UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 1998
[ ] 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 Identification No.)
incorporation or organization)
One Rockefeller Plaza, Rockefeller Center, New York, New York 10020
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
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 ____
Harris & Harris Group, Inc.
Form 10-Q, September 30, 1998
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . 1
Statements of Assets and Liabilities . . . . . . . . . . . . . . 2
Statements of Operations . . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 4
Statements of Changes in Net Assets. . . . . . . . . . . . . . . 5
Schedule of Investments. . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition. . . . . . . . . . . . . . . . . . . . . . . 21
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 23
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . 26
Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 31
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . 31
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . 31
Item 4. Submission of Matters to a Vote of Security Holders. . . 31
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 32
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Harris & Harris Group, Inc.
Form 10-Q, September 30, 1998
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.
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, 1997 contained in Harris & Harris Group's
(the "Company") 1997 Annual Report.
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. On September 25, 1997,
the Company's Board of Directors approved a proposal to seek qualification
of the Company in 1998 as a Regulated Investment Company ("RIC") under
Sub-Chapter M of the Internal Revenue (the "Code"). (At that time,
the Company was taxable under Sub-Chapter C of the Code (a "C
Corporation").) On April 8, 1998, the Company announced that it had
received a certification from the Securities and Exchange Commission
for 1997 relating to the Company's status under section 851(e) of the
Code. That certification was necessary for the Company to qualify as
a RIC for 1998 and subsequent taxable years.
Pursuant to the Company's receipt of the section 851(e) certification,
the Company's Board of Directors declared and paid a one-time cash dividend
of $0.75 per share to meet one of the Company's requirements for
qualification for Sub-Chapter M tax treatment in 1998. The Company
has requested rulings from the Internal Revenue Service (the "IRS")
regarding other issues relevant to the Company's tax status as a RIC.
(See Note 5 of Notes to Financial Statements.)
The qualification of the Company as a RIC under Sub-Chapter M of
the Code depends on it satisfying certain technical requirements regarding
its income, investment portfolio, and distributions. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -- Taxation under Sub-Chapter M.") There can be no assurance that the
Company will qualify for Sub-Chapter M treatment for 1998 or subsequent
years. In addition, under certain circumstances, even if the Company
were qualified for Sub-Chapter M treatment in 1998 or a subsequent year,
the Company might elect to be taxed in that year as a C Corporation and
not elect RIC status. Nevertheless, the Company's financial statements
for 1998 assume the Company will qualify for such treatment.
1
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<S> <C> <C>
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
Investments, at value (See
accompanying schedule of
investments and notes). . . . . . . $ 19,926,685 $ 38,659,230
Cash and cash equivalents. . . . . . . 129,904 145,588
Notes receivable (Note 6). . . . . . . 300,000 0
Prepaid expenses . . . . . . . . . . . 49,424 85,126
Other assets . . . . . . . . . . . . . 281,039 383,840
-------------- --------------
Total assets . . . . . . . . . . . . . $ 20,687,052 $ 39,273,784
============== ==============
LIABILITIES & NET ASSETS
Accounts payable
and accrued liabilities . . . . . . $ 531,467 $ 899,491
Deferred rent. . . . . . . . . . . . . 44,722 51,662
Deferred income tax liability (Note 5) 0 667,697
Note Payable (Note 6). . . . . . . . . 0 4,000,000
------------- -------------
Total liabilities. . . . . . . . . . . 576,189 5,618,850
------------- -------------
Commitments and contingencies (Note 6)
Net assets . . . . . . . . . . . . . . $ 20,110,863 $ 33,654,934
-------------- -------------
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;
10,692,971 issued at 9/30/98 and
issued and outstanding at 12/31/97. . 106,930 106,930
Additional paid in capital . . . . . . . 16,173,519 16,178,979
Accumulated net realized income. . . . . 2,144,486 12,028,191
Accumulated unrealized appreciation of
investments, net of deferred tax
liability of $1,113,009 at 9/30/98
and $2,817,898 at 12/31/97. . . . . . 1,839,666 5,340,834
Treasury stock, at cost (73,730 shares). (153,738) 0
-------------- --------------
Net assets . . . . . . . . . . . . . . . $ 20,110,863 $ 33,654,934
-------------- --------------
Total net assets and liabilities . . . . $ 20,687,052 $ 39,273,784
============== ==============
Shares outstanding . . . . . . . . . . . 10,619,241 10,692,971
============== ==============
Net asset value per outstanding share. . $ 1.89 $ 3.15
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
Investment income:
Interest from:
Fixed-income securities. $ 46,571 $ 147,099 $ 314,237 $ 362,330
Affiliated companies . . 22,649 11,111 109,133 30,000
Other income (Note 6). . . 135,680 10,000 143,028 18,369
-------- --------- --------- ---------
Total investment income. 204,900 168,210 566,398 410,699
Expenses:
Salaries and benefits. . . 182,136 442,888 646,284 1,229,131
Profit sharing
expense (credit). . . . 0 0 (423,808) 0
Administration
and operations . . . . 74,346 77,800 272,294 303,576
Professional fees . . . . 66,767 47,071 246,866 189,900
Rent . . . . . . . . . . . 40,522 28,846 118,137 101,562
Directors' fees
and expenses . . . . . 31,252 36,577 101,385 87,303
Depreciation . . . . . . . 12,500 15,000 37,500 45,000
Custodian fees . . . . . . 2,253 5,039 8,451 12,182
Restructuring Expense. . . 0 100,000 0 100,000
Interest expense (Note 6). 11,963 0 85,378 0
---------- --------- ---------- ---------
Total expenses . . . . . 421,739 753,221 1,092,487 2,068,654
---------- --------- ---------- ---------
Operating loss before
income taxes . . . . . . (216,839) (585,011) (526,089) (1,657,955)
Income tax benefit
(provision) (Note 5) . . . (743,949) 497,297 (1,137,192) 665,644
----------- --------- --------- -----------
Net operating loss . . . . . (960,788) (87,714) (1,663,281) (992,311)
Net realized (loss) gain
on investments:
Realized (loss) gain
on sale of investments . (787,873) (95,052) (200,696) 696,086
--------- -------- --------- -------
Total realized (loss) gain. (787,873) (95,052) (200,696) 696,086
Income tax benefit
(provision) (Note 5) . . 0 33,268 0 (243,630)
Net realized (loss)
gain on investments. . . (787,873) (61,784) (200,696) 452,456
----------- --------- ----------- ---------
Net realized loss. . . . . .(1,748,661) (149,498) (1,863,977) (539,855)
Net (decrease) increase in unrealized appreciation on investments:
Increase as a result of
investment sales . . . . 554,687 102,314 665,312 102,314
Decrease as a result of
investment sales . . . . (170,468) (391,084) (963,680) (1,730,910)
Increase on investments
held . . . . . . . . . . 2,262 2,391,856 3,779,954 4,770,561
Decrease on investments
held . . . . . . . . . .(2,271,010) (953,126) (8,687,643) (8,586,240)
------------ ---------- ----------- -----------
Change in unrealized
appreciation on
investments. . . . .(1,884,529) 1,149,960 (5,206,057) (5,444,275)
Income tax benefit
(provision) (Note 5) . . 743,949 (390,502) 1,704,889 1,905,496
------------ ---------- ---------- -----------
Net (decrease) increase
in unrealized appreciation
on investments . . . . .(1,140,580) 759,458 (3,501,168) (3,538,779)
------------ ---------- ----------- -----------
Net (decrease) increase in
net assets from operations:
Total. . . . . . . . . . $(2,889,241) $ 609,960 $(5,365,145) $(4,078,634)
============ ========== ============ ============
Per outstanding share. . $ (0.27) $ 0.06 $ (0.51) $ (0.39)
============ ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
Cash flows used in operating activities:
Net decrease in net assets
from operations . . . . . . . . . . . $ (5,365,145) $ (4,078,634)
Adjustments to reconcile net decrease
in net assets from operations to net
cash used in operating activities:
Net realized and unrealized loss on
investments . . . . . . . . . . . . 5,406,753 4,748,189
Deferred income taxes . . . . . . . . (667,697) (1,940,490)
Depreciation. . . . . . . . . . . . . 37,500 45,000
Changes in assets and liabilities:
Receivable from brokers . . . . . . . 0 (557,606)
Prepaid expenses. . . . . . . . . . . 35,702 64,182
Interest receivable . . . . . . . . . 78,457 123,740
Taxes receivable. . . . . . . . . . . 0 (387,020)
Other assets. . . . . . . . . . . . . (4,855) 102,162
Accounts payable and accrued liabilities (316,227) 107,152
Deferred rent . . . . . . . . . . . . (6,940) (6,939)
Purchase of fixed assets. . . . . . . (8,300) (23,618)
---------- ---------
Net cash used in operating activities (810,752) (1,803,882)
Cash provided by investing activities:
Net sale of short-term investments
and marketable securities. . . . 13,934,302 5,011,522
Investment in private placements
and loans. . . . . . . . . . . . (960,308) (3,160,642)
----------- -----------
Net cash provided by investing activities 12,973,994 1,850,880
Cash flows used in financing activities:
Payment of dividend . . . . . . . . . (8,019,728) 0
Payment of note payable (Note 6). . . (4,000,000) 0
Purchase of Treasury stock (Note 6) . (199,802) 0
Proceeds from sale of stock (Note 6). 40,604 0
----------- -----------
Net cash used in financing activities (12,178,926) 0
Net (decrease) increase in cash and cash equivalents:
Cash and cash equivalents at beginning
of the period . . . . . . . . . 145,588 155,440
Cash and cash equivalents at end
of the period . . . . . . . . . 129,904 202,438
----------- -----------
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . $ (15,684) $ 46,998
=========== ==========
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . . $ 372 $ 5,959
Interest paid . . . . . . . . . . . . $ 85,378 $ 0<PAGE>
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
Changes in net assets from operations:
Net operating loss. . . $(960,788) $ (87,714) $(1,663,281) $(992,311)
Net realized (loss)
gain on investments. .(787,873) (61,784) (200,696) 452,456
Net increase (decrease)
in unrealized appreciation
on investments as a
result of sales . . . 384,219 (190,710) (298,368) (1,058,587)
Net (decrease) increase
in unrealized
appreciation on
investments held . .(1,524,799) 950,168 (3,202,800) (2,480,192)
----------- ---------- ----------- -----------
Net (decrease) increase
in net assets resulting
from operations . . (2,889,241) 609,960 (5,365,145) (4,078,634)
Changes in net assets from capital
stock transactions:
Payment of dividends . . 0 0 (8,019,728) 0
Proceeds from
sale of stock . . . . 10,877 0 40,604 0
Purchase of
Treasury stock. . . . (34,088) 0 (199,802) 0
--------- --------- ----------- ---------
Net decrease in net assets
resulting from capital
stock transactions. . (23,211) 0 (8,178,926) 0
--------- --------- ----------- ----------
Net (decrease)increase
in net assets . . . . (2,912,452) 609,960 (13,544,071) (4,078,634)
Net assets:
Beginning of
the period . . . . 23,023,315 31,244,009 33,654,934 35,932,603
----------- ----------- ----------- -----------
End of the period . . $20,110,863 $31,853,969 $20,110,863 $31,853,969
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Investments in Unaffiliated
Companies (12)(13)(14) -- 6.3% of total investments
Publicly Traded Portfolio (Common stock unless noted otherwise)
-- 3.6% of total investments
Oil and Gas Related
CORDEX Petroleums Inc. (1)
Argentine and Chilean oil and gas exploration -- 2.01%
of fully diluted equity
Class A Common Stock . . . . . . .(C) 4,052,080 $ 44,968
Biotechnology and Healthcare Related
Somnus Medical
Technology, Inc. (1)(4) . . . . .(C) 35,000 109,375
Princeton Video Image, Inc. (1)(2)(7)
-- Real time sports and
entertainment advertising --
1.4% of fully diluted equity. . .(C) 150,200 531,843
Voice Control Systems, Inc. (1)(2)
-- Supplier of speech
recognition and related
speech input technology . . . . .(C) 22,964 37,977
-----------
Total Publicly Traded
Portfolio (cost: $1,437,927) . . . . . . . . . . . . . . $ 724,163
Private Placement Portfolio (Illiquid) -- 2.7% of total investments
Exponential Business Development Company (1)(2)(5) --
Venture capital partnership
focused on early stage companies
-- 0.87% of fully diluted equity
Limited partnership interest . . .(A) -- $ 25,000
MedLogic Global Corporation (1)(2) --
Medical cyanoacrylate adhesive --
0.43% of fully diluted equity
Series B Convertible Redeemable
Preferred Stock . . . . . . . . . .(B) 60,319
Common Stock . . . . . . . . . . .(B) 25,798 511,692
----------
Total Private Placement
Portfolio (cost: $1,058,775) . . . . . . . . . . . . . . . . $ 536,692
----------
Total Investments in
Unaffiliated Companies (cost: $2,496,702) . . . . . . . . . $1,260,855
</TABLE>
The accompanying notes are an integral part of this schedule.
