 28,688 86,976
Other assets. . . . . . . . . . . . . . 263,419 269,500
------------ ------------
Total assets. . . . . . . . . . . . . . $ 39,009,557 $ 37,524,555
============ ============
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities $ 330,465 $ 352,129
Deferred rent. . . . . . . . . . . . . . 63,228 59,887
Deferred income tax liability (Note 5) . 1,418,072 550,630
------------ ------------
Total liabilities. . . . . . . . . . . . 1,811,765 962,646
------------ ------------
Commitments and contingencies (Note 6)
Net assets . . . . . . . . . . . . . . . $ 37,197,792 $ 36,561,909
============ ============
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;
10,442,682 issued and outstanding at
9/30/96 and 10,333,902 issued and
outstanding at 12/31/95 . . . . . . . 104,427 103,339
Additional paid in capital . . . . . . . 15,850,578 15,691,978
Accumulated net realized income. . . . . 18,229,445 19,362,249
Accumulated unrealized appreciation on
investments, net of deferred taxes
of $1,564,635 at 9/30/96 and
$698,250 at 12/31/95. . . . . . . . . 3,013,342 1,404,343
------------ ------------
Net assets . . . . . . . . . . . . . . . $ 37,197,792 $ 36,561,909
============ ============
Shares outstanding . . . . . . . . . . . 10,442,682 10,333,902
------------ ------------
Net asset value per outstanding share. . $ 3.56 $ 3.54
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
(UNAUDITED)
<S> <C> <C> <C> <C>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
Investment income:
Interest from:
Fixed-income securities $ 194,570 $ 262,015 $ 625,434 $ 754,706
Affiliated companies 9,556 0 29,667 0
Dividend income--
Unaffiliated companies 0 0 8,024 8,436
Other income. . . . . . . 13,440 0 49,146 2,786
----------- ----------- ----------- -----------
Total income. . . . . . 217,566 262,015 712,271 765,928
Expenses:
Salaries and benefits . . 367,772 376,545 1,152,078 1,137,926
Administration and
operations. . . . . . . 130,061 91,347 384,379 305,504
Consulting fees . . . . . 89,522 29,132 335,225 118,344
Professional fees . . . . 42,686 103,895 139,963 164,773
Depreciation and
amortization. . . . . . 14,500 15,000 43,187 155,980
Rent. . . . . . . . . . . 41,784 29,797 119,628 87,391
Directors' fees and
expenses. . . . . . . . 20,132 12,907 47,203 25,793
Custodian fees. . . . . . 2,929 3,326 9,040 9,704
----------- ----------- ----------- -----------
Total expenses. . . . . 709,386 661,949 2,230,703 2,005,415
----------- ----------- ----------- -----------
Operating loss before
income taxes. . . . . . (491,820) (399,934) (1,518,432) (1,239,487)
Income tax benefit (Note 5) 171,181 103,523 524,458 690,449
----------- ----------- ----------- -----------
Net operating loss. . . . (320,639) (296,411) (993,974) (549,038)
Net realized (loss) gain on investments:
Realized (loss) gain on
sale of investments . . (51,277) 200,895 (213,584) (4,589)
----------- ----------- ----------- -----------
Total realized (loss)
gain. . . . . . . . . (51,277) 200,895 (213,584) (4,589)
Income tax benefit
(provision) (Note 5). . 17,947 (70,313) 74,754 1,606
----------- ----------- ----------- -----------
Net realized (loss)
gain on investments . . (33,330) 130,582 (138,830) (2,983)
Net realized loss . . . . . (353,969) (165,829) (1,132,804) (552,021)
Net increase (decrease) in unrealized appreciation on investments:
Decrease on investments
held. . . . . . . . . . (518,112) (709,516) (1,409,833) (456,185)
Increase on investments
held. . . . . . . . . . 93,404 856,888 3,885,217 1,778,984
----------- ----------- ----------- -----------
Sub-total . . . . . . (424,708) 147,372 2,475,384 1,322,799
Increase as a result of
investment sales. . . . 37,831 0 0 291,277
----------- ----------- ----------- -----------
Total (decrease) increase
in unrealized appreciation
on investments. . . . . (386,877) 147,372 2,475,384 1,614,076
Income tax provision
(benefit) (Note 5). . . 135,406 (51,610) (866,385) (564,927)
----------- ----------- ----------- -----------
Net increase (decrease) in
unrealized appreciation
on investments. . . . . (251,471) 95,762 1,608,999 1,049,149
----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations:
Total . . . . . . . . . . $ (605,440) $ (70,067) $ 476,195 $ 497,128
=========== =========== =========== ===========
Per outstanding share . . $ (0.06) $ (0.00) $ 0.05 $ 0.05
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
Nine Nine
Months Ended Months Ended
9/30/96 9/30/95
Cash flows provided (used) by operating activities:
Net increase in net assets resulting from
operations. . . . . . . . . . . . . . . . . . $ 476,195 $ 497,128
Adjustments to reconcile increase in net assets
from operations to net cash provided (used)
by operating activities:
Net realized and unrealized gain on investments (2,261,800) (1,609,487)
Deferred income taxes . . . . . . . . . . . . 867,442 733,583
