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 March 31, 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. 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'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 May 1, 1997 was
10,442,682.
1
Harris & Harris Group, Inc.
Form 10Q, March 31, 1997
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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. . . . . . . . . . . . . . . . . . . . . . . 22
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 24
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . 25
Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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, March 31, 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
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
------
<S> <C> <C>
March 31, 1997 December 31, 1996
(Unaudited) (Audited)
Investments, at value (See accompanying
schedule of investments and notes). . . . $ 33,703,525 $ 35,648,682
Cash and cash equivalents. . . . . . . . . . 159,122 155,440
Receivable from brokers. . . . . . . . . . . 25,374 0
Interest receivable. . . . . . . . . . . . . 81,518 198,342
Taxes receivable (Note 5). . . . . . . . . . 2,103,294 2,119,492
Prepaid expenses . . . . . . . . . . . . . . 60,525 81,501
Other assets . . . . . . . . . . . . . . . . 231,919 351,833
------------ ------------
Total assets . . . . . . . . . . . . . . . . $ 36,365,277 $ 38,555,290
============ ============
LIABILITIES & NET ASSETS
------------------------
Accounts payable and accrued liabilities. . . $ 346,029 $ 374,326
Payable to brokers. . . . . . . . . . . . . . 411,354 0
Deferred rent . . . . . . . . . . . . . . . . 58,601 60,914
Deferred income tax liability (Note 5). . . . 1,278,978 2,187,447
------------ ------------
Total liabilities . . . . . . . . . . . . . . 2,094,962 2,622,687
Commitments and contingencies (Note 6) ------------ ------------
Net assets. . . . . . . . . . . . . . . . . . $ 34,270,315 $ 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 3/31/97 and 12/31/96. . . . 104,427 104,427
Additional paid in capital. . . . . . . . . . 15,850,576 15,850,576
Accumulated net realized income . . . . . . . 15,636,467 15,606,009
Accumulated unrealized appreciation of
investments, net of deferred tax liability
of $1,384,519 at 3/31/97 and $2,295,998
at 12/31/96. . . . . . . . . . . . . . . . 2,678,845 4,371,591
------------ ------------
Net assets. . . . . . . . . . . . . . . . . . $ 34,270,315 $ 35,932,603
============ ============
Shares outstanding. . . . . . . . . . . . . . 10,442,682 10,442,682
------------ ------------
Net asset value per outstanding share . . . . $ 3.28 $ 3.44
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<S> <C> <C>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
Investment income:
Interest from:
Fixed-income securities. . . . . . . . . . $ 136,287 $ 227,338
Affiliated companies. . . . . . . . . . . . 10,000 10,000
Dividend Income -- Unaffiliated Companies 0 4,090
Other income. . . . . . . . . . . . . . . . . 869 24,896
------------- --------------
Total investment income. . . . . . . . . . 147,156 266,324
Expenses:
Salaries and benefits . . . . . . . . . . . 440,324 396,631
Administration and operations . . . . . . . 98,327 122,212
Professional fees . . . . . . . . . . . . . 88,097 126,905
Depreciation. . . . . . . . . . . . . . . . 15,000 10,000
Rent. . . . . . . . . . . . . . . . . . . . 39,497 38,346
Directors' fees and expenses. . . . . . . . 35,848 12,400
Custodian fees. . . . . . . . . . . . . . . 3,506 3,116
------------- --------------
Total expenses. . . . . . . . . . . . . . . . 720,599 709,610
------------- --------------
Operating loss before income taxes. . . . . (573,443) (443,286)
Income tax benefit (Note 5) . . . . . . . . 198,881 154,130
------------- --------------
Net operating loss. . . . . . . . . . . . . . (374,562) (289,156)
Net realized gain on investments:
Realized gain on sale of investments. . . . 623,108 64,420
------------ -------------
Total realized gain. . . . . . . . . . . 623,108 64,420
Income tax provision (Note 5). . . . . . (218,088) (22,547)
------------- -------------
Net realized gain on investments. . . . . . . 405,020 41,873
------------ -------------
Net realized income (loss). . . . . . . . . . 30,458 (247,283)
------------ -------------
Net (decrease) increase in unrealized
appreciation on investments:
Decrease as a result of investment sales. . (1,764,909) 0
Increase on investments held. . . . . . . . 1,414,354 1,320,193
Decrease on investments held. . . . . . . . (2,253,670) (96,999)
------------- -------------
Change in unrealized (depreciation)
appreciation on investments. . . . . . . (2,604,225) 1,223,194
Income tax benefit (provision) (Note 5) . . 911,479 (428,118)
------------ -------------
Net (decrease) increase in unrealized
appreciation on investments . . . . . . . . . (1,692,746) 795,076
------------- -------------
Net (decrease) increase in net assets