6
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Investments in
Non-Controlled Affiliates (12)(14) -- 60.9% of total investments
Publicly Traded Portfolio -- 5.7% of total investments
Nanophase Technologies Corporation (1)(6)(8) --
Manufactures and markets
inorganic crystals of
nanometric dimensions --
4.98% of fully diluted equity
Common Stock . . . . . . . . . . . .(C) 730,916 $1,133,212
----------
Total Publicly Traded
Portfolio (cost: $1,626,204) . . . . . . . . . . . . . . $1,133,212
Private Placement Portfolio (Illiquid) -- 55.2% of total investments
Genomica Corporation (1)(2)(5)(6)(9) -- Develops software
that enables the study of complex genetic diseases --
10.8% of fully diluted equity
Common Stock . . . . . . . . . . . .(A) 199,800
Series A Voting
Convertible Preferred Stock. . . . .(A) 1,660,200 $1,000,304
InSite Marketing Technology, Inc. (1)(2)(4)
-- Integrates marketing science and
sales strategy into e-commerce
-- 7.12% of fully diluted equity
Common Stock . . . . . . . . . . . .(A) 1,351,351 500,000
NBX Corporation (1)(2)(6)(10) --
Exploits innovative distributed
computing technology for use in
small business telephone systems
-- 14.3% of fully diluted equity
Promissory Note --
8% due March 16, 2001 . . . . . . . (A) $ 10,000 10,000
Series A Convertible
Preferred Stock . . . . . . . . . . (B) 500,000
Series C Convertible
Preferred Stock . . . . . . . . . . (B) 240,793
Series D Convertible
Preferred Stock . . . . . . . . . . (A) 59,965 4,540,298
PHZ Capital Partners Limited
Partnership (2) -- Organizes and
manages investment partnerships --
20.0% of fully diluted equity
Demand Promissory Note -- 8%. . . . (A) $500,000 500,000
Limited partnership interest. . . . (D) -- 1,405,622
Questech Corporation (1)(2)(6) --
Manufactures and markets
proprietary decorative tiles
and signs -- 12.4% of
fully diluted equity
Common Stock . . . . . . . . . . . .(A) 302,459
Common Stock . . . . . . . . . . . .(D) 263,333
Warrants at $4.00
expiring 11/28/01 . . . . . . . . .(A) 166,667 2,263,335
SciQuest, Inc. (1)(2)(6)(11) --
Internet e-commerce source for
scientific products -- 5.11% of
fully diluted equity
Series C Convertible
Preferred Stock . . . . . . . . . .(A) 277,163
Warrants at $2.7962
expiring 6/30/07. . . . . . . . . .(A) 26,822 775,000
------------
Total Private Placement
Portfolio (cost: $7,195,308) . . . . . . . . . . . . . . $10,994,559
------------
Total Investments in
Non-Controlled Affiliates (cost: $8,821,512). . . . . . . $12,127,771
</TABLE>
The accompanying notes are an integral part of this schedule.
7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
(Unaudited)
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Private Placement Portfolio
in Controlled Affiliates (12)(14)
(Illiquid) -- 13.3% of total investments
MultiTarget, Inc. (1)(2)(6) -- Developing
intellectual property
related to localized treatment of cancer --
37.5% of fully diluted equity
Series A Convertible
Preferred Stock. . . . . . . . . .(D) 375,000 $ 1
NeuroMetrix, Inc. (1)(2)(6) -- Developing
devices for: 1) detection of carpal
tunnel syndrome and 2) diabetics to
monitor their blood glucose -- 27.1%
of fully diluted equity
Series A Convertible
Preferred Stock. . . . . . . . . .(B) 175,000
Series B Convertible
Preferred Stock. . . . . . . . . .(B) 125,000
Series C-2 Convertible
Preferred Stock. . . . . . . . . .(A) 229,620 2,648,100
Total Private Placement
Portfolio in Controlled
Affiliates (cost: $1,768,100) . . . . . . . . . . . . $ 2,648,101
U.S. Government Obligations -- 19.5% of total investments
U.S. Treasury Bill
dated 04/02/98 due date
10/01/98 -- 5.0% yield . . . . . .(K) $ 2,150,000 $ 2,150,000
U.S. Treasury Bill
dated 05/07/98 due date
11/05/98 -- 4.9% yield . . . . . .(K) $ 350,000 348,604
U.S. Treasury Bill
dated 05/21/98 due date
11/19/98 -- 5.0% yield . . . . . .(K) $ 800,000 795,656
U.S. Treasury Bill
dated 06/04/98 due date
12/03/98 -- 4.8% yield . . . . . .(K) $ 600,000 595,698
Total Investments in
U.S. Government Obligations
(cost: $3,887,696) . . . . . . . . . . . . . . . . . . . $ 3,889,958
Total Investments -- 100% (cost: $16,974,010). . . . . . . . $19,926,685
</TABLE>
The accompanying notes are an integral part of this schedule.
8
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1998
(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-incomeproducing.
(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 1998. Accordingly, the amounts
shown on the schedule represent the gross additions in 1998.
(5) No changes in valuation occurred in these investments during the
nine months ended September 30, 1998.
(6) These investments are development stage companies. A development stage
company is defined as a company that is devoting substantially all of
its efforts to establishing a new business, and either has not yet
commenced its planned principal operations or has commenced such
operations but has not realized significant revenue from them.
(7) Formerly named Princeton Electronic Billboard, Inc. As of
September 30, 1998, the market price per share of Princeton Video
Image, Inc. ("PVII") was $4.125. As of November 4, 1998, the market
price was $3.0625 and would result in a value of $394,853 at such date.
The Company is subject to a lock-up agreement on the stock, which
expires December 16, 1998.
(8) As of September 30, 1998, the market price per share of Nanophase
Technologies Corporation ("NANX") was $1.9375. As of November 4, 1998,
the market price per share was $3.00, and would result in a value
of $1,754,198 at such date.
(9) 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 Directors of the Company and is Administrative
Director of Cold Spring Harbor Laboratory. Mr. Charles E. Harris,
Chairman of the Company was elected to the Board of Trustees of Cold
Spring Harbor Laboratory in November 1998.
(10)Formerly named PowerVoice Technologies, Inc.
(11)SciQuest, Inc. acquired BioSupplyNet, Inc. See Note 6 of Notes to
Financial Statements.
(12)Investments in unaffiliated companies consist of investments in which
theCompany 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.
(13)The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $2,604,378. The gross unrealized
appreciation based on tax cost for these securities is $0. The
gross unrealized depreciation based on the tax cost for these
securities is $1,343,523.
(14)The percentage ownership of each investee company disclosed in the
Schedule ofInvestments expresses the potential common equity
interest in each such investee. The calculated percentage represents
the amount of the issuer's common stock the Company owns or can
acquire as a percentage of the issuer's total outstanding common
stock plus common shares reserved for issued and outstanding warrants,
convertible securities and stock options.
The accompanying notes are an integral part of this schedule.<PAGE>
9
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:
10
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 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
11
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:
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.
12
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.
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.
13
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"). 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 September 30, 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. As a BDC, the Company
continues to be subject to such reporting requirements.
