SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------
FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 001-15941
UTEK CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Jurisdiction of
Incorporation or Organization)
59-3603677
(IRS Employer
Identification No.)
202 S. Wheeler Street
Plant City, FL 33566
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 754-4330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as 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 [ ]
On December 6, 2000 there were 3,782,226 shares outstanding of the
Registrant's common stock, $0.01 par value.
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Page 1 of 42
UTEK CORPORATION
FORM 10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999................................... 3
Consolidated Statements of Operations -- For the Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)..... 4
Consolidated Statements of Cash Flows -- For the Nine Months Ended September 30, 2000 and 1999 (unaudited)............... 5
Consolidated Statements of Changes in Net Assets For the Nine Months Ended September 30, 2000 and 1999 (unaudited)....... 6
Financial Highlights For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) ................................. 7
Statements of Investments as of September 30, 2000 (unaudited) and December 31, 1999..................................... 8
Notes to Consolidated Financial Statements............................................................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................. 25
Item 2. Changes in Securities and Use of Proceeds.......................................................................... 25
Item 3. Defaults Upon Senior Securities.................................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................................................ 25
Item 5. Other Information.................................................................................................. 25
Item 6. Exhibits and Reports on Form 8-K................................................................................... 25
Signatures................................................................................................................. 26
Page 2 of 42
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTEK Corporation
Consolidated Balance Sheets
December 31 September 30
1999 2000
------------ ------------
(Unaudited)
ASSETS
Investments in non-controlled affiliates (cost
$1,418,212 and $3,548,396 at
December 31, 1999 and September 30,
2000, respectively) $2,594,931 $4,110,224
Cash and cash equivalents 1,007,229 21,334
Deferred offering costs 375,362 815,519
Prepaid expenses and other assets 147,085 92,580
Fixed assets, net 80,738 77,425
---------- ----------
TOTAL ASSETS 4,205,345 5,117,082
========== ==========
LIABILITIES
Notes payable to bank - 60,975
Accrued expenses 114,453 317,669
Deferred income taxes 806,439 1,053,197
---------- ----------
TOTAL LIABILITIES 920,892 1,431,841
---------- ----------
NET ASSETS $3,284,453 $3,685,241
========== ==========
Commitments and Contingencies
Composition of net assets
Common stock, $.01 par value, 19,000,000 shares
authorized; 2,782,226 shares issued and
outstanding at December 31, 1999 and
September 30, 2000 $27,822 $27,822
Preferred stock, $.01 par value, 1,000,000 shares
authorized and none issued and outstanding - -
Additional paid-in capital 2,136,010 2,136,010
Accumulated income:
Accumulated net operating income 386,702 1,147,278
Net realized gain on investments, net of income taxes - 23,717
Net unrealized appreciation of investments, net of
deferred income taxes 733,919 350,414
---------- ----------
Net assets $3,284,453 $3,685,241
========== ==========
Net asset value per share $1.18 $1.32
===== =====
See accompanying notes
Page 3 of 42
UTEK Corporation
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1999 2000 1999 2000
----------- ---------- ----------- ----------
Income from operations:
Sale of technology rights $225,720 $ 447,720 $1,098,213 $2,354,192
Consulting fees 93,893 - 137,107 -
Investment income, net 18,376 9,206 36,721 26,366
-------- --------- ---------- ----------
337,989 456,926 1,272,041 2,380,558
-------- --------- ---------- ----------
Expenses:
Salaries and wages 43,569 92,157 120,265 255,452
Professional fees 19,610 37,427 197,601 149,332
Sales and marketing 17,326 37,089 103,128 561,246
General and administrative 50,697 40,088 133,092 190,121
-------- --------- ---------- ----------
131,202 206,761 554,086 1,156,151
-------- --------- ---------- ----------
Income before income taxes 206,787 250,165 717,955 1,224,407
Provision (benefit) for income taxes 48,815 96,375 (64,167) 463,831
-------- --------- ---------- ----------
Net income from operations 157,972 153,790 782,122 760,576
Net realized and unrealized gains:
Net realized gain on investment, net of
income tax expense of $14,310 - 23,717 - 23,717
Increase in unrealized appreciation
(depreciation) of non-controlled
affiliate investments, net of
deferred income tax expense
(benefit) of ($225,769) and
($322,256) for the three months
ended September 30, 1999 and 2000,
respectively and $139,231, and
($231,384) for the nine months ended
September 30,1999 and 2000, respectively 369,865 (534,126) 974,635 (383,505)
-------- --------- ---------- ----------
Net increase (decrease) in net assets
from operations $527,837 $(356,619) $1,756,757 $ 400,788
======== ========= ========== ==========
Unaudited proforma information:
Net increase (decrease) in net assets before
proforma effect of change in Company's
tax structure 527,837 (356,619) 1,756,757 400,788
Proforma effect of change in tax structure (309,337) - (615,955) -
-------- --------- ---------- ----------
Pro forma increase (decrease) in net assets
from operations $218,500 $(356,619) $1,140,802 $ 400,788
======== ========= ========== ==========
See accompanying notes
Page 4 of 42
UTEK Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months
Ended September 30
--------------------------
1999 2000
----------- -----------
Operating activities:
Net increase in net assets $1,756,757 $ 400,788
Adjustments to reconcile net increase (decrease)
in net assets to net cash provided by
operating activities:
Net unrealized (appreciation) depreciation of
investments (1,113,866) 614,889
Deferred income taxes 75,064 246,758
Services received for common stock 204,219 -
Depreciation and amortization 10,460 14,369
Gain on sale of investments - (38,027)
Changes in operating assets and liabilities:
Deferred offering costs (375,362) (440,157)
Prepaid expenses and other assets (59,610) 54,505
Accrued expenses 161,326 203,216
---------- -----------
Net cash provided by operating activities 658,988 1,056,341
---------- -----------
Investing activities:
Investment securities received for sale of
portfolio companies (1,098,213) (2,154,192)
Proceeds received on sale of investments - 62,037
Purchases of fixed assets (24,003) (11,056)
---------- ----------
Net cash used in investing activities (1,122,216) (2,103,211)
---------- ----------
Financing activities:
Advances from bank - 60,975
Proceeds from issuances of common stock 1,305,807 -
---------- ----------
Net cash provided by financing activities 1,305,807 60,975
---------- ----------
Increase (decrease) in cash and cash equivalents 842,579 (985,895)
Cash and cash equivalents at beginning of period 418,178 1,007,229
---------- ----------
Cash and cash equivalents at end of period $1,260,757 $ 21,334
========== ==========
See accompanying notes
Page 5 of 42
UTEK Corporation
Consolidated Statements of Changes in Net Assets
(Unaudited)
Nine Months Ended
September 30,
1999 2000
---------- -----------
Changes in net assets from operations:
Net income from operations $ 782,122 $ 760,576
Net realized gain on sale of investments - 23,717
Change in net unrealized appreciation
(depreciation) of investments 974,635 (383,505)
---------- ----------
Net increase in net assets from operations 1,756,757 400,788
Capital stock transactions:
Common stock issued for cash 1,305,807 -
Common stock issued for services 204,219 -
---------- ----------
Net increase in net assets from stock transactions 1,510,026 -
---------- ----------
Net increase in net assets 3,266,783 400,788
Net assets at beginning of period 1,365,647 3,284,453
---------- ----------
Net assets at end of period $4,632,430 $3,685,241
========== ==========
See accompanying notes
Page 6 of 42
UTEK Corporation
Financial Highlights
(Unaudited)
Nine Months Ended
September 30
---------------------------
1999 2000
----------- -----------
PER SHARE INFORMATION
Net asset value, beginning of period $ 0.56 $ 1.18
Net increase from operations (1) 0.30 0.27
Net change in realized and unrealized
appreciation (depreciation) on investments
(after taxes) (1) 0.24 (0.13)
Net increase from stock transactions (1) 0.57
---------- ----------
Net assets value, end of period $ 1.67 $ 1.32
========== ==========
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $4,632,430 $3,685,241
Ratio of expenses to average net
assets (2) 18% 33%
Ratio of net income to average net
assets 26% 22%
Weighted average number of shares
outstanding during the period 2,647,585 2,782,226
- -------------
(1) Calculated based on weighted average number of shares outstanding during the
period.
