As filed with the Securities and Exchange Commission on October 29, 2003
Securities Act Registration No. 333-
Investment Company Registration No. 811-07074
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM N-2
Registration Statement
Under the Securities Act of 1933: [X]
Pre-effective Amendment No. [ ]
Post-effective Amendment No. [ ]
and/or
Registration Statement
Under the Investment Company Act of 1940: [ ]
Amendment No. 5 [X]
___________
HARRIS & HARRIS GROUP, INC.
(Exact Name of Registrant as Specified In its Charter)
111 West 57th Street
Suite 1100
New York, New York 10019
(Address of Principal Executive Offices)
(212) 582-0900
(Registrant's Telephone Number, including Area Code)
Charles E. Harris, Chairman, CEO
111 West 57th Street
Suite 1100
New York, New York 10019
(Name and Address of Agent for Service)
___________
Copy to:
Richard T. Prins, Esq. Gary M. Epstein, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Randolph A. Bullard, Esq.
Four Times Square Greenberg Traurig LLP
New York, New York 10036 1221 Brickell Avenue
(212) 735-3000 Miami, Florida 33131
(305) 579-0500
__________________
Copy to:
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
___________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum Proposed Maximum
Amount Being Offering Price Aggregate Amount of
Title of Securities Being Registered Registered per Share Offering Price(1) Registration Fee
------------------------------------ ---------- ---------------- ----------------- ----------------
Common Shares, $0.01 par value 2,000,000 $6.95 $13,900,000 $1,125(2)
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933 and based on
the average of the high and low prices as reported on the Nasdaq
National Market of the registrant's common stock on October 28, 2003.
(2) $364 previously paid.
___________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8,
MAY DETERMINE.
HARRIS & HARRIS GROUP, INC.
CROSS REFERENCE SHEET
PART A-PROSPECTUS
Items in Part A of Form N-2 Location in prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover Front Cover Page
Item 2. Inside Front and Outside Back Cover Page Front Cover Page; Inside Front Cover Page
Item 3. Fee Table and Synopsis Prospectus Summary; Table of Fees and Expenses
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Prospectus Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant Business; Risk Factors; Investment Policies
Item 9. Management Management of the Company
Item 10. Capital Stock, Long-Term Debt and Other Securities Prospectus Summary; Capitalization; Dividends and
Distributions; Taxation; Risk Factors
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Management of the Company
Item 13. Table of Contents of the Statement of Additional Not Applicable
Information
Items in Part B of Form N-2(1) Location in prospectus
---------------------------- ----------------------
Item 14. Cover Page Not Applicable
Item 15. Table of Contents Not Applicable
Item 16. General Information and History Business; Our History
Item 17. Investment Objective and Policies Business; Investment Policies
Item 18. Management of the Company Management of the Company
Item 19. Control Persons and Principal Shareholders Management of the Company
Item 20. Investment Advisory and Other Services Not Applicable
Item 21. Brokerage, Allocation and Other Practices Investment Policies; Underwriting
Item 22. Tax Status Taxation
Item 23. Financial Statements Financial Statements
PART C-OTHER INFORMATION
Items 24-33 have been answered in Part C of this Registration Statement.
____________________
(1) Pursuant to General Instructions to Form N-2, all information required by
Part B: Statement of Additional Information has been incorporated into
Part A: the prospectus of the Registration Statement.
============================================================================
| The information in this prospectus is not complete and may be changed. |
| These securities may not be sold until the registration statement filed |
| with the Securities and Exchange Commission is effective. This |
| prospectus is not an offer to sell these securities and it is not |
| soliciting an offer to buy these securities in any state where the offer |
| or sale is not permitted. |
============================================================================
SUBJECT TO COMPLETION, ________, 2003
PROSPECTUS
2,000,000 Shares
HARRIS & HARRIS GROUP, INC.
Common Stock
Harris & Harris Group, Inc. is a venture capital investment company
that operates as a non-diversified business development company under the
Investment Company Act of 1940. We are offering 2,000,000 shares of our common
stock plus 300,000 additional shares if the underwriter exercises its
over-allotment option at the public offering price less underwriter discounts
and commissions within 30 days from the date of this prospectus. We are selling
all of the shares offered hereby. Our common stock is listed on the Nasdaq
National Market under the symbol "TINY." On , 2003, the last reported sale
price of our common stock was $ .
An Investment In The Securities Offered In This Prospectus Involves A
High Degree Of Risk. You Should Consider Investing In Us Only If You Are
Capable Of Sustaining The Loss Of Your Entire Investment. See "Risk Factors"
beginning on page .
This prospectus sets forth concisely the information about us that a
prospective investor ought to know before investing. You should read this
prospectus before deciding whether to invest in the shares of common stock and
retain it for future reference. Material that has been incorporated by
reference and other information about us can be obtained from the Securities
and Exchange Commission's ("SEC") website (http://www.sec.gov).
Neither the SEC nor any state securities commission has approved or
disapproved these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a crime.
Price to Public Sales Load Proceeds to Company(3)
-----------------------------------------------------------
Total Minimum(1) $ $ $
Total Maximum(2) $ $ $
________________
(1) If over allotment is not exercised.
(2) If over allotment is exercised.
(3) Before deduction of expenses incurred by us, estimated at $ . After
deducting the expenses, the net proceeds to us will be $ .
PUNK, ZIEGEL & COMPANY
The date of the prospectus is , 2003
The shares of common stock will be ready for delivery on or about ,
2003 at the offices of in New York.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction in which the offer or sale is not
permitted. You should assume that the information in this prospectus is
accurate only as of the date of this prospectus. Our business, financial
condition and prospects may have changed since that date.
In this prospectus, unless otherwise indicated, "Harris & Harris,"
"Company," "us," "our" and "we" refer to Harris & Harris Group, Inc. We own or
have rights to trademarks or trade names that we use in connection with the
operation of our business. This prospectus also includes trademarks owned by
other persons.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY............................................................1
TABLE OF FEES AND EXPENSES....................................................5
RISK FACTORS..................................................................7
FORWARD-LOOKING INFORMATION..................................................13
USE OF PROCEEDS..............................................................13
PRICE RANGE OF COMMON STOCK..................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................14
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA...............................16
BUSINESS.....................................................................23
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES...............................27
DETERMINATION OF NET ASSET VALUE.............................................31
INVESTMENT POLICIES..........................................................33
MANAGEMENT OF THE COMPANY....................................................38
DIVIDENDS AND DISTRIBUTIONS..................................................49
TAXATION.....................................................................49
CERTAIN GOVERNMENT REGULATIONS...............................................51
CAPITALIZATION...............................................................53
UNDERWRITING.................................................................54
LEGAL MATTERS................................................................55
EXPERTS......................................................................55
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS.....................................55
FURTHER INFORMATION..........................................................56
PRIVACY PRINCIPLES OF THE COMPANY............................................56
PART C-- OTHER INFORMATION..................................................C-1
i
PROSPECTUS SUMMARY
This summary highlights information that is described more fully
elsewhere in this prospectus. It may not contain all of the information that is
important to you. To understand the offering fully, you should read the entire
document carefully, including the risk factors beginning on page .
Our Business
Harris & Harris Group, Inc. is a venture capital investment company
that operates as a non-diversified business development company under the
Investment Company Act of 1940 (the "1940 Act"). For tax purposes, we are
similar to a mutual fund, operating as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). Our
investment objective is to achieve long-term capital appreciation, rather than
current income, by making venture capital investments in early-stage companies.
Our approach is comprised of a patient examination of available early stage
opportunities, thorough due diligence and close involvement with management.
We make new venture capital investments exclusively in "tiny
technology," which we define as microsystems, microelectromechanical systems
("MEMS") and nanotechnology. Our portfolio includes non-tiny technology
investments made prior to 2001, and we may make follow-on investments in either
tiny or non-tiny technology companies. By making these investments, we seek to
provide our shareholders with an increasingly pure play on tiny technology
through a reasonably diversified portfolio of venture capital investments. We
believe that we are the only publicly-traded U.S. venture capital company
specializing in tiny technology.
Tiny technology is multidisciplinary and widely applicable, and it
incorporates technology that is significantly smaller than is currently in
general use. Microsystems are measured in micrometers, which are units of
measurement in millionths of a meter. Nanotechnology is measured in nanometers,
which are units of measurement in billionths of a meter. Because it is a new
field, tiny technology has significant scientific, engineering and
commercialization risks. See "Business" and "Risk Factors."
As a venture capital company, we make it possible for our investors to
participate at an early stage in this emerging field while our portfolio
companies are still private. By making investments in companies that control
intellectual property relevant to tiny technology, we are building a portfolio
that we believe will be difficult to replicate in the future. To the investor,
we offer:
o a portfolio consisting of investments that are generally
available only to a small, highly specialized group of
investors;
o a highly qualified team of professionals with expertise in
venture capital investing, intellectual property and
nanotechnology to evaluate and monitor investments;
1
o the opportunity to benefit from our experience in a new field
expected to permeate a variety of industries; and
o through the ownership of our publicly traded shares, a measure
of liquidity not available in typical venture capital
investments.
The number of tiny technology investment opportunities available to us
has increased over the past two years, through both new opportunities and
opportunities for follow-on investments in our existing portfolio companies. We
believe that our expertise and record of prior investments in tiny technology
are likely to lead us to additional tiny technology investment opportunities in
the future. We intend to use the net proceeds of this offering to:
o increase our capital in order to take advantage of these
investment opportunities;
o increase the diversification of tiny technology companies in
our portfolio;
o increase the percentage of our total assets invested in tiny
technology;
o increase our market share in tiny technology venture capital
investing; and
o lower our expenses as a percentage of assets and otherwise
achieve certain economies and advantages of scale in our
operations.
We identify investment opportunities primarily through four channels:
o our involvement in the field of tiny technology;
o research universities that seek to transfer their scientific
discoveries to the private sector;
o other venture capital companies seeking co-investors; and
o direct calls and business plan submissions by companies,
business incubators and individuals seeking venture capital.
Since registering as an investment company in 1992, we have invested
in a variety of industries. In 1994, we invested in our first tiny technology
company, Nanophase Technologies Corporation, which completed an initial public
offering in 1997. Recognizing the potential of tiny technology, we continued to
monitor developments in the field, eventually making tiny technology our
exclusive focus for initial investments. Since August 2001, all 12 of our
initial investments have been in companies involved in the development of
products and technologies based on tiny technology.
Our portfolio now includes a total of 18 companies, 13 of which we
consider to be involved in tiny technology. We are an internally managed
investment company; that is, our officers and employees, rather than an
investment adviser, manage our operations under the general supervision of our
board directors.
Tiny Technology
Tiny technology is neither an industry nor a single technology, but a
variety of enabling technologies with critical dimensions below 100
micrometers. Tiny technology manifests itself in tools, materials and devices
that address broad markets, including instrumentation, electronics, photonics,
computing, medical devices, pharmaceutical manufacturing, drug delivery and
drug discovery. The development and commercialization of tiny technology often
require the integration of multiple disciplines, including biology, physics,
chemistry, material sciences, computer science and the engineering sciences.