Depreciation and amortization . . . . . . . . 43,187 155,980
Other . . . . . . . . . . . . . . . . . . . . 1,448 23,340
Changes in assets and liabilities:
Receivable from brokers . . . . . . . . . . . 205,789 3,145,021
Prepaid expenses. . . . . . . . . . . . . . . 58,288 40,690
Interest receivable . . . . . . . . . . . . . 239,286 (244,998)
Taxes receivable. . . . . . . . . . . . . . . (600,271) 338,965
Other assets. . . . . . . . . . . . . . . . . (4,292) (95,335)
Accounts payable and accrued liabilities. . . (21,664) (53,983)
Collection on note receivable . . . . . . . . 0 54,664
Purchase of fixed assets. . . . . . . . . . . (32,815) (6,594)
------------ ------------
Net cash provided (used) by operating activities (1,029,207) 2,978,974
Cash flows provided (used) by investing activities:
Net sale (purchase) of short-term investments
and marketable securities . . . . . . . . . . 5,156,883 (3,794,588)
Investment in private placements. . . . . . . . (4,406,614) (3,649,540)
------------ ------------
Net cash provided (used) by investing activities 750,269 (7,444,128)
Cash flows provided (used) by financing activities:
Purchase of stock . . . . . . . . . . . . . . . 0 (646,430)
Proceeds from exercise of stock options . . . . 87,500 62,500
Proceeds from private placement of common stock 0 5,000,001
------------ ------------
Net cash provided by financing activities 87,500 4,416,071
Net decrease in cash:
Cash at beginning of period . . . . . . . . . . 364,354 221,457
Cash at end of period . . . . . . . . . . . . . 172,916 172,374
------------ ------------
Net decrease in cash. . . . . . . . . . . . . . $ (191,438) $ (49,083)
============ ============
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . $ 57,234 $ 8,323
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<S> <C> <C> <C> <C>
Three Three Nine Nine
Months Ended Months Ended Months Ended Months Ended
9/30/96 9/30/95 9/30/96 9/30/95
Changes in net assets from operations:
Net operating loss. . $ (320,639) $ (296,411) $ (993,974) $ (549,038)
Net realized (loss)
gain on investments (33,330) 130,582 (138,830) (2,983)
Net (decrease)
increase in unrealized
appreciation on
investments held. . (251,471) 95,762 1,608,999 1,049,149
------------ ------------ ------------ ------------
Net (decrease)
increase in net
assets resulting
from operations . . (605,440) (70,067) 476,195 497,128
Capital stock transactions:
Restricted Stock Award 0 0 0 (536,146)
Proceeds from exercise
of stock options. . 0 0 87,500 62,500
Tax benefit of exercise
of stock options. . 0 0 72,188 0
Proceeds from private
placement of common stock 0 0 0 5,000,001
----------- ------------ ------------ ------------
Net increase from capital
stock transactions 0 0 159,688 4,526,355
----------- ------------ ------------ ------------
Net (decrease) increase
in net assets. . . . (605,440) (70,067) 635,883 5,023,483
Net assets:
Beginning of period 37,803,232 36,404,352 36,561,909 31,310,802
------------ ------------ ------------ ------------
End of period. . . . $ 37,197,792 $ 36,334,285 $ 37,197,792 $ 36,334,285
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Unaffiliated Companies (9)(11) -- 15.0% of total investments
Publicly-Traded Portfolio (Common Stock unless noted otherwise)
Oil and Gas Related -- 0.7%
CORDEX Petroleums, Inc. (1)(5)
Argentinian oil and gas exploration
Class A Common Stock. . . . . . . . . . (C) 4,052,080 $ 252,878
Biotechnology and Healthcare Related --7.3%
Alliance Pharmaceutical Corporation
(1)(5). . . . . . . . . . . . . . . . (C) 70,000 1,198,750
Biofield Corp.(1)(4). . . . . . . . . . (C) 50,000 456,250
Magellan Health Services, Inc.
(1)(2)(5)(6). . . . . . . . . . . . . (C) 54,368 1,090,531
------------
Total Publicly-Traded Portfolio (cost: $1,566,024). . . . . . . $ 2,998,409
Private Placement Portfolio (Illiquid) -- 7.0%
CORDEX Petroleums, Inc. (1)(2)(5)
Argentinian oil and gas exploration
Special Warrants . . . . . . . . . . . (C) 1,667,000 $ 0
Exponential Business Development Company
(1)(2)(5) Venture capital partnership
focused on early stage companies
0.9% Limited partnership interest. . . (A) - - 25,000
Micracor, Inc. (1)(2)(7) -- Designs
and manufactures advanced solid
state photonic systems --
3.4% of fully-diluted equity
Series F Convertible Preferred Stock --
444,444 shares and 1,199,999 Warrants
at $2.25 expiring 7/20/99. . . . . . . (D) - - 1
Convertible Note . . . . . . . . . . . (D) $103,000 1
Princeton Video Image, Inc. (1)(2)(7)(8)
Real time sports and entertainment
advertising 3.6% of fully-diluted
equity . . . . . . . . . . . . . . . . (B) 68,400
Warrants at $2.25 expiring 8/97. . . . (D) 6,700 2,613,425
------------
Total Private Placement Portfolio (cost: $1,771,000). . . . . . $ 2,638,427
------------
Total Investments in Unaffiliated Companies (cost: $3,337,024) $ 5,636,836
------------
</TABLE>
The accompanying notes are an integral part of this schedule.