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification in 1998 as a RIC under Sub-Chapter M of the
Code. As a RIC, the Company must, among other things, distribute at least
90 percent of its taxable net income and may either distribute or retain its
taxable net realized capital gains on investments. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Taxation under Sub-Chapter M.") There can be no assurance that the Company
will qualify as a RIC or that if it does qualify, it will continue to
qualify. In addition, even if the Company were to qualify as a RIC, under
certain circumstances, it might elect in a given year to be taxed as a C
Corporation and not elect RIC status.
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
14
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 bases.
Income Taxes. Prior to January 1, 1998, the Company recorded income
taxes using the liability method in accordance with the provision of
Statement of Financial Accounting Standards No. 109. Accordingly, deferred
tax liabilities had been established to reflect temporary differences
between the recognition of income and expenses for financial reporting and
tax purposes, the most significant difference of which relates to the
Company's unrealized appreciation on investments.
The September 30, 1998 financial statements do not include a provision
for deferred taxes on unrealized gains other than the provision for taxes on
the unrealized gains as of December 31, 1997, net of the operating and
capital loss carryforwards incurred by the Company through December 31, 1997.
(See Note 5. Income Taxes.)
Reclassifications. Certain reclassifications have been made to the
December 31, 1997 and September 30, 1997 financial statements to conform to
the September 30, 1998 presentation.
Estimates by Management. The preparation of the financial statements in
conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of September 30, 1998 and December 31,1997, and the
reported amounts of revenues and expenses for the three months and nine
months ended September 30, 1998 and September 30, 1997. 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. The Company's 1988 Plan was cancelled as of
December 31, 1997, canceling all outstanding stock options and eliminating
all potential stock option grants.
The Company accounted 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)
income and net asset value per share would have been reduced to the following
pro-forma amounts:
15
<TABLE>
<S> <C> <C>
Three Months Nine Months Ended
September 30, 1997 September 30, 1997
Net Realized (Loss) Income:
As Reported $ (149,498) $ (539,855)
Pro Forma $ (255,264) $ (857,152)
Net Asset Value per share:
As Reported $ 3.05 $ 3.05
Pro Forma $ 3.04 $ 3.02
</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>
September 30, 1997
Stock volatility 0.60
Risk-free interest rate 6.3%
Option term in years 7
Stock dividend yield - -
</TABLE>
The FASB No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995.
A summary of the status of the Company's 1988 Plan at September 30, 1997
and changes during the nine months then ended is presented in the table and
narrative below. The Company's 1988 Plan was cancelled as of December 31,
1997, canceling all outstanding stock options and eliminating all potential
stock option grants.
<TABLE>
September 30, 1997
<S> <C> <C>
Shares Weighted
Average
------ --------
Exercise
Price
Outstanding at beginning of period 1,080,000 $4.58
Granted 320,000 $3.94
Exercised - - - -
Forfeited 270,000 $5.34
Expired - - - -
Canceled - - - -
--------- -----
Outstanding at end of period 1,130,000 $4.22
========= =====
Exercisable at end of period 439,000 $3.60
Weighted average fair value
of options granted $2.50
</TABLE>
16
As of January 1, 1998, the Company implemented the Harris & Harris
Group, Inc. Employee Profit Sharing Plan (the "Plan") that provides for
profit sharing equal to 20 percent of the net realized income of the Company
as reflected on the statement of operations of the Company for such year,
less the nonqualifying gain, if any. Under the Plan, net realized income of
the Company includes investment income, realized gains and losses, and
operating expenses (including taxes paid or payable by the Company), but it
will be calculated without regard to dividends paid or distributions made to
shareholders, payments under the Plan, unrealized gains and losses, and loss
carry-overs from other years ("Qualifying Income"). The portion of net
after-tax realized gains attributable to asset values as of September 30,
1997 will be considered nonqualifying gain, which will reduce "Qualifying
Income." As of September 30, 1998, the Company does not have an accrual for
the Plan and in the nine months ended September 30, 1998 reversed a bonus
accrual of $423,808 established as of December 31, 1997; $198,763 in the
three months ended March 31, 1998, $225,045 in the three months ended June
30, 1998 and $0 in the three months ended September 30, 1998.
NOTE 4. EMPLOYEE BENEFITS
The Company has an employment and severance contract ("Employment
Contract") with its Chairman, Charles E. Harris, pursuant to which he is to
receive compensation in the form of salary and other benefits. On January
1, 1998 Mr. Harris' Employment Contract was amended to reduce his salary to
$200,000 and to allow him to participate in other business opportunities and
investments. 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 is 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
September 30, 1998, the Company had a reserve of $255,430 for the plan.
17
NOTE 5. INCOME TAXES
For the three and nine months ended September 30, 1998 and 1997, the
Company's income tax (provision) benefit was allocated as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1998 Sept. 30,1997
Investment
operations. . $ (743,949)* $ 497,297 $ (1,137,192) $ 665,644
Realized (loss)
gain on
investments . 0 33,268 0 (243,630)
Net (decrease)
increase in
unrealized
appreciation on
investments . 743,949* (390,502) 1,704,889 1,905,496
------------- -------------- ------------- ------------
Total income tax
benefit . . . $ 0 $ 140,063 $ 567,697 $ 2,327,510
============= ============== ============= ============
</TABLE>
*As the unrealized appreciation on investments decreases, the tax liability
on the gain also decreases, which creates a tax benefit. However, as the
tax liability decreases below the net operating loss and capital ("NOL")
carryforward, the Company is no longer getting the benefit of the NOL
carryforward therefore the Company has to reverse that portion of the NOL
carryforward not being utilized, creating a tax provision in the accumulated
income (loss), where the original tax NOL was recorded.
The above tax benefit consists of the following:
<TABLE>
<S> <C> <C> <C> <C>
Current -- Federal $ 0 $ 387,020 $ (100,000) $ 387,020
Deferred -- Federal 0 (246,957) 667,697 1,940,490
-------- ---------- ----------- ----------
Total income tax benefit $ 0 $ 140,063 $ 567,697 $2,327,510
======== ========== =========== ==========
</TABLE>
The Company's net deferred tax liability at September 30, 1998 and
December 31, 1997 consists of the following:
<TABLE>
<S> <C> <C>
September 30, 1998 December 31, 1997
Unrealized appreciation on investments $ 1,113,009 $ 2,817,898
Net operating and capital loss carryforward (1,708,523) (1,856,958)
Medical retirement benefits - - (81,345)
Other - - (211,898)
------------ ------------
Deferred income tax (asset) liability $ (595,514) $ 667,697
Valuation allowance 595,514 - -
------------ ------------
Net deferred income tax (asset) liability $ 0 $ 667,697
============ ============
</TABLE>
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification in 1998 as a RIC under Sub-Chapter M of the
Code. As a RIC, the Company annually must distribute at least 90 percent of
its investment company taxable income as a dividend and may either
distribute or retain its taxable net capital gains from investments. There
can be no assurance that the Company will qualify as a RIC or that, if it
does qualify, it will continue to qualify or will elect to qualify. To
initially qualify as a RIC, among other requirements, the Company had to
pay a dividend to shareholders equal to the Company's pre-RIC cumulative
realized earnings and profits ("E&P"). On April 9, 1998, the Company
declared a one-time cash dividend of $0.75 per share to meet this
requirement (for a total of $8,019,728).
18
The cash dividend was paid on May 12, 1998. Continued qualification as a
RIC requires the Company to satisfy certain portfolio diversification
requirements in future years. The Company's ability to satisfy those
requirements may not be controllable by the Company. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Taxation under Sub-Chapter M.")
The Company incurred ordinary and capital losses for a total of
approximately $4.9 million during its C Corporation taxable years that remain
available for use and may be carried forward to its 1998 and subsequent
taxable years. Ordinarily, a corporation that elects to qualify as a RIC
may not use its loss carryforwards from C Corporation taxable years to
offset RIC investment company taxable income or net capital gains. In
addition, a corporation that elects to qualify as a RIC continues to be
taxable as a C Corporation on any gains realized within 10 years of its
qualification as a RIC from sales of assets that were held by the
corporation on the effective date of the election ("C Corporation Assets")
to the extent of any gain built into the assets on such date ("Built-In
Gain"). The Company has filed a private ruling request with the Internal
Revenue Service ("IRS") asking the IRS to rule that the Company can carry
forward its C Corporation losses to offset any Built-In Gains resulting
from sales of its C Corporation Assets, thereby enabling the Company to
retain some or all of the proceeds from such sales without disqualifying
itself as a RIC or incurring corporate level income tax. Although the IRS,
for technical reasons, has stated that it will not issue a private letter
ruling on this matter, the Company has received a tax opinion letter from
Sutherland, Asbill and Brennan LLP which supports the Company's position.
The Company intends to use the $4.9 million loss carryforward to reduce the
taxes due to Built-In Gains. The September 30, 1998 NAV includes the
ordinary and capital loss carryforwards of approximately $0.10 per share.
In addition, because a RIC is not permitted to have, as of the close of
any RIC taxable year, E&P accumulated during any C Corporation taxable year,
the Company has also requested a ruling that its sale of C Corporation
Assets with Built-In Gains during RIC taxable years will not generate C
Corporation E&P. Although there is no guarantee that the IRS will rule
favorably on the Company's request for rulings, the management of the
Company believes that favorable rulings are likely.
There can be no assurance that the Company will qualify as a RIC or
that, if it does qualify, it will elect RIC status.
The Company's net deferred income tax liability as of September 30, 1998
would have been approximately $0 had it continued to account for its taxes
as a C Corporation.
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 $40,522 and $28,846 and
for the three months ended September 30, 1998 and 1997, respectively and
$118,137 and $101,562 for the nine months ended September 30, 1998 and 1997,
respectively. Future minimum lease payments in each of the following years
19
are: 1999 -- $176,030; 2000 -- $178,561; 2001 -- $178,561; 2002 -- $178,561;
2003 -- $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. 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 September 30, 1998, the
Company would have to fund additional cash and/or property that would have
to be valued at a total of approximately $776,000 by December 1998, in order
for the Senior Professorship to become permanent.
In June 1997, the Company agreed to provide one of its investee companies,
BioSupplyNet, Inc., with a $450,000 revolving line of credit. BioSupplyNet
had borrowed $300,000 through September 29, 1998, when it was acquired by
SciQuest, Inc. As part of the transaction, the Company received a
Promissory Note in the amount of $300,000 plus interest (approximately
$12,200) of which $285,000 is due on December 28, 1998. The Company will
also receive $88,000 for reimbursement of expenses the Company paid on
BioSupplyNet's behalf in 1996. The $88,000 is reflected in Other Income.
