A Publicly Traded Venture Capital Company Investing in Tiny Technology

 

 

A Publicly Traded Venture Capital Company Investing in Tiny Technology

 

 

FIRST QUARTER REPORT 2002

 

FELLOW SHAREHOLDERS:

 

               The first quarter of 2002 was a signal quarter for our Company. On February 14, following a Board of Directors meeting, we announced that the Company would focus for the first time on a single area of venture capital investing: small technology, including nanotechnology, microsystems and microelectromechanical systems (MEMS).

 

At the time of that strategic announcement, we already had a small-technology investment in privately held Nantero, Inc., a Harvard University spin-off developing a non-volatile random access memory (NRAM) utilizing carbon nanotubes; and another such investment in Nanopharma Corp., a spin-off from Massachusetts General Hospital founded to develop advanced drug delivery systems.  We were also far enough along in due diligence and negotiations on various other small-technology opportunities that we were able to co-invest with other venture capital firms in two more such investments during the first quarter.  The first was NanoOpto Corp., a Princeton University spin-off that is applying proprietary nano-optics and nano-manufacturing technology to design and make components for optical networking.  The second was NeoPhotonics Corporation, a privately held company developing patented technology that enables the manufacture of unique nanoscale optical compositions for the telecommunications industry.  At this writing, we have five small-technology investments in the portfolio, having also invested on May 6 in privately held Nanotechnologies, Inc., an Austin, Texas-based producer of a wide variety of nanoscale materials using a proprietary plasma-based technology.

 

               Now that we are focusing all of our new business activity on small technology, we are finding fully relevant all of the experience and relationships that we have built up over the years in our high technology venture capital investing activities.  And the advantages of specialization in terms of expertise, corporate identity and networking effects are proving to be even greater than we had hoped when we made this strategic decision.  We are encouraged by positive feedback that is taking many forms, including recognition from thought leaders in small technology, robust deal flow from scientists, research universities, entrepreneurs and other venture capitalists, and some extremely attractive candidates for employment.  But to try to maximize the economic benefits of this specialization, we are having to reorient the Company.

 

               As previously discussed in the Annual Report for the year 2001, part of this reorientation was the addition to our Board of Directors of two of the outside consultants who help us evaluate small-technology opportunities, Dr. Kelly S. Kirkpatrick and Lori D. Pressman.  Also, we are interviewing a number of candidates with strong backgrounds in science and technology, as well as other relevant qualifications, for a senior position within the Company.  And to add to our liquid capital, we have filed a transferable rights offering with the Securities and Exchange Commission.  If declared effective and fully subscribed, this rights offering would raise net proceeds of approximately $6.5 million.  As noted in the prospectus, which should be read in its entirety by shareholders when it becomes available, we intend to invest all of the net proceeds of the offering in small technology within a 12-month period.

 

               In summary, we believe that your Company has a major opportunity in small technology.  But continuing to translate this opportunity into reality will be a major job of work.  Shareholders should also be mindful that small technology is at least as risky as other technology-based, early stage venture capital investing, which is one of the riskiest types of investing.  But we cannot pursue our new mission without incurring this risk.  This mission is straightforward and simple:  1) to create wealth for our shareholders by making the best venture capital investments that we can make in small technology; and, 2) as a natural byproduct of that work, to give our shareholders an increasingly pure play on a reasonably diversified portfolio of small-technology venture capital investments. 

 

Charles E. Harris                                                                                         Mel P. Melsheimer

Chairman and Chief Executive Officer                                                     President and Chief Operating Officer

 

 

May 28, 2002

 

 

This letter may contain statements of a forward-looking nature relating to future events.  Statements contained in this letter that are forward looking statements are intended to be made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.  These statements reflect the Company's current beliefs, and a number of important factors could cause actual results to differ materially from those expressed in this press release.  Please see the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for a more detailed discussion of the risks and uncertainties associated with the Company’s business, including but not limited to the risks and uncertainties associated with venture capital investing and other significant factors that could affect the Company's actual results.  Except as otherwise required by Federal securities laws, Harris & Harris Group, Inc. undertakes no obligation to update or revise these forward looking statements to reflect new events or uncertainties.


 

UNAUDITED SCHEDULE OF INVESTMENTS*

(As of March 31, 2002)

 

 

 

 

 

 

 

 

 

 

Shares/Principal

Value

 

 

 

AlphaSimplex Group, LLC

$4,763

 

 

 

Exponential Business Development Company

 

 

    Limited partnership interest

$25,000

 

 

 

Informio, Inc.

 

 

    Series A Convertible Preferred Stock

229,364

$151,380

 

 

 

Kriton Medical, Inc.

 

 

    Series B Convertible Preferred Stock

476,191

$1,000,001

 

 

 

NanoOpto Corporation

 

 

    Series A-1 Convertible Preferred Stock

267,857

$625,000

 

 

 

Nantero, Inc.

 

 

    Series A Convertible Preferred Stock

345,070

$489,999

 

 

 

NeoPhotonics Corporation

 

 

    Series D Convertible Preferred Stock

1,478,197

$1,000,000

 

 

 

Experion Systems, Inc.

 

 

    Series A Convertible Preferred Stock

187,500

 

    Series B Convertible Preferred Stock

22,500

$600,000

 

 

 

Nanopharma Corp.

 

 

    Series A Convertible Preferred Stock

684,516

$700,000

 

 

 

NeuroMetrix, Inc.