8
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Private Placement in Non-Controlled Affiliates (Illiquid) -- 30.6%
Dynecology Incorporated (1)(2)(5)(7) --
Develops various environmental
intellectual properties -- Option
expiring 12/13/98 to purchase at
$15 per share 135,000 shares of
Common Stock equaling 18.1% of
fully-diluted equity. . . . . . . . . . . (D) - - $ 45,000
Gel Sciences, Inc. (1)(2)(7) -- Develops
engineered response gels for controlled
release systems -- 11.1% of
fully-diluted equity
Warrants -- 27,766 at $1.65 expiring
02/01/00 . . . . . . . . . . . . . . . . (D) - -
Common Stock . . . . . . . . . . . . . . . (B) 171,172
Series A Preferred Stock . . . . . . . . . (D) 135,178
Series A-1 Preferred Stock . . . . . . . . (D) 57,607
Series B Convertible Preferred Stock . . . (B) 397,409
Series C Convertible Preferred Stock . . . (B) 101,515 2,344,922
Harber Brothers Productions, Inc. (1)(2)(5)(7)
-- Finances, produces and markets media
products that combine entertainment, music,
learning and interactivity -- 21.5% of
fully-diluted equity
Series A Voting Convertible Preferred Stock (A) 967,500 967,500
Highline Capital Management, LLC (2)(5)(7)
-- Organizes and manages investment
partnerships 24.9% of fully-diluted equity (A) - - 500,000
Nanophase Technologies Corporation (1)(2)(5)(7)
-- Manufactures and markets inorganic
crystals of nanometric dimensions
7.6% of fully-diluted equity
Series D Convertible Preferred Stock. . . . (B) 1,162,204 2,614,959
NeuroMetrix, Inc. (1)(2)(4)(7) -- Developing
a device for diabetics to monitor their
blood glucose -- 30% of fully-diluted equity
Warrants -- 125,000 at $1.60 expiring 6/2/97(A)
Series A Convertible Preferred Stock (A) 175,000 210,000
PHZ Capital Partners Limited Partnership
(1)(2)(5)(7) Organizes and manages
investment partnership 20.0% of
fully-diluted equity. . . . . . . . . . (B) 1,000,000
One year 8% note due 9/22/97. . . . . . (A) $ 500,000 500,000
PureSpeech, Inc. (1)(2)(4)(7) -- Develops
and markets innovative speech recognition
technology 8.6% of fully-diluted equity
Series A Convertible Preferred Stock. . (A) 190,476 999,999
Questech Corporation (1)(2)(5)(13) --
Manufactures and markets proprietary
decorative tiles and signs -
18.9% of fully-diluted equity
Common Stock. . . . . . . . . . . . . . (B) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01 . . (A) 166,667 167
Sonex International Corporation
(1)(2)(5)(7) -- Manufactures and markets
an ultrasonic toothbrush for home use
17.6% of fully-diluted equity
Series A Non-Voting Convertible
Preferred Stock . . . . . . . . . . . (D) 588,935
Common Stock. . . . . . . . . . . . . . (D) 34,000 1
------------
Total Private Placement Portfolio
in Non-Controlled Affiliates (cost: $11,062,518). . . . . . . $ 11,445,716
------------
</TABLE>
The accompanying notes are an integral part of this schedule.
9
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C> <C> <C>
Method of
Valuation (3) Shares Value
------------- ------ -----
Private Placement Portfolio in Controlled Affiliates (Illiquid) -- 16.0%
Genomica Corporation (1)(2)(4)(7)(10) --
Develops software that enables the
study of complex genetic diseases
26.6% of fully-diluted equity
Series A Convertible Preferred Stock. . . . . (A) 1,660,200
Common Stock. . . . . . . . . . . . . . . . . (A) 199,800 $ 1,000,304
MultiTarget, Inc. (1)(2)(4)(7)--Developing
intellectual property related to
localized treatment of cancer
41.7% of fully-diluted equity
Series A Convertible Preferred Stock. . . . . (A) 375,000 60,811
nFX Corporation (1)(2)(7) -- Develops
neural-network software
37.5% of fully-diluted equity
Series A Voting Convertible Preferred
Stock . . . . . . . . . . . . . . . . . . . (B) 1,294,288 2,888,980
Series B Non-Voting Convertible Preferred
Stock . . . . . . . . . . . . . . . . . . . (B) 689,920 1,539,979
PowerVoice Technologies, Inc. (1)(2)(4)(7) --
To commercially exploit innovative
distributed computing technology
29.7% of fully-diluted equity
Series A Convertible Preferred Shares . . . . (A) 500,000 500,000
------------
Total Private Placement Portfolio
in Controlled Affiliates (cost: $4,097,835) . . . . . . . . . $ 5,990,074
------------
U.S. Government Obligations -- 38.4%
Treasury Note dated 03/01/93 due date
02/28/98 -- 6.0% yield. . . . . . . . . . . . (C) $ 4,941,400
Treasury Bill dated 10/19/95 due date
10/17/96 -- 4.9% yield. . . . . . . . . . . . (A) 1,498,248
Treasury Bill dated 11/16/95 due date
11/14/96 -- 5.0% yield. . . . . . . . . . . . (A) 1,997,996
Treasury Bill dated 12/14/95 due date
12/12/96 -- 5.0% yield. . . . . . . . . . . . (A) 2,098,703
Treasury Bill dated 6/15/96 due date
02/13/97 -- 5.2% yield. . . . . . . . . . . . (A) 3,833,741
------------
Total Investments in U.S. Government Obligations
(cost: $14,367,360) . . . . . . . . . . . . . . . . . . . . . $ 14,370,088
------------
Total Investments -- 100% (cost: $32,864,737) . . . . . . . . . $ 37,442,714
============
</TABLE>
The accompanying notes are an integral part of this schedule.
