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 June 30, 1997
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. Employe
incorporation or organization)Identification No.)
One Rockefeller Plaza
Suite 1430
New York, New York 10020
(Address of principal executive offices)
(212) 332-3600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
Indicate 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 August 8, 1997 was
10,442,682.
1.
Harris & Harris Group, Inc.
Form 10-Q, June 30, 1997
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<S> <C>
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 3
Statements of Assets and Liabilities . . . . . . . . . . . . . . 4
Statements of Operations . . . . . . . . . . . . . . . . . . . . 5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 6
Statements 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. . . . . . . . . . . . . . . . . . . . . . . 23
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 24
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . 26
Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 27
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . 27
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 27
item 4. Submission of Matters to a Vote of Security Holders. . . 27
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 27
Item 6. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . 27
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . 28
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.
Harris & Harris Group, Inc.
Form 10-Q, June 30, 1997
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 be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 1996
contained in the Company's 1996 Annual Report.
3.
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STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<S> <C> <C>
June 30, 1997 December 31, 1996
(Unaudited) (Audited)
Investments, at value (See accompanying
schedule of investments and notes) . . . . $ 29,058,316 $ 35,648,682
Cash and cash equivalents. . . . . . . . . . 132,030 155,440
Interest receivable. . . . . . . . . . . . . 115,690 198,342
Taxes receivable (Note 5). . . . . . . . . . 2,119,492 2,119,492
Prepaid expenses . . . . . . . . . . . . . . 39,549 81,501
Other assets . . . . . . . . . . . . . . . . 235,678 351,833
------------ ------------
Total assets . . . . . . . . . . . . . . . . $ 31,700,755 $ 38,555,290
============ ============
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities . . $ 400,458 $ 374,326
Deferred rent. . . . . . . . . . . . . . . . 56,288 60,914
Deferred income tax liability (Note 5) . . . 0 2,187,447
------------ ------------
Total liabilities. . . . . . . . . . . . . . 456,746 2,622,687
Commitments and contingencies (Note 6) ------------ ------------
Net assets . . . . . . . . . . . . . . . . . $ 31,244,009 $ 35,932,603
============ ============
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 6/30/97 and 12/31/96 104,427 104,427
Additional paid in capital . . . . . . . . . 15,850,576 15,850,576
Accumulated net realized income. . . . . . . 15,215,652 15,606,009
Accumulated unrealized appreciation of investments,
net of deferred tax liability of $0 at 6/30/97
and $2,295,998 at 12/31/96. . . . . . . . 73,354 4,371,591
------------ ------------
Net assets . . . . . . . . . . . . . . . . . $ 31,244,009 $ 35,932,603
============ ============
Shares outstanding . . . . . . . . . . . . . 10,442,682 10,442,682
------------ ------------
Net asset value per outstanding share. . . . $ 2.99 $ 3.44
============ ============
The accompanying notes are an integral part of these financial statements.
4.
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<CAPTION>
STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/97 6/30/97 6/30/96 6/30/97
Investment income:
Interest from:
Fixed-income securities . $ 78,944 $ 203,526 $ 215,231 $430,864
Affiliated companies. . . . . 8,889 10,111 18,889 20,111
Dividend Income --
Unaffiliated Companies. . . . 0 3,934 0 8,024
Other income. . . . . . . . . 7,500 10,810 8,369 35,706
------------ ------------ ----------- --------
Total investment income 95,333 228,381 242,489 494,705
Expenses:
Salaries and benefits. . . . 345,919 387,675 786,243 784,306
Administration and operations 127,449 132,106 225,776 254,318
Professional fees. . . . . . 54,732 216,075 142,829 342,980
Directors' fees and expenses 14,878 14,671 50,726 27,071
Rent . . . . . . . . . . . . 33,219 39,498 72,716 77,844
Depreciation . . . . . . . . 15,000 18,687 30,000 28,687
Custodian fees . . . . . . . 3,637 2,995 7,143 6,111
