| As a result, there can be no assurance that we will achieve our investment objective |
| You should consider carefully the risks described below |
| In addition to the risk factors described below, other factors that could cause actual results to differ materially include: • changes in the economy; • risk associated with possible disruption in our operations due to terrorism; • future regulatory actions and conditions in our operating areas; and • other risks and uncertainties as may be detailed from time to time in our public announcements and SEC filings |
| Our investment portfolio is highly concentrated and, as a result, our financial results are largely dependent upon the performance of certain significant investments |
| Our investment portfolio is highly concentrated and, as a result, our financial results are largely dependent upon the performance of certain significant investments; principally, Xethanol Corp, KP Renewables, plc, Industrial Biotechnology Corp, UTEK Real Estate Holdings, Inc, Trio Industries Group, Inc, and Fuel FX International, Inc |
| These six investments totaled dlra19dtta7 million in fair value at December 31, 2005, representing 51prca of our investments and 44prca of net assets |
| As a result, if our investment in one or more of these companies fails to perform as expected, our financial results could be negatively affected |
| Our quarterly and annual results could fluctuate significantly |
| Our quarterly and annual operating results could fluctuate significantly due to a number of factors |
| These factors include the small number and range of values of the transactions that are completed each quarter, fluctuations in the values of our investments, 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 and its impact on our unrealized gains and losses, as well as other general economic conditions |
| As a result of these factors, quarterly and annual results are not necessarily indicative of our performance in future quarters and years |
| Our investment model is highly speculative in nature |
| Our investment model is highly speculative because it involves making investments in new development stage companies and having those companies invest in new, untested technology |
| 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 become obsolete |
| Our portfolio companies must successfully acquire licenses to new technologies, and in some cases further develop new technologies |
| We cannot assure 8 ______________________________________________________________________ [37]Table of Contents 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 |
| We may lose our entire investment in any or all of our portfolio companies |
| Our portfolio companies depend upon the research and development activities of universities, medical research centers and federal research laboratories, over which neither our portfolio companies nor we have any control |
| Our portfolio companies depend upon the research activities of universities, medical research centers and federal research laboratories |
| Neither we, nor our portfolio companies, have any control over the research activities of universities, medical research centers and federal research laboratories |
| As neither we nor our portfolio companies provide supervision of any universities, medical research centers and federal research laboratories, we cannot ensure that the research will be done properly and that the results, which we may license, will be reproducible |
| In addition, we have no control over what types of technologies are presented to us by universities, medical research centers and federal research laboratories for evaluation and commercial development |
| Further, the licenses to technologies that our portfolio companies obtain may be non-exclusive |
| Technologies acquired by our portfolio companies may become obsolete before we can sell their securities |
| Neither our portfolio companies nor we 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 |
| The patents on the technologies that our portfolio companies license may infringe upon the rights of others, and patent applications that have been 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 to a technology 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, medical centers 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 |
| If our primary investments are deemed not to be qualifying assets, we could be precluded from investing in the manner described in this Annual Report on Form 10-K or deemed to be in violation of the 1940 Act |
| As a BDC, we must not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70prca of our total assets are qualifying assets |
| For a discussion of the principal categories of “qualifying assets,” see “Business - Regulation as a Business Development Company |
| ” Currently, if we acquire debt or equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets cannot be treated as qualifying assets |
| This result is dictated by the definition of “eligible portfolio company” under the 1940 Act, which in part looks to whether a company has outstanding marginable securities |
| Amendments promulgated in 1998 by the Federal Reserve expanded the definition of marginable securities under the Federal Reserve’s margin rules to include any non-equity security |
| Thus, any debt securities issued by any entity are marginable securities under the Federal Reserve’s current margin rules |
| As a result, the staff of the SEC has raised the question to the BDC industry as to whether a private company that has outstanding debt securities would qualify as an “eligible portfolio company” under the 1940 Act |
| The SEC issued proposed rules which would define an eligible portfolio company as any company that does not have securities listed on a national securities exchange or association |
| If adopted, the effect of these rules would be to eliminate confusion regarding whether a privately-owned company that issued debt would qualify as an “eligible portfolio company |
| ” Unless and until the proposed rules described above are adopted by the SEC, if there were a court ruling or regulatory decision that provided that a privately-owned company that has outstanding debt securities (none of which is listed on a national securities exchange or association) was not an eligible portfolio company, we could be precluded from investing in the manner described in this Annual Report on Form 10-K or deemed to be in violation of the 1940 Act |
| 9 ______________________________________________________________________ [38]Table of Contents Technologies that have been developed with funding from the US 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 US 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 US In addition, the US 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 be unable or decide not to make additional cash investments in our portfolio companies which could result in our losing our initial investment if the portfolio company fails |
| We may have to make additional cash investments in our portfolio companies to protect our overall investment value in the particular company |
| 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 |
| The securities we hold in our portfolio companies are subject to restriction on resale, and we may not be able to sell the securities we hold for amounts equal to their recorded value, if at all |