10
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1996
(UNAUDITED)
Notes to Schedule of Investments
1. Represents a non-income producing security. Equity investments that
have not paid dividends within the last twelve 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 Methods
of Valuation A to L.
4. These investments were made during 1996.
5. There were no purchases or sales of these securities during the nine
months ended September 30, 1996.
6. Formerly named National Mentor Holding Corp., Magellan Health Services,
Inc. was later acquired by Charter Medical Corporation, which subsequently
changed its name to Magellan Health Services, Inc.
7. These investments are in 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 has not yet
commenced its planned principal operations or has commenced such
operations but has not realized significant revenue from them.
8. Formerly named Princeton Electronic Billboard, Inc.
9. Investments in unaffiliated companies consist of investments where the
Company owns or has options to acquire less than 5% of the investee
company. Investments in non-controlled affiliated companies consist of
investments where the Company owns or has options to acquire more than 5%
but less than 25% of the investee company. Investments in controlled
affiliated companies consist of investments where the Company owns or has
options to acquire more than 25% of the investee company.
10. Genomica Corporation was co-founded by Harris & Harris Group, Inc., Cold
Spring Harbor Laboratory and Falcon Technology Partners, LP. Mr.
G. Morgan Browne serves on the Board of Harris & Harris Group, Inc. and is
Administrative Director of Cold Spring Harbor Laboratory.
11. The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $3,444,701. The gross unrealized appreciation
based on tax cost for these securities is $3,540,331. The gross
unrealized depreciation based on the cost of these securities is
$1,455.873.
12. The percentage ownership of each investee, disclosed in the Schedule of
Investments, expresses the potential common equity interest in each such
investee. The calculated percentage represents the amount of issuer's
common stock the Company owns or can acquire as a percentage of the
issuer's total outstanding common stock plus common shares reserved for
issued and outstanding warrants, convertible securities and stock options.
13. Formerly named Intaglio, Ltd.
The accompanying notes are an integral part of this schedule.
11
FOOTNOTE TO SCHEDULE OF INVESTMENTS
ASSET VALUATION POLICY GUIDELINES
The Company's 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, as amended (the "1940 Act"), requires
periodic valuation of each investment in the Company's portfolio to determine
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.
The Company's Board of Directors is responsible for 1) determining overall
valuation guidelines and 2) ensuring the valuation of investments within the
prescribed guidelines.
The Company's Investment and Valuation Committee, comprised of at least three
or more Board members, is responsible for reviewing and approving the
valuation of the Company's assets 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 the assets of the Company, 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.
Valuation assumes that, in the ordinary course of its business, the Company
will eventually sell its investment.
The Company's valuation policy with respect to the five broad investment
categories is as follows:
12
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 the original cost to the Company. 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. Some
examples of such 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 the company's common stock; 5) material positive
or negative changes in the company's business.
B. Private Market: The private market method uses actual third-party
transactions in the company's securities as a basis for valuation, using
actual, executed, historical transactions in the company's securities 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.
C. Public Market: The public market method is used when there is an
established public market for the class of the company's securities held by
the Company. The Company discounts market value for securities that are
subject to significant legal, contractual or practical restrictions. Other
securities, for which market quotations are readily available, 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 System is the last reported sales price on the day of
valuation; other securities traded in the over-the-counter market and listed
securities for which no sale was reported on that day is the mean of the
closing bid price and ask 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.
D. 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 the
Company 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 the
Company's Investment and 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 owned by the Company and the nature of
any rights to require the company to register restricted securities under
applicable securities laws.
13
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 the original cost to the Company. Such
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. 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.
G. 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 the Company 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 the Company's Investment and 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 and projected
markets.
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 most recent bid
quotations when available.
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:
I. Fixed-Income Securities are valued by independent pricing services that
provide market quotations based primarily on quotations from dealers and
brokers, market transactions, and other sources.
J. Other Fixed-Income Securities that are not readily marketable are valued at
fair value by the Investment and Valuation Committee.
14
SHORT-TERM FIXED-INCOME INVESTMENTS
K. 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
L. All Other Investments are reported at fair value as determined in good
faith by the Investment and Valuation Committee.