In December 1997, the Company signed a Demand Promissory Note for a
$4,000,000 line of credit with J.P. Morgan collateralized by the Company's
U.S. Treasury obligations. In March 1998 the line of credit was increased to
$6,000,000. As of December 31, 1997, the Company had borrowed $4,000,000
against the line of credit. From December 31, 1997 to January 2, 1998, the
rate on the line of credit was prime (8.5 percent). From January 2, 1998
to April 2, 1998, the interest rate on the line of credit was LIBOR plus
1.5 percent (7.3125 percent). In March 1998, the Company paid down
$2,500,000; in April 1998, the Company paid the remaining balance.
On April 15, 1998, the Company announced that the Board of Directors had
approved the purchase of up to 700,000 shares of Company stock in the open
market. As of September 30, 1998, the Company had purchased a total of
88,833 shares for a total of $199,802 or an average of $2.25 per share.
However, the treasury shares purchased were decreased by director purchases
of 15,103 shares of Company stock.
20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results 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 (provision) benefit. The second
element is "Net realized (loss) 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.
These two elements are combined in the Company's financial statements and
reported as "Net realized (loss) income." 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 (loss) gain on investments" and "Net (decrease) increase
in unrealized appreciation on investments" are directly related. When a
security is sold to realize a (loss) gain, net unrealized appreciation
(increases) decreases and net realized gain (decreases) increases.
Financial Condition
The Company's total assets and net assets were, respectively, $20,687,052
and $20,110,863 at September 30, 1998, compared to $39,273,784 and
$33,654,934 at December 31, 1997. The decrease is mainly owing to the payment
of a one-time cash dividend of approximately $8 million to meet one of the
Company's requirements for qualifications for Sub-Chapter M tax treatment in
1998; a decrease of approximately $5.7 million in the valuation of one of
the Company's investee companies, Nanophase Technologies Corporation; and
the payment of the Company's outstanding line of credit of $4,000,000. Net
asset value per share was $1.89 at September 30, 1998 and $3.15 at December
31, 1997.
The Company's outstanding shares were 10,619,241 as of September 30,
1998 and 10,692,971 as of December 31, 1997. The Company's outstanding
shares were reduced as a result of its buyback program of 88,833 shares
for a total of $199,802. However the treasury shares were then decreased
by purchases of Company stock by directors with 50 percent of their director
compensation.
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 September 30, 1998,
approximately 68.5 percent of the Company's $20.7 million in total assets
consisted of investments at fair value in private businesses, of which net
unrealized appreciation was approximately $4.1 million before taxes. At
December 31, 1997, approximately 34.0 percent
21
of the Company's $39.3 million in total assets consisted of investments at
fair value in private businesses, of which net unrealized appreciation was
approximately $2.5 million before taxes, if applicable.
A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
September 30, 1998 December 31, 1997
Investments, at cost $16,974,010 $30,500,498
Unrealized appreciation* 2,952,675 8,158,732
----------- -----------
Investments, at fair value $19,926,685 $38,659,230
=========== ===========
</TABLE>
*The accumulated unrealized appreciation on investments net of deferred taxes
is $1,839,666 at September 30, 1998, versus $5,340,834 at December 31, 1997.
(See Note 5 of Notes to Financial Statements.)
Following an initial investment in a private company, the Company may
make additional investments in such investee in order to: (1) increase its
ownership percentage; (2) exercise warrants or options that were acquired
in a prior financing; (3) preserve the Company's proportionate ownership
in a subsequent financing; or (4) attempt to preserve or enhance the value
of the Company's investment. Such additional investments are referred to
as "follow-on" investments. There can be no assurance that the Company will
make follow-on investments or have sufficient funds to make additional
investments. The failure to make such follow-on investments could jeopardize
the viability of the investee company and the Company's investment or could
result in a missed opportunity for the Company to participate to a greater
extent in an investee's successful operations. The Company attempts to
maintain adequate liquid capital to 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 and other increases in cost in its private placement portfolio
during the nine months ended September 30, 1998:
<TABLE>
<S> <C>
New Investments Amount
InSite Marketing Technology, Inc. $ 500,000
Follow-on Investments:
MultiTarget, Inc. $ 51,802
Exercise of Warrants:
Voice Control Systems, Inc. $ 82,953
22
Loans:
BioSupplyNet, Inc. $ 250,000
NBX Corporation 10,000
----------
Sub-total $ 260,000
Interest on Loans*
NeuroMetrix, Inc. $ 48,100
Voice Control Systems, Inc. 17,453
----------
Sub-total $ 65,553
----------
Total $ 960,308
==========
</TABLE>
*The Company received additional shares in NeuroMetrix, Inc. and Voice
Control Systems, Inc. in exchange for the accrued interest on its loans.
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 $314,237
and $362,330 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease is as a result of a decline in the balance of
the Company's fixed-income portfolio and the decline in interest rates.
The Company had interest income from affiliated companies of $109,133 and
$30,000 for the nine months ended September 30, 1998 and 1997, respectively.
The increase is due to the receipt of interest income (either in funds or
additional shares) on loans outstanding to investee companies.
The Company recorded $88,000 in Other Income as a result of BioSupplyNet's
reimbursement of 1996 expenses.
Operating expenses were $1,092,487 and $2,068,654 for nine months ended
September 30, 1998 and 1997, respectively. The decrease is primarily due to:
the reversal of $423,808 for the Company's profit-sharing plan accrual made
in the fourth quarter of 1997, a decrease in salaries as a result of reduced
staff and a decrease in the Chairman's salary, and a decrease in overall
expenses as a result of the Company's effort to cut expenses. The decreases
were offset by the interest expense on the funds drawn on the JP Morgan line
of credit. Most of the Company's operating expenses are related to employee
and director compensation, office and
23
rent expenses and consulting and professional fees (primarily legal and
accounting fees).
Also in 1997, the Company had $100,000 in restructuring expenses incurred
in the Company's research into Sub Chapter M status.
Net operating losses before taxes were $526,089 and $1,657,955 for the
nine months ended September 30, 1998 and 1997, respectively.
The Company had interest income from fixed-income securities of $46,571
and $147,099 for the three months ended September 30, 1998 and 1997,
respectively. The decrease is a result of the Company having less available
funds as a result of the payment of the dividend, operating expenses and
additional investments.
The Company had interest income from affiliated companies of $22,649 and
$11,111 for the three months ended September 30, 1998 and 1997, respectively.
The increase is due to interest income on loans outstanding to investee
companies.
Operating expenses were $421,739 and $753,221 for three months ended
September 30, 1998 and 1997, respectively. The decrease is primarily due to:
a decrease in salaries as a result of reduced staff and a decrease in the
Chairman's salary, and a decrease in administration and operation expenses
as a result of the Company's effort to cut expenses. The decreases were
offset by an increase in professional fees, particularly legal fees as a
result of the Company's research into Sub Chapter M status.
Net operating losses before taxes were $216,839 and $585,011 for the
three months ended September 30, 1998 and 1997, respectively.
For a discussion of the tax benefit and provision for the three months
and nine months ended September 30, 1998, see Note 5 of Notes to Financial
Statements.
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 on Portfolio Securities:
During the nine months ended September 30, 1998, the Company sold various
investments, realizing a net pre-tax loss of $200,696 of which a net of
$298,368 has been recognized in prior periods, therefore, it decreased
unrealized appreciation on investments.
During the nine months ended September 30, 1997, the Company sold various
public securities realizing a net pre-tax gain of $696,086, of which
$1,628,600 had been recognized as unrealized in prior years, therefore, it
decreased unrealized appreciation on investments.
24
During the three months ended September 30, 1998, the Company sold
various public securities realizing a net pre-tax loss of $787,873 of which
a net loss of $384,219 had been recognized in prior periods, therefore, it
increased unrealized appreciation on investments.
During the three months ended September 30, 1997, the Company sold
various public securities realizing a net pre-tax loss of $95,052, of which
a net gain of $288,770 had been recognized as unrealized in prior quarters.
Unrealized Appreciation and Depreciation on Portfolio Securities:
The Board of Directors values the portfolio securities on a quarterly
basis pursuant to the Company's Asset Valuation Policy Guidelines in
accordance with the 1940 Act. (See Footnote to Schedule of Investments.)
Net unrealized appreciation on investments before taxes decreased,
during the nine months ended September 30, 1998, $5,206,057 from $8,158,732
to $2,952,675, primarily as a result of decreased valuations in Nanophase
Technologies Corporation, Princeton Video Image, Inc. and MedLogic Global
Corporation. These decreases were offset primarily by an increased valuation in
NeuroMetrix, Inc.
Net unrealized appreciation on investments before taxes decreased, during
the nine months ended September 30, 1997, by $5,444,275 from $6,667,589 to
$1,223,314 owing primarily to decreased valuations of Gel Sciences, Inc.,
Harber Brothers Productions, Inc., nFX Corporation, Princeton Video Image,
Inc. and PureSpeech, Inc., offset by the increased valuations of NBX
Corporation and Nanophase Technologies Corporation.
Net unrealized appreciation on investments before taxes decreased, during
the three months ended September 30, 1998, by $1,884,529, from $4,837,204 to
$2,952,675, owing primarily to decreases in Nanophase Technologies
Corporation, MultiTarget, Inc., Somnus Corporation and Energy Research
Corporation.
Net unrealized appreciation on investments before taxes increased, during
the three months ended September 30, 1997, by $1,149,960, from $73,354 to
$1,223,314, owing primarily to increased valuations of NBX Corporation, Fuisz
Technologies and Zonagen, Inc., offset by a decreased valuation of nFX
Corporation.
25
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at September 30, 1998 of $6,209,885, versus
$21,693,067 (net of $4,000,000 drawn from the J.P. Morgan line of credit) at
December 31, 1997. Included in marketable securities at September 30, 1998
are the Company's holdings in Nanophase Technologies Corporation of
$1,133,212 and Princeton Video Image, Inc. of $531,843. Princeton Video
Image, Inc. is subject to a lock-up agreement, which expires December 16,
1998, and both holdings are valued at September 30, 1998 at discounts from
market value: a 20 percent discount in the case of Nanophase Technologies
Corporation and a 14.2 percent discount in the case of Princeton Video
Image, Inc.