| Our portfolio companies are mainly thinly traded public companies or private companies, and we acquire securities in our portfolio companies in private transactions |
| As a result, substantially all of the securities we hold in our portfolio companies are subject to legal restrictions on resale |
| Furthermore, our ability to sell the securities in our portfolio may be limited by, and subject to, the lack of or limited nature of a trading market for such securities |
| Therefore, 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 or at the time we desire to sell |
| We are dependent on sales transactions, structured as tax-free exchanges, to sell the new companies we form to acquire new technologies |
| A change in the Internal Revenue Code affecting tax-free exchanges could reduce our ability to sell such companies |
| We do not anticipate selling any of the new companies we form to acquire new technologies 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 such companies on commercially reasonable terms |
| If we are unable to successfully sell the new companies we form to acquire new technologies in a merger transaction structured as a tax-free exchange, we may be required to significantly alter the use of our U2B^® investment process |
| The agreements we have with universities, medical research centers and federal research laboratories do not guarantee that such entities will grant licenses to us or other companies |
| The agreements that we have entered into with universities, medical research centers and federal research laboratories 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, the university, medical research center or federal research laboratory will grant a license to us or other companies |
| As a result, we may expend time and resources evaluating a technology and not be able to secure a license to such technology |
| We are dependent upon our management’s ability to identify portfolio companies to acquire the new companies we form to acquire new technologies |
| Our investment strategy is based upon selling the new companies we form to acquire new technologies in stock for stock exchanges to companies that wish to acquire the technologies owned by our newly formed companies but which may be neither operating nor established |
| We do not expect to sell any securities of the new companies we form to acquire new technologies to the public |
| Therefore, if we fail to identify a company to acquire our newly formed companies, our entire investment could be lost |
| 10 ______________________________________________________________________ [39]Table of Contents We are dependent upon and have little or no control over the efforts of portfolio companies to successfully commercialize the acquired technologies or to retain the licenses to such technologies |
| We receive common stock from the portfolio company based upon the mutually agreed upon values of the new companies we form to acquire new technologies, its licensed technology and the portfolio company |
| We then intend to sell the securities that we acquire in exchange for the new companies we form to acquire new technologies at some time in the future |
| Therefore, our ability to profit from an investment is ultimately dependent upon the price we receive for the shares of the portfolio company |
| In most cases, the companies that acquire the new companies we form to acquire new technologies will be dependent upon successfully commercializing the technologies they acquire |
| We do not have control over the portfolio companies that acquire the new companies we form to acquire new technologies |
| These portfolio 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 need additional financing which they are unable to secure and which we are unable or unwilling to provide, or they may be subject to adverse developments unrelated to the technologies they acquire |
| They may lose the rights granted to them for the technology for failure to comply with the license agreement |
| We cannot assure you that any of the 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 companies or that our portfolio companies will not take actions that could be detrimental to our investment |
| 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 lost |
| 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 |
| Substantially all of our portfolio investments are recorded at fair value as determined in good faith by our board of directors, and as a result, there is uncertainty regarding the value of our portfolio investments |
| At December 31, 2005 and December 31, 2004, investments amounting to dlra26dtta4 million or 59dtta4prca of our net assets and dlra14dtta0 million or 60dtta5prca of our net assets, respectively, have been valued at fair value as determined by our board of directors |
| Pursuant to the requirements of the 1940 Act, our board of directors is responsible for determining in good faith the fair value of our investments for which market quotations are not readily available |
| Because there is typically no readily available market value for the investments in our portfolio, our board of directors determines in good faith the fair value of these investments pursuant to a valuation policy and a consistently applied valuation process |
| There is no single standard for determining fair value in good faith |
| As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make |
| If we were required to sell any of such investments, there is no assurance that the fair value, as determined by the board of directors, 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 |
| We adjust quarterly the valuation of our portfolio to reflect the board of directors’ determination of the fair value of each investment in our portfolio |
| Any changes in fair value are recorded in our statement of operations as “Change in net unrealized appreciation (depreciation) of investments |
| ” Our business depends on key personnel |
| We rely on, and will continue to be substantially dependent upon, the continued services of our management, principally our Chief Executive Officer and Chairman, Clifford M Gross |
| Our management team is responsible for the review of potential investments by and the provision of advice to companies regarding the acquisition of technologies and additional research and development |
| We also depend upon our management’s key contacts with universities, medical research centers and federal research laboratories to maintain our access to new technologies and our relationships with companies in the private sector in order to effectuate the sale of the new companies we form to acquire new technologies |
| 11 ______________________________________________________________________ [40]Table of Contents 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, 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 |
| 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 would have a material adverse effect on our financial condition and the price of our common stock |
| If our portfolio companies fail to comply with the requirements of the forum in which their securities are quoted or the trading market on which their securities are listed, the liquidity and prices of our investments would be materially adversely affected |
| At December 31, 2005, dlra22dtta9 million or 47prca of our total assets consisted of investments at value in companies whose securities are quoted on the OTC Bulletin Board or are listed on the American Stock Exchange or other similar markets |