The reported values of securities for which market quotations are not readily
available and for other assets reflect the Investment and 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 the securities had to be sold in an
immediate liquidation. The Company makes many of its portfolio investments
with the view of holding them for a number of years, and the reported value of
such investments may be considered in terms of disposition over a period of
time. Thus valuations as of any particular date are not necessarily indicative
of amounts that may ultimately be realized as a result of future sales or
other dispositions of investments held.
15
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company") is a venture capital investment
company operating as a Business Development Company ("BDC") under the
Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
investment company under the 1940 Act. The Company operates as an internally
managed investment company whereby its officers and employees, under the
general supervision of its Board of Directors, conduct its operations.
The Company elected to become a BDC on July 26, 1995, after receiving the
necessary approvals. From July 31, 1992 until the election of BDC status, the
Company operated as a closed-end, non-diversified, investment company under
the 1940 Act. Upon commencement of operations as an investment company, the
Company revalued all of its assets and liabilities at fair value as defined in
the 1940 Act. Prior to such time, the Company was registered and filed under
the reporting requirements of the Securities Exchange Act of 1934 as an
operating company and, while an operating company, operated directly and
through subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the
preparation of the financial statements:
Portfolio Investment Valuations. Investments are stated at "fair value" as
defined in the 1940 Act and in the applicable regulations of the Securities
and Exchange Commission. All assets are valued at fair value 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 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 on the
first-in first-out basis for financial reporting and tax basis.
Income Taxes. The Company records income taxes using the liability method in
accordance with the provision of Statement of Financial Accounting Standards
No. 109. Accordingly, deferred tax liabilities have been established to
reflect temporary differences between the recognition of income and expense
for financial reporting and tax purposes, the most significant difference of
which relates to the Company's unrealized appreciation on investments.
16
Reclassifications. Certain reclassifications have been made to the December
31, 1995 financial statements to conform to the September 30, 1996
presentation.
Estimates by Management. The preparation of the financial statements in
conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of September 30, 1996 and December 31, 1995, and the
reported amounts of income and expenses for the three months and nine months
ended September 30, 1996. Actual results could differ from these estimates.
NOTE 3. STOCK OPTION PLAN AND WARRANTS OUTSTANDING
On August 3, 1989, the shareholders of the Company approved the 1988 Long Term
Incentive Compensation Plan. On June 30, 1994, the shareholders of the
Company approved various amendments to the 1988 Long Term Incentive
Compensation Plan: 1) to conform to the provisions of the Business Development
Company regulations under the 1940 Act, which allow for the issuance of stock
options to qualified participants; 2) to increase the reserved shares under
the amended plan; 3) to call the plan the 1988 Stock Option Plan, as Amended
and Restated (the "1988 Plan"); and 4) to make various other amendments. On
October 20, 1995, the shareholders of the Company approved an amendment to the
1988 Plan authorizing automatic 20,000 share grants of non-qualified stock
options to newly elected non-employee directors of the Company.
Under the 1988 Plan, the number of shares of common stock of the Company
reserved for issuance is equal to 20 percent of the outstanding shares of
common stock of the Company at the time of grant. However, so long as
warrants, options, and rights issued to persons other than the Company's
directors, officers, and employees at the time of grant remain outstanding,
the number of reserved shares under the 1988 Plan may not exceed 15 percent of
the outstanding shares of common stock of the Company at the time of grant,
subject to certain adjustments.
At September 30, 1996, there were 2,088,536 shares of common stock reserved
for the issuance of stock option awards under the Amended 1988 Plan, of which
1,253,605 were subject to outstanding options and warrants and 834,931 were
available for future awards.
The 1988 Plan provides for the issuance of incentive stock options and
non-qualified stock options to eligible employees as determined by the
Compensation Committee of the Board (the "Committee"), which is composed of
four non-employee directors. The Committee also has the authority to construe
and interpret the 1988 Plan; to establish rules for the administration of the
1988 Plan; and, subject to certain limitations, to amend the terms and
conditions of any outstanding awards. Options may be exercised for up to 10
years from the date of grant at prices not less than the fair market value of
the Company's common stock at the date of grant. The 1988 Plan provides that
payment by the optionee upon exercise of an option may be made using cash or
Company stock held by the optionee.
18
The following table summarizes changes in outstanding stock options under the
1988 Plan:
<TABLE>
<S> <C> <C>
Number of Option Exercise
Shares Price Per Share
--------- ---------------
Outstanding at December 31, 1995 1,050,000 $1.1875 - $5.750
Issued 80,000 $6.1875 - $7.000
Canceled (64,000) $5.375
Exercised (50,000) $1.750
--------- ----------------
Outstanding at September 30, 1996 1,016,000 $1.1875 - $7.000
========= ================
</TABLE>
As of September 30, 1996, there were outstanding warrants to purchase 237,605
shares of common stock at a price of $2.0641 per share expiring in 1999.
NOTE 4. EMPLOYEE BENEFITS
As of August 15, 1990, the Company entered into non-competition, employment
and severance contracts with its Chairman, Charles E. Harris, pursuant to
which he is to receive compensation in the form of salary and other benefits.