------------ ----------- --------- --------
Total expenses. . . . . . 594,834 811,707 1,315,433 1,521,317
------------ ----------- --------- ---------
Operating loss
before income taxes (499,501) (583,326)(1,072,944)(1,026,612)
Income tax (provision)
benefit (Note 5) (30,534) 199,147 168,347 353,277
------------ ----------- ---------- ---------
Net operating loss . . . . . . (530,035) (384,179) (904,597) (673,335)
Net realized gain (loss) on investments:
Realized gain (loss) on sale
of investments. . . . . . . . 168,030 (226,727) 791,138 (162,307)
----------- ------------ -------- ---------
Total realized gain (loss) 168,030 (226,727) 791,138 (162,307)
Income tax (provision)
benefit (Note 5) (58,810) 79,354 (276,898) 56,807
------------ ----------- ---------- --------
Net realized gain (loss)
on investments 109,220 (147,373) 514,240 (105,500)
------------ ------------ ---------- ---------
Net realized loss. . . . . . . (420,815) (531,552) (390,357) (778,835)
------------ ------------ --------- ---------
Net (decrease) increase in unrealized appreciation on investments:
Increase as a result
of investments sales . . . . 0 2,005 0 2,005
Decrease as a result
of investments sales . . . . 0 0 (1,764,909) 0
Increase on investments held . 1,430,872 2,574,066 2,845,226 3,771,035
Decrease on investments held .(5,420,882) (937,004) (7,674,552) (910,779)
------------ ------------ ----------- ----------
Change in unrealized appreciation
on investments. . . . . . .(3,990,010) 1,639,067 (6,594,235)2,862,261
Income tax benefit (provision)
(Note 5) 1,384,519 (573,673) 2,295,998(1,001,791)
------------ ------------ ---------- ----------
Net (decrease) increase
in unrealized appreciation
on investments (2,605,491) 1,065,394 (4,298,237)1,860,470
------------ ------------ ---------- ----------
Net (decrease) increase in net assets from operations:
Total. . . . . . . . . . . .$(3,026,306) $ 533,842 $(4,688,594)$1,081,635
============ ========== =========== ==========
Per outstanding share. . . . $ (0.29) $ 0.05 $ (0.45)$ 0.10
============ =========== ============ ==========
The accompanying notes are an integral part of these financial statements.
5.
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STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
Cash flows provided by (used in)
operating activities:
Net (decrease) increase in net assets
resulting from operations . . . . . . . . $(4,688,594) $ 1,081,635
Adjustments to reconcile (decrease)
increase in net assets from operations
to net cash used in operating activities:
Net realized and unrealized loss (gain)
on investments. . . . . . . . . . . . . . . 5,803,097 (2,699,954)
Deferred income taxes. . . . . . . . . . . . (2,187,447) 1,003,437
Depreciation . . . . . . . . . . . . . . . . 30,000 28,687
Other. . . . . . . . . . . . . . . . . . . . 0 (893)
Changes in assets and liabilities:
Receivable from brokers . . . . . . . . . . 0 205,789
Prepaid expenses. . . . . . . . . . . . . . 41,952 35,018
Interest receivable . . . . . . . . . . . . 82,652 82,958
Taxes receivable. . . . . . . . . . . . . . 0 (411,730)
Other assets. . . . . . . . . . . . . . . . 104,581 8,648
Accounts payable and
accrued liabilities. . . . . . . . . . . . 26,132 31,092
Payable to brokers. . . . . . . . . . . . . 0 0
Deferred rent . . . . . . . . . . . . . . . . (4,626) (4,627)
Purchase of fixed assets. . . . . . . . . . . (18,427) (25,020)
------------ -------------
Net cash used in operating activities . . . (810,680) (664,960)
Cash provided by (used in) investing activities:
Net sale of short-term investments
and marketable securities . . . . . . . . . 3,437,835 4,300,537
Investment in private placements. . . . . . (2,650,565) (3,845,803)
------------ -------------
Net cash provided by investing activities . 787,270 454,734
Cash flows provided by financing activities:
Proceeds from exercise of stock options .. . 0 87,500
------------ -------------
Net cash provided by financing activities . 0 87,500
Net decrease in cash and cash equivalents:
Cash and cash equivalents
at beginning of the period. . . . . . . . 155,440 364,354
Cash and cash equivalents
at end of the period. . . . . . . . . . . 132,030 241,628
------------ ------------
Net decrease in cash and cash equivalents. . . $ (23,410) $ (122,726)
============ ============
Supplemental disclosures of cash flow information:
Income taxes paid. . . . . . . . . . . . . . . $ 5,959 $ 2,145
============ ============
</TABLE>
The accompanying notes are an integral part of these finanical statements.