from operations:
Total . . . . . . . . . . . . . . . . . . . $ (1,662,288) $ 547,793
============= =============
Per outstanding share. . . . . . . . . . . $ (0.16) $ 0.05
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
------------------------
(Unaudited)
<S> <C> <C>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
Cash flows provided by (used in)
operating activities:
Net (decrease) increase in net assets
resulting from operations . . . . . . . . . . $ (1,662,288) $ 547,793
Adjustments to reconcile (decrease) increase in
net assets from operations to net cash provided
by (used in) operating activities:
Net realized and unrealized loss (gain)
on investments. . . . . . . . . . . . . . . 1,981,117 (1,287,614)
Deferred income taxes . . . . . . . . . . . . (908,469) 431,128
Depreciation . . . . . . . . . . . . . . . . 15,000 10,000
Other . . . . . . . . . . . . . . . . . . . . 0 (2,315)
Changes in assets and liabilities:
Receivable from brokers . . . . . . . . . . . (25,374) (2,805,585)
Prepaid expenses. . . . . . . . . . . . . . . 20,976 15,849
Interest receivable . . . . . . . . . . . . . 116,824 (8,012)
Taxes receivable. . . . . . . . . . . . . . . 16,197 (134,593)
Other assets. . . . . . . . . . . . . . . . . 107,762 (27,400)
Accounts payable and accrued liabilities. . . (28,297) 20,671
Payable to brokers. . . . . . . . . . . . . . 411,354 0
Deferred rent . . . . . . . . . . . . . . . . (2,313) 0
Purchase of fixed assets. . . . . . . . . . . (2,847) (24,697)
------------ ------------
Net cash provided by (used in)
operating activities. . . . . . . . . . . . 39,642 (3,264,775)
Cash provided by (used in) investing activities:
Net sale of short-term investments
and marketable securities. . . . . . . . 1,709,625 5,234,633
Investment in private placements. . . . . . . (1,745,585) (1,943,302)
------------- -------------
Net cash (used in) provided by
investing activities. . . . . . . . . . . . (35,960) 3,291,331
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 increase 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 159,122 478,410
------------- -------------
Net increase in cash and cash equivalents . . $ 3,682 $ 114,056
============= =============
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . . . . . . $ 5,909 $ 0
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
(Unaudited)
<S> <C> <C>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
Changes in net assets from operations:
Net operating loss. . . . . . . . . . . . . $ (374,562) $ (289,156)
Net realized gain on investments. . . . . . 405,020 41,873
Net decrease in unrealized
appreciation on investments
as a result of sales. . . . . . . . . . . (1,147,190) 0
Net (decrease) increase in unrealized
appreciation on investments held. . . . . (545,556) 795,076
------------- -------------
Net (decrease) increase in net
assets resulting from operations. . . . . (1,662,288) 547,793
Changes in net assets from
capital stock transactions:
Proceeds from exercise of
stock options . . . . . . . . . . . . . . 0 87,500
Tax benefit of restricted stock award
and common stock transactions . . . . . . 0 72,188
------------- -------------
Net increase in net assets resulting
from capital stock transactions . . . . . 0 159,688
------------- -------------
Net (decrease) increase
in net assets . . . . . . . . . . . . . . . (1,662,288) 707,481
Net assets:
Beginning of period . . . . . . . . . . . . $ 35,932,603 $ 36,561,909
------------- -------------
End of period . . . . . . . . . . . . . . . $ 34,270,315 $ 37,269,390
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS MARCH 31, 1997
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation(3) Principal Value
Investments in Unaffiliated Companies (9)(13)(14) -- 14.1% of total investments
Publicly Traded Portfolio (common stock unless noted otherwise) -- 6.2% of
total investments
Oil and Gas Related
CORDEX Petroleums Inc. (1)
Argentine oil and gas exploration
Class A Common Stock. . . . . . . . (C) 4,052,080 $ 324,156
Biotechnology and Healthcare Related
ENDOCare, Inc.(1)(2)(4) . . . . . . . (C) 150,000 609,375
Fuisz Technologies, Inc.(1)(4). . . . (C) 70,000 411,250
Keravision, Inc.(1)(4). . . . . . . . (C) 25,000 253,125
Magellan Health Services,Inc.(1)(6)(4)(C) 20,000 492,500
-------------
Total Publicly Traded Portfolio (cost: $2,230,212). . . . . . . $ 2,090,406
-------------
Private Placement Portfolio (Illiquid) -- 7.9% 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 40,000
Princeton Video Image, Inc. (1)(2)
(5)(7)(8)
Real time sports
and entertainment advertising --
3.4% of fully diluted equity
Common Stock . . . . . . . . . . . . (B) 68,400
Warrants at $2.25 expiring 8/25/97 . (D) 6,700 2,613,425
-------------
Total Private Placement Portfolio (cost: $771,000). . . . . . . $ 2,678,425
-------------
Total Investments in
Unaffiliated Companies (cost: $3,001,212). . . . . . . . . . $ 4,768,831
-------------
</TABLE>
The accompanying notes are an integral part of this schedule.