Examples of tiny technology-enabled products currently on the market
are quite diverse. They include accelerometers used in automobiles to sense
impact and deploy airbags, cosmetics with ingredients that block UV light but
that are invisible to the human eye, nanoclays used for strength in the running
boards of minivans, textiles with liquid-stain repellant surfaces and fast
acting painkillers.
Within tiny technology, microsystems and MEMS both refer to materials,
devices and processes that are on a micrometer size scale. A micrometer, which
is also referred to as a micron, is 0.000001 meter, or one millionth of a
meter. In practice, any device from 100 microns down to 0.1 micron in size may
be considered "micro." Nanotechnology refers to materials, devices and
processes with critical dimensions below 0.1 micron, equal to 100 nanometers. A
nanometer is 0.000000001 meter, or one billionth of a meter. It is at the scale
below 100 nanometers, the nanoscale, that quantum effects begin to dominate
classical macroscale physics. At the nanoscale, size- and shape-dependent
properties of materials allow previously unattainable material and device
performance.
Although the practical application of tiny technology requires great
expertise to implement in manufacturing processes, we believe that tiny
technology's broad applicability presents significant and diverse, market
opportunities.
2
Risk Factors
Set forth below is a summary of certain risks that you should
carefully consider before investing in us through the offering. See "Risk
Factors " below for a more detailed discussion of the risks in investing in our
shares of common stock.
o Investing in small, private companies involves a high degree of
risk and is highly speculative.
o We may invest in companies working with technologies or
intellectual property which currently has few or no proven
commercial applications.
o We invest in illiquid securities and may not be able to dispose
of them when it is advantageous to do so, or ever.
o Unfavorable economic conditions could impair our ability to
engage in liquidity events.
o Because there is generally no established market in which to
value our investments, our valuation committee's value
determinations may differ materially from the values that a
ready market or third party would attribute to these
investments.
o Because we are a non-diversified company with a relatively
concentrated portfolio, the value of our business is subject to
greater volatility than the value of companies with more
broadly diversified investments.
o Approximately 35% of the fair value of our venture capital
investment portfolio, as of June 30, 2003, is concentrated in
one company, NeuroMetrix, Inc., which is not a tiny technology
company.
o Approximately 43% of the fair value of our venture capital
investment portfolio, as of June 30, 2003, is not invested in
tiny technology.
o Investing in our stock is highly speculative and an investor
could lose some or all of the amount invested.
o Our shares might trade at a discount from net asset value or at
premiums that are unsustainable over the long term and
currently trade at a substantial premium over net asset value.
Other Information
Our website is www.TinyTechVC.com and is not incorporated by reference
into this prospectus. We make available free of charge through our website the
following materials as soon as reasonably practicable after filing or
furnishing them to the SEC:
o our annual report on Form 10-K;
o our quarterly reports on Form 10-Q;
o our current reports on Form 8-K; and
o amendments to those reports.
3
The Offering
Common stock offered........ 2,000,000 shares of common stock.
Common stock to be
outstanding
after the offering.......... 13,498,845 shares. Does not include 300,000
shares to be sold by us if the underwriter's
over allotment option is exercised in
full, as described in "Underwriting."
Use of proceeds............. We estimate the net proceeds of the offering to
be approximately $ . We expect to invest or
earmark for potential follow-on investment the
net proceeds within approximately two years,
depending on the available investment
opportunities for the types of investments that
we make. We may also pay operating expenses,
including due diligence expenses on new
investments, from the proceeds.
Nasdaq National Market
symbol...................... TINY
4
TABLE OF FEES AND EXPENSES
The following tables are intended to assist you in understanding the
various costs and expenses directly or indirectly associated with investing in
our common stock. Amounts are based on estimated amounts for our current fiscal
year after giving effect to anticipated net proceeds of the offering, assuming
that we incur the estimated offering expenses, and the underwriters exercise
the over-allotment option.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price)
Annual Expenses (as a percentage of net assets attributable to common stock)
Management Fees N/A
Interest Payments on Borrowed Funds .05%
Other Expenses
Profit-Sharing Accrual(1) .00
Accrual for Mandatory Retirement(2) .58
Salaries and Benefits(3) 3.37
Administration and Operations 1.02
Professional Fees .85
Rent .44
Directors' Fees and Expenses .40
Depreciation .11
Custodian Fees .02
Total Annual Expenses(4) 6.84%
_______________________________
(1) We have an Employee Profit-Sharing Plan that provides for profit sharing
equal to 20% of our net realized after-tax income as reflected on our
Consolidated Statement of Operations for such year, less non-qualifying
gains, if any. Under the Employee Profit-Sharing Plan, our net realized
income includes investment income, realized gains and losses and operating
expenses (including taxes paid or payable by us), but is calculated
without regard to dividends paid or distributions made to shareholders,
payments under the plan, unrealized gains and losses and loss carryovers
from other years, which we refer to as qualifying income. The portion of
net after-tax realized gains attributable to asset values as of September
30, 1997 is considered non-qualifying gain, which reduces qualifying
income. As of September 30, 2003, 20% of the estimated realizable net
income, less the nonqualifying gain, is approximately $0. The expense
accrual associated with this liability for 2003 is approximately $0 or
0% of net assets. This expense is subject to change over the remainder
of 2003, and therefore, by year end, may be substantially larger or
smaller than the amount stated above. Under no circumstances may this
expense exceed 20% of the net realized after-tax income.
(2) We established a Mandatory Retirement Plan on March 20, 2003. In
conjunction with this plan, we are required by law to provide to one
employee, our President, Chief Operating Officer and Chief Financial
Officer, a retirement benefit that has an estimated present value of
$450,000. We are amortizing the expense of this benefit through December
31, 2004 in the amounts of $225,000 in 2003 and $225,000 in 2004.
(3) Our President, Chief Operating Officer and Chief Financial Officer is
scheduled to retire on December 31, 2004, pursuant to the Mandatory
Retirement Plan. It is expected that our other officers will assume his
responsibilities thereafter. His salary and non-continuing benefits in
2003, including the amortization of his retirement benefit, will total
approximately $503,200, or 1.30% of net assets attributable to common
stock.
(4) Total annual expenses after December 31, 2004 will not include $503,200
for our President, Chief Operating Officer and Chief Financial Officer's
salary and non-continuing benefits. Total annual expenses as a percentage
of net assets attributable to common stock, not including $503,200 for our
President, Chief Operating Officer and Chief Financial Officer's salary
and non-continuing benefits, would be 5.54%.
5
Example
The following examples illustrate the projected dollar amount of
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in our common stock. These amounts are based upon
payment by us of expenses at levels set forth in the above table, which include
$503,200 of salary and non-continuing benefits for our President, Chief
Operating Officer and Chief Financial Officer in the first year, but not
thereafter.
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$68 $176 $283 $595
The foregoing table is to assist you in understanding the various
costs and expenses that an investor in our common stock will bear directly or
indirectly. The assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of our common stock. Actual
expenses and annual rates of return may be more or less than those assumed for
purposes of the example.
6
RISK FACTORS
Investing in our common stock involves a number of significant risks
relating to our business and investment objective. You should carefully
consider the risks and uncertainties described below before you purchase any of
our common stock. These risks and uncertainties are not the only ones we face.
Unknown additional risks and uncertainties, or ones that we currently consider
immaterial, may also impair our business. If any of these risks or
uncertainties materialize, our business, financial condition or results of
operations could be materially adversely affected. In this event, the trading
price of our common stock could decline, and you could lose all or part of your
investment.
Risks related to the companies in our portfolio.
Investing in small, private companies involves a high degree of risk
and is highly speculative.
We have invested a substantial portion of our assets in privately held
development stage or start-up companies. These businesses tend to lack
management depth, to have limited or no history of operations and to have not
attained profitability. Tiny technology companies are especially risky,
involving scientific, technological and commercialization risks. Because of the
speculative nature of these investments, these securities have a significantly
greater risk of loss than traditional investment securities. Some of our
venture capital investments are likely to be complete losses or unprofitable
and some will never realize their potential. We have been and will continue to
be risk seeking rather than risk averse in our approach to venture capital and
other investments. Neither our investments nor an investment in our common
stock is intended to constitute a balanced investment program.
We may invest in companies working with technologies or intellectual
property which currently has few or no proven commercial applications.
Nanotechnology, in particular, is a developing area of technology, of
which much of the future commercial value is unknown, difficult to estimate and
subject to widely varying interpretations. There are as of yet relatively few
nanotechnology products commercially available. The timing of additional future
commercially available nanotechnology products is highly uncertain.
Our portfolio companies working with tiny technology may be
particularly susceptible to intellectual property disputes.
Research and commercialization efforts in tiny technology are being
undertaken by a wide variety of government, academic and private corporate
entities. As additional commercially viable applications of tiny technology
begin to emerge, ownership of intellectual property on which products are based
may be contested. Any dispute over the ownership of, or rights to, any of our
portfolio companies' technologies or products would have a material adverse
effect on that company's value and may have a material adverse effect on the
value of our common stock.
Our portfolio companies may not be able to market their products
successfully.
Even if our portfolio companies are able to develop commercially
viable products, the market for new products and services is highly
competitive, rapidly changing and especially sensitive to adverse general
economic conditions. Commercial success is difficult to predict, and the
marketing efforts of our portfolio companies may not be successful.
Unfavorable economic conditions could result in the inability of our
portfolio companies to access additional capital, leading to financial losses
in our portfolio.
Most of the companies in which we have made or will make investments
are susceptible to economic slowdowns or recessions. An economic slowdown or
adverse capital or credit market conditions may affect the ability of a company
in our portfolio to raise additional capital from venture capital or other
sources or to engage in a liquidity event such as an initial public offering or
merger. Such conditions may lead to financial losses in our portfolio, which
could have a material adverse effect on the value of our common stock.
7
Risks related to the illiquidity of our investments.
We invest in illiquid securities and may not be able to dispose of
them when it is advantageous to do so, or ever.
Most of our investments are or will be equity or equity-linked
securities acquired directly from small companies. These equity securities are
generally subject to restrictions on resale or otherwise have no established
trading market. The illiquidity of most of our portfolio of equity securities
may adversely affect our ability to dispose of these securities at times when
it may be advantageous for us to liquidate these investments. We may never be
able to dispose of these securities.
Unfavorable economic conditions could impair our ability to engage in
liquidity events.
Our business of making private equity investments and positioning them
for liquidity events may be adversely affected by current and future capital
markets and economic conditions. The public equity markets currently provide
little opportunity for liquidity events, even for more mature technology
companies than those in which we typically invest. The potential for public
market liquidity could further decrease and could lead to an inability to
realize potential gains or could lead to financial losses in our portfolio and
a decrease in our revenues, net income and assets. Recent government reforms
affecting stock markets, investment banks and securities research practices may
make it more difficult for privately held companies to complete successful
initial public offerings of their equity securities. Slowdowns in initial
public offerings also have an adverse effect on the frequency and valuations of
acquisitions of privately held companies. The lack of exit opportunities also
has an adverse effect on the ability of privately held companies to raise
capital.
Even if our portfolio companies complete an initial public offering,
the returns on our investments may be uncertain.