6.
<TABLE>
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STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/97 6/30/96
Changes in net assets
from operations:
Net operating loss. . . . . $(530,035) $ (384,179) $(904,597) $(673,335)
Net realized gain (loss)
on investments 109,220 (147,373) 514,240 (105,500)
Net decrease in unrealized
appreciation on investments
as a result of sales. . . 0 0 (1,147,190) 0
Net (decrease) increase in unrealized
appreciation on
investments held . . . .(2,605,491) 1,065,394 (3,151,047) 1,860,470
------------ ---------- ------------ ---------
Net (decrease) increase in net
assets resulting
from operations . . . . (3,026,306) 533,842 (4,688,594) 1,081,635
Changes in net assets from
capital stock transactions:
Proceeds from exercise of
stock options . . . . . 0 0 0 87,500
Tax benefit of restricted
stock award
and common stock transactions 0 0 0 72,188
------ ---------- ------------ ------------
Net increase in net assets
resulting from capital
stock transactions 0 0 0 159,688
------ ---------- ------------ ------------
Net (decrease) increase
in net assets . . . . . (3,026,306) 533,842 (4,688,594) 1,241,323
Net assets:
Beginning of period. . 34,270,315 37,269,390 35,932,603 36,561,909
------------ ------------ ------------ ------------
End of period . . . . $ 31,244,009 $ 37,803,232 $ 31,244,009 $ 37,803,232
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these finanial statements.
7.
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<CAPTION>
SCHEDULE OF INVESTMENTS JUNE 30, 1997
(Unaudited)
<S> <C> <C> <C>
Method of Shares/ Value
Valuation (3) Principal
Investments in Unaffiliated Companies (9)(14)(15) --
21.2% of total investments
Publicly Traded Portfolio (common stock unless noted otherwise) --
17.2% of total investments
Oil and Gas Related
CORDEX Petroleums Inc. (1)
Argentine oil and gas exploration
Class A Common Stock. . . . (C) 4,052,080 $ 324,223
Biotechnology and Healthcare Related
Alliance Pharmaceutical
Corporation (1)(4). . . . . . . . (C) 80,000 804,960
Biosite Diagnostics, Inc. (1)(4). . (C) 80,000 750,000
Cytyc Corp. (1)(4). . . . . . . . . (C) 10,000 271,250
ENDOCare, Inc. (1)(2)(4). . . . . . (C) 150,000 562,500
Fuisz Technologies, Ltd. (1)(4) . . (C) 125,000 1,109,375
Keravision, Inc. (1)(4) . . . . . . (C) 45,000 410,625
Magellan Health
Services, Inc. (1)(4)(6) . . . . . (C) 20,000 590,000
Zonagen, Inc. (1)(4). . . . . . . . (C) 7,500 164,062
------------
Total Publicly Traded Portfolio (cost: $4,469,648). . . . . . . .$ 4,986,995
Private Placement Portfolio (Illiquid) -- 4.0% of total investments
Exponential Business Development Company (1)(2)(5)
Venture capital partnership focused on early stage companies
Limited partnership interest . . . (A) 0 $ 25,000
Micracor, Inc. (1)(2)
Designs and manufactures advanced solid
state photonic systems
Convertible Note . . . . . . . . . (D) $ 103,000 37,000
Princeton Video Image, Inc. (1)(2)(7)(8)
Real time sports and entertainment advertising
3.0% of fully diluted equity
Common Stock . . . . . . . . . . . (B) 68,400
Warrants at $2.25 expiring 8/25/97 (D) 6,700 1,110,674
-----------
Total Private Placement Portfolio (cost: $771,000). . . . . . . .$ 1,172,674
-----------
Total Investments in
Unaffiliated Companies (cost: $5,240,648). . . . . . . . . . .$ 6,159,669
-----------
</TABLE>
The accompanying notes are an integral part of this schedule.
8.
