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, 2000
[ ] 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.
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(Exact name of registrant as specified in its charter)
New York 13-3119827
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Rockefeller Plaza, Rockefeller Center, New York, New York 10020
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(Address of Principal Executive Offices) (Zip Code)
212/332-3600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 3, 2000
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Common Stock, $0.01 par value per share 9,240,831 shares
Harris & Harris Group, Inc.
Form 10-Q, September 30, 2000
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements . . . . . . . . . 1
Consolidated Statements of Assets and Liabilities. . . . . . 3
Consolidated Statements of Operations. . . . . . . . . . . . 4
Consolidated Statements of Cash Flows. . . . . . . . . . . . 5
Consolidated Statements of Changes in Net Assets . . . . . . 6
Consolidated Schedule of Investments . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 26
Financial Condition. . . . . . . . . . . . . . . . . . . . . 26
Results of Operations. . . . . . . . . . . . . . . . . . . . 29
Liquidity and Capital Resources. . . . . . . . . . . . . . . 33
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . 40
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 42
Item 2. Changes in Securities and Use of Proceeds. . . . . . 42
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . 42
Item 4. Submission of Matters to a Vote of Security Holders. 42
Item 5. Other Information. . . . . . . . . . . . . . . . . . 42
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 42
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . 43
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 44
Harris & Harris Group, Inc.
Form 10-Q, September 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
The information furnished in the accompanying consolidated
financial statements reflects all adjustments that are, in the
opinion of management, necessary for a fair presentation of the
results for the interim period presented.
On June 30, 1994, the Company's shareholders approved a
proposal to allow the Company to make an election to become a
Business Development Company ("BDC") under the amended Investment
Company Act of 1940. The Company made such election on July 26,
1995. Certain information and disclosures normally included in the
consolidated 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 consolidated financial statements be read in
conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1999 contained in the
Company's 1999 Annual Report.
On September 25, 1997, the Company's Board of Directors
approved a proposal to seek qualification of the Company as a
Regulated Investment Company ("RIC") under Sub-Chapter M of the
Internal Revenue Code (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 ("SEC")
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.
In 1999, because of changes in its investment portfolio, the
Company requested recertification from the SEC relating to the
Company's status under section 851(e) of the Code. On February 24,
2000, the Company received the certification, and the Company filed
for 1999 to elect treatment as a RIC. The Company intends to elect
the same treatment for 2000 and subsequent taxable years. However,
there can be no assurance that the Company will qualify for Sub-
Chapter M treatment in 2000 or subsequent years. In addition, under
certain circumstances, even if the Company qualified for Sub-Chapter
M treatment in a given year and elected Sub-Chapter M treatment for
that year, the Company might take action in a subsequent year to
ensure that it would be taxed in that subsequent year as a C
Corporation, rather than as a RIC. On February 17, 1999, the
Company received rulings from the Internal Revenue Service (the
"IRS") regarding other issues relevant to the Company's tax status
as a RIC. (See "Note 6. Income Taxes" and "Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Sub-Chapter M Status.")
1
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. The
Company was unable to satisfy these requirements for the 1998 tax
year owing to the nature of the Company's ownership interest in one
of its investee companies, and therefore it did not elect Sub-
Chapter M status for 1998. In addition, because the Company
realized taxable losses in 1998, it was not strategically
advantageous for the Company to elect Sub-Chapter M tax status for
1998. The Company changed the nature of its ownership interest in
the non-qualifying investee company effective January 1, 1999 in
order to meet the Sub-Chapter M requirements. Moreover, the Company
received a tax opinion in 1998 that the Company interprets to mean
that its tax-loss carryforward at December 31, 1998 of approximately
$7.0 million (resulting in a tax credit of approximately $2.5
million) would be applicable as a qualifying RIC to offset the
Company's unrealized gains as of December 31, 1998. That opinion
was confirmed in one of the rulings received from the IRS in
February 1999.
2
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
September 30, 2000 December 31, 1999
(Unaudited) (Audited)
Investments, at value (See accompanying
schedule of investments and notes). . $ 55,094,205 $ 63,535,651
Cash and cash equivalents. . . . . . . . 181,341 133,256
Restricted funds (Note 5). . . . . . . . 202,575 0
Funds in escrow (Note 7) . . . . . . . . 0 1,327,748
Interest receivable. . . . . . . . . . . 15,544 44,189
Note receivable. . . . . . . . . . . . . 21,775 32,663
Prepaid expenses . . . . . . . . . . . . 16,359 74,328
Other assets . . . . . . . . . . . . . . 131,453 172,933
--------------- --------------
Total assets . . . . . . . . . . . . . . $ 55,663,252 $ 65,320,768
=============== ==============
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities. $ 660,720 $ 700,566
Payable to broker for unsettled trades. . 472,716 0
Accrued profit sharing (Note 3) . . . . . 6,108,434 9,434,467
Income tax liability (Note 6) . . . . . . 4,109,621 0
Deferred income tax liability (Note 6). . 1,364,470 1,517,774
Deferred rent . . . . . . . . . . . . . . 26,216 33,156
--------------- --------------
Total liabilities . . . . . . . . . . . . 12,742,177 11,685,963
Commitments and contingencies --------------- --------------
(Note 7 and 8)
Net assets. . . . . . . . . . . . . . . . $ 42,921,075 $ 53,634,805
=============== ==============
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
9/30/00 and 12/31/99 . . . . . . . . . 106,930 106,930
Additional paid in capital. . . . . . . . 16,159,504 16,159,504
Additional paid in capital - common
stock warrants . . . . . . . . . . . . 109,641 0
Accumulated net realized income (deficit) 5,931,694 (5,192,860)
Accumulated unrealized appreciation of
investments, net of deferred tax
liability of $1,630,506 at 9/30/00
and $1,783,810 at 12/31/99 . . . . . . 23,150,786 45,098,711
Treasury stock, at cost, 1,452,140
shares at 9/30/00 and 12/31/99 . . . . (2,537,480) (2,537,480)
--------------- --------------
Net assets. . . . . . . . . . . . . . . . $ 42,921,075 $ 53,634,805
=============== ==============
Total net assets and liabilities. . . . . $ 55,663,252 $ 65,320,768
=============== ==============
Shares outstanding. . . . . . . . . . . . 9,240,831 9,240,831
=============== ==============
Net asset value per outstanding share . . $ 4.64 $ 5.80
=============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
Sept. Sept. Sept. Sept.
30, 2000 30, 1999 30, 2000 30, 1999
Investment income:
Interest from:
Fixed-income securities $ 145,748 $ 64,349 $ 290,563 $ 185,557
Affiliated companies . . 15,701 19,196 49,759 28,513
Other income. . . . . . . 18,368 3,722 53,432 4,022
---------- ---------- ------------ -----------
Total investment income. 179,817 87,267 393,754 218,092
Expenses:
Profit-sharing accrual
(reversal) (Note 3). . . 1,928,945 5,254 (2,187,482) 1,423,824
Salaries and benefits . . 231,671 182,130 753,957 574,463
Administration and
operations . . . . . . . 62,910 53,542 308,009 241,421
Professional fees . . . . 44,251 95,013 250,265 219,003
Rent. . . . . . . . . . . 42,827 39,799 125,936 122,555
Directors' fees and
expenses . . . . . . . . 20,810 19,500 76,220 82,616
Depreciation. . . . . . . 10,000 12,500 30,000 37,500
Custodian fees. . . . . . 4,469 3,713 9,069 6,996
Interest expense (Note 4) 0 0 146,141 0
---------- ---------- ------------ -----------
Total expenses . . . . 2,345,883 411,451 (487,885) 2,708,378
---------- ---------- ------------ -----------
Operating (loss) income
before income taxes. . .(2,166,066) (324,184) 881,639 (2,490,286)
Income tax provision
(Note 6) . . . . . . . . 0 0 0 0
---------- ---------- ------------ ------------
Net operating (loss)
income. . . . . . . . . .(2,166,066) (324,184) 881,639 (2,490,286)
Net realized gain (loss) on investments:
Realized gain (loss)
on investments . . . . . 6,261,211 (86,217) 14,356,893 11,039,600
---------- ---------- ------------ ------------
Total realized gain
(loss). . . . . . . . 6,261,211 (86,217) 14,356,893 11,039,600
Income tax provision
(Note 6). . . . . . . .(1,472,905) 0 (4,113,978) (2,479,820)
---------- ---------- ------------ -----------
Net realized gain (loss)
on investments. . . . . 4,788,306 (86,217) 10,242,915 8,559,780
Net realized income (loss) 2,622,240 (410,401) 11,124,554 6,069,494
Net increase (decrease) in unrealized appreciation on investments:
Increase as a result of
investment sales . . . . 0 73,446 0 559,352
Decrease as a result of
investment sales . . . .(4,286,250) (98,895) (16,738,527) (4,939,595)
Increase on investments
held . . . . . . . . . .11,305,318 1,803,900 26,738,880 4,859,080
Decrease on investments
held. . . . . . . . . .(2,583,958) (357,853) (32,101,582) (1,333,107)
----------- ---------- ------------- -----------
Change in unrealized
appreciation on
investments. . . . . . 4,435,110 1,420,598 (22,101,229) (854,270)
Income tax (provision)
benefit (Note 6) . . . . 0 29,096 153,304 1,705,375
------------ ---------- ------------ -----------
Net increase (decrease)
in unrealized appreciation
on investments . . . . . 4,435,110 1,449,694 (21,947,925) 851,105
---------- ---------- ------------ -----------
Net increase (decrease) in net assets from operations:
Total . . . . . . . . . .$7,057,350 $1,039,293 $(10,823,371) $ 6,920,599
========== ========== ============ ===========
Per outstanding share . .$ 0.76 $ 0.11 $ (1.17) $ 0.75
========== ========== ============ ===========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
Cash flows from operating activities:
Net (decrease) increase in net
assets resulting from operations. .$ (10,823,371) $ 6,920,599
Adjustments to reconcile net
(decrease) increase in net assets
from operations to net cash used in operating activities:
Net realized and unrealized loss
(gain) on investments. . . . . . . 7,744,336 (10,185,330)
Depreciation. . . . . . . . . . . . 30,000 37,500
Other . . . . . . . . . . . . . . . 82,632 0
Changes in assets and liabilities:
Restricted funds (Note 5) . . . . . (202,575) 0
Funds in escrow (Note 7). . . . . . 1,327,748 (1,327,748)
Interest receivable . . . . . . . . 28,645 (62,510)
Notes receivable. . . . . . . . . . 10,888 10,000
Prepaid expenses. . . . . . . . . . 57,969 59,027
Receivable from brokers . . . . . . 0 380,707
Other assets. . . . . . . . . . . . 18,452 (18,326)
Accounts payable and accrued
liabilities. . . . . . . . . . . . (39,846) (71,208)
Payable to broker for unsettled
trades . . . . . . . . . . . . . . 472,716 0
Accrued profit sharing (Note 3) . . (3,326,033) 1,423,824
Income tax liability (Note 6) . . . 4,109,621 0
Deferred income tax liability
(Note 6) . . . . . . . . . . . . . (153,304) 774,445
Deferred rent . . . . . . . . . . . (6,940) (6,940)
------------- ------------
Net cash used in operating
activities . . . . . . . . . . . . (669,062) (2,065,960)
Cash flows from investing activities:
Net purchase of U.S. Treasury &
Governmental Agency securities
and purchase of marketable
securities . . . . . . . . . . . . (12,409,717) (1,368,720)
Proceeds from sale of investments . 17,551,338 12,274,631
Investment in private placements
and loans. . . . . . . . . . . . . (4,417,500) (2,777,001)
Purchase of fixed assets. . . . . . (6,974) (7,754)
---------- -----------
Net cash provided by investing
activities . . . . . . . . . . . . 717,147 8,121,156
Cash flows from financing activities:
Payment of dividend . . . . . . . . 0 (3,647,017)
Proceeds from note payable (Note 4) 3,000,000 0
Payment of note payable . . . . . . (3,000,000) 0
Proceeds from sale of treasury stock 0 17,283
Purchase of treasury stock (Note 4) 0 (2,373,551)
--------- ------------
Net cash used in financing activities 0 (6,003,285)
Net increase in cash and cash equivalents:
Cash and cash equivalents at
beginning of the period. . . . . . 133,256 164,143
Cash and cash equivalents at end of
the period . . . . . . . . . . . . 181,341 216,054
---------- ------------
Net increase in cash and cash equivalents $ 48,085 $ 51,911
========== ============
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . $ 84,728 $ 1,407
Interest paid . . . . . . . . . . . $ 36,500 $ 0
The accompanying notes are an integral part of these consolidated
financial statements.