| In order for the securities of our portfolio companies to be eligible for continued listing on those markets or quotation systems, our portfolio companies must remain in compliance with certain listing standards |
| Among other things, these standards require that our portfolio companies remain current in their filings with the SEC and comply with certain of the provisions of the Sarbanes-Oxley Act of 2002 |
| If our portfolio companies are no longer in compliance with these and other related requirements, there would be no forum or market for the quotation or listing of the securities of our portfolio companies |
| Without such a forum or market, the liquidity and prices of our investments would be materially adversely affected |
| We cannot give any assurance that our portfolio companies will remain in compliance with the requirements to be quoted on the OTC Bulletin Board or listed on the American Stock Exchange or any other market or quotation system |
| Changes in the law or regulations that govern us could have a material impact on our operations |
| Any change in the law or regulations that govern our business could have a material impact on us or on our operations |
| Laws and regulations may be changed from time to time, and the interpretations of the relevant laws and regulations also are subject to change |
| We are subject to certain risks associated with our foreign operations and investments |
| We have operations in the United Kingdom and Israel and make investments in foreign companies |
| As of December 31, 2005, approximately 7dtta7prca of our assets were comprised of assets in foreign operations and investments in foreign companies |
| Certain risks are inherent in foreign operations, including: • difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • foreign customers may have longer payment cycles than customers in the US; • tax rates in certain foreign countries may exceed those in the US, and foreign earnings may be subject to withholding requirements, exchange controls or other restrictions; • general economic and political conditions in countries where we operate may have an adverse effect on our operations; • exposure to risks associated with changes in foreign exchange rates; • difficulties associated with managing a large organization spread throughout various countries; • difficulties in enforcing intellectual property rights; and • required compliance with a variety of foreign laws and regulations |
| Investing in foreign companies may expose us to additional risks not typically associated with investing in US companies |
| These risks include changes in foreign exchange rates, exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility |
| 12 ______________________________________________________________________ [41]Table of Contents As we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks |
| We cannot assure you that these and other factors will not have a material adverse effect on our international operations or our business as a whole |
| One of our current stockholders has significant influence over our management and affairs |
| Clifford M Gross, our Chief Executive Officer and Chairman, beneficially owns approximately 25prca of our common stock as of December 31, 2005 |
| Therefore, Dr |
| Gross may be able to exert influence over our management and policies |
| Gross may acquire additional equity in our company in the future |
| The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of the sale of our company and might ultimately affect the market price of our common stock |
| We may need additional capital in the future, and it may not be available on acceptable terms |
| We have historically relied on outside financing and cash flow from the sale of our investments to fund our operations, capital expenditures and expansion |
| However, we may require additional capital in the future to fund our operations, finance our investments in portfolio companies, or respond to competitive pressures or strategic opportunities |
| We cannot assure you that additional financing will be available on terms favorable to us, or at all |
| In addition, the terms of available financing may place limits on our financial and operating flexibility |
| If we are unable to obtain sufficient capital in the future, we may: • be forced to reduce our operations; • not be able to expand or acquire complementary businesses; and • not be able to develop new services or otherwise respond to changing business conditions or competitive pressures |
| Regulations governing our operation as a business development company will affect our ability to, and the way in which we, raise additional capital |
| We may require additional capital in the future to fund our operations, finance our investments in portfolio companies, or respond to competitive pressures or strategic opportunities |
| We may acquire additional capital from the following sources: Senior Securities and Other Indebtedness |
| We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as senior securities, up to the maximum amount permitted by the 1940 Act |
| If we issue senior securities, including debt or preferred stock, we will be exposed to additional risks, including the following: • Under the provisions of the 1940 Act, we will be permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200prca after each issuance of senior securities |
| If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our debt at a time when such sales and/or repayments may be disadvantageous |
| • It is likely that any senior securities or other indebtedness we issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility |
| • We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities and other indebtedness |
| • Preferred stock or any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock, including separate voting rights and could delay or prevent a transaction or a change in control to the detriment of the holders of our common stock |
| Additional Common Stock |
| We are not generally able to issue and sell our common stock at a price below our net asset value per share |
| We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below our net asset value of the common stock if our board of directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale |
| In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount) |
| We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act |
| If we raise additional funds 13 ______________________________________________________________________ [42]Table of Contents by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease and they may experience dilution |
| Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on favorable terms or at all |
| Our common stock price may be volatile |
| The trading price of our common stock may fluctuate substantially, depending on many factors, some of which are beyond our control and may not be directly related to operating performance |
| These factors include the following: • price and volume fluctuations in the overall stock market from time to time; • significant volatility in the market price and trading volume of securities of BDCs or technology-transfer companies; • changes in regulatory policies or tax guidelines with respect to BDCs or technology-transfer companies; • actual or anticipated changes in our earnings or fluctuations in our operating results; • general economic conditions and trends; • loss of a major funding source; or • departures of key personnel |