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS JUNE 30, 1997
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation(3) Principal Value
Private Placement Portfolio in Non-Controlled Affiliates
(9)(15) (Illiquid) -- 37.5% of total investments
Dynecology Incorporated (1)(2)(7) --
Develops various environmental
intellectual properties --
Option expiring 12/16/98 to purchase at
$15 per share 135,000 shares of
Common Stock equaling 18.2%
of fully diluted equity. . . . . . .(D) $ 30,000
Gel Sciences, Inc. (1)(2)(7) --
Develops engineered response gels
for controlled release systems --
10.9% of fully diluted equity
Warrants at $1.65
expiring 02/01/00. . . . . . . . . (D) 27,766
Common Stock . . . . . . . . . . . (D) 171,172
Series A Preferred Stock . . . . . (D) 135,178
Series A-1 Preferred Stock . . . . (D) 57,607
Series B Convertible Preferred Stock(D) 397,409
Series C Convertible Preferred Stock(D) 101,515
Demand Promissory Note . . . . . . (D) $ 216,000 764,908
Genomica Corporation (1)(2)(7)(10) --
Develops software
that enables the study of complex
genetic diseases --
16.9% of fully diluted equity
Common Stock . . . . . . . . . . . (A) 199,800
Series A Voting Convertible
Preferred Stock. . . . . . . . . . (A) 1,660,200 1,000,304
Harber Brothers Productions, Inc.
(1)(2)(7) -- Finances, produces
and markets media products that combine
entertainment, music, learning and
interactivity --18.7% of fully diluted equity
Series A Voting Convertible
Preferred Stock . . . . . . . . . .(D) 967,500 1
Demand Promissory Note . . . . . . .(D) $ 250,000 1
Highline Capital Management, LLC. (2) --
Organizes and manages
investment partnerships --
24.9% of fully diluted equity. . . .(A) 500,000
Highline Offshore Advisors, LLC.
(1)(2)(4)(7) -- Organizes and manages
offshore investment vehicles --
24.9% of fully diluted equity. . . .(A) 500,000
Nanophase Technologies Corporation (1)(2)(7) --
Manufactures and markets inorganic
crystals of nanometric dimensions
6.6% of fully diluted equity
Series D Convertible Preferred Stock(B) 1,162,204 3,486,612
NeuroMetrix, Inc. (1)(2)(7) -- Developing
devices for: 1) diabetics to monitor
their blood glucose and 2) detection
of carpal tunnel syndrome
30% of fully diluted equity
Series A Convertible Preferred Stock(A) 125,000
Series B Convertible Preferred Stock(A) 175,000 410,000
PHZ Capital Partners Limited Partnership (1)(2)(5)
Organizes and manages investment partnerships --
20.0% of fully diluted equity
Limited partnership interest . . . .(B) 1,000,000
One year 8% note due 9/22/97 . . . .(A) $ 500,000 500,000
PureSpeech, Inc. (1)(2)(7) -- Develops and markets
innovative speech recognition technology --
8.3% of fully diluted equity
Series A Convertible Preferred Stock(D) 476,190 187,120
Convertible Promissory Note. . . . .(A) $ 243,980 243,980
Questech Corporation (1)(2)(5)(11) --
Manufactures and markets
proprietary decorative tiles and signs --
15.4% of fully diluted equity
Common Stock . . . . . . . . . . . .(D) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01.(A) 166,667 167
------------
Total Private Placement Portfolio
in Non-Controlled Affiliates (cost: $10,791,801) . . . . . . $ 10,886,261
------------
The accompanying notes are an integral part of this schedule.