5
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Three Months Ended Nine Months Ended
Sept. Sept. Sept. Sept.
30, 2000 30, 1999 30, 2000 30, 1999
Changes in net assets from operations:
Net operating (loss)
income. . . . . . . . . $(2,166,066) $ (324,184) $ 881,639 $(2,490,286)
Net realized gain (loss)
investments . . . . . . 4,788,306 (86,217) 10,242,915 8,559,780
Net decrease in unrealized
appreciation on
investments as a result
of sales . . . . . . . (4,286,250) (25,449) (16,585,223) (4,380,243)
Net increase (decrease)
in unrealized appreciation
on investments held. . 8,721,360 1,475,143 (5,362,702) 5,231,348
----------- ----------- ------------ ----------
Net increase (decrease) in
net assets resulting from
operations . . . . . . 7,057,350 1,039,293 (10,823,371) 6,920,599
Changes in net assets from capital
stock transactions:
Additional paid in capital
on Common Stock
Warrants issued (Note 4) 0 0 109,641 0
Payment of dividends. . . 0 0 0 (3,647,017)
Proceeds from sale of treasury
stock (Note 4). . . . . 0 0 0 17,283
Purchase of treasury
stock (Note 4). . . . . 0 (1,832,831) 0 (2,373,551)
---------- ----------- ----------- -----------
Net (decrease) increase in net
assets resulting from capital
stock transactions. . . 0 (1,832,831) 109,641 (6,003,285)
---------- ----------- ----------- -----------
Net increase (decrease)
in net assets . . . . . 7,057,350 (793,538) (10,713,730) 917,314
Net assets:
Beginning of the period . 35,863,725 24,267,561 53,634,805 22,556,709
---------- ----------- ----------- -----------
End of the period . . . .$42,921,075 $23,474,023 $42,921,075 $23,474,023
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
6
CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
(Unaudited)
Method of Shares/
Valuation (3) Principal Value
Investments in Unaffiliated Companies (15)(16)(17) -- 40.6% of total
investments
Publicly Traded Portfolio -- 33.7% of total investments
Alliance Pharmaceutical Corp. (7) --
Research and development of
pharmaceutical products -- 0.51% of
fully diluted equity
Common Stock . . . . . . . . . . . . (C) 300,000 $ 4,489,219
Genomica Corporation (1)(2)(6)(10) --
Develops software that enables
the study of complex genetic diseases --
2.95% of fully diluted equity
Common Stock . . . . . . . . . . . . (C) 731,111 11,173,375
Kana Communications, Inc. (1)(8) --
Provides customer-centric e-business
applications and systems -- 0.06% of
fully diluted equity
Common Stock . . . . . . . . . . . . (C) 67,834 1,358,207
SciQuest.com, Inc. (1) Internet
e-commerce source for scientific
products
Common Stock . . . . . . . . . . . . (C) 222,000 1,533,176
-----------
Total Publicly Traded Portfolio (cost: $4,295,701) . . . . . . . $18,553,977
-----------
Private Placement Portfolio (Illiquid) -- 6.9% of total investments
Essential.com, Inc. (1)(2)(9) --
Online energy and communications
marketplace 0.73% of fully diluted equity
Common stock . . . . . . . . . . . . (B) 169,185 $ 2,204,000
Exponential Business Development
Company (2)(5) -- Venture
capital partnership focused on
early stage companies
Limited partnership interest. . . . . (A) -- 25,000
Informio, Inc. (1)(2)(4)(6)(11) --
Developing audio web portal
technology
Series A Convertible Preferred Stock. (A) -- 504,601
Kriton Medical, Inc. (1)(2)(6) --
Research and development of
medical devices -- 1.87% of
fully diluted equity
Series B Convertible Preferred Stock. (A) 476,191 1,000,001
MedLogic Global Corporation (1)(2)(6) --
Medical cyanoacrylate adhesive --
0.35% of fully diluted equity
Series B Convertible Preferred Stock. (D) 54,287
Common Stock. . . . . . . . . . . . . (D) 25,798 103,763
-----------
Total Private Placement Portfolio (cost: $3,912,910) . . . . . . $ 3,837,365
-----------
Total Investments in Unaffiliated Companies (cost: $8,208,611) . $22,391,342
-----------
The accompanying notes are an integral part of this
consolidated schedule.
7
CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
(Unaudited)
Method of Shares/
Valuation (3) Principal Value
Investments in Non-Controlled Affiliated Companies (15)(17) -- 35.2% of
total investments
Publicly Traded Portfolio -- 14.8% of total investments
Nanophase Technologies Corporation (1)(12) --
Manufactures and markets inorganic
crystals of nanometric dimensions --
4.46% of fully diluted equity
Common Stock . . . . . . . . . . . . . (C) 672,916 $ 8,175,929
-----------
Total Publicly Traded Portfolio (cost: $1,162,204) . . . . . . $ 8,175,929
-----------
Private Placement Portfolio (Illiquid) -- 20.4% of total investments
Experion Systems, Inc. (1)(2)(4)(6)(13) --
Business-to-business e-commerce and
e-services trust-based marketing
start-up -- 14.26% of fully diluted equity
Convertible Preferred Stock. . . . . .(A) 187,500 $ 1,500,000
NeuroMetrix, Inc. (1)(2)(6) -- Medical
devices for monitoring neuromuscular
disorders -- 15.47% 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(B) 229,620
8% Convertible Note. . . . . . . . . .(A) $750,000 6,708,225
PHZ Capital Partners Limited Partnership (2)(14)
-- Organizes and manages investment
partnerships -- 20.0% of fully diluted equity
Limited partnership interest . . . . .(D) -- 2,067,653
Questech Corporation (1)(2)(6) --
Manufactures and markets proprietary
decorative tiles and signs -- 9.42% of
fully diluted equity
Common Stock . . . . . . . . . . . . .(B) 646,954
Warrants at $5.00 expiring 11/15/09. .(A) 1,965
Warrants at $4.00 expiring 11/28/01. .(A) 152,422 970,593
-----------
Total Private Placement Portfolio (cost: $7,660,251). . . . . $11,246,471
-----------
Total Investments in Non-Controlled Affiliated
Companies (cost: $8,822,455). . . . . . . . . . . . . . . . $19,422,400
-----------
The accompanying notes are an integral part of this
consolidated schedule.
8
CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
(Unaudited)
U.S. Government and Agency Obligations -- 24.2% of total investments
U.S. Treasury Bill dated 04/06/00
due date 10/05/00 -- 5.8% yield . . . . (K) $1,500,000 $ 1,499,295
U.S. Treasury Bill dated 10/14/99
due date 10/12/00 -- 6.0% yield . . . . (K) $ 400,000 399,360
U.S. Treasury Bill dated 05/04/00
due date 11/02/00 -- 6.1% yield. . . . (K) $ 950,000 945,203
U.S. Treasury Bill dated 11/12/99
due date 11/09/00 -- 6.1% yield. . . . (K) $2,700,000 2,682,990
U.S. Treasury Bill dated 5/18/00
due date 11/16/00 -- 6.2% yield. . . . (K) $ 400,000 397,016
Federal Home Loan Bank Discount Notes -
due date 11/17/00. . . . . . . . . . . (K) $2,600,000 2,577,380
Federal Home Loan Bank Discount Notes -
due date 11/24/00. . . . . . . . . . . (K) $ 200,000 198,110
U.S. Treasury Bill dated 06/01/00
due date 11/30/00 -- 6.2% yield. . . . (K) $1,350,000 1,336,743
Federal Home Loan Bank Discount Notes -
due date 12/13/00. . . . . . . . . . . (K) $1,100,000 1,085,150
Federal Home Loan Bank Discount Notes -
due date 01/03/01. . . . . . . . . . . (K) $1,800,000 1,768,752
Federal Home Loan Bank Discount Notes -
due date 02/07/01. . . . . . . . . . . (K) $ 400,000 390,464
-----------
Total Investments in U.S. Government and Agency Obligations
(cost: $13,281,847). . . . . . . . . . . . . . . . . . . . . $13,280,463
-----------
Total Investments -- 100% (cost: $30,312,913). . . . . . . . . $55,094,205
===========
The accompanying notes are an integral part of this
consolidated schedule.