As of September 30, 1998, the Company had a $6,000,000 line of credit in
place with J.P. Morgan, of which the Company had no outstanding balance.
Management believes that its cash, receivables and marketable securities
provide the Company with sufficient liquidity for its operations over the
next 12 months.
On May 12, 1998, the Company paid out a one-time cash dividend of $0.75
per share for a total of $8,019,728, to meet one of the requirements for
qualification for Sub-Chapter M tax treatment in 1998.
Taxation Under Sub-Chapter M
In order to qualify as a RIC, the Company must distribute to stockholders
annually in a timely manner at least 90 percent of its "investment company
taxable income," as defined in the Code (i.e., net investment income,
including accrued original issue discount, and net short-term capital gains)
(the "90 percent Distribution Requirement"). As a RIC, it would not be
subject to federal income tax on the portion of its investment company
taxable income and net capital gains (net long-term capital gain in excess
of net short-term capital loss) distributed to stockholders. In addition,
if the Company distributes in a timely manner 98 percent of its capital
gains net income for each one-year period ending on December 31, and
distributes 98 percent of its net ordinary income for each calendar year
(as well as any income not distributed in prior years), it will not be
subject to the 4 percent nondeductible federal excise tax imposed with
respect to certain undistributed income of RICs. If RIC status is elected,
the Company generally will endeavor to distribute to stockholders all of
its investment company taxable income and its net capital gain, if any, for
each taxable year so that such Company will not incur income and excise
taxes on its earnings.
In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things: (a) continue to qualify as a BDC under the 1940
Act, (b) derive in each taxable year at least 90 percent of its gross income
from dividends, interest, payments with respect to securities loans, gains
from the sale of stock or securities, or other income derived with respect
to its business of investing in such stock or securities (the "90 percent
Income Test"); and (c) adequately diversify its holdings pursuant to
detailed rules set forth in section 851 of the Code.
26
If the Company acquires or is deemed to have acquired debt obligations
that were issued originally at a discount or that otherwise are treated under
applicable tax rules as having original issue discount, the Company will be
required to include in income each year a portion of the original issue
discount that accrues over the life of the obligation regardless of whether
cash representing such income is received in the same taxable year and to
make distributions accordingly.
Although it does not presently expect to do so, the Company is authorized
to borrow funds and to sell assets in order to satisfy distribution
requirements. However, under the 1940 Act, the Company is not permitted to
make distributions to stockholders while the Company's debt obligations and
other senior securities are outstanding unless certain "asset coverage"
tests are met. Moreover, the Company's ability to dispose of assets to meet
its distribution requirements may be limited by other requirements relating
to its status as a RIC, including the diversification requirements. If the
Company disposes of assets in order to meet distribution requirements, the
Company may make such dispositions at times which, from an investment
standpoint, are not advantageous.
If the Company fails to satisfy the 90 percent Distribution Requirement
or otherwise fails to qualify as a RIC in any taxable year, it will be
subject to tax in such year on all of its taxable income, regardless of
whether the Company makes any distributions to its stockholders. In
addition, in that case, all of the Company's distributions to its
stockholders will be characterized as ordinary income (to the extent of the
Company's current and accumulated earnings and profits). In contrast, as is
explained below, if the Company qualifies as a RIC, a portion of its
distributions may be characterized as long-term capital gain in the hands of
stockholders.
Other than distributions properly designated as "capital gain dividends"
as is described below, dividends to stockholders of the investment company
taxable income of the Company will be taxable as ordinary income to
stockholders to the extent of the Company's current or accumulated earnings
and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Company's net capital gain properly designated by the
Company as "capital gain dividends" will be taxable to stockholders as a
long-term capital gain regardless of the stockholder's holding period for
his or her shares. Distributions in excess of the Company's earnings and
profits will first reduce the adjusted tax basis of the stockholder's shares
and, after the adjusted basis is reduced to zero, will constitute capital
gains to the stockholder. For a summary of the tax rates applicable to
capital gains, including capital gains dividends, see discussion below.
To the extent that the Company retains any net capital gain, it may
designate such retained gain as "deemed distributions" and pay a tax thereon
for the benefit of its stockholders. In that event, the stockholders will
be required to report their share of retained net capital gain on their tax
returns as if it had been distributed to them and report a credit, or claim
a refund, for the tax paid thereon by the Company. The amount of the deemed
distribution net of such tax will be added to the stockholder's cost basis
for his or her shares. Because the Company expects to pay tax on net capital
gain at its regular corporate capital gain tax rate, and because that rate is
in excess of the maximum rate currently payable by individuals on net
capital gain, the amount of tax that individual stockholders will be treated
27
as having paid will exceed the amount of tax that such stockholders would be
required to pay on net capital gain.
Stockholders who are not subject to federal income tax or tax on capital
gains should be able to file a Form 990T or an income tax return on the
appropriate form that allows them to recover the taxes paid on their behalf.
Any dividend declared by the Company in October, November, or December of
any calendar year, payable to stockholders of record on a specified date in
such a month and actually paid during January of the following year, will
be treated as if it had been received by the stockholders on December 31 of
the year in which the dividend was declared.
Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. Even if the price of the shares includes
the amount of the forthcoming distribution, the stockholder generally will
be taxed upon receipt of the distribution and will not be entitled to offset
the distribution against the tax basis in his or her shares.
A stockholder may recognize taxable gain or loss if he or she sells or
exchanges his or her shares. Any gain arising from (or, in the case of
distributions in excess of earnings and profits, treated as arising from)
the sale or exchange of shares generally will be a capital gain or loss.
This capital gain or loss normally will be treated as a long-term capital
gain or loss if the stockholder has held his or her shares for more than
one year; otherwise, it will be classified as short-term capital gain or
loss. However, any capital loss arising from the sale or exchange of shares
held for six months or less will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received with respect to
such shares and, for this purpose, the special rules of Section 246(c)(3)
and (4) of the Code generally apply in determining the holding period of
shares. It is unclear how any such long-term capital loss offsets capital
gains taxable at different rates. All or a portion of any loss realized
upon a taxable disposition of shares of the Company may be disallowed if
other shares of the Company are purchased within 30 days before or after the
disposition.
In general, net capital gain (the excess of net long-term capital gain
over net short-term capital loss) of non-corporate taxpayers is currently
subject to a maximum federal income tax rate of 28 percent (subject to
reduction in many situations), while other income may be taxed at rates as
high as 39.6 percent. Capital gains derived from the disposition of assets
held for more than 12 months generally are subject to federal income tax at
the rate of 20 percent. Corporate taxpayers are currently subject to
federal income tax on net capital gain at the maximum 35 percent rate also
applied to ordinary income. Tax rates imposed by states and local
jurisdictions on capital gain and ordinary income may differ.
The Company may be required to withhold U.S. federal income tax at the
rate of 31 percent of all taxable dividends and distributions payable to
stockholders who fail to provide the Company with their correct taxpayer
identification number or to make required certifications, or regarding whom
the Company has been notified by the IRS that they are subject to backup
withholding. Backup withholding is not an additional tax, and any amounts
28
withheld may be credited against a stockholder's U.S. federal income tax
liability.
Federal withholding taxes at a 30 percent rate (or a lesser treaty rate)
may apply to distributions to stockholders that are nonresident aliens or
foreign partnerships, trusts, or corporations. Foreign investors should
consult their tax advisors with respect to the possible U.S. federal, state,
and local tax consequences and foreign tax consequences of an investment in
the Company.
The Company will send to each of its stockholders, as promptly as
possible after the end of each fiscal year, a notice detailing, on a per
share and per distribution basis, the amounts includible in such
stockholder's taxable income for such year as ordinary income and as
long-term capital gain. In addition, the federal tax status of each year's
distributions generally will be reported to the IRS. Distributions may also
be subject to additional state, local, and foreign taxes depending on a
stockholder's particular situation. The Company's ordinary income dividends
to its corporate shareholders may, if certain conditions are met, qualify
for the dividends received deduction to the extent that the Company has
received qualifying dividend income during the taxable year; capital gain
dividends distributed by the Company are not eligible for the dividends
received deduction.
If necessary for liquidity purposes, in lieu of distributing its taxable
net capital gains, the Company may retain such net capital gains and elect
to be deemed to have made a distribution of the gains, or part thereof, to
the shareholders under the "designated undistributed capital gain" rules of
section 852(b)(3) of the Code. In such a case, the Company would have to
pay a 35 percent corporate level income tax on such "designated
undistributed capital gain," but it would not have to distribute the excess
of the retained "designated undistributed capital gain" over the amount of
tax thereon in order to maintain its RIC status.
Risks
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 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. In addition, the Company
may not qualify or seek to qualify for RIC status.
29
Risks Relating to the Year 2000 Issue
The "Year 2000" computer problem has arisen because many computer
applications worldwide will not properly recognize the date change from
December 31, 1999, to January 1, 2000, potentially causing production of
erroneous data, miscalculations, system failures and other operational
problems.
The Company has undertaken the evaluation of the Year 2000 impact on
its critical computer hardware and software. The Company has not incurred,
nor does it anticipate that it will incur, any material cost in addressing
its Year 2000 problem. The Company has developed a strategic plan focusing
on achieving Year 2000 compliance. Certain systems are being replaced and
or modified to be Year 2000 compliant. The Year 2000 project includes
contingency plans to mitigate potential delays or other problems. At the
present time, it is not possible to determine whether any such events are
likely to occur or to quantify any potential negative impact they may have
on the Company's future results of operations and financial condition.
Ultimately, the potential impact of the Year 2000 issue will depend not
only on the success of the corrective measures undertaken by the Company,
but also on the way in which the Year 2000 issue is addressed by vendors,
service providers, counterparties, utilities, governmental agencies and
other entities with which the Company does business.