9.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS JUNE 30, 1997
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Private Placement Portfolio in Controlled Affiliates
(9)(15) (Illiquid) -- 13.5% of total investments
BioSupplyNet, Inc. (1)(2)(7)(13) -- Expands commercially
the print and World Wide Web product directories developed by
Cold Spring Harbor Laboratory Press
38.3% fully diluted equity
Series A Voting Convertible
Preferred Stock. . . . . . . . . . . . . (A) 775,000 $ 775,000
MultiTarget, Inc. (1)(2)(7) --
Developing intellectual property
related to localized treatment of cancer
37.5% of fully diluted equity
Series A Convertible Preferred Stock . . (A) 375,000 106,396
NBX Corporation (1)(2)(7)(12) -- Exploits
innovative distributed computing technology
for use in small business telephone systems --
25.7% of fully diluted equity
Series A Convertible Preferred Stock . . (B) 500,000
Series C Convertible Preferred Stock . . (B) 240,793 2,615,000
nFX Corporation (1)(2) -- Develops
neural-network software
38.3% of fully diluted equity
Series A Voting Convertible
Preferred Stock. . . . . . . . . . . . . (D) 1,294,288
Series B Non-Voting Convertible
Preferred Stock. . . . . . . . . . . . . (D) 689,920 289,014
Demand Promissory Note . . . . . . . . . (A) $ 145,000 145,000
------------
Total Private Placement Portfolio
in Controlled Affiliates (cost: $4,913,116). . . . . . . . . $ 3,930,410
U.S. Government Obligations -- 27.8% of total investments
U.S. Treasury Note dated 03/01/93 due date
02/28/98 -- 5.125% rate. . . . . . . . . (H) $ 5,000,000 $ 4,981,250
U.S. Treasury Bill dated 01/09/97 due date
07/10/97 -- 4.8% yield . . . . . . . . . (K) $ 360,000 358,118
U.S. Treasury Bill dated 03/13/97 due date
09/11/97 -- 5.1% yield . . . . . . . . . (K) $ 1,240,000 1,208,425
U.S. Treasure Bill dated 11/14/96 due date
11/13/97 -- 5.2% yield . . . . . . . . . (K) $ 1,590,000 1,534,183
------------
Total Investments in U.S. Government Obligations
(cost: $8,039,397) . . . . . . . . . . . . . . . . . . . . . $ 8,081,976
------------
Total Investments -- 100% (cost: $28,984,962) . . . . . . . . . $ 29,058,316
============
The accompanying notes are an integral part of this schedule.
10.
SCHEDULE OF INVESTMENTS JUNE 30, 1997
(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 Method
of Valuation A to L.
(4) These investments were made during 1997. Accordingly, the amounts shown
on the schedule represent the gross additions in 1997.
(5) No activity occurred in these investments during the six months ended
June 30, 1997.
(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 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
Harris & Harris Group, Inc. (the "Company") owns less than 5 percent of
the investee company. Investments in non-controlled affiliated companies
consist of investments where the Company owns more than 5 percent but
less than 25 percent of the investee company. Investments in controlled
affiliate companies consist of investments where the Company owns more
than 25 percent of the investee company.
(10) Genomica Corporation was cofounded by the Company, Cold Spring Harbor
Laboratory and Falcon Technology Partners, LP. Mr. G. Morgan Browne
serves on the Board of the Company and is Administrative Director of
Cold Spring Harbor Laboratory.
(11) Formerly named Intaglio, Ltd.
(12) Formerly named PowerVoice Technologies, Inc.
(13) BioSupplyNet, Inc. was cofounded by the Company, Cold Spring Harbor
Laboratory and other investors. Mr. G. Morgan Browne serves on the Board
of Directors and is Administrative Director of Cold Spring Harbor
Laboratory.
(14) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $5,348,325. The gross unrealized appreciation
based on tax cost for these securities is $1,102,510. The gross
unrealized depreciation on the cost for these securities is $291,164.
(15) 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 option
grants.
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 (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:
EQUITY-RELATED SECURITIES
Equity-related securities are carried at fair value using one or more of
the following basic methods of valuation:
12.
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) significant
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, including
large blocks in relation to trading volume. 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. For other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that day, market value is
the mean of the closing bid price and asked price on that day.
This method is the preferred method of valuation when there is an
established public market for a company's securities, as that market provides
the most objective basis for valuation.
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.
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:
13.
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 the 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.
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.
14.
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 and 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:
Cash and Cash Equivalents. Cash and cash equivalents include money market
instruments with maturities of less than three months.
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 expenses
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 June
30, 1996 and December 31, 1996 financial statements to conform to the June 30,
1997 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 June 30, 1997 and December 31,1996 and the reported amounts
of revenues and expenses for the three and six months ended June 30, 1997 and
June 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.
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.
The Company accounts for the 1988 Plan under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
1988 Plan been determined consistent with the fair value method required by
FASB Statement No. 123 ("FASB No. 123"), the Company's net realized loss and
net asset value per share would have been reduced to the following pro-forma
amounts:
17.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/97 6/30/97
Net realized loss:
As Reported $ (420,815) $ (531,552) $(390,357) $ (778,835)
Pro Forma $ (526,580) $ (643,214) $(601,888) $(1,002,159)
Net Asset Value per share:
As Reported $ 2.99 $ 3.64 $ 2.99 $ 3.64
Pro Forma $ 2.98 $ 3.63 $ 2.97 $ 3.62
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C> <C>
June 30, 1997 June 30, 1996
Stock volatility 0.60 0.61
Risk-free interest rate 6.3% 6.3%
Option term in years 7 7
Stock dividend yield -- --
</TABLE>
Because the FASB No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost and related impact on net realized loss and net asset value per share may
not be representative of that value to be expected in future years.