9
CONSOLIDATED SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
(Unaudited)
Notes to Consolidated Schedule of Investments
(1) Represents a non-income producing security. Equity investments
that have not paid dividends within the last twelve months are considered
to be non-income producing.
(2) Legal restrictions on sale of investment.
(3) See Footnote to Schedule of Investments for a description of the
Methods of Valuation A to L.
(4) These investments were made during 2000. Accordingly, the
amounts shown on the schedule represent the gross additions in 2000.
(5) No changes in valuation occurred in these investments during the
nine months ended September 30, 2000.
(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 it has
not yet commenced its planned principal operations or it has commenced
such operations but has not realized significant revenue from them.
(7) On September 29, 2000, the market price per share of Alliance
Pharmaceutical Corp. (National Market Symbol: ALLP) was $15.25.
The Company's 300,000 shareholding in Alliance Pharmaceutical
before a discount for illiquidity was valued at $4,575,000.
During October and November 2000, the Company sold the remaining
300,000 shares for total proceeds of approximately $4,427,944.
(8) On October 5, 1999, Silknet Software, Inc. (National Market
Symbol: SILK) acquired InSite Marketing Technology, Inc. On
April 19, 2000, Kana Communications, Inc. (National Market
Symbol: KANA) and Silknet Software completed a merger, in which
each share of Silknet Software was exchanged tax free for 1.66
Kana Communications shares. Upon the completion of the merger,
90 percent of the Silknet Software/Kana Communications shares
became freely tradeable, and the Company is subject to a lock-up
agreement on the remaining 10 percent of the stock that expires
on April 19, 2001. On September 29, 2000, the market price per
share of Kana Communications was $22.25. The Company's 67,834
shareholding in Kana Communications before a discount for the 10
percent escrow was valued at $1,509,306. During November 2000,
the Company sold 61,043 shares for total proceeds of
approximately $1,508,459. On November 3, 2000, the market price
per share of Kana Communications was $25.875.
The accompanying notes are an integral part of this consolidated
schedule.
10
(9) On June 29, 2000, Sundial Marketplace Corporation was acquired
in a tax-free merger by Essential.com, Inc.
(10) On September 29, 2000, Genomica Corporation commenced trading on
Nasdaq and closed at $19.4375. The Company's 731,111 shareholding in
Genomica Corporation before a discount for the six month lock-up and
illiquidity was valued at $14,210,970. On November 3, 2000 the
market price per share of Genomica Corporation was $12.8175. In
1996, Genomica Corporation was cofounded by the Company, Cold
Spring Harbor Laboratory ("CSHL"), a not-for-profit institution,
and Falcon Technology Partners, LP. Mr. G. Morgan Browne serves
on the Board of Directors of the Company and is Administrative
Director of CSHL. In late 1998, Charles E. Harris, Chairman and
CEO of Harris & Harris Group, became a trustee of CSHL.
(11) Previously named iPacer Corporation.
(12) On September 29, 2000, the market price per share of Nanophase
Technologies Corporation (National Market Symbol: NANX) was
$13.50. The Company's 672,916 shareholding in Nanophase
Technologies before a discount for illiquidity was valued at
$9,084,366. On November 3, 2000, the market price per share of
Nanophase Technologies was $13.50.
(13) Previously named MyPersonalAdvocate.com, Inc.
(14) Harris Partners I L.P. owns a 20 percent limited partnership
interest in PHZ Capital Partners L.P. The partners of Harris Partners
I L.P. are Harris & Harris Enterprises, Inc. (sole general partner) and
Harris & Harris Group, Inc. (sole limited partner). Harris & Harris
Enterprises, Inc. is a 100 percent owned subsidiary of Harris &
Harris Group, Inc.
(15) Investments in unaffiliated companies consist of investments in which
Company owns less than five percent of the investee company.
Investments in non-controlled affiliated companies consist of
investments in which the Company owns more than five percent but less
than 25 percent of the investee company. Investments in controlled
affiliated companies consist of investments in which the Company owns
more than 25 percent of the investee company.
(16) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $8,208,611. The gross unrealized appreciation
based on the tax cost for these securities is $15,274,964. The gross
unrealized depreciation based on the tax cost for these securities is
$1,092,233.
(17) The percentage ownership of each investee company disclosed in
the Consolidated Schedule of Investments 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 consolidated schedule.
11
FOOTNOTE TO CONSOLIDATED SCHEDULE OF INVESTMENTS
ASSET VALUATION POLICY GUIDELINES
The Company's investments can be classified into five broad
categories for valuation purposes:
1) EQUITY-RELATED SECURITIES
2) INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR RESEARCH
AND DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT
3) LONG-TERM FIXED-INCOME SECURITIES
4) SHORT-TERM FIXED-INCOME INVESTMENTS
5) ALL OTHER INVESTMENTS
The Investment Company Act of 1940 (the "1940 Act") requires
periodic valuation of each investment in the Company's portfolio to
determine net asset value. Under the 1940 Act, unrestricted
securities with readily available market quotations are to be valued
at the current market value; all other assets must be valued at
"fair value" as determined in good faith by or under the direction
of the Board of Directors.
The Company's Board of Directors is responsible for (1)
determining overall valuation guidelines and (2) ensuring the
valuation of investments within the prescribed guidelines.
The Company's Investment and Valuation Committee, comprised of
at least three or more Board members, is responsible for reviewing
and approving the valuation of the Company's assets within the
guidelines established by the Board of Directors.
Fair value is generally defined as the amount that an
investment could be sold for in an orderly disposition over a
reasonable time. Generally, to increase objectivity in valuing the
assets of the Company, external measures of value, such as public
markets or third-party transactions, are utilized whenever possible.
Valuation is not based on long-term work-out value, nor immediate
liquidation value, nor incremental value for potential changes that
may take place in the future.
Valuation assumes that, in the ordinary course of its business,
the Company will eventually sell its investment.
The Company's valuation policy with respect to the five broad
investment categories is as follows:
12
EQUITY-RELATED SECURITIES
Equity-related securities are carried at fair value using one
or more of the following basic methods of valuation:
A. Cost: The cost method is based on the original cost to the
Company. This method is generally used in the early stages of a
company's development until significant positive or negative events
occur subsequent to the date of the original investment that dictate
a change to another valuation method. Some examples of such events
are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a
meaningful public market for the company's common stock; and (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 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
13
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.
14
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.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company") is a venture
capital investment company operating as a business development
company ("BDC") under the Investment Company Act of 1940 ("1940
Act"). A BDC is a specialized type of investment company under the
1940 Act. The Company operates as an internally managed investment
company whereby its officers and employees, under the general
supervision of its Board of Directors, conduct its operations.
The Company elected to become a BDC on July 26, 1995, after
receiving the necessary approvals. From 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.
Harris & Harris Enterprises, Inc. ("Enterprises") is a 100
percent wholly owned subsidiary of the Company. Enterprises holds
the lease for the office space, which it subleases to the Company
and an unaffiliated party; owns a financial relations and consulting
firm; is a partner in Harris Partners I, L.P.; and is taxed as a C
corporation. Harris Partners I L.P. is a limited partnership and
owns a 20 percent limited partnership interest in PHZ Capital
Partners, L.P. The partners of Harris Partners I L.P. are
Enterprises (sole general partner) and Harris & Harris Group, Inc.
(sole limited partner).
The Company filed for 1999 to elect treatment as a RIC
("Registered Investment Company") and intends to elect the same
treatment for 2000 and subsequent taxable years. As a RIC, the
Company must, among other requirements, distribute at least 90
percent of its taxable net operating income and may either
distribute or retain its taxable net realized capital gains on
investments. (See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Sub-Chapter M
Status.") 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 in a given year as
a RIC, and elected Sub-Chapter M treatment for that year, the
Company might take action in a subsequent year to ensure that it
would be taxed in that subsequent year as a C Corporation, rather
than as a RIC (See "Note 6. Income Taxes").
16
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies
followed in the preparation of the consolidated financial
statements:
Principles of Consolidation. The consolidated financial
statements have been prepared in accordance with Generally Accepted
Accounting Principles for investment companies. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
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 Consolidated Schedule of
Investments.
Securities Transactions. Securities transactions are accounted
for on the date the securities are purchased or sold (trade date);
dividend income is recorded on the ex-dividend date; and interest
income is accrued as earned. Realized gains and losses on
investment transactions are determined on the specific
identification basis for financial reporting and tax reporting.
Income Taxes. Prior to January 1, 1999, 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 related to the Company's unrealized
appreciation on investments.
The September 30, 2000 consolidated financial statements
include a provision for deferred taxes on the remaining net built-in
gains as of December 31, 1998, net of the unutilized operating and
capital loss carryforwards incurred by the Company through December
31, 1998. These statements also include a tax provision on net
realized long-term capital gains which the Company intends to retain
for liquidity and to fund investment opportunities, rather than
distribute to shareholders as a cash distribution. Accordingly, the
Company intends to declare a designated undistributed capital gain dividend
for the year. (See "Note 6. Income Taxes" and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Sub-Chapter M Status.")
The Company pays federal, state and local income taxes on
behalf of its wholly owned subsidiary, Harris & Harris Enterprises,
which is a C corporation. (See "Note 6. Income Taxes".)
17
Reclassifications. Certain reclassifications have been made to
the December 31, 1999 and September 30, 1999 financial statements to
conform to the September 30, 2000 presentation.