8
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS MARCH 31, 1997
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Private Placement Portfolio in Non-Controlled Affiliates (9)(14)(Illiquid) --
33.1% of total investments
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) $ 35,000
Gel Sciences, Inc. (1)(2)(7) --
Develops engineered response gels
for controlled release systems --
10.3% of fully diluted equity
Warrants at $1.65 expiring 02/01/00. . . .(D) 27,766
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 2,353,921
Genomica Corporation (1)(2)(7)(10) --
Develops software that enables the
study of complex genetic diseases
18.1% 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 --
21.5% of fully diluted equity
Series A Voting Convertible
Preferred Stock . . . . . . . . . . . . .(D) 967,500
Convertible Note . . . . . . . . . . . . .(D) $ 250,000 1
Highline Capital Management, LLC. (2)(7) --
Organizes and manages
offshore investment vehicles --
24.9% of fully diluted equity. . . . . . .(A) 500,000
Highline Offshore Advisors, LLC. (1)(2)(4) --
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
6.9% of fully diluted equity
Series D Convertible Preferred Stock. . . (B) 1,162,204 2,614,959
NeuroMetrix, Inc. (1)(2)(5)(7) -- Developing
a device for diabetics to monitor their
blood glucose --
30% of fully diluted equity
Series A Convertible Preferred Stock. . . (A) 125,000
Warrants at $1.60 expiring 6/2/97 . . . . (A) 175,000 210,000
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 -- 7.3% of fully diluted equity
Series A Convertible Preferred Stock . . .(D) 190,476 166,667
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: $10,131,823) . . . . . . $ 11,144,187
-------------
</TABLE>
The accompanying notes are an integral part of this schedule.
9
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS MARCH 31, 1997
--------------------------------------
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Private Placement Portfolio in Controlled Affiliates (9)(14) (Illiquid) --
17.6% of total investments
BioSupplyNet, Inc. (1)(2)(4)(7)(12)--
Expands commercially the print and
World Wide Web product directories
developed by Cold Spring Harbor
Laboratory Press --
34.5% fully diluted equity
Series A Voting Convertible
Preferred Stock. . . . . . . . . . . . . (A) 575,000 $ 575,000
MultiTarget, Inc. (1)(2)(7) -- Developing
intellectual property
related to localized treatment of cancer
37.8% of fully diluted equity
Series A Convertible Preferred Stock. . .(A) 375,000 106,396
nFX Corporation (1)(2) -- Develops
neural-network software --
37.4% of fully diluted equity
Series A Voting Convertible
Preferred Stock . . . . . . . . . . . . .(D) 1,294,288 996,740
Series B Non-Voting Convertible
Preferred Stock . . . . . . . . . . . . .(D) 689,920 1,539,980
Convertible Note. . . . . . . . . . . . .(A) $ 100,000 100,000
PowerVoice Technologies, Inc. (1)(2)(7) --
Exploits innovative distributed computing
technology for use in small business
telephone systems --
27% of fully diluted equity
Series A Convertible Preferred Stock. . (B) 500,000
Series C Convertible Preferred Stock. . (B) 240,793 2,615,000
Total Private Placement Portfolio -------------
in Controlled Affiliates (cost: $4,668,116) . . . . . . . $ 5,933,116
-------------
U.S. Government Obligations -- 35.2% of total investments
U.S. Treasury Note dated 3/01/93 due date
02/28/98 -- 5.125% rate. . . . . . . . .(H) $ 5,000,000 $ 4,957,050
U.S. Treasury Bill dated 10/24/96 due date
04/24/97 -- 5.0% yield . . . . . . . . .(K) $ 1,015,000 998,492
U.S. Treasury Bill dated 05/30/96 due date
05/29/97 -- 5.3% yield . . . . . . . . .(K) $ 915,000 904,014
U.S. Treasury Bill dated 12/12/96 due date
06/12/97 -- 5.3% yield . . . . . . . . .(K) $ 1,000,000 974,975
U.S. Treasury Bill dated 10/24/96 due date
08/14/97 -- 5.4% yield . . . . . . . . .(K) $ 810,000 792,984