(2) Excluding income taxes.
Page 7 of 42
UTEK Corporation
Statement of Investments
December 31, 1999
Initial date of Original
Shares Acquisition Cost Value
- --------- --------------- ---------- ----------
Common Stock in non-controlled affiliate - 79.0%
1,000,000 5/98 Lexon, Inc., publicly traded over the counter development
state enterprise - 21.9%; developer of health care technology $ 320,000 $ 720,000
879,300 1/99 Image Analysis, Inc., privately held - 23.1%; medical and
hospital equipment developer 219,825 756,198
1,584,000 5/99 Centrex, Inc., privately held - 15.9%; developer of water
purification methodologies 522,720 522,720
900,000 5/99 Nucor Enterprises, Inc., privately held - 3.8%, developer of
construction materials 126,000 126,000
491,957 6/99 NuElectric, Inc., publicly traded over the counter - 9.3%
environmental services 142,667 305,013
150 11/99 Rosbon, Inc., privately held - 5.0%, real estate development 87,000 165,000
---------- ----------
TOTAL INVESTMENTS - 79.0% $1,418,212 2,594,931
========== ==========
Cash and other assets, less liabilities - 21.0% 689,522
----------
Net Assets at December 31, 1999 - 100% $3,284,453
==========
Notes to Schedule of Investments:
* The above investments are non-income producing. Equity investments that have
not paid dividends within the last twelve months are considered non-income
producing.
* Original cost approximates tax basis of investments.
* Unrestricted securities with readily available market quotations are to be
valued at 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. (Notes 1 and 2)
* Lexon, Inc., Image Analysis, Inc., Centrex, Inc., Nucor Enterprises, Inc. and
395,978 NuElectric, Inc. shares are restricted as to disposition for a two
year period commencing on the date of acquisition. After two years these
shares may be sold pursuant to rule 144.
* The Company owns more than 10% of the outstanding common stock of each of the
above investments. As such, the Company is deemed to be an affiliate of the
above companies. Affiliation for purposes of the 40 Act is 5%.
See accompanying notes
Page 8 of 42
UTEK Corporation
Statement of Investments
September 30, 2000
(Unaudited)
Initial date of Original
Shares Acquisition Cost Value
- --------- --------------- ---------- ----------
Common Stock in non-controlled affiliate - 111.5%
924,973 5/98 Lexon, Inc., publicly traded over the counter development
state enterprise - 10.5%; developer of health care technology $295,991 $388,489
879,300 1/99 Image Analysis, Inc., privately held - 20.5%; medical and
hospital equipment developer 219,825 756,198
1,584,000 5/99 Centrex, Inc., privately held - 1.3%; developer of water
purification methodologies 522,720 47,520
900,000 5/99 Nucor Enterprises, Inc., privately held - 2.3%; developer of
construction materials 126,000 83,700
1,037,957 6/99 NuElectric, Inc., publicly traded over the counter - 23.1%;
environmental services 590,388 851,125
150 11/99 Rosbon, Inc., privately held - 4.5%; real estate development 87,000 165,000
100,799 3/00 Graphco Technologies, Inc., privately held - 25.8%;
developer of e-commerce technologies 952,362 952,362
931,000 6/00 The Quantum Group, Inc., publicly traded over the
counter - 23.5%; developer of tire recycling methodologies 754,110 865,830
---------- ----------
TOTAL INVESTMENTS - 111.5% $3,548,396 $4,110,224
========== ==========
Cash and other assets, less liabilities - (11.5)% (424,983)
----------
Net Assets at September 30, 2000 - 100% $3,685,241
==========
Notes to Schedule of Investments:
* The above investments are non-income producing. Equity investments that have
not paid dividends within the last twelve months are considered non-income
producing.
* Original cost approximates tax basis of investments.
* Unrestricted securities with readily available market quotations are to be
valued at 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. (Notes 1 and 2)
* Lexon, Inc., Image Analysis, Inc., Centrex, Inc., Nucor Enterprises, Inc. and
941,978 NuElectric, Inc. shares are restricted as to disposition for a two
year period commencing on the date of acquisition. After two years these
shares may be sold pursuant to rule 144.
* The Company owns more than 10% of the outstanding common stock of each of the
above investments with the exception of Graphco Technologies, Inc. and The
Quantum Group, Inc. As such, the Company is deemed to be an affiliate of the
above companies with the exception of Graphco Technologies, Inc. and The
Quantum Group, Inc.
See accompanying notes
Page 9 of 42
UTEK Corporation
Notes to Consolidated Financial Statements
(Information as of September 30, 1999 and 2000 and for the nine months
then ended is Unaudited)
1. Nature of Business and Significant Accounting Policies
Interim Financial Information
The financial information as of September 30, 1999 and 2000 and for the
nine month periods then ended is unaudited, but includes all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management are necessary in order to make the financial statements not
misleading at such dates and for those periods. These financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes required by generally accepted
accounting principles. These consolidated financial statements should be read in
conjunction with the audited financial statements and related notes included in
the Company's Form N-2 for the year ended December 31, 1999. Operating results
for the nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the entire year.
The Company
We are a non-diversified, closed-end management investment company that has
elected to be treated as a Business Development Company ("BDC") under the
Investment Company Act of 1940.
We commenced operations in 1997 as UTEK Corporation ("UTEK Florida"), which
was incorporated under the laws of the State of Florida in August 1996. UTEK
Florida was engaged in the business of technology transfer. On December 31,
1998, we formed UTEK, LLC, a limited liability company organized under the laws
of the State of Florida. Subsequent thereto, the shareholders of UTEK Florida
exchanged their shares of common stock for membership units in UTEK, LLC. In
July 1999, we formed UTEK Corporation under the laws of the State of Delaware
and in October 1999, UTEK LLC was merged into UTEK Corporation.
As a BDC, we must be primarily engaged in the business of furnishing
capital and providing significant managerial assistance to companies that do not
have ready access to capital through conventional financial channels. Such
companies are termed "portfolio" companies.
The Company invests in portfolio companies that management believes are
positioned to benefit from the acquisition of new technology. The Company's
investments in portfolio companies generally are used by the portfolio companies
to acquire the license rights to new technologies developed at universities and
/or government research facilities. The Company provides portfolio companies
with managerial assistance in technology transfer. Technology transfer is the
process by which technologies developed by universities or research laboratories
are licensed to companies for commercial use. The Company also may make
additional investments to fund continued research and development of the
acquired technologies.