Forward-Looking Statements
The information contained herein contains certain forward-looking
statements. These statements include the plans and objectives of management
for future operations and financial objectives, portfolio growth and
availability of funds. These forward-looking statements are subject to the
inherent uncertainties in predicting future results and conditions. Certain
factors that could cause actual results and conditions to differ materially
from those projected in these forward-looking statements are set forth
herein. Other factors that could cause actual results to differ materially
include the uncertainties of economic, competitive and market conditions,
and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the forward-
looking statements included herein are reasonable, any of the assumptions
could be inaccurate and therefore, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. Therefore, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the objectives and plans of the Company will be achieved.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On Wednesday, July 29, 1998, the Company held its Annual Meeting
of Shareholders for the following purposes: 1) to elect directors of the
Company; and 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, 1998. At the close of
business on the record date (June 19, 1998), an aggregate of 10,651,200
shares of common stock were issued and outstanding.
All of the nominees at the July 29, 1998 Annual Meeting were
elected directors:
<TABLE>
<S> <C> <C>
Nominee For Withheld
Dr. C. Wayne Bardin 9,756,260 104,030
Dr. Phillip A. Bauman 9,756,260 104,030
G. Morgan Browne 9,756,260 104,030
Harry E. Ekblom 9,551,172 309,118
Dugald A. Fletcher 9,551,760 308,530
Charles E. Harris 9,756,260 104,030
Glenn E. Mayer 9,755,672 104,618
William R. Polk 9,755,672 104,618
James E. Roberts 9,551,760 308,530
</TABLE>
Mr. Jon J. Masters did not stand for re-election.
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, 1998, the affirmative votes cast were 9,788,435,
the negative votes cast were 41,780 and those abstaining were 30,075.
31
Item 5. Other Information
On November 4, 1998, the Board of Directors of the Company adopted
resolutions to amend Company's By-Laws in certain respects, including (i) to
require that special meetings of shareholders be called only by the President
or a majority of the entire Board of Directors then in office; (ii) to
prohibit the removal of directors without cause; (iii) to provide that the
Board of Directors may fix a record date not more than 60 days prior to the
date of certain shareholder determinations or corporate actions; and (iv) to
require advance notice of shareholder nominations of directors and
shareholder intention to bring new business at annual meetings, not less than
90 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting of shareholders. A copy of the form of
amendment to the Company's By-Laws and a copy of the Company's By-Laws as
amended are attached hereto as Exhibits 3.1(b)(i) and 3.1(b)(ii).
In accordance with recent amendments to the shareholder proposal
rules set forth in Rules 14a-4 and 14a-8 under the Securities and Exchange
Act of 1934, as amended, written notice of shareholder proposals submitted
outside the processes of Rule 14a-8 for consideration at the 1999 Annual
Meeting of Shareholders must be received by the Company on or before March
31, 1999 in order to be considered timely for purposes of Rule 14a-4. The
persons designated in the Company's proxy statement shall be granted
discretionary authority with respect to any shareholder proposal of which the
Company does not receive timely notice.
Item 6. Exhibits and Reports on Form 8-K
3.1(a) Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1(a) to
the Company's Form 10- K for the year ended December 31,
1995.
3.1(b)(i)* Restated By-Laws of the Company, as amended.
3.1(b)(ii)* Form of Restated By-Laws amendment.
4.1 Specimen Certificate of Common Stock, incorporated by
reference to Exhibit 4 to Company's Registration Statement
on Form N-2 filed October 29, 1992.
11.0* Computation of per share earnings. See Statement of
Operations.
27.0* Financial Data Schedule.
(b) None
*Filed herewith.
32
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
-----------------------------
Rachel M. Pernia, Vice President
Treasurer, Controller and Principal
Accounting Officer
Date: November 13, 1998
33
EXHIBIT INDEX
Item Number (of Item 601 of Regulation S-K)
27. Financial Data Schedule
BY-LAWS
OF
HARRIS & HARRIS GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office of the
corporation shall be located in the City, County and State of New York.
SECTION 2. OTHER OFFICES. The corporation may have other offices
and places of business, within or without the State of New York, as shall be
determined by the directors.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the shareholders may
be held at such place or places, within or without the State of New York, as
shall be fixed by the directors and stated in the notice of the meeting.
SECTION 2. ANNUAL MEETING. The annual meeting of shareholders
for the election of directors and the transaction of such other business as
may properly come before the meeting shall be held on the date selected by the
Board of Directors in each calendar year.
SECTION 3. NOTICE OF ANNUAL MEETING. Notice of the annual meeting
shall be given to each shareholder entitled to vote, at least ten days
prior to the meeting.
SECTION 4. SPECIAL MEETINGS. Special meetings of the shareholders
for any purpose or purposes may be called by only the President or a
majority of the entire Board of Directors then in office.
1
SECTION 5. NOTICE OF SPECIAL MEETING. Notice of a special meeting,
stating the time, place and purpose or purposes thereof, shall be given
to each shareholder entitled to vote, at least ten days prior to the meeting.
The notice shall also set forth at whose direction it is being issued.
SECTION 6. QUORUM. At any meeting of the shareholders, the
holders of a majority of the shares of stock then entitled to vote, shall
constitute a quorum for all purposes, except as otherwise provided by law or
the Certificate of Incorporation.
SECTION 7. VOTING. At each meeting of the shareholders, every
holder of stock then entitled to vote may vote in person or by proxy, and,
except as may be otherwise provided by the Certificate or Incorporation, shall
have one vote for each share of stock registered in his name.
SECTION 8. ADJOURNED MEETINGS. Any meeting of shareholders may
be adjourned to a designated time and place by a vote of a majority in
interest of the shareholders present in person or by proxy and entitled to
vote, even though less than a quorum is so present. No notice of such an
adjourned meeting need be given, other than by announcement at the meeting,
and any business may be transacted which might have been transacted at the
meeting as originally called.
SECTION 9. ACTION BY WRITTEN CONSENT OF SHAREHOLDERS. Whenever
by any provision of statute or of the Certificate of Incorporation or of
these By-Laws, the vote of shareholders at a meeting thereof is required or
permitted to be taken in connection with any corporate action, the meeting
and vote of shareholders may be dispensed with, if all the shareholders who
would have been entitled to vote upon the action if such meeting were held,
shall consent in writing to such corporate action being taken.
SECTION 10. NOTICE OF SHAREHOLDER NOMINEES. Only persons who are
nominated in accordance with the following procedures set forth in these
By-Laws shall be eligible for election as directors of the corporation.
Nominations of persons for election to the Board of Directors may be made at
any annual meeting of shareholders (a) by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (b) by any shareholder
of the corporation (i) who is a shareholder of record on the date of the
giving of notice provided for in this Section 10 and on the record date for
the determination of shareholders entitled to vote at such annual meeting and
(ii) who complies with the notice procedures set forth in this Section 10.
2
In addition to any other applicable requirements, for a nomination
to be made by a shareholder, such shareholder must have given timely notice
thereof in proper written form to the Secretary of the corporation.
To be timely, a shareholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than ninety (90) days nor more than one hundred and
twenty (120) days prior to the anniversary date of the immediately preceding
annual meeting of shareholders; provided, however, that in the event that the
annual meeting is called for a date that is not within thirty (30) days before
or after such anniversary date, notice by the shareholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which notice of the date of the annual meeting
was mailed or such public disclosure of the date of the annual meeting was
made, whichever first occurs.
To be in proper written form, a shareholder's notice to the
Secretary must set forth (a) as to each person whom the shareholder proposes
to nominate for election as a director (i) the name, age, business address
and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class or series and number of shares of
capital stock of the corporation which are owned beneficially or of record
by the person and (iv) any other information relating to the person that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the shareholder giving the notice (i) the name and
record address of such shareholder, (ii) the class or series and number of
shares of capital stock of the corporation which are owned beneficially or
of record by such shareholder, (iii) a description of all arrangements or
understandings between such shareholder and each proposed nominee and any
other person or persons (including their names) pursuant to which the
nomination(s) are to be made by such shareholder, (iv) a representation that
such shareholder intends to appear inperson or by proxy at the annual
meeting to nominate the persons named in its notice and (v) any other
information relating to such shareholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant
to Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder. Such notice must be accompanied by a written consent of each
proposed nominee to be named as a nominee and to serve as a director
if elected.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
3
this Section 10. If the Chairman of the annual meeting determines that a
nomination was not made in accordance with the foregoing procedures, the
Chairman shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
SECTION 11. NOTICE OF SHAREHOLDER BUSINESS. No business may be
transacted at an annual meeting of shareholders, other than business that
is either (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors (or any duly
authorized committee thereof), (b) otherwise properly brought before the
annual meeting by or at the direction of the Board of Directors (or any
duly authorized committee thereof) or (c) otherwise properly brought
before the annual meeting by any shareholder of the corporation (i) who is
a shareholder of record on the date of the giving of the notice provided
for in this Section 11 and on the record date for the determination of
shareholders entitled to vote at such annual meeting and (ii) who
complies with the notice procedures set forth in this Section 11.
In addition to any other applicable requirement, for business to be
properly brought before an annual meeting by a shareholder, such shareholder
must have given timely notice thereof in proper written form to the Secretary
of the corporation.
To be timely, a shareholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the
corporation not less than ninety (90) days nor more than one hundred and
twenty (120) days prior to the anniversary date of the immediately preceding
annual meeting of shareholders; provided, however, that in the event that
the annual meeting is called for a date that is not within thirty (30) days
before or after such anniversary date, notice by the shareholder in order
to be timely must be so received not later than the close of business on
the tenth (10th) day following the day on which notice of the date of the
annual meeting was mailed or public disclosure of the date of the annual
meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the Secretary
must set forth as to each matter such shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such shareholder, (iii)
the class or series and number of shares of capital stock of the corporation
which are owned beneficially or of record by such shareholder, (iv) a
description of all arrangements or understandings between such shareholder
and anyother person or persons (including their names) in connection with
the proposal of such business by such shareholder and any material interest
of such shareholder in such business and (v) a representation that such
shareholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
4
No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 11, provided, however, that, once
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 11 shall be deemed to preclude
discussion by any shareholder of any such business. If the Chairman of an
annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the Chairman
shall declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER. The number of directors of the corporation
shall be determined from time to time by resolutions of the directors, who
shall hold office for the term of one year and until their successors are duly
elected and qualify. The number of directors may be less than three when all
of the shares are owned by less than three shareholders, but in such event
the number of directors may not be less than the number of shareholders.
