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A Publicly Traded Venture Capital Company
Investing in Tiny Technology |
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FIRST QUARTER REPORT 2003 |
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FELLOW
SHAREHOLDERS: |
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During the year to date,
through May 28, 2003, your Company continued to build its portfolio of
privately held tiny-technology companies (companies developing
nanotechnology, microsystems or microelectromechanical systems (MEMS)) by
making one follow-on investment and two new investments. The follow-on investment, announced on
January 7, 2003, was in Optiva, Inc. (www.optivainc.com). The new investments were in NanoGram
Devices Corporation (www.nanogramdevices.com) and Nanosys, Inc.
(www.nanosysinc.com). |
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If we include Nanosys on a
pro-forma basis, Nanosys, Optiva, Agile Materials & Technologies,
NanoGram Devices and Nanotechnologies were our five most highly valued
tiny-technology investments at March 31, 2003, at $1.5 million, $1.25
million, $1.0 million, $0.75 million and $0.75 million, respectively. With a total of 10 tiny-technology
investments in our portfolio, Harris & Harris Group is one of the more
active venture capital firms in the tiny-technology space. The Company is one of perhaps three
venture capital firms now making all of its initial investments in tiny
technology, and it is the only publicly traded venture capital company with
this exclusive focus. |
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Our fundamental approach to
evaluating tiny-technology enabled companies does not depart from the
classical venture capital approach that we have used successfully in the past
for non-tiny technology investments.
Ideally, in addition to having an important competitive advantage as a
result of employing a proprietary tiny technology, a candidate for investment
has solid, entrepreneurially adept management; a product or service that
fills a real need; a target market of significant size with barriers to
entry; and a strong investor group.
Of course, early-stage companies worthy of investment rarely start out
with all of these ideal attributes. |
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Because much of tiny technology
is so new, we have to pay especially close attention to evaluating how far
away tiny-technology companies are from commercialization. In assessing likely time to
commercialization, we are finding Mihail "Mike" Roco's framework of
the four generations of nanotechnology to be useful. Dr. Roco is Chairman of the Federal
Subcommittee on Nanoscale Science Engineering and Technology which oversees
the National Nanotechnology Initiative.
His four generations of nanotechnology are delineated as follows: |
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·
Generation 1: Passive nanostructures, including coatings, nanoparticles
and nanostructured metals, polymers and ceramics. Emerged around 2001. |
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·
Generation 2: Active nanostructures,
including transistors, targeted drugs and chemicals, actuators and adaptive
structures. Should emerge around
2005. |
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·
Generation 3: 3-D nanosystems,
including heterogeneous nanocomponents and various assembling techniques,
networking at the nanoscale and new architectures. Should emerge around 2010. |
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·
Generation 4: Molecular nanosystems,
consisting of heterogeneous molecules that mimic the processes of life. May emerge around 2020. |
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We classify six of our 10
tiny-technology investments as passive
nano- or microstructures, thus as Generation 1 technology in Dr.
Roco's framework. |
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Optiva, Inc.:
Optiva's new E-type polarizers are enabled via nanostructured polymers
that self-assemble into discotic columns with the help of supramolecular
chemistry. To create polarizing
sheets, further alignment of this liquid crystal technology is carried out by
currently available standard bulk manufacturing processes. |
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Agile Materials & Technologies, Inc.: Agile is developing a passive material, a
ferroelectric material called Barium Strontium Titanate. Agile has discovered a way to deposit very
thin films of this material over large areas. This technology enables the material to be used in integrated
passive structures in novel wireless circuit designs. |
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NanoGram Devices Corporation: NanoGram Devices uses a nanostructured metal oxide, silver
vanadium oxide, to make batteries for implantable medical devices. The increased surface area of the
nanostructured materials and the high proportion of atoms on the surface of
the nanomaterial permit greater energy density and flatter charge times over
the life of the battery. |
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Nanotechnologies, Inc.:
Nanotechnologies has a proprietary technology for manufacturing
nanoparticles with uniform size distributions. These nanoparticles can be used in fields ranging from energetics
to biocides. |
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NeoPhotonics Corp.:
NeoPhotonics has a proprietary method for manufacturing and depositing
different types of nanoparticles on functional zones within optical waveguide
products for the telecommunications sector.