The Company seeks "merger partners" for portfolio companies, whereby the
Company receives common stock in the merger partner in a non-taxable exchange
for shares of the portfolio company. The Company generally seeks merger partners
that are in the early stages of development. The merger partners normally have
little or no prior operating history.
Investments
Investments are stated at value. Securities traded on the over-the-counter
market are valued at the closing price on the valuation date. Restricted
securities may be subject to a discount from the closing price. Restricted
securities and other securities for which prices are not readily available, or
for which market quotations are considered not to reflect fair value, are valued
at fair value as determined in good faith by or under the direction of the Board
of Directors based upon among other things applicable quantitative and
qualitative factors. These factors may include, but are not limited to, type of
securities, nature of business, marketability, market price of unrestricted
securities of the same issue, (if any), comparative valuation of securities of
publicly-traded companies in the same or similar industries, current financial
conditions and operating results, sales and earnings growth, operating revenues,
competitive conditions and current and prospective conditions in the overall
stock market.
Cash and Cash Equivalents
The Company considers all highly liquid fixed income investments with
maturities of three months or less to be cash equivalent.
Page 10 of 42
UTEK Corporation
Notes to Consolidated Financial Statements
(Information as of September 30, 1999 and 2000 and for the nine months
then ended is Unaudited)
1. Nature of Business and significant Accounting Policies - (Continued)
Revenue Recognition
The Company recognizes revenue from the sale of technology rights upon the
exchange of the shares of portfolio companies with unrelated merger partners.
The Company records revenue based on the value of the consideration received. In
most cases, the consideration received for the Rights is the common stock of the
purchaser. The common stock received is recorded as an investment at value.
Revenue derived from consulting services is recognized as earned, over the life
of the underlying consulting agreements. In some cases, the Company is paid a
fee for negotiating a successful technology transfer. In these instances,
revenue is recognized upon consummation of the transaction.
Concentrations of Credit Risk
Cash and cash equivalents are financial instruments that potentially
subject the company to concentrations of credit risk. The estimated fair value
of financial instruments approximates the carrying value based on available
market information. The Company invests its excess available funds primarily in
U.S. Government backed securities. The Company's customers are typically located
in the United States.
Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at discovery of new knowledge
that will be useful in developing new products or processes. The Company
expenses all research and development costs as they are incurred. As of December
31, 1999, the Company had incurred no such costs. As of September 30, 2000 the
Company had incurred $235,000 in such costs, which is classified as sales and
marketing expense in the consolidated statements of operations.
2. Investments
Equity securities at December 31, 1999 and September 30, 2000 (79.0% and
111.5% of net assets, respectively) were valued at fair value as estimated by
independent third party appraisers hired by the Company, in the absence of
readily ascertainable fair values.
The values assigned to these securities are based upon available
information and do not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized. Accordingly, the fair values
included in the schedule of investments may differ from the values that would
have been used had a ready market existed for these securities and such
differences could be significant.
As of December 31, 1999 and September 30, 2000, the Company had established
seven and nine portfolio companies, respectively with net assets of $133,000 and
$1,000, respectively, which are included in other assets.
On January 28, 2000, the Company sold its Cancer Diagnostic portfolio
company to Lexon, Inc. for $200,000. The Company received $50,000 in cash and a
promissory note for $150,000.
On March 21, 2000, the Company sold its 70% interest in Digital Personnel,
Inc. portfolio company to a subsidiary of Graphco Technologies, Inc. ("GTC")
for 100,799 shares of GTC common stock in a non-taxable exchange.
On June 24, 2000, the Company sold its 95% interest in Advanced Recycling
Sciences, Inc. portfolio company to the Quantum Group, Inc. for 931,000
unregistered shares of The Quantum Group, Inc. common stock in a non-taxable
exchange.
On September 21, 2000, the Company sold its 91% interest in Zorax, Inc.
portfolio company to NuElectric, Inc. for 546,000 unregistered shares of
NuElectric, Inc. common stock in a non-taxable exchange.
Page 11 of 42
UTEK Corporation
Notes to Consolidated Financial Statements
(Information as of September 30, 1999 and 2000 and for the nine months
then ended is Unaudited)
3. Income Taxes
Prior to October 14, 1999, the Company's business was structured as a limited
liability company ("LLC"). The LLC elected to be treated as a partnership under
the provisions of Subchapter K of the Internal Revenue Code. Under those
provisions, the LLC did not pay corporate income taxes on its taxable income.
Instead, the owners of the LLC were individually liable for income taxes on the
LLC's taxable income. The LLC's subsidiaries, including UTEK Holdings and UTEK
Corporation, were all taxed as C corporations.
On October 14, 1999, the Company restructured its business, whereby the members
of the LLC contributed their membership interests to the Company, a newly
created corporation. As a result, all of the LLC's assets, including the stock
of its subsidiaries, were transferred to the Company and the LLC was dissolved.
In addition, UTEK Holdings and UTEK Corporation were liquidated into the
Company. As of October 14, 1999, the Company is taxable as a C corporation.
4. Commitments and Contingencies
On September 13, 2000, the Company obtained a revolving line of credit with
a local financial institution. This line of credit allows the Company to borrow
up to $150,000, with a rate of interest at prime (presently 9.5%). The line of
credit is due on demand and is secured by a pledge of a portion of the Company's
investments in non-controlled affiliates and the personal guarantees of the
chief executive officer, a director, and a shareholder. The current amount due
to the bank is $60,975.
5. Impact of New Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be measured
at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for financial statements beginning in 2001. The Company is currently
studying the future effects of adopting this statement. Adoption of statement
No. 133 is not expected to have a significant effect on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. The
Company believes its revenue recognition practices for the sale of technology
rights meet these requirements. The Company is required to adopt the provisions
of this Bulletin in the fourth fiscal quarter of 2000 and is currently in the
process of assessing the impact of its adoption on its revenue sources.
6. Subsequent Events
On October 25, 2000, the Company completed its initial public offering of
1,000,000 shares of its common stock offered at $6.00 per share. As a result of
this offering the Company's net assets were increased by $4,964,780.
On November 29, 2000, the Company received 1,068,354 shares of Common Stock
of Torvec, Inc. in connection with the merger of the Company's 100% owned
portfolio company Ice Surface Development, Inc. into Torvec, Inc.
Page 12 of 42
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the UTEK Corporation (the
"Company") December 31, 1999 Consolidated Financial Statements, including the
notes thereto. The following discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Words such as "may", "expects",
"anticipates", "intends", "plans", "believes", "seeks", "estimates", variations
of such words, and similar expressions are intended to identify such
forward-looking statements. Future events and the Company's actual results could
differ materially from the results reflected in these forward-looking
statements, as a result of certain of the factors set forth below and elsewhere
in this analysis.
Certain matters in Management's Discussion and Analysis are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are subject to certain risks and uncertainties,
including the financial performance of the Company and market valuations of its
stock, which could cause actual results to differ materially from those
currently anticipated. Although the Company believes the expectations reflected
in any forward-looking statements are based on reasonable assumptions, the
Company can give no assurance that its expectations will be attained.