When companies in which we have invested as private entities complete
initial public offerings of their securities, these newly issued securities are
by definition unseasoned issues. Unseasoned issues tend to be highly volatile
and have uncertain liquidity, which may negatively affect their price. In
addition, we are typically subject to lock-up provisions which prohibit us from
selling our investment into the public market for specified periods of time
after an initial public offering. The market price of securities that we hold
may decline substantially before we are able to sell these securities. Most
initial public offerings of technology companies are listed on the Nasdaq
National Market. Recent government reforms of the Nasdaq National Market have
made market making by broker-dealers less profitable, which has caused
broker-dealers to reduce their market making activities, thereby making the
market for unseasoned stocks less liquid.
Risks related to our company.
Because there is generally no established market in which to value our
investments, our valuation committee's value determinations may differ
materially from the values that a ready market or third party would attribute
to these investments.
There is generally no public market for the equity securities in which
we invest. Pursuant to the requirements of the 1940 Act, we value substantially
all of the equity securities in our portfolio at fair value as determined in
good faith by the valuation committee of the board of directors within the
guidelines established by the board of directors. As a result, determining fair
value requires that judgment be applied to the specific facts and circumstances
of each portfolio investment pursuant to specified valuation principles and
processes. We are required by the 1940 Act to value specifically each
individual investment on a quarterly basis and record unrealized depreciation
for an investment that we believe has become impaired. Conversely, we must
record unrealized appreciation if we believe that the underlying portfolio
company has appreciated in value. Without a readily ascertainable market value
and because of the inherent uncertainty of valuation, the fair value that we
assign to our investments may differ from the values that would have been used
had a ready market existed for the investments, and the difference could be
material. Any changes in estimated fair value are recorded in our consolidated
statements of operations as a change in the "Net (decrease) increase in
unrealized appreciation on investments." See "Determination of Net Asset
Value."
8
Because we are a non-diversified company with a relatively
concentrated portfolio, the value of our business is subject to greater
volatility than the value of companies with more broadly diversified
investments.
As a result of investing a greater portion of our assets in the
securities of a smaller number of issuers, we are classified as a
non-diversified company. We may be more vulnerable to events affecting a single
issuer or industry and therefore subject to greater volatility than a company
whose investments are more broadly diversified. Accordingly, an investment in
our common stock may present greater risk to you than an investment in a
diversified company.
We may be obligated to pay substantial amounts under our profit
sharing plan.
Our employee profit-sharing plan requires us to distribute to our
officers and employees 20% of our net after-tax realized income as reflected on
our consolidated statements of operations for that year, less the
non-qualifying gain, if any. These distributions may have a significant effect
on the amount of distributions made to our shareholders, if any.
Approximately 35% of the fair value of our venture capital investment
portfolio, as of June 30, 2003, is concentrated in one company, NeuroMetrix,
Inc., which is not a tiny technology company.
At June 30, 2003, we valued our investment in NeuroMetrix, Inc., which
is not a tiny technology company, at $5,075,426, which represents 34.96% of the
fair value of our venture capital investment portfolio, or 19.91% of our net
asset value at June 30, 2003. Any downturn in the business outlook of
NeuroMetrix, Inc., or any failure of the products of NeuroMetrix, Inc. to
receive widespread acceptance in the marketplace, would have a significant
effect on our specific investment in NeuroMetrix, Inc. and the overall value of
our portfolio.
Approximately 43% of the fair value of our venture capital investment
portfolio, as of June 30, 2003, is not invested in tiny technology.
Although all 12 of our portfolio investments added since August 2001
have been in tiny technology companies, and although we consider 13 of the
companies in our current equity investment portfolio to be tiny technology
companies, at June 30, 2003, only 56.99% of the fair value of our venture
capital investment portfolio, or 32.45% of our net asset value, is invested in
tiny technology companies, which may limit our ability to achieve our
investment objective.
We are dependent upon key management personnel for future success.
We are dependent for the selection, structuring, closing and
monitoring of our investments on the diligence and skill of our senior
management and other key advisers. We utilize lawyers and outside consultants,
including two of our directors, Dr. Kelly S. Kirkpatrick and Lori D. Pressman,
to assist us in conducting due diligence when evaluating potential investments.
There is generally no publicly available information about the companies in
which we invest, and we rely significantly on the diligence of our employees
and advisers to obtain information in connection with our investment decisions.
Our future success to a significant extent depends on the continued service and
coordination of our senior management team, and particularly depends on our
Chairman and Chief Executive Officer, Charles E. Harris. The departure of any
of our executive officers, key employees or advisers could materially adversely
affect our ability to implement our business strategy. We do not maintain for
our benefit any key man life insurance on any of our officers or employees.
We will need to hire additional employees as the size of our portfolio
increases.
We anticipate that it will be necessary for us to add investment
professionals with expertise in tiny technology to accommodate the increasing
size of our portfolio. We may need to provide additional scientific, business
or investment training for our hires. There is competition for highly qualified
personnel, and we may not be successful in our efforts to recruit and retain
highly qualified personnel.
9
The market for venture capital investments, including tiny technology
investments, is highly competitive.
We face substantial competition in our investing activities from many
competitors, including but not limited to private venture capital funds,
investment affiliates of large industrial, technology, service and financial
companies, small business investment companies, wealthy individuals and foreign
investors. Our most significant competitors typically have significantly
greater financial resources than we do. Many sources of funding compete for a
small number of attractive investment opportunities. Hence, we face substantial
competition in sourcing good investment opportunities on terms of investment
that are commercially attractive.
In addition to the difficulty of finding attractive investment
opportunities, our status as a regulated business development company may
hinder our ability to participate in investment opportunities or to protect the
value of existing investments.
We are required to disclose on a quarterly basis the name and business
description of our portfolio companies and the value of any portfolio
securities. Most of our competitors are not subject to these disclosure
requirements. Our obligation to disclose this information could hinder our
ability to invest in some portfolio companies. Additionally, other current and
future regulations may make us less attractive as a potential investor than a
competitor not subject to the same regulations.
Our failure to make follow-on investments in our portfolio companies
could impair the value of our portfolio.
Following an initial investment in portfolio companies, we may make
additional investments in the portfolio companies as "follow-on" investments,
in order to: (1) increase or maintain in whole or in part our ownership
percentage; (2) exercise warrants, options or convertible securities that were
acquired in the original or subsequent financing; or (3) attempt to preserve or
enhance the value of our investment. Recently, "pay to play" provisions have
become common in venture capital transactions. These provisions require
proportionate investment in subsequent rounds of financing in order to preserve
preferred rights such as anti-dilution protection or even to prevent preferred
shares from being converted to common shares.
We may elect not to make follow-on investments or otherwise lack
sufficient funds to make those investments. We have the discretion to make any
follow-on investments, subject to the availability of capital resources. The
failure to make follow-on investments may, in some circumstances, jeopardize
the continued viability of a portfolio company and our initial investment, or
may result in a missed opportunity for us to increase our participation in a
successful operation, or may cause us to lose some or all preferred rights
pursuant to "pay to play" provisions. Even if we have sufficient capital to
make a desired follow-on investment, we may elect not to make a follow-on
investment because we may not want to increase our concentration of risk,
because we prefer other opportunities or because we are inhibited by compliance
with business development company requirements or the desire to maintain our
RIC tax status.
Bank borrowing or the issuance of debt securities or preferred stock
by us to fund investments in portfolio companies or to fund our operating
expenses would make our total return to common shareholders more volatile.
Use of debt or preferred stock as a source of capital entails two
primary risks. The first risk is that the use of debt leverages our available
common equity capital, magnifying the impact on net asset value of changes in
the value of our investment portfolio. For example, a business development
company that uses 33% leverage (that is, $50 of leverage per $100 of common
equity) will show a 1.5% increase or decline in net asset value for each 1%
increase or decline in the value of its total assets. The second risk is that
the cost of debt or preferred stock financing may exceed the return on the
assets the proceeds are used to acquire, thereby diminishing rather than
enhancing the return to common shareholders. To the extent that we utilize debt
or preferred stock financing for any purpose, these two risks would likely make
our total return to common shareholders more volatile. In addition, we might be
required to sell investments in order to meet dividend, interest or principal
payments when it may be disadvantageous for us to do so.
10
As provided in the 1940 Act and subject to some exceptions, we can
issue debt or preferred stock so long as our total assets immediately after the
issuance, less some ordinary course liabilities, exceed 200% of the sum of the
debt and any preferred stock outstanding. The debt or preferred stock may be
convertible in accordance with SEC guidelines, which may permit us to obtain
leverage at more attractive rates. The requirement under the 1940 Act to pay,
in full, dividends on preferred shares or interest on debt before any dividends
may be paid on our common stock means that dividends on our common stock from
earnings may be reduced or eliminated. An inability to pay dividends on our
common stock could conceivably result in our ceasing to qualify as a RIC under
the Code, which would be materially adverse to the holders of our common stock.
We are authorized to issue preferred stock, which would convey special
rights and privileges to its owners.
We are currently authorized to issue up to 2,000,000 shares of
preferred stock, under terms and conditions determined by our board of
directors. Such shares would have a preference over our common shares with
respect to dividends and liquidation. The statutory class voting rights of any
preferred shares we would issue could make it more difficult for us to take
some actions that may, in the future, be proposed by the board and/or holders
of common stock, such as a merger, exchange of securities, liquidation or
alteration of the rights of a class of our securities if these actions were
perceived by the holders of the preferred shares as not in their best
interests. The issuance of preferred shares convertible into shares of common
stock might also reduce the net income and net asset value per share of our
common shares upon conversion. These effects, among others, could have an
adverse effect on your investment in our common stock.
Loss of status as a RIC would reduce our net asset value and
distributable income.
We currently qualify as a regulated investment company, or RIC, under
the Code. As a RIC, we do not have to pay Federal income taxes on our income
(including realized gains) that is distributed to our shareholders.
Accordingly, we are not permitted under accounting rules to establish reserves
for taxes on our unrealized capital gains. If we failed to qualify for RIC
status, to the extent that we had unrealized gains, we would have to establish
reserves for taxes, which would reduce our net asset value, net of a reduction
in the reserve for employee profit sharing, accordingly. To the extent that we,
as a RIC, were to decide to make a deemed distribution of net realized capital
gains and retain the net realized capital gains, we would have to establish
appropriate reserves for taxes upon making that decision. See "Taxation."
We operate in a regulated environment.
We are subject to substantive SEC regulations as a business
development company. Securities and tax laws and regulations governing our
activities may change in ways adverse to our and our shareholders' interests,
and interpretations of these laws and regulations may change with unpredictable
consequences. Any change in the laws or regulations that govern our business
could have an adverse impact on us or on our operations. Also, as business and
financial practices continue to evolve, they may render the regulations under
which we operate less appropriate and more burdensome than they were when
originally imposed. See "Certain Government Regulations."
Quarterly results fluctuate and are not indicative of future quarterly
performance.
Our quarterly operating results fluctuate as a result of a number of
factors. These factors include, among others, variations in and the timing of
the recognition of realized and unrealized gains or losses, the degree to which
we and our portfolio companies encounter competition in our markets and general
economic and capital markets conditions. As a result of these factors, results
for any one quarter should not be relied upon as being indicative of
performance in future quarters.
To the extent that we do not realize income or retain after-tax
realized capital gains, we may have a greater need for additional capital to
fund our investments and operating expenses.