Estimates by Management. The preparation of the consolidated
financial statements in conformity with Generally Accepted
Accounting Principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities as of September 30, 2000 and December 31,
1999, and the reported amounts of revenues and expenses for the
three and nine months ended September 30, 2000 and September 30,
1999. Actual results could differ from these estimates.
NOTE 3. STOCK OPTION PLAN AND EMPLOYEE PROFIT-SHARING PLAN
On August 3, 1989, the shareholders of the Company approved the
1988 Long Term Incentive Compensation Plan (the "1988 Plan"). The
Company's 1988 Plan was cancelled as of December 31, 1997, canceling
all outstanding stock options and eliminating all potential stock
option grants. As a substitution for the 1988 Plan, the Company
adopted an employee profit-sharing plan.
As of January 1, 1998, the Company began implementing the
Harris & Harris Group, Inc. Employee Profit-Sharing Plan (the "1998
Plan") that provides for profit sharing equal to 20 percent of the
net realized income. The 1998 Plan was terminated by the Company as
of December 31, 1999, subject to the payment of any amounts owed on
the 1999 realized gains under the 1998 Plan.
In March 2000, the Company paid out, under the 1998 Plan, 90
percent of the profit sharing on the 1999 realized gains of
approximately $1,024,696; the remaining 10 percent or approximately
$113,855 was paid out in September 2000, upon the completion and
filing of the Company's 1999 federal tax return.
As of January 1, 2000, 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 Consolidated Statements 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 is 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 is considered nonqualifying gain, which
reduces Qualifying Income.
18
As soon as practicable following the year-end audit, the Board
of Directors will determine whether, and if so how much, Qualifying
Income exists for a plan year, and 90 percent of the Qualifying
Income will be paid out to Plan participants pursuant to the
distribution percentages set forth in the Plan. The remaining 10
percent will be paid out after the Company has filed its federal tax
return for that year in which Qualifying Income exists. Currently,
the distribution amounts for each officer and employee are as
follows: Charles E. Harris, 13.790 percent; Mel P. Melsheimer,
4.233 percent; Rachel M. Pernia, 1.524 percent; and Jacqueline M.
Matthews, 0.453 percent. If a participant leaves the Company for
other than cause, the amount earned will be accrued and may
subsequently be paid to such participant.
Notwithstanding any provisions of the Plan, in no event may the
aggregate amount of all awards payable for any Plan year during
which the Company remains a "business development company" within
the meaning of 1940 Act be greater than 20 percent of the Company's
"net income after taxes" within the meaning of Section 57(n)(1)(B)
of the 1940 Act. In the event the awards exceed such amount, the
awards will be reduced pro rata.
The Plan may be modified, amended or terminated by the
Company's Board of Directors at any time with the stipulation that
no such modification, amendment or termination may adversely affect
any participant that has not consented to such modification,
amendment or termination.
The Company calculates the Plan accrual at each quarter end
based on the realized and unrealized gains at that date, net of
operating expenses for the year. Any adjustments to the Plan
accrual are then reflected in the Consolidated Statements of
Operations for the quarter. The Plan accrual is not paid out until
the gains are realized. During the third quarter of 2000, the
Company, as a result of an increase in the net unrealized
appreciation, increased the profit-sharing accrual by $1,928,945,
however, for the nine months ended September 30, 2000, as a result
of a net decrease in the unrealized appreciation on investments, the
Company reduced the profit-sharing accrual by $2,187,482 which
decreased the cumulative accrual under the Plan to $6,108,434 at
September 30, 2000.
The amounts payable under the Plan for the gains realized
during the nine months ended September 30, 2000 of approximately
$1,657,036 plus any adjustments for the three months ended December
31, 2000 will be paid out as follows: 90 percent will be paid out as
soon as practicable following the 2000 year-end audit; the remaining
10 percent will be paid out upon the completion and filing of the
Company's 2000 federal tax return.
On April 26, 2000 the shareholders of the Company approved the
performance goals under the Plan in accordance with Section 162(m)
of the Internal Revenue Code of 1986 ("Code"). The Code generally
provides that a public company such as the Company may not deduct
compensation paid to its chief executive officer or to any of its
four most highly compensated officers to the extent that the
compensation paid to any such officer/employee exceeds $1 million in
any tax year, unless the payment is made upon the attainment of
objective performance goals that are approved by the Company's
shareholders.
19
NOTE 4. CAPITAL TRANSACTIONS
In 1998, the Board of Directors approved that, effective
January 1, 1998, 50 percent of all directors' fees be used to
purchase Company common stock from the Company. However, effective
on March 1, 1999, the directors may purchase the Company's common
stock in the market, rather than from the Company. During 1998 and
1999, the directors bought directly from the Company 24,491 and
5,816 shares, respectively.
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. The Company purchased a total of
401,878 shares in the open market for a total of $795,529. On July
14, 1999, the Board of Directors announced a tender offer to
purchase up to 1,100,000 shares of its common stock for cash at a
price equal to $1.63 per share. A total of 1,080,569 shares were
tendered for a total cost, including related expenses of
approximately $71,500, of $1,832,831. Of these shares, 1,075,269
were tendered by one shareholder, which tendered all of its
holdings.
Since 1998, as a result of the shares purchased in the open
market and through the tender offer in 1999, the Company has
purchased a total of 1,482,447 shares for a total of $2,628,337,
including commissions and expenses, at an average price of $1.77 per
share. These treasury shares were reduced by the purchases made by
the directors.
On January 27, 2000, the Company placed privately, with an
unaffiliated investor, for $3 million in cash, a one-year 12 percent
note with one-year warrants to purchase 25,263 shares of the
Company's common stock at $11.8750 per share. The note may be
prepaid at any time. Unless the note is prepaid, six months after
its issuance, the investor will receive additional one-year warrants
to purchase an additional $300,000 worth of the Company's common
stock at the then-current market price. During March 2000, with
part of the proceeds from the sale of SciQuest.com stock, the
Company prepaid the Note. The Company incurred total interest costs
of $146,141: $36,500 in cash on the note and $109,641 on the
warrants.
On October 12, 2000, the Company announced that the Board of
Directors had authorized a repurchase program in the open market of
up to $2 million of the Company's stock, at the discretion of
management. As of November 13, 2000, the Company had repurchased a total
of 12,000 shares in the open market at approximately $3.94 per share.
NOTE 5. EMPLOYEE BENEFITS
On October 19, 1999, Charles E. Harris signed an Employment
Agreement with the Company (disclosed in a Form 8-K filed on October
27, 1999) (the "Employment Agreement"), which superseded an
employment agreement that was about to expire on December 31, 1999.
The Employment Agreement shall terminate on December 31, 2004
("Term") subject to either an earlier termination or an extension in
accordance with the terms; on January 1, 2000 and on each day
thereafter, the Term extends automatically by one day unless at any
time the Company or Mr. Harris, by written notice, decides not to
extend the Term, in which case the Term will expire five years from
the date of the written notice.
20
During the period of employment, Mr. Harris shall serve as the
Chairman and Chief Executive Officer of the Company. He shall be
responsible for the general management of the affairs of the Company
and all its subsidiaries, reporting directly to the Board of
Directors of the Company. He shall serve as a member of the Board
for the period of which he is elected and shall from time to time be
reelected. If elected, he shall serve as President of the Company
and as an officer and director of any subsidiary or affiliate of the
Company.
Mr. Harris is to receive compensation under his Employment
Agreement in the form of base salary of $208,315, with automatic
yearly adjustments to reflect inflation. In addition, the Board may
increase such salary, and consequently decrease it, but not below
the level provided for by the automatic adjustments described above.
Mr. Harris is also entitled to participate in the Company's Profit-
Sharing Plan as well as in all compensation or employee benefit
plans or programs, and to receive all benefits, perquisites, and
emoluments for which salaried employees are eligible. Under the
Employment Agreement, the Company is to furnish Mr. Harris with
certain perquisites which include a company car, membership in
certain clubs and up to a $5,000 annual reimbursement for personal,
financial or tax advice.
The Employment Agreement provides Mr. Harris with life
insurance for the benefit of his designated beneficiaries in the
amount of $2,000,000; provides reimbursement for uninsured medical
expenses (not to exceed $10,000 per annum, adjusted for inflation,
over the period of the contract); disability insurance in the amount
of 100 percent of his base salary; and provides Mr. Harris and his
spouse with long-term care insurance. These benefits are for the
term of the contract.
The Employment Agreement provides for the Company to adopt a
supplemental executive retirement plan (the "SERP") for the benefit
of Mr. Harris. Under the SERP, the Company will cause an amount
equal to one-twelfth of the Mr. Harris's current base salary to be
credited each month (a "Monthly Credit") to a special account
maintained for this purpose on the books of the Company for the
benefit of Mr. Harris (the "SERP Account"). The amounts credited to
the SERP Account will be deemed invested or reinvested in such
mutual funds or U.S. Government securities as determined by Mr.
Harris. The SERP Account will be credited and debited to reflect
the deemed investment returns, losses and expenses attributed to
such deemed investments and reinvestments. Mr. Harris's benefit
under the SERP will equal the balance in the SERP Account and such
benefit will always be 100 percent vested (i.e., not forfeitable).
Mr. Harris will determine the form and timing of the distribution of
the balance in the SERP Account; provided, however, in the event of
the termination, the balance in the SERP Account will be distributed
to Mr. Harris or his beneficiary, as the case may be, in a lump-sum
payment within 30 days of such termination. The Company established
a rabbi trust for the purpose of accumulating funds to satisfy the
obligations incurred by the Company under the SERP. The restricted
funds for the SERP Plan total $202,575 as of September 30, 2000.
Mr. Harris's rights to benefits pursuant to this SERP will be no
greater than those of a general creditor of the Company.
21
The Employment Agreement provides severance pay in the event of
termination without cause or by constructive discharge and also
provides for certain death benefits payable to the surviving spouse
equal to the executive's base salary for a period of two years.