Directors need not be shareholders.
SECTION 2. POWERS. The Board of Directors may adopt such rules
and regulations for the conduct of its meetings, the exercise of its powers
and the management of the affairs of the corporation as it may deem proper,
not inconsistent with the laws of the State of New York, the Certificate of
Incorporation or these By-Laws.
In addition to the powers and authorities by these By-Laws
expressly conferred upon them, the Board of Directors may exercise all such
powers of the corporation and do such lawful acts and things except as are by
statute, the Certificate of Incorporation or these By-Laws directed or
required to be exercised or done by the shareholders.
SECTION 3. MEETING, QUORUM, ACTION WITHOUT MEETING. Meetings of
the Board of Directors may be held at any place, either within or outside the
State of New York, provided a quorum be in attendance. Except as may be
otherwise provided by the Certificate of Incorporation or by the Business
Corporation Law, a majority of the directors in office shall constitute a
quorum at any meeting of the Board of Directors and the vote of a majority of
a quorum of directors shall constitute the act of the Board of Directors.
5
The Board of Directors may hold an annual meeting, without notice,
immediately after the annual meeting of shareholders. Regular meetings of the
Board of Directors may be established by a resolution adopted by the Board of
Directors. The Chairman of the Board of Directors may call, and at the
request of any two directors must call, a special meeting of the Board of
Directors, three days notice of which shall be given by overnight United
States Mail or by Federal Express or any other private overnight courier
service, or two days notice of which shall be given personally or by
telephone, telecopier or telefax (or similar communications equipment),
telegram or cable, to each director.
Any one or more members of the Board of Directors or any Committee
thereof may participate in a meeting of such Board of Directors or Committee
by means of a conference telephone call or similar communications equipment
allowing all persons participating in the meeting to hear each other at the
same time, if before the meeting the Chairman of the Board of Directors or the
Chairman of such Committee, as the case may be, determines that an emergency
or other extraordinary circumstances exist, making telephone participation in
the meeting by one or more directors appropriate. The determination by the
Chairman of the Board of Directors or the Chairman of a Committee thereof, as
the case may be, that an emergency or other extraordinary circumstances exist,
making telephone participation in the meeting by one or more directors
appropriate, shall be final and conclusive. Where authorized by the Chairman of
the Board of Directors or the Chairman of a Committee thereof, as described
above in this paragraph, participation by means of a conference telephone call
or similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time shall constitute presence in
person at the meeting.
Any action required or permitted to be taken by the Board of
Directors or any Committee thereof may be taken without a meeting if all
members of the Board of Directors or the Committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the
written consents thereto by the members of the Board of Directors or Committee
shall be filed with the minutes of the meetings of the Board of Directors or
Committee.
6
SECTION 4. VACANCIES, REMOVAL. Except where the Certificate of
Incorporation contains provisions authorizing cumulative voting or the
election of one or more directors by class or their election by holders of
bonds, or requires all action by shareholders to be by a greater vote, any
one or more of the directors may be removed, (a) for cause, at any time,
by vote of the shareholders holding a majority of the outstanding stock of
the corporation entitled to vote, present in person or by proxy, at any
special meeting of the shareholders or by written consent of all of the
shareholders entitled to vote, or (b) for cause, by action of the Board of
Directors at any regular or special meeting of the Board of Directors.
Shareholders may not remove directors without cause. A vacancy or
vacancies occurring from such removal may be filled at a special meeting
of shareholders called for such purpose or at a regular or special meeting
of the Board of Directors.
SECTION 5. COMMITTEES. The Board of Directors, by resolution
adopted by a majority of the entire Board of Directors, may designate from
its members an Executive Committee or other committee or committees, each
consisting of three or more members, with such powers and authority (to
the extent permitted by law) as may be provided in said resolution.
ARTICLE IV
OFFICERS
SECTION 1. EXECUTIVE OFFICERS. The executive officers of the
corporation shall be a Chairman of the Board, a President, a Treasurer and a
Secretary, all of whom shall be elected annually by the Board of Directors,
who shall hold office at the pleasure of the Board of Directors. No one
person may serve simultaneously as both President and Secretary of the
corporation, but any two or more other offices may be held simultaneously by
the same person. All vacancies occurring among any of the officers shall be
filled by the Board of Directors.
SECTION 2. OTHER OFFICERS. The Board of Directors may appoint
such other officers and agents with such powers and duties as it shall deem
necessary.
SECTION 3. THE CHAIRMAN OF THE BOARD. The Chairman of the Board
of Directors shall be the chief executive officer of the corporation and,
while the Board of Directors is not in session, shall have general management
and control of the business and affairs of the corporation. He shall also
preside at all meetings of the Board of Directors and shall have and perform
such other duties as from time to time may be assigned to him by the Board of
Directors.
7
SECTION 4. THE PRESIDENT. The President, who may but need not be
a director, shall, in the absence of a Chairman of the Board, preside at all
meetings of the shareholders and directors. He shall have and perform such
other duties as from time to time may be assigned to him by the Board of
Directors or the Chairman of the Board.
SECTION 5. THE VICE-PRESIDENT. The Vice-President, if one be
elected, or if there be more than one, the senior Vice-President as determined
by the Board of Directors, in the absence or disability of the President,
shall exercise the powers and perform the duties of the President and each
Vice-President shall exercise such other powers and perform such other duties
as from time to time may be assigned to him by the Board of Directors, the
Chairman of the Board, or the President.
SECTION 6. THE TREASURER. The Treasurer shall have custody of
all funds, securities and evidences of indebtedness of the corporation; he
shall receive and give receipts and acquittances for moneys paid in on
account of the corporation, and shall pay out of the funds on hand all
bills, payrolls, and other just debts of the corporation, of whatever
nature, upon maturity; he shall enter regularly in books to be kept by him
for that purpose, full and accurate accounts of all moneys received and
paid out by him on account of the corporation, and he shall perform all
other duties incident to the office of Treasurer and as may be prescribed
by the Board of Directors.
SECTION 7. THE SECRETARY. The Secretary shall keep the minutes
of all meetings of the Board of Directors and of the shareholders; he shall
attend to the giving and serving of all notices to shareholders and directors
or other notice required by law or by these By-Laws; he shall affix the seal
of the corporation to deeds, contracts and other instruments in writing
requiring a seal, when duly signed or when so ordered by the Board of
Directors; he shall have charge of the certificate books and stock books and
such other books and papers as the Board of Directors may direct, and he
shall perform all other duties incident to the office of Secretary.
SECTION 8. SALARIES. The salaries and other compensation of all
officers and employees shall be fixed by the Board of Directors, or by any
committee designated from among the directors (in accordance with Article III,
Section 5, of these By-Laws) to handle such compensation matters, and the fact
that any officer is a director shall not preclude him from receiving a salary
and other compensation as an officer, or from voting upon the resolution
providing the same.
8
ARTICLE V
CAPITAL STOCK
SECTION 1. FORM AND EXECUTION OF CERTIFICATES. Certificates of
stock shall be in such form as required by the Business Corporation Law of
New York and as shall be adopted by the Board of Directors. They shall be
numbered and registered in the order issued; shall be signed by the Chairman
or a Vice-Chairman of the Board of Directors (if any) or by the President or
Vice-President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer and may be sealed with the corporate
seal or a facsimile thereof. When such a certificate is countersigned by a
transfer agent or registered by a registrar, the signatures of any such
officers may be facsimile.
SECTION 2. TRANSFER. Transfer of shares shall be made only upon
the books of the corporation by the registered holder in person or by
attorney, duly authorized, and upon surrender of the certificate or
certificates for such shares properly assigned for transfer.
SECTION 3. LOST OR DESTROYED CERTIFICATES. The holder of any
certificate representing shares of stock of the corporation may notify the
corporation of any loss, theft or destruction thereof, and the Board of
Directors may thereupon, in its discretion, cause a new certificate for the
same number of shares, to be issued to such holder upon satisfactory proof
of such loss, theft or destruction, and the deposit of indemnity by way of
bond or otherwise, in such form and amount and with such surety or sureties
as the Board of Directors may require, to indemnify the corporation against
any loss or liability by reason of the issuance of such new certificates.
SECTION 4. RECORD DATE. In lieu of closing the books of the
corporation, for the purpose of determining the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment
thereof, or to express consent to or dissent from any proposal without a
meeting, or for the purpose of determining shareholders entitled to receive
payment of any dividend or the allotment of any rights, or for the purpose
of any other action, the Board of Directors may fix, in advance, a date,
not exceeding sixty days, nor less than ten days, as the record date for
any such determination of shareholders.
9
ARTICLE VI
MISCELLANEOUS
SECTION 1. DIVIDENDS. The Board of Directors may declare
dividends from time to time upon the capital stock of the corporation from
the surplus or net profits available therefor.
SECTION 2. SEAL. The Board of Directors shall provide a suitable
corporate seal and shall be used as authorized by the By-Laws.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation
shall be determined by the Board of Directors.
SECTION 4. CHECKS, NOTES, ETC. Checks, notes, drafts, bills of
exchange and orders for the payment of money shall be signed or endorsed in
such manner as shall be determined by the Board of Directors.
The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall be signed in such
manner as may be determined from time to time by the Board of Directors.
SECTION 5. NOTICE AND WAIVER OF NOTICE. Any notice required to
be given under these By-Laws may be waived by the person entitled thereto, in
writing, by telecopier or telefax (or similar communications equipment),
telegram, cable or radiogram, and the presence of any person at a meeting
shall constitute waiver of notice thereof as to such person.
ARTICLE VII
AMENDMENTS
SECTION 1. BY SHAREHOLDERS. These By-Laws may be amended at any
shareholders' meeting by vote of the shareholders holding a majority (unless
the Certificate of Incorporation requires a larger vote) of the outstanding
stock having voting power, present either in person or by proxy, provided
notice of the amendment is included in the notice or waiver of notice of such
meeting.
10
SECTION 2. BY DIRECTORS. The Board of Directors may also amend
these By-Laws at any regular or special meeting of the Board by a majority
(unless the Certificate of Incorporation requires a larger vote) vote of the
entire Board, but any By-Laws so made by the Board of Directors may be altered
or repealed by the shareholders.