This contract was amended on June 30, 1992, January 3, 1993, and June 30,
1994. The term of the contract expires on December 31, 1999.
Base salary is to be increased annually to reflect inflation and in addition
may be increased by such amounts as the Board of Directors of the Company (the
"Board") deems appropriate.
In addition, Mr. Harris is entitled under certain circumstances to receive
severance pay under the employment and severance contracts.
As of January 1, 1989, the Company adopted an employee benefits program
covering substantially all employees of the Company under a 401(k) Plan and
Trust Agreement. The Company's contributions to the plan are determined by
the Compensation Committee in the fourth quarter.
On June 30, 1994, the Company adopted a plan to provide medical and health
insurance for retirees, their spouses and dependents who, at the time of their
retirement, have ten years of service with the Company and have attained 50
years of age or have attained 45 years of age and have 15 years of service
with the Company. The coverage is secondary to any government provided or
subsequent employer provided health insurance plans. Based upon actuarial
estimates, the Company provided a reserve of $206,630 as of December 31, 1995
for estimated future benefits under the described plan.
18
NOTE 5. INCOME TAXES
The Company has not elected tax treatment available to regulated investment
companies under Subchapter M of the Internal Revenue Code. Accordingly, for
federal and state income tax purposes, the Company is taxed at statutory
corporate rates on its income, which enables the Company to offset any future
net operating losses against prior years' net income. The Company may carry
back operating losses against net income three years and carry forward such
losses fifteen years.
For the three months and nine months ended September 30, 1996, the Company's
income tax provision (benefit) was allocated as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended 9/30/96 Ended 9/30/95 Ended 9/30/96 Ended 9/30/95
Investment operations $ (171,181) $ (103,523) $ (524,458) $ (690,449)
Realized (loss) gain
on investments. . . (17,947) 70,313 (74,754) (1,606)
Net increase in
unrealized appreciation
on investments. . . (135,406) 51,610 866,385 564,927
----------- ----------- ------------ ------------
Total income tax
provision (benefit) $ (324,534) $ 18,400 $ 267,173 $ (127,128)
=========== =========== ============ ============
The above tax provision consists of the following:
Three Months Three Months Nine Months Nine Months
Ended 9/30/96 Ended 9/30/95 Ended 9/30/96 Ended 9/30/95
Current -- Federal $ (188,540) $ (13,309) $ (600,269) $ (860,710)
Deferred -- Federal (135,994) 31,709 867,442 733,582
----------- ----------- ------------ ------------
Total income tax
provision (benefit) $ (324,534) $ 18,400 $ 267,173 $ (127,128)
=========== =========== ============ =============
</TABLE>
The effective tax rate differs from the Federal statutory rate primarily as a
result of tax deductible expenses not allowed for book.
The Company's deferred tax liability at September 30, 1996 consists of the
following:
Unrealized net appreciation on investments. . . . . . . . $ 1,564,635
Medical retirement benefits . . . . . . . . . . . . . . . (72,320)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (74,243)
-----------
Net deferred income tax liability . . . . . . . . . . . . $ 1,418,072
===========
The exercise of nonqualified stock options give rise to compensation which is
includable in the taxable income of recipients and deductible by the Company
for federal and state income tax purposes. Compensation resulting from
increases in the fair market value of the Company's common stock subsequent to
the date of grant of the applicable exercised stock options is not recognized,
in accordance with Accounting Principles Board Opinion No. 25, as an expense
for financial reporting purposes.
19
NOTE 6. COMMITMENTS AND CONTINGENCIES
During 1993, the Company signed a ten-year lease with sublet provisions for
its office space. Rent expense under this lease for the three months and nine
months ended September 30, 1996, amounted to $41,784 and $119,628
respectively. Future minimum lease payments in each of the following years
are: 1997 -- $164,484; 1998 -- $168,768; 1999 -- $176,030; 2000 -- $178,560;
2001 -- $178,560; thereafter $280,506.
The Company has guaranteed a three-year lease obligation of approximately
$21,000 per annum for the office space of one of its investees, Highline
Capital Management LLC.
In December 1993, the Company and MIT announced the establishment by the
Company of the Harris & Harris Group Senior Professorship at MIT. Prior to
the arrangement for the establishment of this Professorship, the Company had
made gifts of stock in start-up companies to MIT. These gifts, together with
the contribution of $700,000 in cash in 1993, which was expensed by the
Company in 1993, were used to establish this named chair.
The Company contributed to MIT $3,280, $20,000 and $20,000 in 1993, 1994, and
1995, respectively. These amounts represent the cost basis to the Company of
the securities donated. These contributions will be applied to the MIT Pledge
at their market value at the time the shares become publicly traded or
otherwise monetized in a commercial transaction and are free from restriction
as to sale by MIT.
At September 30, 1996, the Company would have to fund additional cash and/or
property that would have to be valued at a total of $756,720 by December, 1998
in order for the Senior Professorship to become permanent.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statement of Operations
The Company accounts for its operations under Generally Accepted Accounting
Principles for investment companies. On this basis, the principal measure of
its financial performance is captioned "Net increase (decrease) in net assets
from operations," which is the sum of three elements. The first element is
"Net operating loss," which is the difference between the Company's income
from interest, dividends and fees and its operating expenses, net of
applicable income tax provisions (benefits). The second element is "Net
realized gain (loss) on investments," which is the difference between the
proceeds received from dispositions of portfolio securities and their stated
cost, net of applicable income tax provisions (benefits). These two elements
are combined in the Company's financial statements and reported as "Net
realized income (loss)." The third element, "Net 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
income taxes that would become payable if the unrealized appreciation were
realized through the sale or other disposition of the investment portfolio.