The Company may grant options for up to 2,088,536 shares under the 1988
Plan. The Company has granted options on 1,130,000 shares and 237,605
warrants through June 30, 1997. Under the 1988 Plan, the option exercise
price equals the stock's market price on date of grant. The options granted
vest over a five-year period and expire after 10 years.
18.
A summary of the status of the Company's 1988 Plan at June 30, 1997 and
1996 and changes during the six months then ended is presented in the table
and narrative below:
<TABLE>
<S> <C> <C> <C> <C>
June 30, 1997 June 30, 1996
Shares Weighted Shares Weighted
Average Average
-----------------------------------------------
Exercise Exercise
Price Price
Outstanding at beginning
of the period 1,080,000 $4.58 1,050,000 $4.44
Granted 320,000 $3.94 80,000 $6.39
Exercised - - 50,000 $1.75
Forfeited 270,000 $5.34 - -
Expired - - - -
Outstanding at end of period 1,130,000 $4.22 1,080,000 $4.71
Exercisable at end of period 357,000 $3.19 326,812 $2.94
Weighted average fair
value of options granted $2.50 $4.09
</TABLE>
The range of exercise prices for the outstanding options as of June 30,
1997:
<TABLE>
<S> <C> <C>
Options Exercise Price Remaining Life (Years)
8,000 $1.1875 4.50
150,000 $1.6250 2.10
50,000 $3.0000 5.10
50,000 $3.7500 4.70
410,000 $5.3750 8.25
2,000 $5.7500 8.60
60,000 $6.1875 8.80
20,000 $7.0000 9.10
80,000 $3.6250 9.60
300,000 $3.8750 9.80
As of June 30, 1997, 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 a non-competition,
employment and severance contract with its Chairman, Charles E. Harris,
pursuant to which he is to receive compensation in the form of salary and other
benefits.
19.
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 amount as the Compensation Committee of the
Board of Directors of the Company deems appropriate. In addition, Mr. Harris
would be 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 contribution 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 coverage 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. On February 10, 1997, the Company amended this plan to
include employees who "have seven full years of service and have attained 58
years of age." The coverage is secondary to any government provided or
subsequent employer provided health insurance plans. Based upon actuarial
estimates, the Company provided an original reserve of $176,520 that was
charged to operations for the period ending June 30, 1994. As of June 30,
1997, the Company had a reserve of $232,415 for the plan.
NOTE 5. INCOME TAXES
The Company has not elected tax treatment available to regulated
investment companies under Sub-Chapter 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 and six months ended June 30, 1997 and 1996, the Company's
income tax (benefit) provision was allocated as follows:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/97 6/30/96 6/30/97 6/30/96
Investment operations. . $ 30,534 $ (199,147) $(168,347)$ (353,277)
Realized gain (loss)
on investments . . . . . . 58,810 (79,354) 276,898 (56,807)
(Decrease) increase
in unrealized appreciation
on investments . . . . . . (1,384,519) 573,673 (2,295,998) 1,001,791
------------ ---------- ------------ ----------
Total income tax
(benefit) provision. . . . $(1,295,175) $ 295,172 $(2,187,447)$ 591,707
=========== ========== =========== ===========
</TABLE>
The above tax (benefit) provision consists of the following:
<TABLE>
<S> <C> <C> <C> <C>
Current -- Federal . . . . . $ (16,197) $ (277,136) $ 0 $ (411,729)
Deferred -- Federal. . . . . . (1,278,978) 572,308 (2,187,447) 1,003,436
Total income tax
(benefit) provision . . . $(1,295,175) $ 295,172 $(2,187,447) $ 591,707
</TABLE>
The Company's deferred tax (asset) liability at June 30, 1997 and December
31, 1996 consists of the following:
<TABLE>
<S> <C> <C>
June 30, 1997 December 31, 1996
Unrealized appreciation on investments $ 0 $ 2,295,998
Medical retirement benefits (72,320) (72,320)
Other (30,181) (36,231)
Net operating loss (101,955) 0
Valuation allowance 204,456 0
------------ ------------
Net deferred income tax (asset) liability $ 0 $ 2,187,447
=============== =============
The exercise of nonqualified stock options and certain warrants 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 and warrants is not recognized, in accordance with
Accounting Principles Board Opinion No.25, as an expense for financial
accounting purposes.
