|
Three Months' Report 2001
A Publicly Traded Venture Capital Company
Structured to Maximize Tax Advantaged Returns
Fellow Shareholders:
As first indicated in our report to shareholders for the nine months ended September 30, 2000, the Company has decided to cease printing and mailing its quarterly letters to shareholders. Instead, the Company will publish them on this website, www.hhgp.com, soon after filing its quarterly reports on Form 10Q with the Securities and Exchange Commission. Aside from saving money on printing and mailing costs to what has become our greatly expanded total number of shareholders, this method of publication will also have the advantages of speed and simultaneous disclosure to all shareholders. As required by regulations, the Company will continue to print and mail its annual report to shareholders, as was done with the annual report for the year 2000.
It is intended for this quarterly letter to be read in conjunction with our Form 10Q for the quarter ended March 31, 2001, which is available at www.sec.gov/edgar.shtml. Thus, this letter is not intended to be a fully inclusive disclosure document, and it will not attempt to repeat the detailed numbers and other disclosures in the Form 10Q. Instead, this letter will selectively touch on some of the more significant highlights of the quarter and the economic backdrop against which those highlights took place.
The first quarter of 2001 was commonly characterized by venture capitalists as a nuclear winter. Start-up companies that were running short of funds were routinely being shuttered rather than refinanced, and some privately held companies with adequate cash but doubtful prospects were being reviewed for shut down and return of remaining cash to investors. Initial public offerings of early stage, high-technology companies were practically nonexistent, and even when such companies were acquired, which happened less frequently, they were acquired at much lower valuations. Venture capital firms themselves began experiencing difficulty raising new capital from limited partners as their reported returns turned negative.
In this environment, Harris & Harris Group continued to review new early stage deal opportunities. Both the quantity and the quality of the early stage deal flow have been quite high, and the asking prices have gotten quite reasonable. Nevertheless, we want to be careful not to fund any company that appears likely to encounter difficulty in obtaining additional downstream financing in what could be a protraction of the nuclear winter. We found one opportunity in the first quarter, Schwoo, Inc., (www.schwoo.com), a privately held Pittsburgh-based corporation that is developing software that automatically manages e-commerce security infrastructure, to be sufficiently compelling to invest initially $750,000 for approximately a 11.7 percent fully diluted equity interest. Since then, to date, we have invested an additional $188,577 in Schwoo.
In other financing activity during the first quarter, the Company converted a debt security into $750,000 of additional equity in privately held NeuroMetrix, Inc. NeuroMetrix is a spin-off from the Harvard-MIT Division of Health Sciences and Technology that is developing and marketing a new class of non-invasive products for point-of-care testing of neuromuscular disorders. Harris & Harris Group now owns a 13.4 percent fully diluted interest in NeuroMetrix that it valued as of March 31, 2001 at $6,708,225.
Harris & Harris Group continues to be evaluating other new business opportunities. As of March 31, 2001, our balance sheet included cash and unrestricted marketable securities of $14,982,423 out of total assets of $30,814,330. Fortunately, we had liquified our balance sheet substantially in 2000 through realization of long-term capital gains.
Charles E. Harris,
Chairman and Chief Executive Officer
Mel P. Melsheimer,
President and Chief Operating Officer
May 14, 2001
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, 2001)
|
Investment
|
Shares/Principal
|
Value
|
|
|
|
|
| Essential.com, Inc. |
|
|
| Common Stock |
253,271
|
$16,587
|
|
|
|
| Experion Systems, Inc. |
|
|
| Convertible Preferred Stock |
187,500
|
$1,500,000
|
|
|
|
| Exponential Business Development Co. |
|
|
| Limited Partnership interest |
--
|
$25,000
|
|
|
|
| Genomica Corporation |
|
|
| Common Stock |
731,111
|
$3,015,833
|
|
|
|
| Harris Newco, Inc. |
|
|
| Series 1 Convertible Preferred Stock |
100
|
$2,000,000
|
|
|
|
| Informio, Inc. |
|
|
| Series A Convertible Preferred Stock |
--
|
$504,601
|
|
|
|
| Kana Communications, Inc. |
|
|
| Common Stock |
6,782
|
$13,175
|
|
|
|
| Kriton Medical, Inc. |
|
|
| Series B Convertible Preferred Stock |
476,191
|
$1,000,001
|
|
|
|
| MedLogic Global Corporation |
|
|
| Common Stock |
25,798
|
|
| Series B Convertible Preferred Stock |
54,287
|
--
|
|
|
|
| Nanophase Technologies Corporation |
|
|
| Common Stock |
672,916
|
$4,373,954
|
|
|
|
| NeuroMetrix, Inc. |
|
|
| Series A Convertible Preferred Stock |
175,000
|
|
| Series B Convertible Preferred Stock |
125,000
|
|
| Series C-2 Convertible Preferred Stock |