U.S. Treasury Bill dated 03/13/97 due date
09/11/97 -- 5.5% yield . . . . . . . . .(K) $ 1,740,000 1,695,693
U.S. Treasure Bill dated 11/14/96 due date
11/13/97 -- 5.7% yield . . . . . . . . .(K) $ 1,590,000 $ 1,534,183
-------------
Total Investments in U.S. Government Obligations
(cost: $11,839,010) . . . . . . . . . . . . . . . . . . . $ 11,857,391
-------------
Total Investments -- 100% (cost: $29,640,161). . . . . . . . . $ 33,703,525
=============
</TABLE>
The accompanying notes are an integral part of this schedule.
10
SCHEDULE OF INVESTMENTS MARCH 31, 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 three months ended
March 31, 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 affiliated 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) 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.
(13) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $3,108,889.
The gross unrealized appreciation based on tax cost for these
securities is $2,054,800. The gross unrealized depreciation on the cost
for these securities is $394,858.
(14) 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:
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) 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.
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 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.
Reclassifications. Certain reclassifications have been made to the
March 31, 1996 and December 31, 1996 financial statements to conform to the
March 31, 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 March 31, 1997 and December 31,1996 and the reported
amounts of revenues and expenses for the three months ended March 31, 1997 and
March 31, 1996. Actual results could differ from these estimates.
16
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 income
(loss) and net asset value per share would have been reduced to the following
pro forma amounts:
17
<TABLE>
<S> <C> <C>
March 31, 1997 March 31, 1996
Net Realized Income (Loss):
As Reported $ 30,458 $ (247,283)
Pro Forma $ (111,958) $ (298,490)
Net Asset Value per share:
As Reported $ 3.28 $ 3.59
Pro Forma $ 3.27 $ 3.58
</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>
March 31, 1997 March 31, 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 income (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 1,180,000 shares and warrants on
237,605 shares through March 31, 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.
A summary of the status of the Company's 1988 Plan at March 31, 1997
and 1996 and changes during the three months then ended is presented in the
table and narrative below:
<TABLE>
<S> <C> <C> <C> <C>
March 31, 1997 March 31, 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 300,000 $3.87 60,000 $6.18
Exercised - - 50,000 $1.75
Forfeited 200,000 $5.37 - -
Expired
Outstanding at end of period 1,180,000 $4.27 1,060,000 $4.67
Exercisable at end of period 403,000 $3.42 326,812 $2.93
Weighted average fair value of
options granted $2.50 - $4.00 -
</TABLE>
The range of exercise prices for the outstanding options as of March 31,
1997 are: 8,000 options at $1.1875, with a remaining life of 4.7 years;
150,000 options at $1.625, with a remaining life of 2.3 years; 180,000 options
at $3.00 to $3.75, with an average exercise price of $3.375 and an average
remaining life of 5.1 years; 542,000 options at $5.375 to $7.00, with an
average exercise price of $5.485 and an average remaining life of 8.4 years;
300,000 options at $3.875, with a remaining life of 9.1 years.
As of March 31, 1997, there were outstanding warrants to purchase 237,605
shares of common stock at a price of $2.0641 per share expiring in 1999.
18
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. 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
March 31, 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.