11
BY-LAWS
OF
HARRIS & HARRIS GROUP, INC.
I certify that the following By-Laws, consisting of nine pages, each of
which I have initialed for identification, are the By-Laws:
(1) Adopted, as contemplated by Section 601(a) of the New York
Business Corporation Law, as amended, for and on behalf of the shareholders
of Harris & Harris Group, Inc. (the "corporation"), by a written action
signed by the corporation's sole incorporator and dated as of December 1,
1981;
(2) Approved and adopted by the corporation's Board of Directors
by a unanimous written consent in lieu of an organizational meeting dated as
of December 1, 1981; and
(3) As amended by the corporation's Board of Directors (a) at
its March 23, 1984, special meeting; (b) by a unanimous written consent of
directors dated as of April 13, 1984; (c) at its April 30, 1984, special
meeting; (d) at its July 9, 1984, meeting; (e) at its October 19, 1984,
meeting; (f) at its July 11, 1985, meeting; (g) at its November 17, 1988,
meeting; (h) at its April 25, 1989, meeting; (i) by a unanimous written
consent of directors dated June 9, 1992; (j) by a unanimous written
consent of directors dated October 19, 1992; and (k) at its November 4,
1998, meeting.
By: /s/ Rachel M. Pernia, Secretary
-------------------------------
Dated: November 4, 1998
PROPOSED RESOLUTIONS
OF
THE BOARD OF DIRECTORS
OF
HARRIS & HARRIS GROUP, INC.
November 4, 1998
WHEREAS, the Board of Directors of Harris & Harris Group, Inc. (the
"Corporation") deems it desirable and in the best interests of the
Corporation to amend the Corporation's By-Laws in certain respects,
including (i) to require that special meetings of shareholders be called
only by the President or a majority of the entire Board of Directors then
in office; (ii) to prohibit the removal of directors without cause; (iii)
to provide that the Board of Directors may fix a record date not more than
60 days prior to the date of certain shareholder determinations or corporate
actions; and (iv) to require advance notice of shareholder nominations of
directors and shareholder intention to bring new business at annual meetings.
NOW, THEREFORE, BE IT RESOLVED, that each of the amendments to the
Corporation's By-Laws annexed as Exhibit A to these resolutions are hereby
approved and adopted by the Board of Directors in accordance with the
provisions of Article VII, Section 2 of the Corporation's By-Laws.
1
Exhibit A
1. Article II, Section 4 of the Corporation's By-Laws is hereby
amended to read in its entirety as follows:
Section 4. Special Meetings. Special meetings of the shareholders for
any purpose or purposes may be called by only the President or a majority
of the entire Board of Directors then in office.
2. The second paragraph of Article III, Section 4 of the
Corporation's By-Laws is hereby amended to read in its entirety as follows:
Except where the Certificate of Incorporation contains provisions
authorizing cumulative voting or the election of one or more directors by
class or their election by holders of bonds, or requires all action by
shareholders to be by a greater vote, any one or more of the directors may
be removed, (a) for cause, at any time, by vote of the shareholders holding
a majority of the outstanding stock of the corporation entitled to vote,
present in person or by proxy, at any special meeting of the shareholders
or by written consent of all of the shareholders entitled to vote, or (b)
for cause, by action of the Board of Directors at any regular or special
meeting of the Board of Directors. Shareholders may not remove directors
without cause. A vacancy or vacancies occurring from such removal may be
filled at a special meeting of shareholders called for such purpose or at
a regular or special meeting of the Board of Directors.
3. Article V, Section 4 of the Corporation's By-Laws are hereby
amended to read in its entirety as follows:
Section 4. Record Date. In lieu of closing the books of the corporation,
for the purpose of determining the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a meeting, or for
the purpose of determining shareholders entitled to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other
action, the Board of Directors may fix, in advance, a date, not exceeding
sixty days, nor less than ten days, as the record date for any such
determination of shareholders.
4. The Corporation's By-Laws are hereby amended by adding to Article
II thereof a new section numbered Section 10, and reading in its entirety
as follows:
Section 10. Notice of Shareholder Nominees. Only persons who are
nominated in accordance with the following procedures set forth in these
By-Laws shall be eligible for election as directors of the corporation.
Nominations of persons for election to the Board of Directors may be made
at any annual meeting of shareholders (a) by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (b) by
any shareholder of the corporation (i) who is a shareholder of record on the
date of the giving of notice provided for in this Section 10 and on the
record date for the determination of shareholders entitled to vote at such
annual meeting and (ii) who complies with the notice procedures set forth
in this Section 10.
2
In addition to any other applicable requirements, for a nomination
to be made by a shareholder, such shareholder must have given timely notice
thereof in proper written form to the Secretary of the corporation.
To be timely, a shareholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of
the corporation not less than ninety (90) days nor more than one hundred
and twenty (120) days prior to the anniversary date of the immediately
preceding annual meeting of shareholders; provided, however, that in the
event that the annual meeting is called for a date that is not within
thirty (30) days before or after such anniversary date, notice by the
shareholder in order to be timely must be so received not later than the
close of business on the tenth (10th) day following the day on which notice
of the date of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the Secretary
must set forth (a) as to each person whom the shareholder proposes to
nominate for election as a director (i) the name, age, business address
and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class or series and number of shares
of capital stock of the corporation which are owned beneficially or of
record by the person and (iv) any other information relating to the person
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the shareholder giving the notice (i) the name
and record address of such shareholder, (ii) the class or series and number
of shares of capital stock of the corporation which are owned beneficially
or of record by such shareholder, (iii) a description of all arrangements
or understandings between such shareholder and each proposed nominee and
any other person or persons (including their names) pursuant to which the
nomination(s) are to be made by such shareholder, (iv) a representation that
such shareholder intends to appear in person or by proxy at the annual
meeting to nominate the persons named in its notice and (v) any other
information relating to such shareholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant
to Section 14 of the Exchange Act and the rules and regulations promulgated
thereunder. Such notice must be accompanied by a written consent of each
proposed nominee to be named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth in
this Section 10. If the Chairman of the annual meeting determines that a
nomination was not made in accordance with the foregoing procedures, the
Chairman shall declare to the meeting that the nomination was defective and
such defective nomination shall be disregarded.
3
5. The Corporation's By-Laws are hereby amended by adding to Article
II thereof a new section numbered Section 11, and reading in its entirety
as follows:
Section 11. Notice of Shareholder Business. No business may be
transacted at an annual meeting of shareholders, other than business that
is either (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors (or any duly
authorized committee thereof), (b) otherwise properly brought before the
annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any shareholder of the corporation (i) who is a
shareholder of record on the date of the giving of the notice provided for
in this Section 11 and on the record date for the determination of
shareholders entitled to vote at such annual meeting and (ii) who complies
with the notice procedures set forth in this Section 11.
In addition to any other applicable requirement, for business to be
properly brought before an annual meeting by a shareholder, such
shareholder must have given timely notice thereof in proper written form
to the Secretary of the corporation.
To be timely, a shareholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the
corporation not less than ninety (90) days nor more than one hundred and
twenty (120) days prior to the anniversary date of the immediately
preceding annual meeting of shareholders; provided, however, that in the
event that the annual meeting is called for a date that is not within
thirty (30) days before or after such anniversary date, notice by the
shareholder in order to be timely must be so received not later than the
close of business on the tenth (10th) day following the day on which
notice of the date of the annual meeting was mailed or public disclosure
of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a shareholder's notice to the Secretary
must set forth as to each matter such shareholder proposes to bring before
the annual meeting (i) a brief description of the business desired to be
brought before the annual meting and the reasons for conducting such
business at the annual meeting, (ii) the name and record address of such
shareholder, (iii) the class or series and number of shares of capital
stock of the corporation which are owned beneficially or of record by such
shareholder, (iv) a description of all arrangements or understandings
between such shareholder and any other person or persons (including their
names) in connection with the proposal of such business by such shareholder
and any material interest of such shareholder in such business and (v) a
representation that such shareholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 11, provided, however, that, once
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 11 shall be deemed to
preclude discussion by any shareholder of any such business. If the
Chairman of an annual meeting determines that business was not properly
brought before the annual meeting in accordance with the foregoing
procedures, the Chairman shall declare to the meeting that the business
was not properly brought before the meeting and such business shall not
be transacted.
4
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<REALIZED-GAINS-CURRENT> (200,696) (787,873)
<APPREC-INCREASE-CURRENT> (5,206,057) (1,884,529)
<NET-CHANGE-FROM-OPS> (5,365,145) (2,889,241)
<EQUALIZATION> 0 0
<DISTRIBUTIONS-OF-INCOME> 0 0
<DISTRIBUTIONS-OF-GAINS> 0 0
<DISTRIBUTIONS-OTHER> 0 0
<NUMBER-OF-SHARES-SOLD> 0 0
<NUMBER-OF-SHARES-REDEEMED> 0 0
<SHARES-REINVESTED> 0 0
<NET-CHANGE-IN-ASSETS> (5,365,145) (2,889,241)
<ACCUMULATED-NII-PRIOR> 0 0
<ACCUMULATED-GAINS-PRIOR> 12,028,191 3,893,147
<OVERDISTRIB-NII-PRIOR> 0 0
<OVERDIST-NET-GAINS-PRIOR> 0 0
<GROSS-ADVISORY-FEES> 0 0
<INTEREST-EXPENSE> 85,378 11,963
<GROSS-EXPENSE> 0 0
<AVERAGE-NET-ASSETS> 26,882,898 21,567,089
<PER-SHARE-NAV-BEGIN> 3.15 2.16
<PER-SHARE-NII> (.18) (.16)
<PER-SHARE-GAIN-APPREC> (.33) (.11)
<PER-SHARE-DIVIDEND> .75 0
<PER-SHARE-DISTRIBUTIONS> 0 0
<RETURNS-OF-CAPITAL> 0 0
<PER-SHARE-NAV-END> 1.89 1.89
<EXPENSE-RATIO> 0 0
<AVG-DEBT-OUTSTANDING> 2,000,000 1,250,000
<AVG-DEBT-PER-SHARE> 0.19 0.12
</TABLE>