As a RIC, we must annually distribute at least 90% of our investment
company taxable income as a dividend and may either distribute or retain our
realized net capital gains from investments. As a result, such earnings may not
be available to fund investments. If we fail to generate net realized capital
gains or to obtain funds from outside sources, it would have a material adverse
effect on our financial condition and results of operations as
11
well as our ability to make follow-on and new investments. Because of the
structure and objectives of our business, we generally expect to experience
net operating losses and rely on proceeds from sales of investments, rather
than on investment income, to defray a significant portion of our operating
expenses. Such sales are unpredictable and may not occur. In addition, as a
business development company, we are generally required to maintain a ratio of
at least 200% of total assets to total borrowings, which may restrict our
ability to borrow to fund such requirements.
Investment in foreign securities could result in additional risks.
We currently have no investments in foreign securities. If we invest
in securities of foreign issuers, we may be subject to risks not usually
associated with owning securities of U.S. issuers. These risks can include
fluctuations in foreign currencies, foreign currency exchange controls, social,
political and economic instability, differences in securities regulation and
trading, expropriation or nationalization of assets, and foreign taxation
issues. In addition, changes in government administrations or economic or
monetary policies in the United States or abroad could result in appreciation
or depreciation of our securities and could favorably or unfavorably affect our
operations. It may also be more difficult to obtain and enforce a judgment
against a foreign issuer. Any foreign investments made by us must be made in
compliance with U.S. and foreign currency restrictions and tax laws restricting
the amounts and types of foreign investments.
Risks related to this offering.
Investing in our stock is highly speculative and an investor could
lose some or all of the amount invested.
Our investment objective and strategies result in a high degree of
risk in our investments and may result in losses in the value of our investment
portfolio. Our investments in portfolio companies are highly speculative and,
therefore, an investor in our shares of common stock may lose his or her entire
investment. The value of our common stock may decline and may be affected by
numerous market conditions, which could result in the loss of some or all of
the amount invested in our common stock. The securities markets frequently
experience extreme price and volume fluctuations which affect market prices for
securities of companies generally, and technology and very small capitalization
companies in particular. Because of our focus on the technology and very small
capitalization sectors, and because we are a small capitalization company
ourselves, our stock price is especially likely to be affected by these market
conditions. General economic conditions, and general conditions in the Internet
and information technology, life sciences, nanotechnology, tiny technology,
materials sciences and other high technology industries, may also affect the
price of our common stock.
We will have broad discretion over the use of proceeds of this
offering.
We will have significant flexibility in applying the proceeds of this
offering. We may also pay operating expenses, including due diligence expenses
of potential new investments, from the net proceeds. Our ability to achieve our
investment objective may be limited to the extent that the net proceeds of the
offering, pending full investment, are used to pay operating expenses.
Our shares might trade at discounts from net asset value or at
premiums that are unsustainable over the long term.
Shares of business development companies like us may, during some
periods, trade at prices higher than their net asset value and during other
periods, as frequently occurs with closed-end investment companies, trade at
prices lower than their net asset value. The possibility that our shares will
trade at discounts from net asset value or at premiums that are unsustainable
over the long term are risks separate and distinct from the risk that our net
asset value will decrease. The risk of purchasing shares of a business
development company that might trade at a discount or unsustainable premium is
more pronounced for investors who wish to sell their shares in a relatively
short period of time because, for those investors, realization of a gain or
loss on their investments is likely to be more dependent upon the existence of
a premium or discount than upon portfolio performance. We cannot assure you
that our shares of common stock will trade at a price higher than or equal to
net asset value. On , the last business day prior to the commencement of
this offering, our stock closed at $ per share, a premium of $ over the most
recently determined net asset value per share of $ as of , 2003.
12
Our former independent public accountant, Arthur Andersen LLP, has
been found guilty of a federal obstruction of justice charge, and you may be
unable to exercise effective remedies against it in any legal action.
Our former independent public accountant, Arthur Andersen LLP,
provided us with auditing services for prior fiscal periods through December
31, 2001, including issuing an audit report with respect to our audited
consolidated financial statements as of and for the years ended December 31,
2000 and 2001 included in our Annual Report on Form 10-K for the year ended
December 31, 2002 and incorporated by reference in this prospectus. On June 15,
2002, a jury in Houston, Texas found Arthur Andersen LLP guilty of a federal
obstruction of justice charge arising from the federal government's
investigation of Enron Corp. On August 31, 2002, Arthur Andersen LLP ceased
practicing before the SEC.
We were unable to obtain Arthur Andersen LLP's consent to include its
report with respect to our audited consolidated financial statements as of and
for the years ended December 31, 2000 and 2001 in our Annual Report on Form
10-K for the year ended December 31, 2002 or to incorporate by reference such
report in this prospectus. Rule 437a under the Securities Act of 1933, or the
Securities Act, permits us to dispense with the requirement to file their
consent. As a result, you may not have an effective remedy against Arthur
Andersen LLP in connection with a material misstatement or omission with
respect to our audited consolidated financial statements that are incorporated
by reference in this prospectus or any other filing we may make with the SEC,
including, with respect to this offering or any other offering registered under
the Securities Act, any claim under Section 1l of the Securities Act. In
addition, even if you were able to assert such a claim, as a result of its
conviction and other lawsuits, Arthur Andersen LLP may fail or otherwise have
insufficient assets to satisfy claims made by investors or by us that might
arise under federal securities laws or otherwise relating to any alleged
material misstatement or omission with respect to our audited consolidated
financial statements.
You have no right to require us to repurchase your shares.
You do not have the right to require us to repurchase your shares of
common stock.
FORWARD-LOOKING INFORMATION
This prospectus may contain "forward-looking statements" based on our
current expectations, assumptions, and estimates about us and our industry.
These forward-looking statements involve risks and uncertainties. Words such as
"believe," "anticipate," "estimate," "expect," "intend," "plan," "will," "may,"
"continue" and other similar expressions identify forward-looking statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of several factors more fully
described in "Risk Factors " and elsewhere in this prospectus. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
USE OF PROCEEDS
We estimate the net proceeds of this offering to be approximately
$ .
We expect to invest or earmark for potential follow-on investment the
net proceeds within approximately two years, depending on the available
investment opportunities for the types of investments that we make. Although we
intend to make our initial investments exclusively in companies that we believe
are involved significantly in tiny technology, we may also make follow-on
investments in existing portfolio companies involved in other technologies.
Pending investment in portfolio companies, we intend to invest the net proceeds
of any offering of shares of our common stock in time deposits and/or
income-producing securities that are issued or guaranteed by the federal
government or an agency of the federal government or a government owned
corporation. We may also pay operating expenses, including due diligence
expenses on potential investments, from the proceeds, which will reduce the net
proceeds of this offering that we will have available for investment.
13
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the
symbol "TINY."
The following table sets forth for the quarters indicated the high and
low sale prices on the Nasdaq National Market per share of our common stock and
the net asset value and the premium or discount from net asset value per share
at which the shares of common stock were trading, expressed as a percentage of
net asset value, at each of the high and low sale prices provided.
Premium or Discount as a
Market Price Net Asset Value % of NAV
----------------------- ("NAV") Per Share ----------------------------
Quarter Ended High Low at End of Period High Low
------------------------ ---------- --------- ----------------- ---------- ---------
March 31, 2000 35.75 9.00 5.08 603.7 77.2
June 30, 2000 18.50 5.13 3.88 376.8 32.2
September 30, 2000 10.75 5.50 4.64 131.7 18.5
December 31, 2000 7.13 2.25 3.51 103.1 (35.9)
March 31, 2001 4.25 2.06 3.09 37.5 (33.3)
June 30, 2001 3.29 2.01 3.29 - (38.9)
September 30, 2001 2.86 1.60 2.92 (2.1) (45.2)
December 31, 2001 2.33 1.55 2.75 (15.3) (43.6)
March 31, 2002 5.50 1.80 2.63 109.1 (31.6)
June 30, 2002 5.10 2.74 2.68 90.3 2.2
September 30, 2002 2.99 2.00 2.61 14.6 (23.4)
December 31, 2002 2.50 1.85 2.37 5.5 (21.9)
March 31, 2003 3.99 2.36 2.26 76.5 4.4
June 30, 2003 7.95 2.71 2.22 258.1 22.1
September 30, 2003 9.49 4.47 2.11 349.8 111.8
The last reported price for our common stock on , 2003 was
$ per share. As of October 24, 2003, we had approximately 143
shareholders of record.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained in this section should be read in
conjunction with our June 30, 2003 Summary Financial Statements and our 2002
Consolidated Financial Statements and the Notes thereto. In addition, this
offering memorandum contains certain forward-looking statements. These
statements include the plans and objectives of management for future operations
and financial objectives and can be identified by the use of forward-looking
terminology such as "believe," "anticipate," "estimate," "expect," "intend,"
"plan," "will," "may" or "continue" or the negative thereof or other variations
thereon or comparable terminology. These forward-looking statements are subject
to the inherent uncertainties in predicting future results and conditions.
Information presented for portfolio companies has been obtained from
the portfolio companies.
Background and Overview
We incorporated under the laws of the state of New York in August
1981. In 1983, we completed an initial public offering and invested $406,936 in
Otisville BioTech, Inc. ("Otisville"), which also completed an initial public
offering later that year. In 1984, Charles E. Harris purchased a controlling
interest in us, thereby also becoming the control person in Otisville. We then
divested our other assets and became a financial services company, with the
14
investment in Otisville as the initial focus of our business activity. We hired
new management for Otisville, and Otisville acquired new technology targeting
the development of a human blood substitute.
By 1988, we operated two insurance brokerages and a trust company as
wholly-owned subsidiaries. In 1989, Otisville changed its name to Alliance
Pharmaceutical Corporation ("Alliance"), and by 1990, we had completed selling
our $406,936 investment in Alliance for total proceeds of $3,923,559.
In 1992, we sold our insurance brokerage and trust company
subsidiaries to their respective managements and registered as an investment
company under the 1940 Act, commencing operations as a closed-end,
non-diversified investment company. In 1995, we elected to become a business
development company subject to the provisions of Sections 55 through 65 of the
1940 Act. Throughout our corporate history, we have made early stage venture
capital investments in a variety of industries. In 1994, we made our first tiny
technology investment. Since August 2001, we have made initial investments
exclusively in tiny technology, including our last 12 initial investments.
Since our investment in Otisville in 1983, we have made a total of 53
venture capital investments, including four private investments in public
equities. We have sold 35 of these 53 investments, realizing total proceeds of
$105,659,158 on our invested capital of $37,366,522. Sixteen of these 35
investments were profitable. The average and median holding periods for these
35 investments were 3.57 years and 3.20 years respectively. At June 30, 2003,
we valued the 18 venture capital investments remaining in our portfolio at
$14,517,674, or 56.9% of our net assets, net of unrealized depreciation of
$3,180,323. At June 30, 2003, the average and median holding periods for our
venture capital investments were 2.52 years and 1.31 years, respectively.
We have invested a substantial portion of our assets in private,
development stage or start-up companies. These private businesses tend to be
thinly capitalized, unproven, small companies that lack management depth, have
little or no history of operations and are developing unproven technologies. At
June 30, 2003, $14,517,674 or 56.9% of our net assets consisted of venture
capital investments at fair value, net of unrealized depreciation of
$3,180,323. At December 31, 2002, $12,036,077 or 44.2% of our net assets
consisted of venture capital investments at fair value, of which net unrealized
depreciation was $2,718,389. At December 31, 2001, $13,120,978 or 53.9% of our
net assets consisted of venture capital investments at fair value, of which net
unrealized appreciation was $1,215,444.