These functionalized zones permit greater integration on optical
chips. |
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NanoOpto Corporation:
NanoOpto creates optical components that are enabled through its
proprietary technology for printing nanofabricated structures with dimensions
below the wavelength of light. These
nanostructures permit novel structures to be integrated onto a single chip. |
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We classify the other four of
our tiny-technology investments as active
nanostructures or microstructures, thus as Generation 2 technology
in Dr. Roco's framework. |
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Nanosys, Inc.:
Nanosys is working to create active nanostructures such as
photovoltaic cells and chemical and biological sensors. These active devices will be enabled by
Nanosys's ability to synthesize and manufacture most of the functionality of
a system into its individual semiconducting nanowires and nanocrystals. Nanosys also plans to develop more
integrated devices with heterogeneous nanocomponents that we would consider
to be products for the 3rd Generation of nanotechnology. |
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Nantero, Inc.: In
our view, Nantero spans the gap between Dr. Roco's 2nd Generation
and 3rd Generation of nanotechnology. Nantero is using carbon nanotubes as nanoelectromechanical
switches for non-volatile memory and other nearer-term electronic
applications. Each carbon nanotube
could represent a nano-sized switch capable of switching between O and
l. Nantero is already capable of
making these nanotube switches and creating arrays of switches using standard
CMOS compatible technology. Nantero has
stated that it intends to network these nanotubes to create a new architecture
for memory that we would consider to be a product for the 3rd
Generation, long before 2010. |
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Nanopharma Corp.:
Nanopharma is developing drug delivery materials that are enabled by
their biomimetic properties and by their tiny size. This enables them to circulate in the body longer, solubilize
insoluble compounds and be easily and non-toxically cleared from the body. |
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Continuum Photonics, Inc.:
Continuum is developing a family of unique MEMS-based optical
networking switches that will enhance the flexibility and reliability of
optical networks. Continuum's
DirectLight technology actively compensates for variations in manufacturing
tolerances, eliminating calibration steps during the assembly process. |
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We have not made any
tiny-technology investments that we would classify under Dr. Roco's framework
as purely Generation 3 or 4.
Classical early-stage venture capital investment horizons are, as a
rule of thumb, about seven years.
Within seven years, in reasonably normal capital markets, a successful
company should have achieved enough commercial traction to be a candidate for
an initial public offering (IPO) or an acquisition. Even though we believe that tiny technology will change a lot
of things in years to come, we do not believe that it will change the
economics of high-return venture capital investing. Thus, time to commercialization will remain an important
consideration for us in evaluating potential tiny-technology investments. |
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Our deal flow
remains robust. We continue to
believe that this era of depressed valuations for venture capital investments
is providing us with an historic opportunity to put capital to work on
advantageous terms. As always, we
thank you, our fellow shareholders, for your support as we continue to buck
the tide by making new investments at a time when new investments by the
venture capital community as a whole have declined for 12 straight
quarters. In a more ebullient
environment, we could not have made the progress that we have made in
establishing our franchise in tiny-technology investing. |
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Charles
E. Harris |
Mel
P. Melsheimer |
Douglas W. Jamison |
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Chairman
and CEO |
President
& COO |
Vice
President |
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May 28, 2003 |
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This
letter may contain statements of a forward-looking nature relating to future
events. 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 letter. Please see the
Company's Annual Report on Form 10-K and recent Prospectus 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. |
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Unaudited Schedule of Investments* |
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(As
of March 31, 2003) |
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Shares/ |
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Principal |
Value |
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Investment
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Agile
Materials & Technologies, Inc |
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Series
A Convertible Preferred Stock |
3,732,736 |
$1,000,000 |
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AlphaSimplex Group, LLC |
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Limited
Liability Company interest |
-- |
4,301 |
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Continuum Photonics, Inc |
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Series B
Convertible Preferred Stock |
2,000,000 |
123,394 |
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Experion
Systems, Inc. |
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Series A
Convertible Preferred Stock |
294,118 |
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Series B
Convertible Preferred Stock |
35,294 |
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Series C
Convertible Preferred Stock |
222,184 |
1,037,000 |
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Exponential Business
Development |
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Limited
partnership interest |
-- |
25,000 |
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Kriton Medical, Inc. |
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Series B
Convertible Preferred Stock |
476,191 |
0 |
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NanoGram Devices
Corporation |
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Series A-2
Convertible Preferred Stock |
750,000 |
750,000 |
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NanoOpto Corporation |
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Series A-1
Convertible Preferred Stock |
267,857 |
237,866 |