Shareholders, potential investors and other readers are urged to consider these
factors carefully in evaluating any forward-looking statements. Forward-looking
statements made herein are only made as of the date of this report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
General
The Company is a closed end, non-diversified management investment company
that has elected to be treated as a special type of investment company known as
a business development company, or BDC. Our primary business is to make
investments in companies that possess or will likely identify emerging and
established technologies and markets for those technologies. Our primary
investment objective is to increase our net assets by exchanging stock in our
portfolio companies for equity, cash and other assets which we will use to
acquire licenses to additional technologies by:
o making controlling investments in and forming development stage
companies, which we refer to as portfolio companies;
o developing our portfolio companies through the acquisition of new
technologies and, when appropriate, the funding of further research and
development;
o realizing value primarily through the sale of our portfolio companies to
companies in related industries in non-taxable transactions in which we
receive common stock of the acquiring company; and
o selling the common stock we receive in exchange for our portfolio
companies and investing the proceeds of sale in licensing and when
appropriate funding the further development of additional technologies
for our portfolio companies. We call this process U2BSM.
Our goal is to concentrate our investments in companies, which we believe
are likely to benefit from our management's expertise in technology transfer.
We form and make investments in our portfolio companies for the purpose of
assisting the portfolio companies in obtaining licenses to new technologies
developed at universities and research laboratories in a variety of industries.
Our portfolio companies are formed with the objective of completing a technology
transfer. Our U2BSM investment model is designed to bring technologies from
their inception at universities to the private sector; hence, we engage in
technology transfer. We also seek acquisition partners that will purchase our
portfolio companies including their technology rights, primarily in stock for
stock exchanges. In addition, we may also make additional investments in
portfolio companies and their acquirers to fund continued research and
development of the acquired technologies.
Page 13 of 42
The income that we derive from our investments in our portfolio companies
consists of both cash and equity securities that we receive upon disposition of
our portfolio companies. The appraised dollar value of the equities that we
receive makes up most of our revenues. An independent appraiser assesses the
value of the shares we receive in exchange for our portfolio companies.
Our expenses include salaries and wages, professional fees, sales and
marketing costs as well as general and administrative costs. Sales and marketing
costs include license and sponsored research fees, as well as advertising,
travel and other expenses that vary with revenues. General and administrative
costs include rent, depreciation, telecommunications and other overhead costs.
On October 25, 2000 the Company completed its Initial Public Offering (IPO)
of 1,000,000 shares of its common stock at $6.00 per share to raise additional
equity to support its growth strategy. Approximately $816,000 of our net assets
at September 30, 2000 are attributable to the costs of this offering. The net
proceeds of the offering were approximately $4,800,000.
Results of Operations
Three months ended September 30, 2000 compared to the three months ended
September 30,1999.
Income from operations. Income from operations increased 35% to $456,926
for the three months ended September 30, 2000 from $337,989 for the three months
ended September 30, 1999. The increase in income from operations resulted from
completing a technology transfer, which represented an increase in value. As
described below, in the three months ended September 30, 2000 we completed one
tax free merger in which we received securities valued at $447,720, compared to
one tax free merger valued at $225,720 for the three months ended September 30,
1999. Our Board of Directors values the shares we received. In our transactions
with:
o NuElectric Corporation, we received 546,000 shares of common stock of
NuElectric Corporation that were valued at the time of sale a $.82 per
share. ($447,720)
o Centrex, Inc., we received 684,000 shares of common stock of Centrex,
Inc., which were valued at the time of sale at $.33 per share. ($225,720)
For the three months ended September 30, 2000, income before income tax was
$250,165, and net income was $153,790, as compared to $206,787 and $157,972,
respectively, for the three months ended September 30, 1999. The net increase
(decrease) in net assets from operations was ($356,619), or ($.13) per share,
for the three months ended September 30, 2000 as compared to $527,837, or $.19
per share for the three months ended September 30, 1999.
Expenses. Total operating expenses for the three months ended September 30,
2000 were $206,761 consisting of salaries and wages of $92,157, professional
fees of $37,427, sales and marketing expenses of $37,089, and general and
administrative expenses of $40,088. These expenses compared to the $131,202
reported for the three months ended September 30,1999, consisting of salaries
and wages of $43,569, professional fees of $19,610, sales and marketing expenses
of $17,326, and general and administrative expenses of $50,697. The 58% increase
in total operating expenses was due to the increased number of employees and
outside services used to grow the business and our ongoing effort to develop the
UTEK U2Bsm brand. Sales and marketing expenses increased 114% to $37,089 for the
three months ended September 30, 2000 from $17,326 for the three months ended
September 30, 1999. The increase in sales and marketing expenses was largely due
to increased efforts to reach a broader market for technology transfers.
Salaries and wages costs increased 112% to $92,157 for the three months ended
September 30, 2000 from $43,569 for the three months ended September 30, 1999.
Increased salary costs reflect the addition of a full-time Manager of Technology
Alliances, an additional full-time Executive Assistant, and our President.
Professional fees increased 91% to $37,427 for the three months ended September
30, 2000 from $19,610 for the three months ended September 30, 1999. The
increase is largely due to the cost of preparing the corporate and subsidiary
tax returns, as well as additional attorneys' fees for work related to
intellectual property.
Income from operations can vary substantially on a quarterly basis due to
the small number and wide range of value of the transactions. Therefore,
quarterly income from operations should not be annualized to predict expected
annual results.
Page 14 of 42
Net Realized and Unrealized Gains and Income Taxes.
Net realized gains (losses) on investments amounted to $23,717 for the
three months ended September 30, 2000 and related to the August 2000 sale of
75,027 shares of its Lexon, Inc. common stock for $62,037 in cash. There were no
realized gains or (losses) for the three months ended September 30, 1999.
Unrealized appreciation (depreciation) of investments amounted to
$(534,126) for the three months ended September 30, 2000, a 244% decrease from
the unrealized appreciation of $369,865 for the three months ended September 30,
1999. The net unrealized losses consisted of valuation changes resulting from
the Board of Directors' valuation of the Company's assets (based on reports from
an independent valuation expert) for the three months ended September 30, 2000
related to our investments in Lexon, Inc., NuElectric, Inc. and Centrex, Inc.
Lexon, Inc. and NuElectric, Inc. are publicly traded securities that lost value
due to the existing volatile market. Centrex, Inc. is a private company whose
net worth warranted a reduction in value.
Net realized and unrealized gains can vary substantially, due to a variety
of factors, on a quarterly basis. Therefore, quarterly net realized and
unrealized gains should not be annualized to predict expected annual results.
Our effective tax rate was a provision of 38% for the nine months ended
September 30, 2000 compared with a provision of 24% for the nine months ended
September 30, 1999. Prior to October 16, 1999, the Company's business was
structured as a limited liability company ("LLC"). The LLC elected to be treated
as a partnership under the provisions of Subchapter K of the Internal Revenue
Code. Under those provisions, the LLC did not pay corporate income taxes on its
taxable income. Instead, the owners of the LLC were individually liable for
income taxes on the LLC's taxable income. As of October 16, 1999, the Company is
taxable as a C corporation. Therefore the provision for income taxes for the
three months and nine months ended September 30, 2000 are not comparable to the
provision for income taxes for the three and nine months ended September 30,
1999.
Nine months ended September 30, 2000 compared to the nine months ended September
30, 1999.