NOTE 6. COMMITMENTS AND CONTINGENCIES
During 1993, the Company signed a ten-year lease with sublet
provisions for office space. In 1995, this lease was amended to include
additional office space. Rent expense under this lease was $33,219 and
$39,498 for the three months ended June 30, 1997 and 1996, and $72,716 and
$77,844 for the six months ended June 30, 1997 and 1996, respectively.
Future minimum lease payments in each of the following years are:
1998 -- $168,768; 1999 -- $176,030; 2000 -- $178,561; 2001 -- $178,561;
2002 -- $178,561; thereafter $101,946.
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.
21.
The Company contributed to MIT securities with a cost basis of $3,280,
$20,000 and $20,000 in 1993, 1994, and 1995 respectively. 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 June 30, 1997, 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.
In January 1997, the Company signed loan agreements with two of its
investee companies for up to $750,000. As of June 30, 1997, the Company had
loaned $395,000 to the investee companies. In addition, the Company has
guaranteed a bonus of up to $100,000 to the key employees of one of its
investee companies.
In June 1997, the Company agreed to provide one of its investee
companies a $450,000 revolving line of credit. The purpose of this line of
credit, which will be secured by accounts receivable, is to provide for
seasonal cash flow. To the extent that this line of credit is utilized, the
Company will also receive warrants to purchase common stock.
22.
Item 7. 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 (decrease) increase 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 benefits. The second element is "Net realized gain 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 (decrease) increase 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 on investments" and "Net (decrease) increase 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
The Company's total assets and net assets were, respectively, $31,700,755
and $31,244,009 at June 30, 1997, versus $38,555,290 and $35,932,603 at
December 31, 1996. Net asset value per share was $2.99 at June 30, 1997,
versus $3.44 at December 31, 1996.
The Company's financial condition is dependent on the success of its
investments. The Company has invested 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 June 30, 1997, 50.4 percent of the
Company's $31.7 million in total assets consisted of investments at fair value
in private businesses, of which net unrealized appreciation was approximately
$0.1 million. At December 31, 1996, 48.8 percent of the Company's $39 million
in total assets consisted of investments at fair value in private businesses,
of which net unrealized appreciation was approximately $5 million before taxes.
A summary of the Company's investment portfolio is as follows:
</TABLE>
<TABLE>
<S> <C> <C>
June 30, 1997 December 31, 1996
Investments, at cost $ 28,984,962 $ 28,981,093
Unrealized appreciation 73,354 6,667,589
------------- -------------
Investments, at fair value $ 29,058,316 $ 35,648,682
============= =============
</TABLE>
The accumulated unrealized appreciation on investments net of deferred taxes
is $73,354 at June 30, 1997, versus $4,371,591 at December 31, 1996.
23.
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) to exercise warrants or options that were acquired
in a prior financing; (3) to 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 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 though 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 six months ended June
30, 1997:
<TABLE>
<S> <C>
Follow-on Investments: Amount
BioSupplyNet, Inc. $ 200,000
Highline Offshore Advisors, LLC. 500,000
MultiTarget, Inc. 45,585
NBX Corporation 850,000
--------------------
Sub-total $ 1,595,585
Loans:
nFX Corporation $ 145,000
Gel Sciences, Inc. 216,000
Harber Brothers Productions, Inc. 250,000
PureSpeech, Inc. 243,980
--------------------
Sub-total $ 854,980
Exercise of Warrants:
NeuroMetrix, Inc $ 200,000
--------------------
Total $ 2,650,565
====================
Results of Operations
Investment Income and Expenses:
The Company's principal objective is to achieve 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 securities, including U.S. Government
Obligations. The amount of interest income earned varies based upon the
average balance of the Company's fixed-income portfolio and the average yield
on this portfolio.
24.
The Company had interest income from fixed-income securities of $215,231
and $430,864 for the six months ended June 30, 1997 and 1996, respectively.