We value our investments each quarter at fair value as determined in
good faith by our valuation committee within guidelines established by our
board of directors in accordance with the 1940 Act. See "Determination of Net
Asset Value."
We have broad discretion in the investment of our capital. However, we
invest primarily in illiquid equity securities of private companies. Generally,
these investments take the form of preferred stock, are subject to restrictions
on resale and have no established trading market. Our principal objective is to
achieve long-term capital appreciation. Therefore, a significant portion of our
investment portfolio provides little or no current yield in the form of
dividends or interest. We do earn interest income from fixed-income securities,
including U.S. government and government agency securities. The amount of
interest income earned varies with the average balance of our fixed-income
portfolio and the average yield on this portfolio and is not expected to be
material to our results of operations.
General business and capital markets conditions in 2002 and 2003 have
been adverse for the venture capital industry. There have been few
opportunities to take venture capital-backed companies public or sell them to
established companies. During this period, it has also been difficult to
finance venture capital-backed companies privately and, in general, for venture
capital funds themselves to raise capital.
We present the financial results of our operations utilizing
accounting principles generally accepted in the United States for investment
companies. On this basis, the principal measure of our financial performance
during any period is the net increase/(decrease) in our net assets resulting
from our operating activities, which is the sum of the following three
elements:
(1) Net Operating Income / (Loss) - the difference between our
income from interest, dividends, and fees and our operating
expenses.
15
(2) Net Realized Gain / (Loss) on Investments - the difference
between the net proceeds of dispositions of portfolio
securities and their stated cost.
(3) Net Increase / (Decrease) in Unrealized Appreciation on
Investments - the net change in the fair value of our
investment portfolio.
Because of the structure and objectives of our business, we generally
expect to experience net operating losses and seek to generate increases in our
net assets from operations through the long term appreciation of our venture
capital investments. We have in the past relied, and continue to rely, on
proceeds from sales of investments, rather than on investment income, to defray
a significant portion of our operating expenses. Because such sales are
unpredictable, we attempt to maintain adequate working capital to provide for
fiscal periods when there are no such sales.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
BALANCE SHEET DATA
Financial Position as of: June 30, December 31,
2003 2002 2001 2000
------------ -------------------------------------------------
(unaudited) (audited)
Total assets $ 35,903,212 $ 35,951,969 $ 39,682,367 $ 43,343,423
Total liabilities $ 10,407,002 $ 8,695,923 $ 15,347,597 $ 11,509,948
Net assets $ 25,496,210 $ 27,256,046 $ 24,334,770 $ 31,833,475
Cash dividends paid $ 0.00 $ 0.00 $ 0.00 $ 184,817
Net asset value per outstanding share $ 2.22 $ 2.37 $ 2.75 $ 3.51
Cash dividends paid per
outstanding share $ 0.00 $ 0.00 $ 0.00 $ 0.02
Shares outstanding 11,498,845 11,498,845 8,864,231 9,064,231
OPERATING DATA
For the six months For the twelve months ended
ended June 30, December 31,
2003 2002 2001 2000
------------------ ------------------------------------------------
(unaudited) (audited)
Total investment income $ 115,240 $ 253,461 $ 510,661 $ 687,050
Total expenses(1) $ 1,426,689 $ 2,124,549 $ 1,035,221 $ (2,623,200)
Net operating income (loss) $ (1,311,449) $ (1,871,088) $ (524,560) $ 3,310,250
Total tax expense (benefit) $ (17,322) $ 199,309 $ 27,951 $ (51,869)
Net realized gain (loss)
on investments $ 11,250 $ 2,390,302 $ 1,276,366 $ 18,963,832
Net realized income (loss) $ (1,300,199) $ 519,214 $ 751,806 $ 22,274,082
Net (decrease) increase in unrealized
appreciation on investments $ (459,637) $(3,241,408) $ (7,641,044) $(37,781,289)
Net (decrease) increase in net assets
resulting from operations $ (1,759,836) $ (2,722,194) $ (6,889,238) $(15,507,207)
(Decrease) increase in net assets
resulting from operations per
outstanding share $ (0.15) $ (0.24) $ (0.78) $ (1.71)
(1) Included in total expenses are the following profit sharing (reversals)
accruals: ($163,049) in 2002; ($984,021) in 2001; ($4,812,675) in 2000.
16
Results of Operations
Three Months Ended June 30, 2003, and June 30, 2002
We had a net decrease in net assets resulting from operations of
$544,709 in the three months ended June 30, 2003, as compared with a net
increase in net assets resulting from operations of $434,289 in the three
months ended June 30, 2002.
Investment Income and Expenses:
-------------------------------
During the three months ended June 30, 2003, and June 30, 2002, we had
net operating losses of $726,989 and $654,718, respectively. The increase
during the three months ended June 30, 2003, reflects an increase in expenses
primarily related to increases in salaries and benefits, professional fees and
rent expense.
Operating expenses were $777,553 and $715,086 for the three months
ended June 30, 2003, and June 30, 2002, respectively. The operating expenses in
the second quarter of 2003 reflect no expense for employee profit sharing. In
the three months ended June 30, 2003, versus the three months ended June 30,
2002, salaries and benefits increased by $97,114, primarily as a result of an
additional employee and a mandatory retirement plan pension expense.
Professional fees increased primarily as a result of an increase in independent
accounting and legal expenses associated with the preparation of our proxy
statement and legal and consulting expenses associated with the preparation of
the mandatory retirement plan and revision of the retiree medical and health
insurance plan.
Realized Gains and Losses on Sales of Portfolio Securities:
-----------------------------------------------------------
During the three months ended June 30, 2003, and June 30, 2002, we
realized net gains on sales of portfolio securities of $28,140 and $688,681,
respectively. During the three months ended June 30, 2003, the net gain
consisted primarily of gains from the sale of U.S. government and government
agency securities. During the three months ended June 30, 2002, the net gain
consisted primarily of a gain of $986,187 from our partnership interest in PHZ
Capital Partners L.P., offset by a loss of $350,583 on the dissolution of
Informio, Inc.
Unrealized Appreciation and Depreciation of Portfolio Securities:
-----------------------------------------------------------------
During the three months ended June 30, 2003, net unrealized
depreciation on investments decreased $168,489, to $3,179,750, from $3,348,239
at March 31, 2003. The decrease was primarily owing to a net decrease of
$184,493 in unrealized depreciation of our venture capital investments.
Six Months Ended June 30, 2003, and June 30, 2002
During the six months ended June 30, 2003, and June 30, 2002, we had
net decreases in net assets resulting from operations of $1,759,836 and
$602,645, respectively.
Investment Income and Expenses:
-------------------------------
During the six months ended June 30, 2003, and June 30, 2002, we had
net operating losses of $1,311,449 and $1,210,951, respectively. The increase
during 2003 reflects an increase to expenses primarily related to increases in
salaries and benefits, professional fees and rent expense, offset by a decrease
in the employee profit sharing accrual.
During the six months ended June 30, 2003, and June 30, 2002,
operating expenses were $1,426,689 and $1,330,781, respectively. The increase
during 2003 was primarily owing to increases in salaries and benefits of
$203,934, reflecting the addition of an employee and a mandatory retirement
plan pension expense, and increases in professional fees, reflecting legal
expenses associated with the implementation of the Sarbanes-Oxley Act and legal
and consulting expenses associated with the preparation of the mandatory
retirement plan and revision of the retiree medical and health insurance plan,
offset by a decrease in employee profit sharing expenses of $249,285 for the
six months ended June 30, 2003.
Realized Gains and Losses on Sales of Portfolio Securities:
-----------------------------------------------------------
During the six months ended June 30, 2003, and June 30, 2002, we
realized net gains on sales of portfolio securities of $28,572 and $799,360,
respectively. The decrease during 2003 was primarily owing to the fact that we
17
neither sold nor liquidated any venture capital investments during the six
months ended June 30, 2003, while during the six months ended June 30, 2002, we
realized net gains of $799,360, consisting primarily of $1,108,226 from our
partnership interest in PHZ Capital Partners L.P., offset by a loss of $350,583
on the dissolution of Informio, Inc.
Unrealized Appreciation and Depreciation of Portfolio Securities:
-----------------------------------------------------------------
During the six months ended June 30, 2003, net unrealized depreciation
on investments increased $459,637, to $3,179,750, from $2,720,113 at December
31, 2002.
The increase was primarily owing to a net increase of $461,934 in
unrealized depreciation of our venture capital investments.
Years Ended December 31, 2002, 2001, and 2000
During the three years ended December 31, 2002, 2001, and 2000, we had
net decreases in net assets resulting from operations of $2,722,194, $6,889,238
and $15,507,207, respectively.
Investment Income and Expenses:
-------------------------------
During the three years ended December 31, 2002, 2001, and 2000, we had
net operating (loss) income of ($1,871,088), ($524,560) and $3,310,250,
respectively. The variation in these results reflects a decrease in the
employee profit sharing accrual that resulted in a reversal of previously
accrued expenses of $163,049 in 2002, $984,021 in 2001, and $4,812,675 in 2000.
When unrealized appreciation as of a certain date subsequently decreases or
increases, the profit sharing accrual decreases or increases accordingly,
resulting in a decrease or increase to expenses.
During the three years ended December 31, 2002, 2001, and 2000,
operating expenses were $2,124,549, $1,035,221 and ($2,623,200), respectively.
The increase during 2002 was primarily owing to a $820,972 reversal of the
profit sharing accrual, as well as an increase in salaries and benefits,
primarily owing to an increase in the retirement medical benefit expense and
the expense of a new employee who started in September 2002, and an increase in
professional fees, primarily as a result of expenses associated with new
investments and preparation of our proxy statement. The increase during 2001
was primarily owing to a $3,828,654 reversal of the profit sharing accrual,
offset by a decrease in all other expenses of $170,233.
Realized Gains and Losses on Sales of Portfolio Securities:
-----------------------------------------------------------
During the three years ended December 31, 2002, 2001, and 2000, we
realized net gains on sales of portfolio securities of $3,284,737, $1,394,781
and $19,065,267, respectively.
During 2002, we realized a gain of $4,776,360 from the liquidation of
our partnership interest in PHZ Capital Partners L.P., and losses of $350,583
and $1,248,825 from the liquidation of Informio, Inc. and the sale of our
previously written-off investment in Schwoo, Inc., respectively.
During 2001, we realized gains on the sales of our investments in
Nanophase Technologies Corporation of $2,762,696 and Genomica Corporation of
$1,022,905. We realized losses on the sales of our investments in:
Essential.com, Inc., $1,349,512; shares of SciQuest.com, Inc. purchased in the
open market, $1,258,679; and MedLogic Global Corporation, $1,033,765. We also
realized a gain of $1,266,729 from our partnership interest in PHZ Capital
Partners L.P. As a result of the gains and losses realized during 2001,
unrealized appreciation increased by $3,948,271.
During 2000, we realized gains on the sales of our investments in
Alliance Pharmaceutical Corp. of $9,693,446 and SciQuest.com, Inc. of
$7,407,377.