Income from operations. Income from operations increased 87% to $2,380,558
for the nine months ended September 30, 2000 from $1,272,041 for the nine months
ended September 30, 1999. The increased income from operations resulted from
completing four technology transfers with substantially more value as contrasted
with five transfers completed in the first nine months of 1999. As described
below, in the first nine months of 2000 we sold one portfolio company for
$200,000 and completed three tax-free mergers in which we received securities
valued at $2,154,192. Our Board of Directors values the shares we received. In
our transactions with:
o Graphco Technologies, Inc., we received 100,799 shares of common stock of
Graphco Technologies, Inc. which were valued at the time of sale at $9.45
per share; and
o Lexon, Inc., we sold one of our portfolio companies for $200,000. Under
the terms of the agreement, we received $50,000 on the date of the
transaction and $120,000 subsequently, with the remaining $30,000 plus
interest to be received by December 31, 2000.
o The Quantum Group, Inc., we received 931,000 shares of common stock of
The Quantum Group, Inc. that were valued at the time of sale at $.81 per
share.
o NuElectric Corporation, we received 546,000 shares of common stock of
NuElectric Corporation that were valued at the time of sale a $.82 per
share.
For the nine months ended September 30, 2000, income before income tax was
$1,224,407, and net income was $760,576, as compared to $717,955 and $782,122,
respectively, for the nine months ended September 30, 1999. The net increase
from operations was $400,788, or $.14 per share, for the nine months ended
September 30, 2000 as compared to $1,756,757, or $.66 per share for the nine
months ended September 30, 1999.
Expenses. Total operating expenses for the nine months ended September 30,
2000 were $1,156,151 consisting of salaries and wages of $255,452, professional
fees of $149,332, sales and marketing expenses of $561,246, and general and
administrative expenses of $190,121. These expenses compared to the $554,086
reported for the nine months ended September 30,1999, consisting of salaries and
wages of $120,265, professional fees of $197,601, sales and marketing expenses
of $103,128, and general and administrative expenses of $133,092. The 109%
increase in total operating expenses was due to the increased number of
Page 15 of 42
employees and outside services in addition to ongoing efforts to grow our
business and develop the U2B(sm) brand. Sales and marketing expenses increased
444% to $561,246 for the nine months ended September 30, 2000 from $103,128 for
the nine months ended September 30, 1999. The increase in sales and marketing
expenses was largely a result of fees paid to fund additional research for the
consummation of technology transfers. Salaries and wages costs increased 112% to
$255,452 for the nine months ended September 30, 2000 from $120,265 for the nine
months ended September 30, 1999. Increased salary costs reflect the addition of
a full-time Manager of Technology Alliances, an additional full-time Executive
Assistant, and our President. Professional fees decreased 24% to $149,332 for
the nine months ended September 30, 2000 from $197,601 for the nine months ended
September 30, 1999. The decrease is the result of the engagement of auditors,
attorneys and other professional service providers in 1999, which were engaged
for initial audit services and other accounting research, as well as
intellectual property and other legal research. Those services, although
recurring, were not as extensive for the nine months ended September 30, 2000 as
those necessary for the initial preparations for the public offering and other
reporting requirements.
Income from operations can vary substantially on a quarterly basis due to
the small number and wide range of value of the transactions. Therefore,
quarterly income from operations should not be annualized to predict expected
annual results.
Net Realized and Unrealized Gains and Income Taxes.
Net realized gains (losses) on investments amounted to $23,717 for the nine
months ended September 30, 2000 and related to the August 2000 sale of 75,027
shares of its Lexon, Inc. common stock for $62,037 in cash. There were no
realized gains or (losses) for the nine months ended September 30, 1999.
Unrealized appreciation (depreciation) of investments amounted to
$(383,505) for the nine months ended September 30, 2000, a 139% decrease from
$974,635 for the nine months ended September 30, 1999. The net unrealized losses
consisted of valuation changes resulting from the Board of Directors' valuation
of the Company's assets (based on reports from an independent valuation expert)
for the nine months ended September 30, 2000. The decrease is a direct result of
our investments in Lexon, Inc., NuElectric, Inc. and Centrex, Inc. Lexon, Inc.
and NuElectric, Inc. are publicly traded securities that lost value due to the
existing volatile market. Centrex, Inc. is a private company whose net worth
warranted a reduction in value.
Net realized and unrealized gains can vary substantially on a quarterly
basis. Therefore, quarterly net realized and unrealized gains should not be
annualized to predict expected annual results.
Our effective tax rate was a provision of 38% for the nine months ended
September 30, 2000 compared with a benefit of 9% for the nine months ended
September 30, 1999. The benefit recorded in 1999 is due to tax losses generated
by certain of our subsidiaries, while the income we generated (during the period
of time in 1999 when we were structured as an LLC) passed through to our
members.
Liquidity and Capital Resources
Net assets increased 12% to $3,685,241 at September 30, 2000 from
$3,284,453 at December 31, 1999, attributable to income from operations less the
unrealized depreciation of non-controlled affiliate investments.
At September 30, 2000 the Company had $21,334 in cash and cash equivalents.
On October 25, 2000 the Company completed its initial public offering. Based
upon our anticipated capital needs for operations, general corporate purposes,
and future research and development agreements with universities to complete
technology transfer transactions, management believes that the net proceeds of
the offering (approximately $4,800,000) will be sufficient to meet our funding
requirements.
On September 13, 2000 the Company secured a $150,000 revolving line of
credit with a local financial institution. Advances under the line of credit
bear interest at the financial institutions prime rate, currently 9.5% per
annum. The line of credit is due on demand and is secured by a pledge of a
portion of our investments in non-controlled affiliates and the personal
guarantees of the chief executive officer, a director and a shareholder. The
Company had used $60,975 of the line for operations at September 30, 2000.
Page 16 of 42
Impact of New Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be measured
at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for financial statements beginning in 2001. The Company is currently
studying the future effects of adopting this statement. Adoption of statement
No. 133 is not expected to have a significant effect on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and
amended it in March and June 2000 with respect to the effective dates. The
Company believes its revenue recognition practices for the sale of technology
rights meet these requirements. The Company is required to adopt the provisions
of this Bulletin in the fourth fiscal quarter of 2000 and is currently in the
process of assessing the impact of its adoption on its revenue sources.
Investment Considerations
Our quarterly results could fluctuate.
The Company's quarterly operating results could fluctuate due to a number
of factors. These factors include the small number and range of values of the
transactions that are completed each quarter, the timing of the recognition of
unrealized gains and losses, the degree to which we encounter competition in our
markets, the volatility of the stock market as it relates to our unrealized
gains and losses, as well as other general economic conditions. As a result of
these factors, quarterly results are not necessarily indicative of the Company's
performance in future quarters.
Our investment model is speculative in nature and our history of investments
using the model is limited.
Our investment model is highly speculative since it involves making
investments in new development stage companies and having those companies invest
in new, untested technology. Furthermore, we have only been using our investment
model for a relatively short period of time and have little or no historical
information upon which to judge whether or not the model is successful. We
cannot assure you that our investment model will be successful or that any of
our investments will be successful.
Our portfolio companies are development stage companies dependent upon the
successful commercialization of new technologies. Each of our investments in
portfolio companies is subject to a high degree of risk and we may lose all of
our investment in a portfolio company if it is not successful.