In addition, Mr. Harris is entitled to receive severance pay
pursuant to the severance compensation agreement that he entered
into with the Company, effective August 15, 1990. The severance
compensation agreement provides that if, following a change in
control of the Company, as defined in the agreement, such
individual's employment is terminated by the Company without cause
or by the executive within one year of such change in control, the
individual shall be entitled to receive compensation in a lump sum
payment equal to 2.99 times the individual's average annualized
compensation and payment of other welfare benefits. If Mr. Harris's
termination is without cause or is a constructive discharge, the
amount payable under the Employment Agreement will be reduced by the
amounts paid pursuant to the severance compensation agreement.
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. As of January 1, 1999, the Company
adopted the Harris & Harris Pension Plan and Trust, a money purchase
plan which would allow the Company to stay compliant with the 401(k)
top-heavy regulations and deduction limitation regulations.
Contributions to the plan are at the discretion of the Company.
On June 30, 1994, the Company adopted a plan to provide medical
and health insurance for retirees, their spouses and dependents who,
at the time of their retirement, have 10 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, as of September 30, 2000, the Company had a
reserve of $317,600 for the plan.
NOTE 6. INCOME TAXES
The Company elected Sub-Chapter M status for the year ended
December 31, 1999. On February 23, 1999, the Company declared a
cash dividend of $0.35 per share (for a total of $3,647,017),
thereby distributing part of the long-term capital gain generated in
1999 by the sale of NBX Corporation to 3Com Corporation.
Approximately $146,213 of the long-term capital gain was not
distributed during 1999. Accordingly, on September 20, 2000, the
Company declared a $0.02 dividend (for a total of $184,817). For
the year ended December 31, 1999, the Company incurred approximately
$20,000 in excise taxes.
The Company utilized in 1999 net operating loss and capital
loss carryforwards of approximately $6.3 million in order to retain
most of its long-term capital gain for 1999. The Company had
accumulated net ordinary and capital losses of approximately $7.0
million (which resulted in a tax credit of approximately $2.5
million) during its C Corporation taxable years, of which $0.8
22
million still remains available for use. 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"). On February 17, 1999, the Company received a ruling from
the IRS concluding that the Company can carry forward its C
Corporation losses to offset any Built-In Gains resulting from sales
of its C Corporation Assets. That ruling may enable 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, depending on whether the Company's sale of C Corporation Assets
with Built-In Gains will generate C Corporation E&P. In general, 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.
However, because the realization of Built-In Gains will occur while
the Company is a RIC, the Company believes that, under current law
and IRS pronouncements, the sale of C Corporation Assets with Built-
In Gains during RIC taxable years will not generate C Corporation
E&P. The Company intends to use the remaining $0.8 million loss
carryforward (which results in a tax credit of approximately $0.3
million) to reduce its taxes which are the result of Built-In Gains.
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 "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation -- Sub-Chapter M Status.") There can be no assurance that
the Company will qualify as a RIC for 2000 or subsequent years or
that, if it does qualify, it will continue to elect RIC status.
During the nine months ended September 30, 2000, the Company
accrued a net tax provision of $3,960,674 as a result primarily of
the long-term capital gains realized on sales of investments in
SciQuest.com and Alliance Pharmaceutical Corp. The Company plans to
retain the capital gains for liquidity and to fund investment
opportunities, including a possible repurchase of some of its
outstanding shares, rather than distribute such funds to
shareholders as a cash dividend. Accordingly, the Company intends
to declare a designated undistributed capital gain dividend for the year.
(See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Sub-Chapter M Status.") The
Company also realized short-term capital gains of approximately
$1,878,283 on sales of shares of Alliance Pharmaceutical Corp. The
Company believes that by partially offsetting the realized short-
term gain with current year expenses, it will neither owe federal
income taxes on this gain, nor be required to distribute any portion
of this gain to shareholders. There can be no assurance of this tax
treatment.
For the three and nine months ended September 30, 2000 and
1999, the Company's income tax provision (benefit) was allocated as
follows:
23
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30,1999
Investment
operations. . . . $ 0 $ 0 $ 0 $ 0
Realized gain (loss)
on investments . . 1,472,905 0 4,113,978 2,479,820
Net increase (decrease)
in unrealized appreciation
on investments . . 0 (29,096) (153,304) (1,705,375)
-------------- -------------- -------------- -------------
Total income tax
provision
(benefit). . . . .$ 1,472,905 $ (29,096) $ 3,960,674 $ 774,445
============== ============= ============= ============
The above tax provision (benefit) consists of the following:
Current --
Federal, State
and City. . . . . .$ 1,472,905 $ 0 $ 4,113,978 $ 0
Deferred -- Federal. 0 (29,096) (153,304) 774,445
-------------- ------------- ------------- -------------
Total income tax
provision
(benefit) . . . . .$ 1,472,905 $ (29,096) $ 3,960,674 $ 774,445
============== ============= =========== ============
The Company's net deferred tax liability at September 30, 2000 and
December 31, 1999 consists of the following:
September 30, 2000 December 31, 1999
Tax on unrealized appreciation
on investments. . . . . . . . . . . $1,630,506 $1,783,810
Net operating loss and capital
loss carryforward . . . . . . . . . (266,036) (266,036)
---------- ----------
Net deferred income tax liability . . $1,364,470 $1,517,774
========== ==========
NOTE 7. 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. During 1999, the Company sublet
this additional space to an unaffiliated party. Rent expense under
this lease was $42,827 and $39,799 for the three months ended
September 30, 2000 and September 30, 1999, and $125,936 and $122,555
for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Future minimum lease payments in each of the following
years are: 2001 -- $178,561; 2002 -- $178,561; 2003 -- $101,946.
The Company had a total of $1,475,276 of funds in escrow as of
December 31, 1999 as a result of the acquisition of NBX Corporation by
3Com Corporation. These funds were in a one-year interest-bearing
escrow account for the benefit of the Company, subject to any 3Com
Corporation warranty claims associated with its acquisition of NBX
Corporation. The Company set up a reserve of 10 percent for any
potential claims, therefore the funds in escrow reflected $1,327,748
net of the reserve of $147,528. The Company received the full escrow
monies including interest for a total of $1,541,136 on March 6, 2000.
24
NOTE 8. SUBSEQUENT EVENTS
During October and November 2000, the Company sold in the open
market the remaining 300,000 shares of Alliance Pharmaceutical Corp.
for total proceeds of $4,427,944 and 61,043 shares of Kana
Communications for total proceeds of $1,508,459. The Company intends
to retain these proceeds and, therefore, will increase its reserve for
taxes by approximately $1,710,260. (See "Note 6. Income Taxes" and
"Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Sub-Chapter M Status.") The Company also
purchased 28,000 shares of SciQuest.com, Inc. in the open market for a
total of $118,930.
25
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
increase (decrease) in net assets from operations," which is the sum
of three elements. The first element is "Net operating income
(loss)," which is the difference between the Company's income from
interest, dividends, and fees and its operating expenses, net of
applicable income tax benefit. The second element is "Net realized
gain (loss) on investments," which is the difference between the
proceeds received from dispositions of portfolio securities and their
stated cost, net of applicable income tax provisions (benefits).
These two elements are combined in the Company's financial statements
and reported as "Net realized income (loss)." The third element, "Net
increase (decrease) in unrealized appreciation on investments," is the
net change in the fair value of the Company's investment portfolio,
net of decrease in deferred income taxes that would become payable if
the unrealized appreciation were realized through the sale or other
disposition of the investment portfolio.
"Net realized gain (loss) on investments" and "Net (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
(loss) increases (decreases).
Financial Condition
The Company's total assets and net assets were, respectively,
$55,663,252 and $42,921,075 at September 30, 2000, compared with
$65,320,768 and $53,634,805 at December 31, 1999.
Among the significant increases in values of the Company's holdings
in the nine months ended September 30, 2000 were: $9,463,645 in
Genomica, as a result of its initial public offering (Genomica
Corporation commenced trading on Nasdaq on September 29, 2000, closing
at $19.4375; on November 3, 2000, the closing market price was
$12.8175); $5,223,510 in Nanophase Technologies; $854,467 in
Essential.com, which acquired Sundial Marketplace; and $5,915,740 in
Alliance Pharmaceutical.
Among the significant decreases in values of the Company's
holdings in the nine months ended September 30, 2000 were: $24,736,593
in SciQuest.com (net of the gain realized on sale); $4,040,855 in Kana
Communications (which acquired Silknet Software); and $1,165,879 in
Questech Corporation.
The Company's profit-sharing plan accrual decreased by $2,187,482
which was added to operating income for the nine months ended
September 30, 2000. In addition, the Company's tax provision
increased by $3,960,674, reflecting long-term gains realized on the
sales of shares of SciQuest.com and Alliance Pharmaceutical Corp. The
Company plans to retain the proceeds rather than distribute the funds
26
to shareholders as a cash dividend. Accordingly, the Company will
declare a designated undistributed capital gain dividend. (See "Sub-
Chapter M Status" and "Consolidated Statements of Operations"
contained in "Item 1. Consolidated Financial Statements.")
The changes in the values of SciQuest.com, Kana Communications,
Nanophase Technologies and Alliance Pharmaceutical Corp. occurred
during a period of extreme volatility of publicly traded, small
capitalization, high technology stocks.
Net asset value per share ("NAV") was $4.64 at September 30, 2000
versus $5.80 at December 31, 1999.
The Company's shares outstanding remained unchanged during the
nine months ended September 30, 2000. However, on October 12, 2000,
the Company announced that the Board of Directors had authorized a
repurchase program in the open market of up to $2 million of the
Company's stock. As of November 13, 2000, the Company had repurchased
a total of 12,000 shares in the open market at approximately $3.94
per share.
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, 2000, $26,729,906 or 48.0 percent of the Company's
total assets consisted of investments at fair value in five publicly
traded securities (four of which were private placements at the time
the Company made the investments), of which net unrealized appreciation
was $21,272,001. Another $15,083,836 or 27.1 percent of the Company's
total assets consisted of non-publicly traded securities at fair value
in private businesses, of which net unrealized appreciation was
$3,510,675.