19
For the three months ended March 31, 1997 and 1996, the Company's income
tax (benefit) provision was allocated as follows:
<TABLE>
<S> <C> <C>
Three Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
Investment operations $ (198,881) $ (154,130)
Realized gain on investments 218,088 22,547
(Decrease) increase in unrealized
appreciation on investments (911,479) 428,118
------------- -------------
Total income tax (benefit) provision $ (892,272) $ 296,535
============= =============
The above tax (benefit) provision consists of the following:
Current -- Federal $ 16,197 $ (134,593)
Deferred -- Federal (908,469) 431,128
------------- -------------
Total income tax (benefit) provision $ (892,272) $ 296,535
============= =============
The Company's deferred tax liability at March 31, 1997 and December 31, 1996
consists of the following:
March 31, 1997 December 31, 1996
Unrealized appreciation on investments $ 1,384,519 $ 2,295,998
Medical retirement benefits (81,345) (72,320)
Other (24,196) (36,231)
------------- -------------
Net deferred income tax liability $ 1,278,978 $ 2,187,447
============= =============
</TABLE>
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 $39,497 and
$38,346 for the three months ended March 31, 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.
20
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 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 December 31, 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.
In January 1997, the Company signed loan agreements with two of its
investee companies for up to $750,000. As of March 31, 1997, the Company had
loaned $350,000 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.
21
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'sfinancial 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,
$36,365,277 and $34,270,315 at March 31, 1997, versus $38,555,290 and
$35,932,603 at December 31, 1996. Net asset value per share was $3.28 at
March 31, 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 March 31, 1997, 54.3 percent of
the Company's $36 million in total assets consisted of investments at fair
value in private businesses, of which net unrealized appreciation was
approximately $4.2 million before taxes. 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.
22
A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
March 31, 1997 December 31, 1996
Investments, at cost $ 29,640,161 $ 28,981,093
Unrealized appreciation 4,063,364 6,667,589
------------ ------------
Investments, at fair value $ 33,703,525 $ 35,648,682
============ ============
</TABLE>
The accumulated unrealized appreciation on investments net of deferred taxes is
$2,678,845 at March 31, 1997, versus $4,371,591 at December 31, 1996.
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 three months ended
March 31, 1997:
<TABLE>
<S> <C>
Follow-on Investments: Amount
---------------------- -------
Highline Offshore Advisors LLC. $ 500,000
MultiTarget, Inc. 45,585
PowerVoice Technologies, Inc. 850,000
------------
Sub-total $ 1,395,585
Loans:
------
nFX Corporation $ 100,000
Harber Brothers Productions 250,000
------------
Sub-total $ 350,000
------------
Total $ 1,745,585
============
</TABLE>
23
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.
The Company had interest income from fixed-income securities of $136,287
and $227,338 for the three months ended March 31,1997 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 consulting and
administrative fees from certain portfolio companies which totaled $869
for the three months ended March 31, 1997 and $24,896 for the three months
ended March 31, 1996.
Operating expenses were $720,599 and $709,610 for the three months ended
March 31, 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 $573,443 and $443,286 for the three
months ended March 31, 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 three months ended March 31, 1997 and 1996, the Company sold
various public securities realizing net gains of $623,108 and $64,420,
respectively.
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments before taxes decreased
$2,604,225 during the three months ended March 31, 1997, from $6,667,589 to
$4,063,364 owing primarily to decreased valuations for Harber Brothers
Productions, Inc. and PureSpeech, Inc. and the realization of previously
unrealized gains on public securities, offset by an increase in the valuation
of PowerVoice Technologies, Inc.
Net unrealized appreciation on investments increased $1,223,194 during the
three months ended March 31, 1996, from $2,102,593 to $3,325,786, owing
primarily to increased valuations for Princeton Video Image, Inc., PHZ Captal
Partners and Alliance Pharmaceutical Corp., offset by the decreased valuation
of Sonex International Corporation and Dynecology, Inc.
24
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities (the
primary measure of liquidity) at March 31, 1997 of $16,317,105, 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 ofits 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.
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 EXHIBIT INDEX
Item Number (of Item 601 of Regulation S-K)
27. Financial Data Schedule
26
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
27
Date: May 13, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000893739
<NAME> HARRIS & HARRIS GROUP, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<INVESTMENTS-AT-COST> 29,640,161
<INVESTMENTS-AT-VALUE> 33,703,525
<RECEIVABLES> 2,210,186
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</TABLE>