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Nanopharma Corp. |
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Series A
Convertible Preferred Stock |
684,516 |
350,000 |
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Nanotechnologies, Inc |
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Series B
Convertible Preferred Stock |
1,538,837 |
750,000 |
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Nantero, Inc |
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Series A
Convertible Preferred Stock |
345,070 |
489,999 |
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NeoPhotonics
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Series D
Convertible Preferred Stock |
1,498,802 |
320,071 |
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NeuroMetrix, Inc. |
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Series A
Convertible Preferred Stock |
875,000 |
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Series B
Convertible Preferred Stock |
625,000 |
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Series C-2
Convertible Preferred Stock |
1,148,100 |
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Series E
Convertible Preferred Stock |
499,996 |
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Series E-1
Convertible Preferred Stock |
235,521 |
5,075,426 |
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Optiva, Inc. |
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Series C
Convertible Preferred Stock |
1,249,999 |
1,250,000 |
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Questech |
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Common Stock |
646,954 |
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Warrants at $5.00
expiring 11/15/04 |
1,966 |
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Warrants at
$1.50 expiring 11/16/05 |
1,250 |
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Warrants at
$1.50 expiring 12/14/06 |
8,500 |
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Warrants
at $1.50 expiring 11/21/07 |
3,750 |
724,588 |
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Total |
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$12,137,645 |
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*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, 2003 for the unaudited
financial information and notes thereto. |
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CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES* |
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ASSETS |
March 31,
2003 December 31, 2002
(Unaudited) (Audited)
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Cash,
U.S. Government Obligations and cash equivalents |
$22,778,141 |
$21,418,101 |
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Investments,
at value |
12,137,645 |
12,036,077 |
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Restricted
funds |
762,532 |
756,944 |
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Funds
in escrow |
0 |
750,000 |
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Receivable
from portfolio company |
0 |
786,492 |
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Interest
receivable |
22,086 |
189 |
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Income
tax receivable |
72,546 |
0 |
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Prepaid
expenses |
75,867 |
96,631 |
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Other
assets |
109,607 |
107,535 |
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Total
assets |
$35,958,424 |
$35,951,969 |
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LIABILITIES & NET ASSETS |
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Accounts
payable and accrued liabilities |
$1,519,347 |
$1,451,568 |
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Payable
to broker for unsettled trade |
0 |
5,696,725 |
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Bank
loan payable |
7,724,207 |
0 |
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Accrued
profit sharing |
1,523 |
15,233 |
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Deferred
rent |
3,084 |
5,397 |
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Current
income tax liability |
0 |
857,656 |
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Deferred
income tax liability |
669,344 |
669,344 |
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Total liabilities |
9,917,505 |
8,695,923 |
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Net assets |
$26,040,919 |
$27,256,046 |
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Net assets are comprised of: |
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Preferred
stock, $0.10 par value, 2,000,000 shares authorized; none issued |
$0 |
$0 |
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Common
stock, $0.01 par value, 25,000,000 shares authorized; |
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13,327,585
issued at 3/31/03 and 12/31/02 |
133,276 |
133,276 |
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Additional
paid in capital |
32,845,872 |
32,845,872 |
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Additional
paid in capital - common stock warrants |
109,641 |
109,641 |
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Accumulated
net realized gain |
550,819 |
1,137,820 |
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Accumulated
unrealized appreciation of investments, net of |
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deferred
tax liability of $844,918 at 3/31/03 and 12/31/02 |
(4,193,158) |
(3,565,032) |
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Treasury
stock, at cost (1,828,740 shares at 3/31/03 and 12/31/02) |
(3,405,531) |
(3,405,531) |
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Net assets |
$26,040,919 |
$27,256,046 |
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Shares
outstanding |
11,498,845 |
11,498,845 |
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Net asset value per outstanding share |
$ 2.26 |
$ 2.37 |
(Unaudited)
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Three Months Ended |
Three Months Ended |
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March 31, 2003 |
March 31, 2002 |
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Investment income: |
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Interest
from unaffiliated issuers |
$ 46,246 |
$ 54,136 |
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Other
income |
18,430 |
5,326 |
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Total
investment income |
64,676 |
59,462 |
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Expenses: |
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Profit-sharing
accrual |
0 |
127,959 |
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Salaries
and benefits |
362,196 |