The decrease is a result of a decline in the balance of the Company's
fixed-income portfolio. The Company also received dividends, consulting and
administrative fees from certain portfolio companies which totaled $8,369 and
$35,706 for the six months ended June 30, 1997 and 1996, respectively.
Operating expenses were $1,315,433 and $1,521,317 for the six months
ended June 30, 1997 and 1996, respectively. 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
fees).
Net operating losses before taxes were $1,072,944 and $1,026,612 for the
six months ended June 30, 1997 and 1996, 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.
Realized Gains and Losses on Sales of Portfolio Securities:
During the six months ended June 30, 1997, the Company sold various
public securities realizing a net pre-tax gain of $791,138, of which $1,764,909
had been recognized in prior years, therefore, it decreased unrealized
appreciation on investments. During the six months ended June 30, 1996, the
Company sold various public securities realizing a net pre-tax loss of
$162,307, of which a loss of $2,005 had been recognized in prior years.
During the three months ended June 30, 1997, the Company sold various
public securities realizing a net pre-tax gain of $168,030. During the three
months ended June 30, 1996, the Company sold various public securities
realizing a net pre-tax loss of $226,727.
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments before taxes decreased, during
the six months ended June 30, 1997, $6,594,235 from $6,667,589 to $73,354 owing
primarily to decreased valuations in Gel Sciences, Inc., Harber Brothers
Productions, Inc., nFX Corporation, Princeton Video Image, Inc. and PureSpeech,
Inc., offset by the increased valuation in NBX Corporation and Nanophase
Technologies, Inc.
Net unrealized appreciation on investments before taxes increased, during
the six months ended June 30, 1996, $2,862,261 from $2,102,593, to $4,964,854
owing primarily to increased valuations for Princeton Video Image, Inc., PHZ
Capital Partners, Alliance Pharmaceutical Corp., Gel Sciences, Inc. and
Nanophase Technologies, Inc., offset by the decreased valuation of Micracor
Inc., Sonex International Corporation, Dynecology, Inc. and CORDEX Petroleums,
Inc.
Net unrealized appreciation on investments before taxes decreased, during
the three months ended June 30, 1997, $3,990,010 from $4,063,364 to $73,354
owing primarily to decreased valuations for Gel Sciences, Inc., nFX Corporation
and Princeton Video Image, Inc., offset by an increased valuation in Nanophase
Technologies, Inc.
Net unrealized appreciation on investments before taxes increased, during
the three months ended June 30, 1996, $1,639,067, from $3,325,787 to
$4,964,854, owing primarily to increased valuations for Gel Sciences, Inc. and
Nanophase Technologies offset by the decreased valuation of Micracor Inc.,
Sonex International Corporation, Dynecology, Inc., Alliance Pharmaceutical
Corp., Magellan Health Services and CORDEX Petroleums, Inc.
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at June 30, 1997 of $15,436,183 versus
$19,296,591 at December 31, 1996. Management believes that its cash,
receivables and marketable securities provide the Company 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 inherent in the nature of
the company's investment portfolio. There are significant risks inherent in
the Company's venture capital business. The Company has invested 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 a 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 their potential. The Company has been
risk seeking rather than risk averse in its approach to 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 pay or 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.<PAGE>
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
On Tuesday July 29, 1997, Registrant held its Annual Meeting of
Shareholders for the following purposes: 1) to elect directors of the Company;
2) to ratify, confirm and approve the Board of Directors' selection of Arthur
Andersen LLP as the Company's independent public accountant for its fiscal
year ending December 31,1997. All of the nominees at the July 29, 1997 Annual
Meeting were elected directors by an affirmative vote of at least 84.2 percent
of the total shares outstanding. With respect to purpose number two,
described as a proposal "to ratify, confirm and approve the Board of
Directors' selection of Arthur Andersen LLP" as the Company's independent
public accountant for its fiscal year ending December 31,1997, the affirmative
votes cast were 88.0 percent the negative votes cast were 0.8 percent and
those abstaining were 0.1 percent, effecting passage.
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<PAGE>
EXHIBIT INDEX
Item Number (of Item 601 of Regulation S-K)
27. Financial Data Schedule 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: August 14, 1997
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 28,984,962
<INVESTMENTS-AT-VALUE> 29,058,316
<RECEIVABLES> 2,235,182
<ASSETS-OTHER> 275,227
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