Unrealized Appreciation and Depreciation of Portfolio Securities:
-----------------------------------------------------------------
During the three years ended December 31, 2002, 2001, and 2000, net
unrealized appreciation on investments decreased by $3,936,533, $7,731,508 and
$37,934,593, respectively. The decrease during 2002 was
18
primarily owing to decreases in the valuations of our venture capital
investments of $3,933,834, including a decrease in unrealized appreciation of
NeuroMetrix, Inc. of $1,986,081. Unrealized appreciation (depreciation) on
investments was ($2,720,113) and $1,216,420 at December 31, 2002, and 2001,
respectively.
The decrease in 2001 was primarily owing to decreases in the
valuations of our venture capital investments, including decreases in the
valuations of our holdings of Nanophase Technologies Corporation, Genomica
Corporation and Schwoo, Inc. of $5,499,664, $1,540,375 and $1,248,827,
respectively, offset by increases in unrealized appreciation of $1,528,082 and
$1,033,775 as a result of the realization of the losses on the sales of our
investments in SciQuest.com, Inc. and MedLogic Global Corporation.
The decrease in 2000 was primarily owing to decreases in the
valuations of our holdings in SciQuest.com, Inc. of $26,102,456 and Kana
Communications, Inc. of $3,816,204, offset by an increase in the value of our
holding in Nanophase Technologies Corporation of $3,709,449.
Financial Condition
Six Months Ended June 30, 2003
At June 30, 2003, our total assets and net assets were $35,903,212 and
$25,496,210, respectively. Our net asset value per share ("NAV") at that date
was $2.22, and our shares outstanding remained unchanged at 11,498,845 during
the six months ended June 30, 2003.
During the six months ended June 30, 2003, significant developments
included an increase in bank loan payable of $7,983,520, an increase in the
value of our investment in U.S. Treasury Bills of $4,386,032 and an increase in
the value of our venture capital investments to $14,517,674 from $12,036,077 at
December 31, 2002. The increase in the value of our venture capital investments
was primarily owing to three new venture capital investments and one follow-on
investment, partially offset by a net decrease in the value of our other
venture capital investments during the period.
The following table is a summary of additions to our portfolio of
venture capital investments during the six months ended June 30, 2003:
New Investment Amount
-------------- ------
Chlorogen, Inc. $ 525,900
NanoGram Devices Corporation $ 750,000
Nanosys, Inc. $ 1,500,000
Follow-on Investment
--------------------
Nanotechnologies, Inc. $ 169,718
-----------
Total $ 2,945,618
===========
Year Ended December 31, 2002
At December 31, 2002, our total assets and net assets were $35,951,969
and $27,256,046, respectively. Our NAV at that date was $2.37, and our shares
outstanding increased to 11,498,845 versus 8,864,231 at December 31, 2001.
During the 12 months ended December 31, 2002, significant developments
included: (1) the payment of $271,467 in federal income taxes as a result of
our deemed dividend distribution to shareholders; (2) a net decrease in the
unrealized appreciation of our venture capital investments of $3,933,834,
including a decrease in the unrealized appreciation of NeuroMetrix, Inc. of
$1,986,081; (3) a decrease in bank loan payable of $12,495,777; (4) the receipt
of net proceeds of $5,643,470 pursuant to the issuance and exercise of
transferable rights for 2,634,614 new shares of our common stock; and (5) the
receipt of $5,700,000 in cash and a recorded receivable in the amount of
$786,492 related to the liquidation of our partnership interest in PHZ Capital
Partners L.P.
19
In addition, the value of our venture capital investments decreased by
$1,084,901, to $12,036,077 at December 31, 2002, primarily owing to seven new
venture capital investments and two follow-on investments totaling $7,195,988,
partially offset by write-downs in the valuations of our venture capital
investments of $5,213,959 and the liquidations of Informio, Inc. and our
partnership interest in PHZ Capital Partners L.P., which decreased the value of
our venture capital investments by a total of $3,072,382 from the value at
December 31, 2001.
The following table is a summary of additions to our portfolio of
venture capital investments for the year ended December 31, 2002:
New Investment Amount
-------------- ------
Agile Materials & Technologies, Inc. $ 1,000,000
Continuum Photonics, Inc. $ 1,000,000
Nanopharma Corp. $ 700,000
NanoOpto Corporation $ 625,000
Nanotechnologies, Inc. $ 750,000
Neo Photonics Corporation $ 1,000,000
Optiva, Inc. $ 1,250,000
Follow-on Investment
--------------------
Experion Systems, Inc. $ 517,706
NeuroMetrix, Inc. $ 353,282
-----------
Total $ 7,195,988
===========
Year Ended December 31, 2001
At December 31, 2001, our total assets and our net assets were
$39,682,367 and $24,334,770, respectively. Our NAV at that date was $2.75, and
our shares outstanding were 8,864,231.
During the 12 months ended December 31, 2001, significant developments
included: (1) the payment of $5,709,884 in federal income taxes as a result of
our deemed dividend distribution; (2) a net decrease in the unrealized
appreciation of our venture capital investments of $7,731,465, including a
write-off for book purposes of the value of our holdings in Schwoo, Inc. of
$1,248,827; (3) sales of our holdings in Nanophase Technologies Corporation,
Genomica Corporation, SciQuest.com, Inc., Essential.com and MedLogic Global
Corporation; and (4) a change in our valuation policy as of March 31, 2001, in
accordance with newly promulgated SEC guidelines. We changed our valuation
policy by no longer discounting publicly held securities for liquidity
considerations. (See "Asset Valuation Policy Guidelines" in the "Footnote to
Consolidated Schedule of Investments.")
The following table is a summary of additions to our portfolio of
venture capital investments for the year ended December 31, 2001:
New Investment Amount
-------------- ------
Schwoo, Inc. $ 888,577
Nantero, Inc. $ 489,999
Follow-on Investment
--------------------
Experion Systems, Inc. $ 80,000
Loan
----
Schwoo, Inc. $ 360,250
------------ -----------
Total $ 1,818,826
----- -----------
20
The following table summarizes fair value of our entire investment
portfolio, as compared with its cost, at June 30, 2003, December 31, 2002, and
December 31, 2001:
June 30, December 31,
2003 2002 2001
---------- ----------- ------------
Investments, at cost $37,534,201 $30,206,935 $37,714,285
Unrealized (depreciation)
appreciation(1) (3,179,750) (2,720,113) 1,216,420
Investments, at fair value $34,354,451 $27,486,822 $38,930,705
(1) At June 30, 2003, December 31, 2002, and December 31, 2001, the
accumulated unrealized depreciation on investments, net of deferred taxes,
was $3,849,094, $3,389,458 and $148,049, respectively.
The following table summarizes the fair value composition of our
venture capital investment portfolio at June 30, 2003, December 31, 2002, and
December 31, 2001:
June 30, December 31,
Category 2003 2002 2001
-------- -------- -------- ---------
Tiny Technology 57.0% 49.0% 9.3%
Other Venture Capital Investments 43.0% 51.0% 90.7%
Total Venture Capital Investments 100.0% 100.0% 100.0%
Cash Flow
Year Ended December 31, 2002
Cash flow provided by operating activities for the year ended December
31, 2002, was $1,923,048, reflecting the following changes from December 31,
2001, to December 31, 2002: an increase in a payable to a broker for an
unsettled trade of $5,969,725; an increase in funds held in escrow of $750,000;
and an increase in a receivable from a partnership liquidation of $786,492. In
addition, net realized and unrealized loss on investments was $651,797, and the
net decrease in net assets resulting from operations was $2,722,194.
Cash provided by investing activities for the year ended December 31,
2002, was $10,751,980, reflecting a decrease in our investment in U.S. Treasury
Bills of $10,358,006 and the proceeds from the liquidation of investments of
$7,631,100, offset by investments in private placements of $7,195,988.
Cash used in financing activities for the year ended December 31,
2002, was $6,842,807, reflecting the payment of the outstanding balance on the
asset line of credit of $12,495,777, offset by the net proceeds from a rights
offering of $5,643,470. We intended to invest in tiny technology, under normal
circumstances, directly or indirectly, the net proceeds of the rights offering
in accordance with its investment objectives and policies, within the 12 months
following the receipt of the net proceeds of the rights offering, depending on
the available investment opportunities.
Liquidity and Capital Resources
Our primary sources of liquidity are cash, receivables and freely
marketable securities, net of short-term indebtedness. Our secondary sources of
liquidity are restricted securities of companies that are publicly traded.
Six Months Ended June 30, 2003
At June 30, 2003, and December 31, 2002, our total net primary
liquidity was $12,134,541 and $16,508,057, respectively. At both dates, our
secondary liquidity was $0, as we had no restricted securities of companies
that are publicly traded. During these periods, our tertiary source of
liquidity was our partnership interest in PHZ Capital Partners L.P., which was
liquidated effective December 31, 2002. We received the final distribution of
$786,492 from PHZ Capital Partners L.P. in the first quarter of 2003.
21
During the six months ended June 30, 2003, the decrease in our net
primary sources of liquidity was primarily owing to: (1) the payment of
federal, state and local taxes; (2) our investments in Chlorogen, Inc.,
Nanotechnologies, Inc. and Nanosys, Inc.; and (3) our use of funds for net
operating expenses.
From December 31, 2002, to June 30, 2003, our liability for accrued
employee profit sharing decreased by $13,710 to $1,523, as a result of the
payment of $13,710 in partial settlement of our 2002 profit sharing obligation.
The remaining 2002 profit sharing accrual of $1,523 will be paid upon the
completion and filing of our 2002 federal tax return.
Our total net income tax liability decreased by $935,945, from
$1,527,000 at December 31, 2002, to $591,055 at June 30, 2003, primarily as a
result of federal, state and local payments made for income earned in 2002.
Year Ended December 31, 2002
At December 31, 2002, 2001, and 2000, our net primary liquidity was
$16,508,057, $13,459,654 and $23,039,736, respectively. On the corresponding
dates, our secondary liquidity was $0, $0 and $3,040,679, respectively. Our
tertiary source of liquidity was our partnership interest in PHZ Capital
Partners L.P., from which we received cash distributions in 2002, 2001, and
2000 of $6,588,661, $172,068 and $280,326, respectively. We liquidated our 20%
partnership interest in PHZ for $5,700,000 effective December 31, 2002, and we
received a final distribution of $786,492 on January 16, 2003. At December 31,
2002, this final distribution of $786,492 was included in net primary liquidity
as a receivable.
During the year ended December 31, 2002, the increase in our net
primary liquidity was primarily owing to: (1) our payment of federal income
taxes; (2) our investments in Nanopharma Corp., NanoOpto Corporation,
NeoPhotonics Corporation, Experion Systems, Inc., Continuum Photonics, Inc.,
Nanotechnologies, Inc., Optiva, Inc., Agile Materials & Technologies, Inc. and
NeuroMetrix, Inc.; (3) our funds held in escrow for a pending venture capital
investment; and (4) our use of funds for operating expenses; offset by our
receipt of $5,643,470 of net proceeds from a rights offering of our common
stock that closed July 31, 2002.