At December 31, 1999, $41,556,607 or 63.6 percent of the
Company's total assets consisted of investments at fair value in
publicly traded securities (that were private businesses at the time
the Company made the investments), of which net unrealized
appreciation was $38,864,873; $18,892,731 or 29.0 percent of the
Company's total assets consisted of non-publicly traded securities at
fair value in private businesses and publicly traded companies, of
which net unrealized appreciation was $8,553,549.
The decrease in the value of publicly traded securities from
$41,556,607 at December 31, 1999 to $26,729,906 at September 30, 2000
is primarily owing to the decrease in the value of SciQuest.com and
the sale of the Company's position in SciQuest.com and the decrease in
the value of Kana Communications. These decreases were partially
offset by the increase in value and reclassification of Genomica
Corporation to a publicly traded security as a result of its initial
public offering (Genomica Corporation commenced trading on Nasdaq on
September 29, 2000, closing at $19.4375; on November 3, 2000, the
closing market price was $12.8175); the reclassification of Alliance
Pharmaceutical as a result of the conversion of the note and warrants
to a publicly-traded security; and the increase in the market value of
Nanophase Technologies. The changes in the values of SciQuest.com,
Kana Communications, Nanophase Technologies and Alliance
Pharmaceutical occurred during a period of extreme volatility of
27
publicly traded, small capitalization, high technology stocks. The
volatility of the overall market may continue to have a significant
impact on the performance of the Company's investments. The value of
the Company's investments will vary on a quarterly basis. (See "Risk
Factors")
The decrease in the value of the non-publicly traded securities
from $18,892,731 at December 31, 1999 to $15,083,836 at September 30,
2000 resulted from: the reclassification of Genomica Corporation to a
publicly traded security as a result of its initial public offering;
the reclassification of Alliance Pharmaceutical to a publicly traded
security by the conversion of the note and the exercise of the
warrant; the liquidation of Adaptive Web Technologies; and the
decrease in the valuation of the Company's investment in Questech
Corporation net of the Company's additional $100,000 investment in
that company. These decreases were offset by additional investments
in NeuroMetrix, Inc. and Sundial Marketplace as well as an increase in
the value of Sundial Marketplace (as a result of its June 29, 2000 tax-
free acquisition by Essential.com) and the Company's new investments
in Experion Systems (formerly named MyPersonalAdvocate.com, Inc.) and
Informio (formerly named iPacer Corporation).
A summary of the Company's investment portfolio is as follows:
September 30, 2000 December 31, 1999
Investments, at cost $30,312,913 $16,653,130
Unrealized appreciation 24,781,292 46,882,521
----------- -----------
Investments, at fair value $55,094,205 $63,535,651
=========== ===========
The accumulated unrealized appreciation on investments net of deferred
taxes is $23,150,786 at September 30, 2000, versus $45,098,711 at
December 31, 1999.
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.
28
The following table is a summary of the cash investments made by
the Company in its private placement portfolio during the nine months
ended September 30, 2000:
New Investments: Amount
Experion Systems, Inc. (1) $ 1,500,000
Informio, Inc.(2) $ 500,000
Additional Investments:
Genomica Corporation $ 500,000
Loans:
NeuroMetrix, Inc. $ 750,000
Questech Corporation(3) $ 100,000
Sundial Marketplace Corporation(4) $ 150,000
Exercise of Warrants Held:
Alliance Pharmaceutical Corp. $ 490,000
Sundial Marketplace Corporation(5) $ 427,500
-----------
Total $ 4,417,500
===========
(1)Formerly named MyPersonalAdvocate.com, Inc.
(2)Formerly named iPacer Corporation.
(3)Converted to equity as part of a recently completed $3.4 million
equity financing of Questech.
(4)Converted to equity and acquired by Essential.com, Inc.
(5)Acquired by Essential.com, Inc.
Results of Operations
Investment Income and Expenses:
The Company realized net operating income (loss) of $881,639 and
($2,490,286) for the nine months ended September 30, 2000, and 1999,
respectively. The Company's net operating income in the nine months
ended September 30, 2000 reflected a decrease in the employee profit-
sharing accrual that resulted in a credit to expenses of
$(2,187,482).
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
$290,563 and $185,557 for the nine months ended September 30, 2000
and 1999, respectively. The increase of $105,006 or 56.6 percent is
the result of an increase in the balance of the Company's fixed
income portfolio during the nine months ended September 30, 2000
29
versus the same period in 1999. The Company incurred total interest
costs of $146,141 on a note during the nine months ended September
30, 2000.
The Company had interest income from affiliated companies of
$49,759 and $28,513 for the nine months ended September 30, 2000 and
1999, respectively. The increase of $21,246 or 74.5 percent is owing
to the increase in outstanding loans to the investee companies during
the nine months ended September 30, 2000 versus the nine months ended
September 30, 1999. The amount of outstanding loans to investee
companies varies. Typically, loans made to investee companies are
bridge loans and are converted into equity at the next financing.
The Company had other income of $53,432 and $4,022 for the nine
months ended September 30, 2000 and September 30, 1999, respectively.
The other income in 2000 represents rental income; in December of
1999, the Company began subleasing office space to an unaffiliated
party. The Company did not have any rental income in the nine months
ended September 30, 1999.
Operating expenses were ($487,885) and $2,708,378 for the nine
months ended September 30, 2000 and September 30, 1999, respectively.
The operating expenses for the nine months ended September 30, 2000
reflect a decrease in the employee profit-sharing accrual resulting
in a credit to expenses of $2,187,482. Salaries and benefits
increased by $179,494 primarily as the result of the Company's
contribution to the Supplemental Executive Retirement Plan or SERP
(see "Note 5. Employee Benefits" in Notes to Consolidated Financial
Statements). Administration and operations increased $66,588 as a
result of increased printing and distribution costs for the Company's
shareholder reports as a result of a significant increase in the
number of beneficial shareholders from last year to this year.
Professional fees increased $31,262 as a result of increased legal
fees. Most of the Company's operating expenses are related to
employee and director compensation, office and rent expenses and
consulting and professional fees (primarily legal and accounting
fees).
The amounts payable under the employee profit-sharing plan for
the gains realized during the nine months ended September 30, 2000 of
approximately $1,657,036 plus any adjustments for the three months
ended December 31, 2000 will be paid out as follows: 90 percent will
be paid out as soon as practicable following the 2000 year-end audit;
the remaining 10 percent will be paid out upon the completion and
filing of the Company's 2000 federal tax return.
The Company realized net operating losses of ($2,166,066) and
($324,184) for the three months ended September 30, 2000 and
September 30, 1999, respectively. The Company's net operating loss
in the three months ended September 30, 2000 reflected an increase in
the employee profit-sharing accrual that resulted in an expense of
$1,928,945 as a result of the increase in unrealized appreciation
during the period.
The Company had interest income from fixed-income securities of
$145,748 and $64,349 for the three months ended September 30, 2000
and September 30, 1999, respectively, reflecting net changes in the
Company's investments in short-term fixed income securities and
prevailing interest rate levels.
30
The Company had interest income from affiliated companies of
$15,701 and $19,196 for the three months ended September 30, 2000 and
September 30, 1999, respectively. The decrease of $3,495 or 18.2
percent is owing to the decrease in the outstanding loans to investee
companies during the third quarter of 2000 versus the third quarter
of 1999. The amount of outstanding loans to investee companies
varies. Typically, loans made to investee companies are bridge loans
and are converted into equity at the next financing.
The Company had other income of $18,368 and $3,722 for the three
months ended September 30, 2000 and September 30, 1999, respectively.
The other income in 2000 represents rental income; in December of
1999, the Company began subleasing office space to an unaffiliated
party. The Company did not have any rental income in the third
quarter of 1999.
Operating expenses were $2,345,883 and $411,451 for the three
months ended September 30, 2000 and September 30, 1999, respectively.
The operating expenses reflect an increase in the employee profit-
sharing accrual of $1,928,945, owing to the net increase in the
unrealized appreciation for the three months ended September 30,
2000. Salaries and benefits increased by $49,541, reflecting the
Company's contribution to the Supplemental Executive Retirement Plan
or SERP which began October 1999. Administration and operations
increased by $9,368 as a result of increased printing and
distribution costs for the Company's shareholder reports.
Professional fees decreased by $50,762 as a result of decreased legal
fees. The remaining expenses are related to rent expenses and
director compensation.
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, the Company
attempts to maintain adequate working capital to provide for fiscal
periods when there are no such sales.
Realized Gains and Losses on Sales of Portfolio Securities:
During the nine months ended September 30, 2000 and September
30, 1999, the Company realized gains of $14,356,893 and $11,039,600,
respectively.
During the nine months ended September 30, 2000, the Company
realized total gains of $14,356,893, including $5,865,521 on the sale
of 500,000 shares of Alliance Pharmaceutical Corp., $7,407,377 on the
sale of its entire position in SciQuest.com, $241,025 on the sale of
85,100 shares of Nanophase Technologies, $725,661 from PHZ Capital
Partners LP and $147,528 on the realization of the reserve on the
NBX/3Com escrow (the Company received in full the escrowed funds on
March 6, 2000). As a result of the gains and losses realized in the
nine months ended September 30, 1999, unrealized appreciation
decreased by $16,738,527.
During the nine months ended September 30, 1999, the Company
realized total gains of $11,039,600, including a gain of
approximately $10,584,630 on the acquisition of NBX Corporation by
3Com Corporation; a gain of approximately $160,918 on its sale of
Princeton Video Image, Inc. stock; and a cash distribution from PHZ
Capital Partners L.P. of approximately $612,170. The Company also
31
incurred losses of approximately $318,118 on the sale of various
publicly traded investments. As a result of the gains and losses
realized in the nine months ended September 30, 1999, unrealized
appreciation decreased by $4,380,243.
During the three months ended September 30, 2000 and 1999, the
Company realized gains (losses) of $6,261,211 and ($86,217),
respectively.
During the three months ended September 30, 2000, the Company
realized a total gain of $6,261,211, consisting primarily of a net
gain of $5,865,521 on the sale of 500,000 shares of Alliance
Pharmaceutical Corp. As a result of the gains and losses realized in
the three months ended September 30, 2000, unrealized appreciation
decreased by $4,286,250. During the three months ended September 30,
1999, the Company sold various publicly traded securities realizing a
net loss of $112,077 and received a cash distribution from PHZ
Capital Partners L.P. of $25,860.