255,376 |
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Administration
and operations |
95,112 |
87,902 |
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Professional
fees |
67,158 |
43,095 |
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Rent |
7,877 |
42,724 |
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Directors'
fees and expenses |
56,365 |
41,076 |
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Depreciation |
9,980 |
5,948 |
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Custodian
fees |
2,187 |
3,839 |
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Interest
expense |
8,261 |
7,776 |
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Total
expenses |
649,136 |
615,695 |
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Operating
loss before income taxes |
(584,460) |
(556,233) |
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Income
tax provision |
0 |
0 |
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Net operating loss |
(584,460) |
(556,233) |
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Net realized gain on investments: |
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Realized
gain on investments |
432 |
110,679 |
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Total
realized gain |
432 |
110,679 |
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Income
tax provision |
(2,973) |
(34,223) |
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Net
realized (loss) gain on investments |
(2,541) |
76,456 |
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Net realized loss |
(587,001) |
(479,777) |
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Net decrease in unrealized
appreciation on investments: |
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Decrease
as a result of investment sales |
0 |
0 |
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Increase
as a result of investment sales |
0 |
0 |
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Increase
on investments held |
227,838 |
45,006 |
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Decrease
on investments held |
(855,964) |
(602,163) |
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Change
in unrealized appreciation on investments |
(628,126) |
(557,157) |
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Income
tax provision |
0 |
0 |
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Net
decrease in unrealized appreciation |
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on
investments |
(628,126) |
(557,157) |
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Net decrease in net assets
resulting from operations: |
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Total |
$(1,215,127) |
$(1,036,934) |
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Per
outstanding share |
$ (0.11) |
$ (0.12) |
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Portfolio
Company |
Website
Address |
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Agile
Materials & Technologies, Inc. |
www.agilematerials.com |
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AlphaSimplex
Group, LLC |
www.alphasimplex.com |
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Continuum
Photonics, Inc. |
www.continuumphotonics.com |
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Experion
Systems, Inc. |
www.experionsystems.com |
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Exponential
Business Development Company |
www.exponential-ny.com |
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NanoGram
Devices Corporation |
www.nanogramdevices.com |
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NanoOpto
Corporation |
www.nanoopto.com |
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Nanopharma
Corp. |
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Nanotechnologies,
Inc. |
www.nanoscale.com |
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Nantero,
Inc. |
www.nantero.com |
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NeoPhotonics
Corporation |
www.neophotonics.com |
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NeuroMetrix,
Inc. |
www.neurometrix.com |
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Optiva,
Inc. |
www.optivainc.com |
Questech
Corporation www.questechmetals.com
Diversification
of Total Assets at March 31, 2003
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Cash, U.S. Government Obligations & Cash Equivalents |
$22,778,141 |
63.35% |
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Investments,
at Value
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Medical Devices |
$5,825,426 |
16.20% |
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NanoGram
Devices Corporation |
750,000 |
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NeuroMetrix,
Inc. |
5,075,426 |
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Materials |
$2,724,588 |
7.58% |
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Nanotechnologies,
Inc. |
750,000 |
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Questech
Corporation |
724,588 |
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Optiva,
Inc. |
1,250,000 |
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Electronics |
$1,489,999 |
4.14% |
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Agile
Materials & Technologies, Inc. |
1,000,000 |
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Nantero |
489,999 |
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Software |
$1,037,000 |
2.88% |
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Experion
Systems, Inc. |
1,037,000 |
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Optical Components |
$681,331 |
1.89% |
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NeoPhotonics
Corporation |
320,071 |
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NanoOpto
Corporation |
237,866 |
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Continuum
Photonics, Inc. |
123,394 |
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Drug Delivery |
$350,000 |
0.97% |
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Nanopharma
Corp. |
350,000 |
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Miscellaneous
|
$25,000
|
0.07%
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Exponential |
25,000 |
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Asset Management |
$4,301 |
0.01% |
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AlphaSimplex
Group LLC |
4,301 |
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Other
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1,042,638
|
2.91% |
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Total
Assets*
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$35,958,424
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100.00%
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