From December 31, 2001, to December 31, 2002, restricted funds
increased by $274,924, or 57.0%, owing to our 2002 contribution of $147,478 to
the Supplemental Executive Retirement Plan, or SERP account, and net changes in
the account from income earned and changes in investments valuations.
From December 31, 2001, to December 31, 2002, our liability for
accrued profit sharing decreased by $163,049 to $15,233, to reflect the
estimated amount to be paid out under the profit sharing plan. Current income
tax liability increased by $602,588 to $857,656, owing primarily to income
recorded in association with the liquidation of our partnership interest in PHZ
Capital Partners L.P.
On November 19, 2001, we established an asset account line of credit
of up to $12,700,000. The asset account line of credit is secured by our U.S.
government and government agency securities. Under the asset account line of
credit, we may borrow up to 95% of the current value of our U.S. government and
government agency securities. Our outstanding balance under the asset line of
credit at December 31, 2002, and December 31, 2001, was $0 and $12,495,777,
respectively. The asset line of credit bears interest at a rate of the Broker
Call Rate plus 50 basis points.
Our net primary sources of liquidity are more than adequate to cover
our gross cash operating expenses over the next 12 months. Such gross cash
operating expenses totaled $2,256,991, $1,992,341 and $2,051,086 in 2002, 2001,
and 2000, respectively.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and those
that require management's most difficult, complex or subjective judgments. Our
critical accounting policies are those applicable to the valuation of
investments.
22
Valuation of Portfolio Investments
As a business development company, we invest primarily in illiquid
securities including debt and equity securities of private companies. The
investments are generally subject to restrictions on resale and generally have
no established trading market. We value substantially all of our equity
investments at fair value as determined in good faith by our valuation
committee. The valuation committee, comprised of at least three or more
non-interested board members, reviews and approves the valuation of our
investments within the guidelines established by the board of directors. Fair
value is generally defined as the amount that an investment could be sold for
in an orderly disposition over a reasonable time. Generally, to increase
objectivity in valuing our assets, external measures of value, such as public
markets or third party transactions, are utilized whenever possible. Valuation
is not based on long term work-out value, nor immediate liquidation value, nor
incremental value for potential changes that may take place in the future.
Recent Developments -- Portfolio Companies
On January 16, 2003, we received $786,492 as final payment in the
liquidation of our partnership interest in PHZ Capital Partners L.P.
On February 3, 2003, we announced that we had invested $750,000 in a
convertible preferred security of NanoGram Devices Corporation. NanoGram
Devices has developed and is commercializing specialized power sources for
medical devices and other medical equipment based on its patented, laser-based
nanomaterials synthesis technology.
On August 1, 2003, we made a follow-on investment of $323,000 in
preferred stock of one of our privately held tiny technology companies that has
not yet announced this financing.
Recent Developments -- Other
Our qualification as a RIC under Sub-Chapter M of the Code depends on
our satisfying certain technical requirements regarding our income, investment
portfolio and distributions. On April 2, 2003, we received SEC certification
and qualified for RIC treatment for 2002. Although the SEC certification for
1999-2002 was issued, there can be no assurance that we will receive such
certification for subsequent years (to the extent we need additional
certification as a result of changes in our portfolio) or that we will actually
qualify as a RIC for subsequent years. In addition, under certain
circumstances, even if we qualified for Sub-Chapter M treatment in a given
year, we might take action in a subsequent year to ensure that we would be
taxed in that subsequent year as a C Corporation, rather than as a RIC.
BUSINESS
We are a venture capital company specializing in tiny technology. We
operate as a business development company under the 1940 Act. Our investment
objective is to achieve long-term capital appreciation, rather than current
income, by making venture capital investments in early stage companies. While
our portfolio includes non-tiny technology investments made prior to 2001, we
now make our initial investments exclusively in tiny technology companies. By
making these investments, we seek to provide our shareholders with an
increasingly pure play on tiny technology through a reasonably diversified
portfolio of venture capital investments. We believe we are the only publicly
traded U.S. venture capital company specializing in tiny technology.
We have a long history of investing in venture capital and of business
development. Our approach is traditional, in that we prefer a patient
examination of available early stage opportunities, thorough due diligence and
close involvement with management. To the investor, we offer:
o a portfolio consisting of investments that are generally
available only to a small, highly specialized group of
investors;
o a highly qualified team of professionals with expertise in
venture capital investing, intellectual property and
nanotechnology to evaluate and monitor investments;
o the opportunity to benefit from our experience in a new field
expected to permeate a variety of industries; and
23
o through the ownership of our publicly traded shares, a
measure of liquidity not available in typical venture capital
investments.
Microsystems, microelectromechanical systems ("MEMS") and
nanotechnology are often referred to collectively as "tiny technology," or
"small technology," by scientists and others in this field. Tiny technology is
multidisciplinary and widely applicable, and it incorporates technology that is
significantly smaller than is currently in general use. Microsystems are
measured in micrometers, which are units of measurement in millionths of a
meter. Nanotechnology is measured in nanometers, which are units of measurement
in billionths of a meter. Because it is a new field, tiny technology has
significant scientific, engineering and commercialization risks.
Tiny technology, particularly nanotechnology, is distinguished by its
applicability to a wide range of industries. As a venture capital company, we
make it possible, through the ownership of our shares, for our shareholders to
participate in this emerging field at an earlier stage than would typically be
possible for them. By making investments in companies that control intellectual
property relevant to tiny technology, we are building a portfolio that we
believe will be difficult to replicate in the future.
Since registering as an investment company in 1992, we have invested
in a variety of industries. In 1994, we invested in our first nanotechnology
company, Nanophase Technologies Corporation, which completed an initial public
offering in 1997, and in which we sold our interest in 2001. Recognizing the
potential of tiny technology, we continued to monitor developments in the
field, eventually making tiny technology the exclusive focus of our initial
investment activity. Since August 2001, all 12 of our initial investments have
been in companies involved in the development of products and technologies
based on tiny technology.
Our portfolio now includes a total of 18 companies, of which we
consider 13 to be involved in tiny technology. While we intend to make initial
investments exclusively in companies that we believe are involved significantly
in tiny technology, we may also make follow-on investments in existing non-tiny
technology portfolio companies. The balance of our funds is primarily invested
in short-term U.S. government and government agency securities. We are an
internally managed investment company because our officers and employees, under
the general supervision of our board of directors, control our operations. We
have no investment adviser.
Subject to our compliance with business development company and tax
code requirements, there are no limitations on the types of securities or other
assets, foreign or domestic, in which we may invest. Investments may include
the following:
o equity, equity-related securities (including warrants) and debt
with equity features from either private or public issuers,
whether in corporate, partnership or other form, including
development stage or start-up entities;
o debt obligations of all types having varying terms with respect
to security or credit support, subordination, purchase price,
interest payments and maturity; and
o to a limited extent, intellectual property, including patents,
research and development in technology or product development
that may lead to patents or other marketable technology.
Neither our investments nor an investment in our securities
constitutes a balanced investment program. We have been and will continue to be
risk seeking rather than risk averse in our investment approach. We reserve the
fullest possible freedom of action, subject to our certificate of
incorporation, applicable law and regulations, and policy statements described
herein. Our tiny technology investment policy is not a "fundamental policy"
under the 1940 Act and, accordingly, may be changed without shareholder
approval, although we will give shareholders at least 60 days prior notice of
any change.
Our business is subject to federal regulation under the 1940 Act,
under which we have elected to operate as a business development company. As a
business development company, we are subject to regulatory requirements, the
most significant of which relate to our investments and borrowings. We are
required to invest at least 70% of our assets in qualifying assets and, over
time, at least 50% in "eligible portfolio companies." We must also maintain a
coverage ratio of assets to senior securities (such as debt and preferred
stock) of at least 200% immediately after giving effect to the issuance of any
senior securities. We are also required to offer managerial assistance to our
24
portfolio companies, in addition to our investment. For tax purposes, we are a
RIC under the Internal Revenue Code of 1986. Both our status as a business
development company and our status as a RIC allow us to commit all of our
assets to only a few investments.
We believe that increasing our size should lower our expenses as a
proportion of average net assets because some of our costs, such as
administration and public company expenses, are fixed and can be spread over a
larger asset base and will decline as a percentage of assets as assets
increase. Each due diligence investigation entails expenses whether or not a
transaction is consummated, and the cost of due diligence and negotiation and
documentation of our investments does not vary significantly with the size of
the investment or intended investment.
Some expenses are expected to increase as new investments are made. We
plan to add personnel to enable us to enlarge the scope of our activities and
our expertise in tiny technology, and our hiring of new employees will increase
with more assets under management. We also believe that a larger number of
outstanding shares and a larger number of beneficial owners of shares could
increase the level of our visibility and improve the trading liquidity of our
shares on the Nasdaq National Market. We may not realize any of these benefits.
Tiny Technology
Tiny technology refers to microsystems, MEMS and nanotechnology, a
variety of enabling technologies with critical dimensions below 100
micrometers, including both organic and inorganic processes. Tiny technology is
neither an industry nor a single technology. Tiny technology manifests itself
in tools, materials and devices that address broad markets, including
instrumentation, electronics, photonics, computing, medical devices,
pharmaceutical manufacturing, drug delivery and drug discovery. The development
and commercialization of tiny technology often require the integration of
multiple disciplines, including biology, physics, chemistry, materials
sciences, computer science and the engineering sciences.
Examples of tiny technology-enabled products currently on the market
are quite diverse. They include accelerometers used in automobiles to sense
impact and release airbags, cosmetics with ingredients that block UV light but
that are invisible to the human eye, nanoclays used for strength in the running
boards of minivans, textiles with liquid-stain repellant surfaces and
over-the-counter painkillers with increased delivery speeds.
Within tiny technology, microsystems and MEMS both refer to materials,
devices and processes that are on a micrometer size scale. A micrometer, which
is also referred to as a micron, is .000001 meter, or one millionth of a meter.
In practice, any device from 100 microns down to 0.1 micron in size may be
considered "micro." Nanotechnology refers to devices and processes with
critical dimensions below 100 nanometers. A nanometer is .000000001 meter, or
one billionth of a meter. It is at the scale below 100 nanometers, the
nanoscale, that quantum effects begin to dominate classical macroscale physics.
At the nanoscale, size- and shape-dependent properties of materials allow
heretofore unattainable material and device performance.
MEMS
MEMS often refer to three-dimensional devices with features between
one and 100 microns that integrate electrical and mechanical structures. MEMS
devices often contain a combination of sensors, actuators, mechanical
structures and electronics that detect or respond to thermal, biological,
chemical or optical information. To date, most commercial MEMS devices are
batch fabricated out of silicon, using techniques based on standard
semiconductor processes. Examples of devices incorporating MEMS technology
include airbag accelerometers, smart pens for digital signatures, the Sony
AIBO(TM) entertainment robot and Texas Instruments' Digital Light Processing
Cinema(TM) system.
Microsystems
Microsystems are similar to MEMS, but without mechanical parts.
Microsystems are microscale machines that sense information from the
environment and provide a response to it. A microsystem often integrates
mechanical, fluidic, optical and pneumatic components into a single system.
Examples of two established microsystem technologies include
microarrays and lab-on-a-chip. Microarrays can identify thousands of genes
simultaneously and usually perform one type of analysis multiple times.