We invest in development stage companies that our management believes can
benefit from our expertise in technology transfer. Development stage companies
are subject to all of the risks associated with new businesses. In addition, our
portfolio companies are also subject to the risks associated with research and
development of new technologies. These risks include the risk that new
technologies cannot be identified, developed or commercialized, may not work, or
are obsolete. Our portfolio companies must successfully acquire licenses to new
technologies, and in some cases further develop new technologies, and then
complete a merger transaction for our investments to be successful. We cannot
assure you that any of our investments in our portfolio companies will be
successful. Our portfolio companies will be competing with larger, established
companies, with greater access to, and resources for, further development of
these new technologies. In addition, for an investment to be successful, our
portfolio companies often must develop the technology and identify buyers who
are willing to acquire the technology, in exchange for their common stock or
other consideration. We cannot assure you that any of our portfolio companies
will be successful or that we will successfully sell our portfolio companies or
sell or relicense the technology rights held by our portfolio companies. We may
lose our entire investment in any or all of our portfolio companies.
Page 17 of 42
Our portfolio companies depend upon the research and development activities of
universities, over which neither we nor our portfolio companies have any
control.
Our portfolio companies depend upon the research activities of universities
and government research facilities. Neither we, nor our portfolio companies,
have any control over the research activities of universities and research
laboratories. In addition, we have no control over what types of research are
presented to us by universities and government research facilities for
evaluation and commercial development. Further, the licenses to technologies
that our portfolio companies obtain may be non-exclusive. In the event that we
make an investment in a portfolio company, and we are unable to locate a new
technology to be acquired by the portfolio company, we could lose our entire
investment.
Technologies acquired by our portfolio companies may become obsolete before we
can sell the portfolio companies.
Neither we nor our portfolio companies have any control over the pace of
technology development. There is a significant risk that a portfolio company
could acquire the rights to a technology that is currently or is subsequently
made obsolete by other technological developments. We cannot assure you that any
of our portfolio companies will successfully acquire, develop and transfer any
new technology.
The patents on the technologies that our portfolio companies license may
infringe upon the rights of others and patent applications that the universities
have submitted may not be granted.
Many of our portfolio companies rely upon patents to protect the
technologies that they license. If the patents on technologies that they license
are found to infringe upon the rights of others, or are held to be invalid, then
the licenses to such technologies will have little or no value to our portfolio
companies. In addition, if a patent licensed by a portfolio company is found to
infringe upon the rights of others, the portfolio company may be liable for
monetary damages. Our portfolio companies are dependent upon the universities or
government research facilities to file, secure and protect patents on licensed
technologies. In the event that a patent is challenged or violated, our
portfolio companies may not have the financial resources to defend the patent
either in the preliminary stages of litigation or in court. In addition, if our
portfolio companies acquire licenses to technologies with patents pending, we
cannot assure you that such patents will be granted.
Technologies that have been developed with funding from the United States
Government may have limits on their use which could affect the value of the
technology to a portfolio company.
Technologies developed with funds provided by the United States Government
have restrictions regarding where they may be sold and have limits on
exclusivity. A portfolio company that acquires a technology developed with
federal funding may be limited as to where it can sell the technology. The
technology may only be allowed to be sold or manufactured within the United
States. In addition, under Section 23 of the United States Code, the Government
has the right to use technologies that it has funded regardless of whether the
technology has been licensed to a third party. Such regulations may limit the
marketability of a technology and therefore reduce the value of the technology
to our portfolio companies.
We may need to make additional investments in our portfolio companies to provide
them with capital to further develop technologies they license.
We may have to make additional investments in portfolio companies to
protect our initial investments. We retain the discretion to make any additional
investments as our management determines. The failure to make such additional
investments may jeopardize the continued viability of a portfolio company and
our initial (and subsequent) investments. Moreover, additional investments may
limit the number of companies in which we can make initial investments. We have
no established criteria in determining whether to make an additional investment
except that our management will exercise its business judgment and apply
criteria similar to those used when making the initial investment. We cannot
assure you that we will have sufficient funds to make any necessary additional
investments which could adversely affect our success and result in the loss of a
substantial portion or all of our investment in a portfolio company.
Page 18 of 42
We may be unable or decide not to make additional investments in our portfolio
companies which could result in our losing our initial investment if the
portfolio company fails or having our ownership and control diluted if a
portfolio company seeks additional funds from third party investors.
Our agreement with the underwriters restricts the size of our investment in
any single portfolio company and, as a result, could prohibit an additional
investment in a portfolio company in the event that our initial investment
represented 10% or more of our assets. Even if we are able to make an additional
investment in a portfolio company within the prescribed limits, we may elect not
to make an additional investment in a portfolio company in order to limit the
size of our investment which is at risk. It is also our policy not to make loans
to our portfolio companies which in the aggregate exceed 25% of our net assets.
Therefore, if a portfolio company requires additional funds to continue
operating, and we cannot or choose not to make an additional investment, our
investment in the portfolio company may decline in value. In addition, to the
extent that a portfolio company seeks additional financing from third parties,
our ownership interest and control of the portfolio company may be diluted.
The securities we hold in our portfolio companies are illiquid and we may not be
able to sell the portfolio company securities we hold for amounts equal to their
recorded value, if at all.
Our portfolio companies are all private entities and we acquire securities
in our portfolio company in private transactions. As a result, all of the
securities we hold in our portfolio companies are restricted securities, as
defined under the Securities Act and are subject to restrictions on resale.
Furthermore, we do not anticipate that a public market will exist for any of the
securities we hold in our portfolio companies. Therefore, any sale or other
transfer of the securities we hold in portfolio companies will be made in
private transactions and we cannot assure you that we will be able to sell our
portfolio company securities for amounts equal to the values that we have
ascribed to them.
We are dependent on merger transactions, structured as tax-free exchanges to
sell our portfolio companies. A change in the Internal Revenue Code affecting
tax-free exchanges could reduce our ability to sell our portfolio companies.
We do not anticipate selling any of our portfolio companies, except in
connection with merger transactions. We anticipate that most, if not all, of
such merger transactions will be structured as tax free exchanges under Section
368 of the Internal Revenue Code. If Section 368 were to be amended so that we
were no longer able to structure our merger transactions as tax free exchanges,
we may not be able to sell our portfolio companies on commercially reasonable
terms. If we are unable to successfully sell a portfolio company in a merger
transaction, we may lose our investment.
We have been dependent on a small number of companies controlled by the same
investor group for the purchase of some of our portfolio companies. We have only
limited experience selling our portfolio companies and of the ten transactions
that we have completed, as of September 30, 2000, six have been to companies
controlled by the same group of investors.
At September 30, 2000, we have completed only ten transactions, including
nine mergers and one stock sale, wherein we sold portfolio companies to other
companies and six of these sales have been made to companies that are controlled
by the same investor group. As a result, we have only had the benefit and
experience of negotiating such agreements with a small number of investors. We
cannot assure you that we will be able to successfully negotiate merger
transactions for the sales of our portfolio companies in the future.
The agreements we have with universities do not guarantee that the universities
will grant licenses to our portfolio companies.
The agreements that we have entered into with universities provide us with
the ability to evaluate the commercial potential for technologies at an early
stage of development. These agreements however, do not provide us with any
guarantee that following our evaluation, a university will grant us a license.
As a result, we may expend time and resources evaluating a technology and not be
able to secure a license to such technology for one of our portfolio companies.
Page 19 of 42
We are exposed to significant asset concentration risk.