"Net realized gain (loss) on investments" and "Net increase (decrease) in
unrealized appreciation on investments" are directly related. When a security
is sold to realize a gain (loss), net unrealized appreciation decreases
(increases) and net realized gain increases (decreases).
Financial Condition at September 30, 1996
The Company's total assets and net assets were, respectively, $39,009,557 and
$37,197,792 at September 30, 1996, versus $37,524,555 and $36,561,909 at
December 31, 1995. Net asset value per share was $3.56 at September 30, 1996,
versus $3.54 at December 31, 1995.
The Company's financial condition is dependent on the success of its
investments. The Company has invested and expects to continue to invest a
substantial portion of its assets in private development stage or start-up
companies. These private businesses tend to be thinly capitalized, unproven,
small companies that lack management depth or have no history of operations.
At September 30, 1996, 51.5 percent of the Company's $39.0 million in total
assets consisted of investments at fair value in private businesses, of which
net unrealized appreciation was $3.1 million before taxes. At December 31,
1995, 35.5 percent of the Company's $37.5 million in total assets consisted of
investments at fair value in private businesses, of which net unrealized
appreciation was $0.8 million before taxes.
21
A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
September 30, 1996 December 31, 1995
Investments, at cost $ 32,864,737 $ 33,826,696
Unrealized appreciation* 4,577,977 2,102,593
------------ ------------
Investments, at fair value $ 37,442,714 $ 35,929,289
============ ============
</TABLE>
*The accumulated unrealized appreciation on investments net of deferred taxes
is $3,013,342 at September 30, 1996, versus $1,404,343 at December 31, 1995.
Following an initial investment in a private company, the Company may make
additional investments in such investee 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 or (4) 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 investee company and the Company's investment or could result in a
missed opportunity for the Company to participate to a greater extent in an
investee's successful operations. The Company attempts to maintain adequate
liquid capital to be in a position to make follow-on investments in its
private investee portfolio companies. The Company may elect not to make a
follow-on investment either because it does not want to increase its
concentration of risk or because it prefers other opportunities, even if the
follow-on investment opportunity appears attractive.
The following table is a summary of the cash investments made by the Company
in its private placement portfolio during the nine months ended September 30,
1996:
<TABLE>
<S> <C>
New Investments: Amount
PureSpeech, Inc. $ 999,999
Genomica, Inc. 1,000,304
NeuroMetrix, Inc. 210,000
MultiTarget, Inc. 60,811
PowerVoice Technologies, Inc. 500,000
------------
Sub-total $ 2,771,114
Follow-on Investments:
nFX Corporation $ 440,000
Micracor, Inc. 103,000
Gel Sciences, Inc. 545,000
------------
Sub-total $ 1,088,000
Exercise of Warrants Held:
Princeton Video Image, Inc. $ 547,500
------------
Total $ 4,406,614
============
</TABLE>
Subsequent to September 30, 1996, the Company co-founded BioSupplyNet, Inc.
with an investment of $575,000, representing a 34.5 percent fully-diluted
interest.
22
Results of Operations
Investment Income and Expenses:
The Company's principal investment objective is capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential for capital appreciation and provides little or no
current yield in the form of dividends or interest. The Company does earn
interest income from fixed-income U.S. Government obligations. The amount of
interest income earned varies based upon the average balance of the Company's
portfolio of U.S. Government obligations and the average yield on this
portfolio.
The Company had interest income of $625,434 and $754,706 for the nine months
ended September 30, 1996 and September 30, 1995, respectively. The decrease
is a result of a decline in the balance of the Company's portfolio of U.S.
Government obligations due to purchases of non-income producing private
portfolio investments. The Company also received consulting and
administrative fees from certain portfolio companies which totaled $49,146 and
$2,786 for the nine months ended September 30, 1996 and September 30, 1995,
respectively.
Operating expenses were $2,230,703 and $2,005,415 for the nine months ended
September 30, 1996 and September 30, 1995, respectively. The increase is
primarily due to additional consulting fees incurred in 1996 related to
prospective private portfolio investments. Most of the Company's operating
expenses are related to employee and director compensation, office and rent
expenses and consulting and professional fees (primarily legal and
accounting).
Net operating losses before taxes were $1,518,432 and $1,239,487 for the nine
months ended September 30, 1996 and September 30, 1995, respectively.
The Company has in the past relied, and continues to rely to a large extent,
upon proceeds from sales of investments, rather than investment income, to
defray a significant portion of its operating expenses. Because such sales
cannot be predicted with certainty, the Company attempts to maintain adequate
working capital to provide for fiscal periods when there are no such sales.
23
Realized Gains and Losses on Sales of Portfolio Securities:
During the nine months ended September 30, 1996 and September 30, 1995, the
Company sold various public securities realizing a net pre-tax loss of
$213,584 and $4,589, respectively.