Unrealized Appreciation and Depreciation of Portfolio Securities:
The Board of Directors values the portfolio securities on a
quarterly basis pursuant to the Company's Asset Valuation guidelines
in accordance with the 1940 Act. (See "Footnote to Consolidated
Schedule of Investments" contained in "Item 1. Consolidated Financial
Statements.")
Net unrealized appreciation on investments decreased by
$22,101,229 or 47.2 percent during the nine months ended September
30, 2000, from $46,882,521 to $24,781,292, primarily as a result of
declines in the values of the Company's holdings in SciQuest.com,
Kana Communications and Questech of $24,736,593 (net of the gain
realized on sale), $4,040,855 and $1,165,879, respectively, offset by
increases in the values of the Company's holdings in Nanophase
Technologies, Genomica and Essential.com of $5,223,510, $9,463,645 and
$854,467, respectively. The changes in the values of SciQuest.com, Kana
Communications, Nanophase Technologies and Alliance Pharmaceutical occurred
during a period of extreme volatility of publicly traded, small
capitalization, high technology stocks. (See "Risk Factors.")
Net unrealized appreciation on investments decreased by $854,270
or 8.2 percent during the nine months ended September 30, 1999, from
$10,407,549 to $9,553,279, primarily as a result of the
reclassification of the Company's holdings of NBX Corporation from
unrealized to realized gain of approximately $4,716,062, offset by
the increase in value of the Company's holdings of SciQuest.com, Inc.
of approximately $2,350,962, and of Alliance Pharmaceutical Corp. of
approximately $2,124,750.
Net unrealized appreciation on investments increased by
$4,435,110 or 21.8 percent during the three months ended September
30, 2000, from $20,346,182 to $24,781,292 owing primarily to
increases in the value of the Company's holdings in Genomica
Corporation and Nanophase Technologies Corporation of $8,133,125 and
$1,854,724, offset by a decrease in the value of the Company's
holdings in Kana Communications of $2,418,828 and a net decrease in
unrealized appreciation in the value of Alliance Pharmaceutical of
$2,968,781 owing to the sale and realization of the appreciation.
32
Net unrealized appreciation on investments increased by
$1,420,598 or 17.5 percent during the three months ended September
30, 1999, from $8,132,681 to $9,553,279, primarily as a result of
the increase in the value of Alliance Pharmaceutical Corp. of
approximately $1,803,750.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash,
receivables and freely tradeable marketable securities. The
Company's secondary sources of liquidity are restricted securities
of companies that are publicly traded. At September 30, 2000 and
December 31, 1999, respectively, the Company's total primary
liquidity was $29,055,654 and $6,622,216. On the corresponding
dates, the Company's total secondary liquidity was $11,173,375 and
$38,230,812.
The increase in the Company's primary source of liquidity from
December 31, 1999 to September 30, 2000 is primarily owing to: (1)
the proceeds from the sale of its investment in SciQuest.com stock
of approximately $8,257,377; (2) the increase in the value of
Nanophase Technologies of approximately $5,223,510; (3) the
conversion of the Alliance Pharmaceutical Note and exercise of the
warrant for a total of 800,000 shares which became freely tradeable
on June 30, 2000 and subsequent sale of 500,000 shares for total
proceeds of $6,957,521 (as of September 30, 2000, the Company held
300,000 shares with a value of $4,489,219); (4) the receipt of
escrowed funds plus interest for a total of $1,541,136; and (5) the
receipt of the funds from the liquidation of Adaptive Web
Technologies.
These increases were offset by the (1) payment of the 1999
employee profit sharing of approximately $1,138,551; (2) the
investments of $1,500,000 in Experion Systems, $500,000 in Informio,
$500,000 in Genomica, $490,000 for the exercise of warrants to
purchase common stock in Alliance Pharmaceutical, $577,500 in
Sundial Marketplace (which was acquired on June 29, 2000 by
Essential.com in a tax-free merger); (3) loans of $750,000 to
NeuroMetrix, and $100,000 to Questech; and (4) the use of funds for
operating expenses.
The decrease in the Company's secondary source of liquidity
from December 31, 1999 to September 30, 2000 is primarily owing to
the expirations of the lock-up periods on SciQuest.com and Silknet
Software (which subsequently merged with Kana Communications) offset
by the completion of the initial public offering of Genomica
Corporation, which commenced trading on September 29, 2000.
The changes in the values of SciQuest.com, Kana Communications,
Nanophase Technologies and Alliance Pharmaceutical reflected the
extreme stock market volatility in the shares of smaller, high
technology companies in the nine months ended September 30, 2000.
From December 31, 1999 to September 30, 2000, the Company's
liabilities for accrued employee profit sharing and deferred income
tax liability changed significantly. Accrued profit sharing
decreased by $3,326,033 to $6,108,434 as a result of payment of
33
approximately
<PAGE>
$1,138,551 of the 1999 profit sharing and the decrease of
$2,187,482 in the liability for accrued employee profit sharing owing to the
decrease in unrealized appreciation for the nine months ended
September 30, 2000.
The Company's total income tax liability increased by
$3,956,317 to $5,474,091 primarily as a result of a tax provision on net
realized long-term capital gains which the Company currently plans
to retain rather than distribute such funds to shareholders as a
cash dividend. Accordingly, the Company will declare a designated
undistributed capital gain dividend. (See "Sub-Chapter M Status"
and "Consolidated Statements of Operations" contained in "Item 1.
Consolidated Financial Statements.")
Sub-Chapter M Status
On September 25, 1997, the Company's Board of Directors
approved a proposal to seek qualification of the Company as a RIC
under Sub-Chapter M of the Code. In order to qualify as a RIC, the
Company must, in general (1) annually derive at least 90 percent of
its gross income from dividends, interest, gains from the sale of
securities and similar sources; (2) quarterly meet certain
investment diversification requirements; and (3) annually distribute
at least 90 percent of its investment company taxable income as a
dividend. In addition to the requirement that the Company must
annually distribute at least 90 percent of its investment company
taxable income, the Company may either distribute or retain its
taxable net capital gains from investments, but any net capital
gains not distributed could be subject to corporate level tax.
Further, the Company could be subject to a four percent excise tax
if it fails to distribute 98 percent of its annual taxable income
and would be subject to income tax if it fails to distribute 100
percent of its taxable income.
Because of the specialized nature of its investment portfolio,
the Company could satisfy the diversification requirements under
Sub-Chapter M of the Code only if it received a certification from
the SEC that it is "principally engaged in the furnishing of capital
to other corporations which are principally engaged in the
development or exploitation of inventions, technological
improvements, new processes, or products not previously generally
available." On April 8, 1998, the Company announced that it had
received such a certification from the SEC for 1997.
Pursuant to the Company's receipt of the certification, the
Company's Board of Directors declared and paid in 1998 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.
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. The
Company was unable to satisfy these requirements for the 1998 tax
year owing to the nature of the Company's ownership interest in one
of its investee companies. In addition, because it realized taxable
losses in 1998, it was not strategically advantageous for the
Company to elect Sub-Chapter M tax status for 1998. The Company
changed the nature of its ownership interest in the non-qualifying
investee company effective January 1, 1999 in order to meet the Sub-
Chapter M requirements.
34
In 1999, because of changes in its investment portfolio, the
Company requested recertification from the SEC relating to the
Company's status under section 851(e) of the Code. On February 24,
2000, the Company received the certification, and the Company filed
for 1999 to elect treatment as a RIC. The Company intends to elect
the same treatment for 2000 and subsequent taxable years. Although
the SEC certification for 1999 was issued, there can be no assurance
that the Company will receive such certification for 2000 or
subsequent years (to the extent it needs additional certification as
a result of changes in its portfolio) or that it will qualify as a
RIC in 2000 or that, if it does qualify in 2000, it will continue to
qualify in subsequent years. In addition, under certain
circumstances, even if the Company qualified for Sub-Chapter M
treatment in 2000 and elected Sub-Chapter M treatment for that year,
the Company might take action in a subsequent year to ensure that it
would be taxed in that subsequent year as a C Corporation, rather
than as a RIC.
The Company incurred ordinary and capital losses during its C
Corporation taxable years that remain available for use and may be
carried forward to its 2000 and subsequent taxable years. A C
Corporation that elects to qualify as a RIC and that makes an
appropriate election 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").
On February 17, 1999, the Company received rulings from the IRS
regarding issues relevant to the Company's tax status as a RIC,
including a ruling from the IRS concluding that the Company can
carry forward its C Corporation losses to offset any Built-In Gains
resulting from sales of its C Corporation Assets. That ruling may
enable 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, depending on whether the Company's sale of C
Corporation Assets with Built-In Gains will generate C Corporation
E&P. In general, 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. However, because the realization of Built-In Gains
will occur while the Company is a RIC, a strong argument exists
that, under current law and IRS pronouncements, the sale of C
Corporation Assets with Built-In Gains during RIC taxable years will
not generate C Corporation E&P. In 1999, the Company used $6.3
million of its loss carryforward (which resulted in a tax credit of
approximately $2.2 million) to reduce the taxes resulting from
Built-In Gains.
If necessary for liquidity purposes or to fund investment
opportunities, 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. For the year ended December 31, 2000, the Company
intends to declare a designated undistributed capital gain dividend.
35
Tax Consequences of Net Capital Gains
The following simplified examples illustrate the tax treatment
under Sub-Chapter M of the Code for the Company and its shareholders
with regard to three possible alternatives, assuming a net long-term
capital gain of $1.00 per share, consisting entirely of sales of
non-real property assets held for more than 12 months.
Under Alternative A: 100 percent of net capital gain declared
as a dividend and distributed to shareholders:
1. No federal taxation at the Company level.
2. Taxable shareholders receive a $1.00 per share
dividend and pay a maximum federal tax of 20 percent* or $.20 per
share, retaining $.80 per share.