As of September 30, 2000, six out of the ten consummated transactions have
been with "merger parties" controlled by a similar group of investors. The value
of these investments represented approximately 35 % of our total net assets as
of September 30, 2000.
We are dependent upon our management's ability to identify acquirers for our
portfolio companies.
Our investment strategy is based upon selling our portfolio companies in
stock for stock exchanges to public companies that wish to acquire the
technologies owned by our portfolio companies but which themselves may be
neither operating nor established. We do not expect to sell any portfolio
company securities to the public. Therefore, if we fail to identify an acquirer
for a portfolio company, we do not expect that we will be able to sell the
portfolio company securities to the public. Therefore, our entire investment in
the portfolio company could be lost.
We are dependent upon and have little or no control over the efforts of
companies that acquire our portfolio companies to successfully commercialize the
technologies they acquire.
When we sell a portfolio company, we receive common stock from the
acquiring company based upon the mutually agreed upon values of the portfolio
company, its licensed technology and the acquiring company. We then intend to
sell the securities that we acquire in exchange for our portfolio companies at
some time in the future. Therefore, our ability to profit from an investment in
a portfolio company is ultimately dependent upon the price we receive for the
shares of the acquiring company. In most cases, the companies that acquire our
portfolio companies will be dependent upon successfully commercializing the
technologies they acquire. We do not have control over the companies that
acquire our portfolio companies and we do not intend to provide them with
managerial assistance. These operating companies may face intense competition,
including competition from companies with greater financial resources, more
extensive research and development, manufacturing, marketing and service
capabilities and a greater number of qualified and experienced managerial and
technical personnel. They may face additional risks of product and technological
obsolescence and government regulation over which we will have little or no
control. They may need additional financing which they are unable to secure and
we are unable or unwilling to provide or they may be subject to adverse
developments unrelated to the technologies they acquire. We cannot assure you
that any of the companies that acquire our portfolio companies will be
successful or that we will be able to sell the securities we receive at a profit
or for sufficient amounts to even recover our initial investment in the
portfolio company.
The companies that merge with our portfolio companies are development stage
companies and, as a result, the value of the securities that we receive in such
merger transactions are subject to significant fluctuations.
Historically we have merged, and we intend to continue to merge, our
portfolio companies with companies in related fields that are development stage
companies. As a result, the securities that we receive when we merge a portfolio
company are subject to all of the risks associated with securities of
development stage companies. The values of these securities may be subject to
significant fluctuations. We cannot assure you that when we sell these
securities, we will receive the value ascribed to the securities either at the
time of acquisition or during subsequent valuation periods.
Our investments in our portfolio companies may be concentrated in one or more
industries and if these industries should decline or fail to develop as expected
our investments will be subject to loss.
Our investments in our portfolio companies may be concentrated in one or
more industries. This concentration will mean that our investments will be
particularly dependent on the development and performance of those industries.
Accordingly, our investments may not benefit from any advantages which might be
obtained with greater diversification of the industries in which our portfolio
companies operate. If those industries should decline or fail to develop as
expected, our investments in our portfolio companies in those industries will be
subject to loss.
Page 20 of 42
Our investments in our portfolio companies are not made on a multi-tiered basis
and are subject to loss.
Substantially all of our portfolio companies are early stage companies. We
may make substantial investments in our portfolio companies to enable them to
conduct initial research, development and acquisition activities. These
investments are not made in companies at different stages of development and,
accordingly, our investments do not benefit from any advantages which might be
obtained by making investments on a multi-tiered basis. We cannot assure you
that any or all of our portfolio companies will find or acquire new
technologies. If any or all of them do find or acquire new technologies, we
cannot give you any assurance that the portfolio companies will be able to find
suitable merger partners or other suitable purchasers of the technologies. As a
result, any or all of our portfolio companies may use the proceeds of our
investments to pay the costs and expenses of researching, developing or
acquiring technologies.
The securities that we receive in exchange for our portfolio companies will be
subject to restrictions on resale which will limit our ability to sell these
securities.
As of September 30, 2000, all of the securities we have received in
exchange for our portfolio companies are "restricted securities," as such term
is defined under Rule 144. These shares are restricted securities because they
were issued in private transactions not involving a public offering and may not
be sold in the absence of registration other than in accordance with Rule 144 or
Rule 701 under the Securities Act or another exemption from registration. As a
result of such restrictions, our ability to sell or otherwise transfer the
securities we hold in our portfolio companies will be limited. We cannot assure
you that we will be able to receive the recorded value of our portfolio company
securities in merger transactions.
We may not be able to merge our portfolio companies with publicly traded
entities and so we may receive non-publicly traded securities in exchange for
our portfolio companies. We may be required to sell the securities we receive at
a substantial discount to their appraised value if no public market exists.
As of September 30, 2000, we have completed ten sales of portfolio
companies. Of these sales, four have been to public companies, and the remainder
have been to non-public companies. We are substantially dependent upon the
ability of non-public acquirers of our portfolio companies to implement a plan
which would facilitate a trading market for their securities or other strategy
which would allow for the potential sale of our ownership interest. In addition,
to the extent that we own more than 10% of an acquiror's shares, we may be
deemed to be an affiliate of the acquiror which would limit our ability to
dispose of securities we receive for our portfolio companies. Further, our
ability to sell the securities we receive for our portfolio companies may be
limited by, and subject to, the lack of or limited nature of a trading market
for the securities and the volatility of the stock market as a whole. Such
limitations could prevent or delay any sale of our investments or significantly
reduce the amount of proceeds, if any, that might otherwise be realized
therefrom.
The values we place on our investments may not accurately reflect their future
value or the value that we will receive for them when we sell them.
At September 30, 2000 and December 31, 1999 respectively, equity securities
amounting to $4,110,224 or 111.5% of net assets, $2,594,931 or 79% of net
assets, respectively, have been valued at fair value as estimated by our Board
of Directors. As a general matter, restricted securities and securities without
an active trading market are more difficult to accurately value than
unrestricted, actively traded securities of public companies. We are required by
the 1940 Act to determine the value of our illiquid securities on a quarterly
basis and make a good faith determination that fair value has been ascribed to
the aforementioned investments. See "Valuation of Portfolio Securities" and our
financial statements. Generally, such investments are valued on a "going
concern" basis without giving effect to any disposition costs. If we were
required to sell any of such investments, there is no assurance that the fair
value, as determined by management, would be obtained. If we were unable to
obtain fair value for such investments, there would be an adverse effect on our
net asset value and on the price of our common stock.
The net asset value (book value) of the shares of our common stock is
significantly less than the current market price of the shares.
The market price of our shares as of the date of this filing is
significantly greater than our net asset value.
Page 21 of 42
Your ownership interest and the value of the shares of our common stock may be
diluted by the exercise of stock options and warrants we have granted or may
grant in the future.
We have adopted employee stock option plans under which certain of our
employees and directors have been granted options to purchase up to 375,000
shares of our common stock. We have also reserved an additional 375,000 shares
of our common stock for issuance under our employee stock option plans to key
employees and directors. In addition, we have issued warrants to the
underwriter, upon payment of the purchase price of $.03 per warrant, to purchase
100,000 shares of common stock at an exercise price of $9.90 per share. The
issuance and sale of these shares of common stock will dilute the ownership
interest of investors and may have an adverse effect on the price of our common
stock.