229,620
|
|
| Series E Convertible Preferred Stock |
53,333
|
$6,708,225
|
|
|
|
| PHZ Capital Partners Limited Partnership |
|
|
| Limited Partnership Interest |
--
|
$1,806,279
|
|
|
|
| Questech Corporation |
|
|
| Common Stock |
646,954
|
|
| Warrants at $5.00 expiring 11/15/04 |
1,965
|
|
| Warrants at $4.00 expiring 11/28/01 |
152,422
|
|
| Warrants at $1.50 expiring 11/16/05 |
1.250
|
$970,598
|
|
|
|
| Schwoo, Inc. |
|
|
| Series B Convertible Preferred Stock |
1,946,535
|
$750,000
|
|
|
|
Total
|
|
$22,684,253 |
*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, 2001 for the unaudited financial information and notes thereto.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
|
|
March 31, 2001
|
December 31, 2000
|
|
|
(Unaudited)
|
(Audited)
|
| Cash, U. S. Government Obligations and cash equivalents |
$7,579,461
|
$15,799,427
|
| Investments, at value |
22,684,253
|
27,022,456
|
| Restricted funds |
331,102
|
265,183
|
| Interest receivable |
82
|
30,082
|
| Note receivable |
10,888
|
10,888
|
| Prepaid expenses |
62,244
|
82,615
|
| Other assets |
146,300
|
132,772
|
| Total assets |
$30,814,330
|
$43,343,423
|
LIABILITIES & NET ASSETS
Accounts payable and accrued liabilities
|
$778,433
|
$771,763
|
|
Payable to broker for unsettled trade
|
0
|
115,005
|
Accrued profit sharing
|
544,386
|
3,483,241
|
| Deferred rent |
21,590
|
23,903
|
| Current income tax liability |
69,316
|
5,751,566
|
Deferred income tax liability
|
1,364,470
|
1,364,470
|
|
|
|
Total liabilities
|
2,778,195
|
11,509,948
|
Commitments and contingencies
|
146,300
|
132,772
|
Net assets
|
$28,036,135
|
$31,833,475
|
|
|
|
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 3/31/01 and 12/31/00 |
106,930 |
106,930
|
| Additional paid in capital |
26,724,595 |
26,724,595 |
| Additional paid in capital - common stock warrants |
109,641 |
109,641 |
| Accumulated net realized gain (loss) |
(71,991) |
642,418 |
| Accumulated unrealized appreciation of investments, net of deferred tax liability of $1,630,506 at 3/31/01and $1,630,506 at 12/31/00 |
4,234,491 |
7,317,422 |
| Treasury stock at cost (1,628,740 shares at 3/31/01 and at 12/31/00) |
(3,067,531) |
(3,067,531) |
| Net assets |
$28,036,135 |
$31,833,475 |
| Shares outstanding |
9,064,231 |
9,064,231 |
| Net asset value per outstanding share |
$3.09 |
$3.51 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three Months Ended
|
|
| |
|
|
|
Investment income:
|
|
|
|
Interest from:
|
|
|
|
Fixed-income securities
|
$152,530
|
$83,954
|
|
Affiliated companies
|
9,617
|
21,682
|
|
Other income
|
29,812
|
15,812
|
|
Total investment income
|
191,959
|
121,448
|
| |
|
|
|
Expenses:
|
|
|
|
Profit sharing reversal
|
(846,290)
|
(1,651,336)
|
|
Salaries and benefits
|
299,704
|
277,546
|
|
Administration and operations
|
93,256
|
92,574
|
|
Professional fees
|
59,203
|
85,307
|
|
Rent
|
42,073
|
41,475
|
|
Directors' fees and expenses
|
22,990
|
21,132
|
|
Depreciation
|
7,500
|
10,000
|
|
Custodian fees
|
3,646
|
3,536
|
|
Interest expense
|
0
|
146,141
|
|
Total expenses
|
(317,918)
|
(973,625)
|
|
Operating income before income taxes
|
509,877
|
1,095,073
|
|
Income tax provision
|
0
|
0
|
|
Net operating income
|
509,877
|
1,095,073
|
| |
|
|
|
Net realized (loss) gain on investments:
|
|
|
|
Realized (loss) gain on sale of investments
|
(1,194,652)
|
3,763,272
|
|
Total realized (loss) gain
|
(1,194,652)
|
3,763,272
|
|
Income tax provision
|
(29,634)
|
(1,183,618)
|
|
Net realized (loss) gain on investments
|
(1,224,286)
|
2,579,654
|
| |
|
|
|
Net realized (loss) income
|
(714,409)
|
3,674,727
|
| |
|
|
|
Net decrease in unrealized appreciation on investments:
|
|
|
|
Decrease as a result of investment sales
|
0
|
(3,204,990)
|
|
Increase as a result of investment sales
|
1,528,082
|
0
|
|
Increase on investments held
|
0
|
14,338,573
|
|
Decrease on investments held
|
(4,611,013)
|
(21,733,839)
|
|
Change in unrealized appreciation on investments
|
(3,082,931)
|
(10,600,256)
|
|
Income tax benefit
|
0
|
153,304
|
|
Net decrease in unrealized appreciation on investments
|
(3,082,931)
|
(10,446,952)
|
| |
|
|
|
Net decrease in net assets resulting from operations:
|
|
|
|
Total
|
$(3,797,340)
|
$(6,772,225)
|
|
Per outstanding share
|
$(0.42)
|
$(0.73)
|
Investee Company Websites And Stock Market Symbols, Where Applicable
|
Investee Company
|
Website Address
|
Stock Market Symbol
|
| |
|
|
|
Essential.com, Inc.
|
www.essential.com
|
|
|
Experion Systems, Inc.
|
www.experionsystems.com
|
|
|
Exponential Business Development Company
|
www.exponential-ny.com
|
|
|
Genomica Corporation
|
www.genomica.com
|
GNOM
|
|
Harris Newco, Inc.
|
|
|
|
Informio, Inc.
|
www.informio.com
|
|
|
Kana Communications, Inc.
|
www.kana.com
|
KANA
|
|
Kriton Medical, Inc.
|
www.kritonmedical.com
|
|
|
MedLogic Global Corporation
|
www.medlogic.com
|
|
|
Nanophase Technologies Corporation
|
www.nanophase.com
|
NANX
|
|
NeuroMetrix, Inc.
|
www.neurometrix.com
|
|
|
PHZ Capital Partners Limited Partnership
|
|
|
|
Questech Corporation
|
www.questechmetals.com
|
|
|
Schwoo, Inc.
|
www.schwoo.com
|
|
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