Under Alternative B: 100 percent of net capital gain retained
by the Company and designated as "undistributed capital gain" or
deemed dividend:
1. The Company pays a corporate-level federal income tax
of 35 percent on the undistributed gain or $.35 per share and
retains 65 percent of the gain or $.65 per share.
2. Taxable shareholders increase their cost basis in
their stock by $.65 per share. They pay a 20 percent* federal
capital gains tax on 100 percent of the undistributed gain of $1.00
per share or $.20 per share in tax. Offsetting this tax,
shareholders receive a tax credit equal to 35 percent of the
undistributed gain or $.35 per share.
Under Alternative C: 100 percent of net capital gain retained
by the Company, with no designated undistributed capital gain or
deemed dividend:
1. The Company pays a corporate-level federal income tax
of 35 percent on the retained gain or $.35 per share plus an excise
tax of four percent of $.98 per share, or about $.04 per share.
2. There is no tax consequence at the shareholder level.
*Assumes all capital gains qualify for long-term rates of 20
percent.
Risk Factors
Investing in the Company's Stock is Highly Speculative and You Could
Lose Some or All of the Amount You Invest
The value of the Company's common stock may decline and may be
affected by numerous market conditions, which could result in the
loss of some or all of your investment in the Company's shares. The
securities markets frequently experience extreme price and volume
fluctuation which affect market prices for securities of companies
36
generally, and technology companies in particular. Because of the
Company's focus on the technology sector, its stock price is likely
to be impacted by these market conditions. General economic
conditions, and general conditions in the Internet and information
technology and life sciences and other high technology industries,
will also affect the Company's stock price.
Investing in the Company's Shares May be Inappropriate for Your Risk
Tolerance
Investing in the Company's shares may be inappropriate for your
risk tolerance. The Company's investments in accordance with its
investment objective and principal strategies may result in an above
average amount of risk and volatility or loss of principal. The
Company's investments in portfolio companies are highly speculative
and aggressive and, therefore, an investment in its shares may not
be suitable for you. The Company has frequently lost substantially
all of its investments in various private equity investments.
The Market for Venture Capital Investments is Highly Competitive.
In Some Cases, the Company's Status as a Regulated Business
Development Company May Hinder its Ability to Participate in
Investment Opportunities.
The Company faces substantial competition in its investing
activities from private venture capital funds, investment affiliates
of large industrial, technology, service and financial companies,
small business investment companies, wealthy individuals and foreign
investors. As a regulated business development company, the Company
is required to disclose quarterly the name and business description
of portfolio companies and value of any portfolio securities. Most
of the Company's competitors are not subject to this disclosure
requirement. The Company's obligation to disclose this information
could hinder its ability to invest in certain portfolio companies.
Additionally, other regulations, current and future, may make the
Company less attractive as a potential investor to a given portfolio
company than a private venture capital fund not subject to the same
regulations.
Regulatory Risks
Securities and tax laws and regulations governing the Company's
activities may change in ways negative to the Company's and its
shareholders' interests and interpretations of such laws and
regulations may change with unpredictable consequences.
The Company is Dependent Upon Key Management Personnel for Future
Success
The Company is dependent for the selection, structuring,
closing and monitoring of its investments on the diligence and skill
of its senior management and other management members. The future
success of the Company depends to a significant extent on the
continued service and coordination of its senior management team,
particularly the Chairman and Chief Executive Officer. The
departure of any of the executive officers or key employees could
materially adversely affect the Company's ability to implement its
business strategy. The Company does not maintain key man life
insurance on any of its officers or employees.
37
Investment in Small, Private Companies
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 with risky technologies 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.
Illiquidity of Portfolio Investments
Most of the investments of the Company are or will be equity
securities acquired directly from small companies. The Company's
portfolio of equity securities are and will usually be subject to
restrictions on resale or otherwise have no established trading
market. The illiquidity of most of the Company's portfolio of
equity securities may adversely affect the ability of the company to
dispose of such securities at times when it may be advantageous for
the Company to liquidate such investments.
Volatility and Illiquidity of Publicly Traded Holdings
When companies in which the Company has invested as private
entities complete initial public offerings, they are by definition
unseasoned issuers. Typically, they have relatively small
capitalizations. Thus, they can be expected to be highly volatile
and of uncertain liquidity. If they are perceived as suffering from
adverse news or developments and/or the capital markets are in a
negative phase, not only their market prices, but also their
liquidity can be expected to be impacted negatively. Historically,
the Company has also invested in unseasoned publicly traded
companies with similar characteristics and thus with similar
exposure to potential negative volatility and illiquidity.
The Inability of the Company's Portfolio Companies to Successfully
Market Their Products Would Have a Negative Impact on its Investment
Returns
Even if the Company's portfolio companies are able to develop
commercially viable products, the market for new products and
services is highly competitive and rapidly changing. Commercial
success is difficult to predict and the marketing efforts of the
Company's portfolio companies may not be successful.
38
Valuation of Portfolio Investments
There is typically no public market of equity securities of the
small private companies in which the Company invests. As a result,
the valuation of the equity securities in the Company's portfolio is
subject to the good faith estimate of the Company's Board of
Directors. (See "Asset Valuation Policy Guidelines" in "Footnote to
Consolidated Schedule of Investments.") In the absence of a readily
ascertainable market value, the estimated value of the Company's
portfolio of equity securities may differ significantly from the
values that would be placed on the portfolio if a ready market for
the equity securities existed. Any changes in estimated net asset
value are recorded in the Company's statement of operations as
"Change in unrealized appreciation on investments." (See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations.")
Fluctuations of Quarterly Results
The Company's quarterly operating results could fluctuate as a
result of a number of factors. These include, among others,
variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which the Company
encounters competition in its markets and general economic
conditions. As a result of these factors, results for any one
quarter should not be relied upon as being indicative of performance
in future quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risk of Loss of Pass Through Tax Treatment
If the Company meets certain diversification and distribution
requirements under the Code, it may qualify as a RIC under the Code
for pass-through tax treatment. The Company would cease to qualify
for pass-through tax treatment if it were unable to comply with
these requirements, or if it ceased to qualify as a BDC under the
1940 Act. The Company also could be subject to a four percent
excise tax (and, in certain cases, corporate level income tax) if it
failed to make certain distributions. (See "Management's Discussion
and Analysis of Financial Condition -- Recent Developments -- Sub-
Chapter M Status.") The lack of Sub-Chapter M tax treatment could
have a material adverse effect on the total return, if any,
obtainable from an investment in the Company. If the Company fails
to qualify as a RIC, the Company would become subject to federal
income tax as if it were an ordinary C Corporation, which would
result in a substantial reduction in the Company's net assets and
the amount of income available for distribution to the Company's
stockholders.
Because the Company Must Distribute Income, the Company Will
Continue to Need Additional Capital
The Company will continue to need capital to fund investments
and to pay for operating expenses. The Company must distribute at
least 90 percent of its net operating income other than net realized
long-term capital gains to its stockholders to maintain its RIC
status. As a result such earnings will not be available to fund
investments. If the Company fails to generate net realized long-
term capital gains or to obtain funds from outside sources, it could
39
have a material adverse effect on the Company's financial condition
and results. The Company does not normally establish reserves for
taxes on unrealized capital gains. To the extent that the Company
retains capital gains, either as a C corporation or as a Sub-Chapter
M corporation, it will have to make provisions for federal taxes and
possibly state and local taxes. In addition, as a BDC, the Company
is generally required to maintain a ratio of at least 200 percent of
total assets to total borrowings, which may restrict its ability to
borrow in certain circumstances.
Reserves for Taxes
As a Sub-Chapter M corporation, the Company does not have to
pay federal income taxes on realized capital gains to the extent
that such gains are distributed to shareholders. Accordingly, it
does not establish reserves for taxes on its unrealized capital
gains. If the Company were not to qualify or were to elect not to
qualify for Sub- Chapter M tax status, it would have to establish
such reserves for taxes, which would reduce its net asset value, net
of a reduction in the reserve for employee profit sharing,
accordingly. To the extent that the Company as a Sub-Chapter M
corporation were to make a deemed distribution of net realized
capital gains and were to retain such net realized capital gains, it
would have to establish appropriate reserves for taxes upon making
such a decision.
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
The Company's business activities contain significant elements
of risk. The Company considers a principal type of market risk to
be valuation risk. 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 Consolidated Schedule of Investments.
40
Neither the Company's investments nor an investment in the
Company is intended to constitute a balanced investment program.
The Company has exposure to public-market price fluctuations to the
extent of its publicly traded portfolio.
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. Even if the Company's portfolio
companies are able to develop commercially viable products, the
market for new products and services is highly competitive and
rapidly changing. Commercial success is difficult to predict and
the marketing efforts of the Company's portfolio companies may not
be successful. 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.
Because there is typically no public market for the equity
interests of the small companies in which the Company invests, the
valuation of the equity interests in the Company's portfolio is
subject to the estimate of the Company's Board of Directors in
accordance with the Company's Asset Valuation Policy Guidelines. In
the absence of a readily ascertainable market value, the estimated
value of the Company's portfolio of equity interests may differ
significantly from the values that would be placed on the portfolio
if a ready market for the equity interests existed. Any changes in
valuation are recorded in the Company's consolidated statements of
operations as "Net increase (decrease) in unrealized appreciation on
investments."
41
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
None
Item 5. Other Information
Recent Sales of Unregistered Securities
None
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) Restated By-laws of the Company, incorporated by reference
to Exhibit 3.1(b) to the Company's Form 10K for the year
ended December 31, 1995.
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.
10.22 Harris & Harris Group, Inc. Employee Profit-Sharing
Plan, incorporated by reference as Exhibit 10.22 to
the Company's Form 10K for the year ended December 31, 1999.
11.0* Computation of per share earnings. See Consolidated
Statements of Operations.
27.0* Financial Data Schedule.
(b) The Company did not file any reports on Form 8-K during
the nine months ended September 30, 2000.
42
EXHIBIT INDEX
Item Number (of Item 601 of Regulation S-K)
27. Financial Data Schedule
43
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 14, 2000
44