If our underwriter does not act as a market maker for our common stock, you may
have more difficulty selling your shares.
The underwriter of our IPO acted as a market maker for our common stock.
However, the underwriter is not obligated to act as a market maker. If our
underwriter does not act as a market maker for our common stock, you may have
more difficulty selling your shares. In addition, our shares may experience
greater fluctuations in price. Our shares may also be thinly traded and a low
amount of trading may significantly adversely affect the price of our shares.
We depend upon Clifford M. Gross and Uwe Reischl for our investment decisions in
portfolio companies.
We rely, and will continue to be substantially dependent upon, the
continued services of our management, principally our Chief Executive Officer
and Chairman of the Board, Clifford M. Gross, and our President Uwe Reischl. Our
management is responsible for the review of potential investments by and the
provision of advice to our portfolio companies regarding the acquisition of
technologies and additional research and development. We also depend upon our
management's key contacts with universities, to maintain our access to new
technologies, and their relationships with companies in the private sector in
order to effectuate the sale of our portfolio companies.
Any transactions we engage in with affiliates may involve conflicts of interest.
The 1940 Act restricts transactions between us and any of our affiliates,
including our officers, directors or employees and principal stockholders. In
many cases, the 1940 Act prohibits transactions between such persons and
ourselves unless we first apply for and obtain an exemptive order from the
Securities and Exchange Commission. Delays and costs in obtaining necessary
approvals may decrease or even eliminate any profitability of such transactions
or make it impracticable or impossible to consummate such transactions. These
affiliations could cause circumstances which would require the Commission's
approval in advance of proposed transactions by us in portfolio companies.
Further, depending upon the extent of our management's influence and control
with respect to such portfolio companies, the selection of the affiliates of
management to perform such services may not be a disinterested decision, and the
terms and conditions for the performance of such services and the amount and
terms of such compensation may not be determined in arm's-length negotiations.
We have a limited amount of funds available for investment in portfolio
companies and as a result, our investments will lack diversification.
Based on the amount of our existing available funds, together with the
funds the Company realized from its subsequent IPO, it is unlikely that we will
be able to commit our funds to investments in, and the acquisition of,
securities of a large number of companies. We intend to continue to operate as a
non-diversified investment company within the meaning of the 1940 Act.
Prospective investors should understand that our current investments are not,
and in the future may not be, substantially diversified. We will not be able to
achieve the same level of diversification as larger entities engaged in similar
venture capital activities. Therefore, our assets may be subject to greater risk
of loss than if they were more widely diversified, because the failure of one or
more of our limited number of investments could have a material adverse effect
on our financial condition.
Page 22 of 42
We are subject to government regulations because of our status as a business
development company.
We have elected to be treated as a BDC under the Small Business Investment
Incentive Act of 1980, which modified the 1940 Act. Although the Incentive Act
relieves BDCs from compliance with many of the provisions of the 1940 Act, the
Incentive Act imposes on BDCs greater restrictions on permitted types of
investments. Moreover, the applicable provisions of the 1940 Act impose numerous
restrictions on our activities, including restrictions on the nature of our
investments and transactions with affiliates. We cannot assure you that this
legislation will be interpreted or administratively implemented in a manner
consistent with our objectives and manner of operations. Upon approval of a
majority of our stockholders, we may elect to withdraw our status as a BDC. If
we elect to withdraw our election, or if our election to operate as a BDC is
rejected, or if we otherwise fail to qualify as a BDC, we may be subject to the
substantially greater regulation under the 1940 Act. Compliance with such
regulations would significantly increase our costs of doing business.
We have a limited operating history upon which you can assess our prospects and
we are subject to the risks associated with any new business.
As a result of our short history of operations, we have only consummated
transactions with a very small number of companies. Therefore, there is little
historical information regarding our operations upon which you can base your
investment decision. In addition, we are subject to all of the business risks
and uncertainties associated with any new business enterprise. We cannot assure
you that our investment objective will be attained.
Our management has limited experience operating a business, and managing and
operating a business development company, and has little or no experience in
corporate finance and corporate mergers.
The members of our management have been engaged in the operation of our
business for a short period of time and so have limited experience. Some of our
directors and executive officers only have experience in science and research.
Furthermore, we commenced operations as a business development company in
October 1999 and so our directors and executive officers have only had
experience operating a business development company since October 1999. In
addition, our management has had limited experience in the areas of corporate
finance and corporate mergers.
Our management has broad discretion in investing the proceeds from our recent
IPO.
Except as set forth in our prospectus under "Use of Proceeds" and subject
to our fundamental policies, our management has broad discretion in the
application of the proceeds of this offering. We have not identified any
particular use for the net proceeds of this offering other than to make
investments on the basis of opportunities as they may arise. Accordingly,
purchasers of our securities must rely on the ability of management in making
portfolio investments consistent with our objectives. Investors will not have
the opportunity to evaluate personally the relevant economic, financial and
other information which will be utilized by management in deciding whether or
not to make a particular investment.
There are no significant barriers to entry to our business and we expect to face
significant competition as new competitors enter the market.
We expect that if our investment model proves to be successful, our current
competitors in the technology transfer market may duplicate our strategy and new
competitors may enter the market. We compete against other technology transfer
companies, some of which are much larger and have significantly greater
financial resources than we do. In addition, these companies will be competing
with our portfolio companies to acquire technologies from universities and
government research laboratories. We cannot assure you that we will be able to
successfully compete against these competitors in the acquisition of technology
licenses, funding of technology development or marketing of portfolio companies.
One of our current stockholders has significant influence over our management
and affairs.
Clifford M. Gross, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 51% of our common stock. Therefore, Dr. Gross
will be able, among other things, to elect directors, change our investment
policies, and withdraw our election to operate as a BDC.
Page 23 of 42
We rely on our Board of Directors to value each investment quarterly. Most of
our securities do not have readily ascertainable market values.
Pursuant to the requirements of the Investment Company Act of 1940 ("1940
Act"), the Board of Directors (with the report of an independent valuation
expert) is required to value each investment quarterly, and we are required to
carry our investments at fair value as determined by the Board of Directors. We
adjust quarterly the valuation of our investments to reflect the Board of
Directors' estimate of the current realizable value of each investment in our
portfolio. Without a readily ascertainable market value, the estimated value of
our portfolio of equity securities may differ significantly from the values that
would be placed on the portfolio if there existed ready market equity
securities. Any changes in estimated value are recorded in the Company's
Statements of Operations as "Net realized and unrealized gains (losses)".
ITEM 3. Qualitative and Quantitative Disclosures About Market Risks
There has been no material change in the qualitative and quantitative
disclosures about market risk since December 31, 1999.
Page 24 of 42
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
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) List of exhibits.
3 (i)(1) Articles of Amendment and Restatement of the Articles of
Incorporation
27 Financial Data Schedule
10 Merger agreement with Torvec, Inc.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three months
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTEK CORPORATION
----------------
(Registrant)
Date: 12-8-00 /s/ CAROLE R. MASON
------------------- --------------------------
Carole R. Mason, Secretary
Page 26 of 42
EXHIBITS
3(i) Articles of Incorporation.
Incorporated by reference to exhibit 3.1 with UTEK Corporation's
registration statement on Form N-2 filed on the Company's behalf with the
Commission on October 2,2000 (File No. 333-93913)
Page 27 of 42