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments decreased $424,708 during the three
months ended September 30, 1996 owing primarily to decreased valuations of
Micracor Inc., Dynecology, Inc. and Cordex Petroleums, Inc. offset slightly by
an increase in the valuation of Alliance Pharmaceutical Corporation and Gel
Sciences, Inc.
Net unrealized appreciation on investments increased $2,475,384 during the
nine months ended September 30, 1996, owing primarily to increased valuations
for Nanophase Technologies Corporation, Gel Sciences, Inc., Princeton Video
Image, Inc., PHZ Capital Partners Limited Partnership, and Alliance
Pharmaceutical Corporation, offset by the decreased valuation of Micracor
Inc., Sonex International Corporation, Dynecology, Inc. and Cordex Petroleums,
Inc.
Net unrealized appreciation on investments increased $1,322,799 during the
nine months ended September 30, 1995, owing primarily to increased valuations
for Cordex Petroleums, Inc. and Questech Corporation offset by the decreased
valuation of Dynecology, Inc. and Magellan Health Services, Inc.
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities (the
primary measure of liquidity) at September 30, 1996 of $18,643,233, versus
$23,833,891 at December 31, 1995. Management believes that its cash,
receivables and marketable securities provide it with sufficient liquidity for
its operations.
Risks
Pursuant to Section 64 (b) (1) of the Investment Company Act of 1940, a
Business Development Company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. There are significant risks inherent in the
company's venture capital business. The Company has invested and will
continue to invest a substantial portion of its assets in private development
stage or start-up companies. These private businesses tend 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 public market for these investments, there
is significantly greater risk of loss than is the case with traditional
investment securities. The Company expects that some of its 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 that potential.
24
The Company has been and shall continue to be risk seeking rather than risk
adverse in its approach to its venture capital and other investments. Neither
the Company's investments nor an investment in the Company is intended to
constitute a balanced investment program. The Company does not currently
intend to pay cash dividends. The Company has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments,
rather than investment income, to defray a significant portion of its
operating expenses.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index for Exhibits to the Form 10-Q
(b) None
26
EXHIBIT INDEX
Item Number (of Item 601 of Regulation S-K)
27. Financial Data Schedule
27
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.
Harris & Harris Group, Inc.
By:/s/_______________________
Rachel M. Pernia, Vice President
Treasurer, Controller and Principal
Accounting Officer
Date: November 13, 1996
28
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000893739
<NAME> HARRIS & HARRIS GROUP, INC.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<INVESTMENTS-AT-COST> 32,864,737 32,864,737
<INVESTMENTS-AT-VALUE> 37,442,714 37,442,714
<RECEIVABLES> 1,101,820 1,101,820
<ASSETS-OTHER> 465,023 465,023
<OTHER-ITEMS-ASSETS> 0 0
<TOTAL-ASSETS> 39,009,557 39,009,557
<PAYABLE-FOR-SECURITIES> 0 0
<SENIOR-LONG-TERM-DEBT> 0 0
<OTHER-ITEMS-LIABILITIES> 1,811,765 1,811,765
<TOTAL-LIABILITIES> 1,811,765 1,811,765
<SENIOR-EQUITY> 0 0
<PAID-IN-CAPITAL-COMMON> 15,955,005 15,955,005
<SHARES-COMMON-STOCK> 10,442,682 10,442,682
<SHARES-COMMON-PRIOR> 10,333,902 10,333,902
<ACCUMULATED-NII-CURRENT> 0 0
<OVERDISTRIBUTION-NII> 0 0
<ACCUMULATED-NET-GAINS> 18,229,445 18,229,445
<OVERDISTRIBUTION-GAINS> 0 0
<ACCUM-APPREC-OR-DEPREC> 3,013,342 3,013,342
<NET-ASSETS> 37,197,792 37,197,792
<DIVIDEND-INCOME> 8,024 0
<INTEREST-INCOME> 655,101 204,126
<OTHER-INCOME> 13,440 49,146
<EXPENSES-NET> 2,230,703 709,386
<NET-INVESTMENT-INCOME> (1,518,432) (491,820)
<REALIZED-GAINS-CURRENT> (213,584) (51,277)
<APPREC-INCREASE-CURRENT> 2,475,384 (386,877)
<NET-CHANGE-FROM-OPS> 476,195 (605,440)
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 0 0
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> 476,195 (605,440)
<ACCUMULATED-NII-PRIOR> 0 0
<ACCUMULATED-GAINS-PRIOR> 18,229,445 18,229,445
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 0 0
<INTEREST-EXPENSE> 0 0
<GROSS-EXPENSE> 0 0
<AVERAGE-NET-ASSETS> 36,879,850 36,879,850
<PER-SHARE-NAV-BEGIN> 3.54 3.64
<PER-SHARE-NII> 0 0
<PER-SHARE-GAIN-APPREC> 0 0
<PER-SHARE-DIVIDEND> 0 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> 3.56 3.56
<EXPENSE-RATIO> 0 0
<AVG-DEBT-OUTSTANDING> 0 0
<AVG-DEBT-PER-SHARE> 0 0
</TABLE>