 

 

    Series A Convertible Preferred Stock

875,000

 

    Series B Convertible Preferred Stock

625,000

 

    Series C-2 Convertible Preferred Stock

1,148,100

 

    Series E Convertible Preferred

266,665

$6,708,225

 

 

 

PHZ Capital Partners Limited Partnership

 

 

    Limited partnership interest

$2,892,498

 

 

 

Questech Corporation

 

 

    Common Stock

646,954

 

    Warrants at $5.00 expiring 11/15/04

1,965

 

    Warrants at $1.50 expiring 11/16/05

1,250

$724,588

 

 

 

Schwoo, Inc

 

 

    Series B Convertible Stock

2,306,194

 

    Convertible Bridge Loans

$360,250

 

    Series B Convertible Preferred Warrants

934,985

$0

 

 

 

 

 

 

*Selected quarterly financial information.  The information contained herein does not include the full unaudited quarterly financial information.  Please see the Company’s report on Form 10Q for the quarter ended March 31, 2002 for the unaudited financial information and notes thereto.

 


 

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

 

 

ASSETS

 

 

 

 

March 31, 2002

December 31, 2001

 

(Unaudited)

(Audited)

 

 

 

Cash, U.S. Government Obligations and cash equivalents

$19,366,554

$25,944,862

Investments, at value

14,921,454

13,120,978

Restricted funds

554,967

482,020

Interest receivable

0

82

Note receivable ($10,487, net of reserve of $10,487)

0

10,487

Prepaid expenses

71,117

14,833

Other assets

         91,478

       109,105

 

 

 

Total assets

$35,005,570

$39,682,367

 

LIABILITIES & NET ASSETS

 

 

 

Accounts payable and accrued liabilities

$1,029,753

$1,039,350

Bank loan payable

8,996,740

12,495,777

Accrued profit sharing

306,241

178,282

Deferred rent

12,337

14,650

Current income tax receivable

(1,807)

255,068

Deferred income tax liability

    1,364,470

    1,364,470

Total liabilities

  11,707,734

  11,509,948

Commitments and contingencies

 

 

 

 

 

Net assets

$23,297,836

$24,334,770

 

 

 

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 3/31/02 and 12/31/01

 

106,930

 

106,930

Additional paid in capital

27,228,748

27,228,748

Additional paid in capital - common stock warrants

109,641

109,641

Accumulated net realized gain (loss)

138,829

618,606

Accumulated unrealized appreciation of investments,

   net of deferred tax liability of $1,540,044 at 3/31/02 and 12/31/01

 

(880,781)

 

(323,624)

 

 

 

Treasury stock at cost (1,828,740 shares at 3/31/02 and 12/31/01)

 (3,405,531)

 (3,405,531)

Net assets

$23,297,836

$24,334,770

 

 

 

Shares outstanding

    8,864,231

    8,864,231

 

 

 

Net asset value per outstanding share

           $2.63

           $2.75


 


CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

Three Months Ended

Three Months Ended

 

         March 31, 2002

         March 31, 2001

Investment income:

 

 

    Interest from:

 

 

        Unaffiliated issuers

$54,136

$152,530

        Affiliated companies

0

9,617

    Other income

   5,326

    29,812

        Total investment income

59,462

191,959

 

 

 

Expenses:

 

 

    Profit-sharing accrual (reversal)

127,959

(846,290)

    Salaries and benefits

255,376

299,704

    Administration and operations

87,902

93,256

    Professional fees

 43,095

59,203

    Rent

42,724

42,073

    Directors' fees and expenses

 41,076

22,990

    Depreciation

5,948

7,500

    Custodian fees

3,839

3,646

    Interest expense

       7,776

              0

          Total expenses

   615,695

(317,918)

    Operating (loss) income before income taxes

(556,233)

509,877

    Income tax provision

             0

             0

Net operating (loss) income

(556,233)

509,877

 

 

 

Net realized gain (loss) on investments:

 

 

    Realized gain (loss) on investments

    110,679

(1,194,652)

          Total realized gain (loss)

110,679

(1,194,652)

    Income tax provision

    (34,223)

     (29,634)

    Net realized gain (loss) on investments

       76,456

(1,224,286)

 

 

 

Net realized loss

(479,777)

(714,409)

 

 

 

Net decrease in unrealized appreciation on investments:

 

 

    Decrease as a result of investment sales

0

0

    Increase as a result of investment sales

0

1,528,082

    Increase on investments held

45,006

0

    Decrease on investments held

(602,163)

(4,611,013)

           Change in unrealized appreciation on investments

(557,157)

(3,082,931)

    Income tax provision

0

0

    Net decrease in unrealized appreciation on investments

(557,157)

(3,082,931)

 

 

 

Net decrease in net assets resulting from operations:

 

 

 

 

 

    Total

$(1,036,934)

$(3,797,340)

 

 

 

    Per outstanding share

         $(0.12)

         $(0.42)

 


 

PORTFOLIO COMPANIES

 

 

 

 

Alpha Simplex Group, LLC

www.alphasimplex.com

 

 

Experion Systems, Inc.

www.experionsystems.com

 

 

Exponential BDC

www.exponential-ny.com/

 

 

Kriton Medical, Inc.

www.kritonmedical.com

 

 

NanoOpto Corporation

www.nanoopto.com

 

 

Nantero, Inc.

www.nantero.com

 

 

NeoPhotonics Corporation

www.neophotonics.com

 

 

Nanotechnologies, Inc.

www.nanoscale.com

 

 

NeuroMetrix, Inc.

www.neurometrix.com

 

 

PHZ Capital Partners, L.P.

 

 

 

Questech Corporation

www.questechmetals.com/

 

 


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