Lab-on-a-
25
chip is a small chip containing microfluidic channels that quickly
separate liquids and gases in order to permit microsensors to analyze the
properties of the liquids and gases. The following are additional fields in
which microsystems are currently being used:
o Military/Aerospace -- telemetry, communications, guidance
systems, control circuitry and avionics.
o Geophysical Exploration -- seismic data acquisition and
geophysical measurement equipment.
o Medical Instrumentation -- instrument motor controls and
diagnostic devices.
o Satellite Systems -- power monitoring and control circuits.
o Industrial Electronic Systems -- measurement and diagnostics
on rotating machinery.
o Opto-Electronics -- sub-miniature temperature controls and
laser diode drivers for data transmission.
Nanotechnology
There are various definitions of nanotechnology. Regardless of the
definition used, the technology being defined qualifies as tiny technology. A
commonly used measure of nanotechnology includes all materials, devices and
processes with critical dimensions below 100 nanometers. A nanometer is
..000000001 meter, or one billionth of a meter. Nanotechnology is defined by the
U.S. Government's National Nanotechnology Initiative as research and technology
development at the atomic, molecular or macromolecular levels, in the length
scale of approximately 1 - 100 nanometer range, to provide a fundamental
understanding of phenomena and materials at the nanoscale and to create and use
structures, devices and systems that have novel properties and functions
because of their small and/or intermediate size.
The nanoscale is the scale at which quantum effects begin to dominate
classical macroscale physics. At the nanoscale, size- and shape-dependent
properties of materials allow heretofore unattainable material and device
performance. Nanotechnology science and its implications are currently the
subject of intense research and development efforts in the governmental,
academic and corporate sectors, in the United States and internationally.
According to the National Institute of Science and Technology, in 2003,
worldwide research and development efforts in nanotechnology are expected to
exceed $3 billion.
Government research funding and patenting activity, prerequisites to
successful commercialization of nanotechnology, have been growing rapidly in
recent years. Currently, researchers in the field are collaborating with
entrepreneurs and venture capitalists to form companies around nanotechnology
platforms. According to the National Institute of Science and Technology, in
April 2003, more than 1,700 companies in 34 nations were reportedly pursuing
the commercialization of nanotechnology.
The first generation of nanotechnology products consists of
instrumentation that permits visualization and manipulation of matter at the
nanoscale and passive nanostructures such as coatings, nanoparticles and
polymers. Examples of commercial instrumentation include nanoimprint
lithography equipment, new variations of the atomic force microscope and highly
sensitive gene and protein detecting arrays. Examples of commercial
nanostructures include cosmetics with ingredients that block UV light but that
are invisible to the human eye, nanoclays used for strength in the running
boards of minivans, textiles with liquid-stain repellant surfaces, faster
acting painkillers, quantum dot semiconductors that fluoresce different colors
based on the size of the particles and nanoscale chemical mechanical polishing
slurries for wafer polishing.
We believe that the next generation of nanotechnology products will
likely consist of active nanostructures, including transistors, targeted drugs
and chemicals, actuators and adaptive structures. We believe that these
products are at least two to three years away from commercial application.
Examples of products being developed include semiconductor nanowires that act
as tiny transistors; functionalized, drug-delivering polymers that allow the
release of therapeutics to be controlled by temperature, pH or a magnetic field
at specified locations within the body; and engineered membrane structures for
filtration.
We project that longer-term product opportunities may include
integrated nanosystems involving heterogeneous nanocomponents and various
assembling techniques. Patents explaining the science of these discoveries have
recently been filed, and the first commercial entities formed to develop these
technologies are emerging from universities, federal labs and industrial
research centers. Future product opportunities may include exponentially denser
and faster electronic devices, with individual molecules acting as transistors;
tissues and organs
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engineered from self-assembling polymers that form biomimetic structures; and
new forms of computing developed by exploiting the superposition of quantum
particles.
Although the practical application of tiny technology requires great
expertise to implement in manufacturing processes, we believe that tiny
technology's broad applicability presents significant and diverse market
opportunities. Our strategy is to try to invest in the best of these tiny
technology companies, with particular emphasis on nanotechnology companies.
This strategy includes making a number of these investments in the current
environment, which is characterized by diminished investment by venture capital
companies and depressed valuations for privately held, early stage companies.
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES
The following are brief descriptions of each portfolio company in
which we are invested. The portfolio companies are presented in two categories:
companies where we directly or indirectly own 5% to 25% of the outstanding
voting securities of the portfolio company or where we hold one or more seats
on the portfolio company's board of directors and, therefore, are deemed to be
an affiliated person under the 1940 Act; and companies where we directly or
indirectly own less than 5% of the outstanding voting securities of such
portfolio company and where we have no other affiliations. Each portfolio
company that we believe is significantly involved in tiny technology is
designated by an asterisk (*).
Non-Controlled Affiliated Companies:
*Agile Materials & Technologies, Inc. ("Agile"), located at 93 Castilian
Drive, Goleta, California 93117, is developing and commercializing
variable integrated passive electronic components utilizing thin-film
ferroelectric materials in innovative circuit designs for commercial and
military radio-frequency electronics. As of June 30, 2003, we held
3,732,736 shares of Series A Convertible Preferred Stock (representing
14.76% of the total Series A Convertible Preferred Stock outstanding) of
Agile. As of the date above, our valuation committee valued the Series A
Preferred Stock of Agile held by us at $1,000,000. The Chief Executive
Officer of the company is Charles A. Bischof.
*Chlorogen, Inc. ("Chlorogen"), located at 893 North Warson Road, St.
Louis, Missouri 63141, is developing a high-yield, plant-based protein
production technology. In this production technology, DNA molecules are
packaged as nanosized expression cassettes and inserted into the plant
chloroplast by a high velocity "gene gun." The genes from the expression
cassettes are integrated into the chloroplast genome, resulting in the
manufacture of the selected protein. As of June 30, 2003, we held
3,000,000 shares of Series A Convertible Preferred Stock (representing
9.52% of the total series A Convertible Preferred Stock outstanding) of
Chlorogen. As of the date above, our valuation committee valued the Series
A Preferred Stock of Chlorogen held by us at $525,900. The Chief Executive
Officer of the company is David N. Duncan.
Experion Systems, Inc. ("Experion"), located at 8 Clock Tower Place,
Maynard, Massachusetts 01754, develops and sells an e-business software
package known as Guided Selling Systems (GSS) for financial institutions
to sell mortgages and other financial products to their members.
Experion's initial customers are credit unions. As of June 30, 2003, we
held 294,118 shares of Series A Convertible Preferred Stock (representing
24.29% of the total shares of Series A Convertible Preferred Stock
outstanding), 35,294 shares of Series B Convertible Preferred Stock
(representing 8.83% of the total shares of Series B Convertible Preferred
Stock outstanding) and 222,184 shares of Series C Convertible Preferred
Stock (representing 16.71% of the total shares of Series C Convertible
Preferred Stock outstanding) of Experion. As of the above date, our
valuation committee valued the total amount of shares of Experion held by
us at $1,037,000. Charles E. Harris serves as a Director of the company.
Ross Blair is the Chief Executive Officer of the company, and Dr. Glen
Urban, the David Austin Professor of Marketing at the MIT Sloan School, is
the Chairman of the company.
*NanoGram Devices Corporation ("NDC"), located at 46774 Lakeview
Boulevard., Fremont, California 94538, is a spinoff from NeoPhotonics. NDC
is commercializing specialized power sources for medical devices and other
medical equipment based on its patented, laser-based nanomaterial
synthesis technology. As of June 30, 2003, we held 63,210 shares of Series
A-1 Convertible Preferred Stock (representing 1.81% of the total Series
A-1 Convertible Preferred Stock outstanding) and 750,000 shares of Series
A-2 Convertible Preferred Stock (representing 8.15% of the total Series
A-2 Convertible Preferred stock outstanding) of NDC. As of the date above,
our valuation committee valued the total amount of shares of NDC held by
us at $813,210. The Chief Executive Officer of the company is Barry
Cheskin.
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*Nanopharma Corp. ("Nanopharma"), located at 191 Commonwealth Avenue,
Boston, Massachusetts 02116, is a privately held company spun off from
Massachusetts General Hospital. Nanopharma is a research-based
pharmaceutical company founded to develop advanced drug delivery systems.
Nanopharma's main goal is to provide fully biodegradable nanoscopic drug
delivery vehicles based on proprietary molecular constructs and
"biological stealth" materials. The company plans to pursue an
out-licensing program for its platform technologies. As of June 30, 2003,
we held 684,516 shares of Series A Convertible Preferred Stock
(representing 87.5% of the total Series A Convertible Preferred Stock
outstanding) of Nanopharma. As of the date above, our valuation committee
valued the Series A Convertible Preferred Stock of Nanopharma held by us
at $350,000. Charles E. Harris is a Director of the company. The Chief
Executive Officer of the company is Michael Tarnow.
*Nanotechnologies, Inc. ("Nanotechnologies"), located at 1908 Kramer Lane,
Building B, Suite L, Austin, Texas 78758, is developing for production a
wide variety of high-performance nanoscale materials for industry. As of
June 30, 2003, we held 1,538,837 shares of Series B Convertible Preferred
Stock (representing 11.77% of the total Series B Preferred Stock
outstanding) and 235,720 shares of Series C Convertible Preferred Stock
(representing 6.48 % of the total Series C Preferred Stock outstanding) of
Nanotechnologies. As of the date above, our valuation committee valued the
total amount of shares of Nanotechnologies held by us at $1,277,681. The
Chief Executive Officer of the company is Randy Bell.
NeuroMetrix, Inc. ("NeuroMetrix"), located at 62 Fourth Avenue, Waltham,
Massachusetts 02451, is a spin-off from the Massachusetts Institute of
Technology. NeuroMetrix develops and sells medical diagnostic products
based on patented intellectual property related to developing portable
instruments that permit low cost, non-invasive diagnostic tests. The
company's core technology is focused on utilizing low-level,
non-invasively measured, electrophysiological signals from nerves and
muscles to perform an array of clinical diagnostic tests. The company's
current products test for and monitor lower back pain, carpal tunnel
syndrome and diabetic neuropathy. The company is operating in a large,
untapped point-of-care neurodiagnostic market. The market opportunity is
estimated at over $1 billion with over 90% of it estimated to be in
monitoring lower back pain, carpal tunnel syndrome and diabetic
neuropathy. There is minimal direct competition but strong indirect
competition that takes two forms, ElectroMyoGraphy (EMG) and neurologists.
EMG requires expensive capital equipment and is targeted at specialists.
Neurologists are expensive, require referral and provide no revenue for
referring physicians. The company has a small but rapidly growing market
share. The company now has over 1,000 customers. The company achieved
initial 510(k) clearance from the Food and Drug Administration in 1998.
Revenue is affected by government regulations specific to reimbursement
procedures. The company is highly dependent on its intellectual property
platform position. As of June 30, 2003, we held 875,000 shares of Series A
Convertible Preferred Stock (representing 100% of the total Series A
Convertible Preferred Stock outstanding), 625,000 shares of Series B
Convertible Preferred Stock (representing 100% of the total Series B
Convertible Preferred Stock outstanding), 1,148,100 shares of Series C-2
Convertible Preferred Stock (representing 28.72 % of the total Series C
Convertible Preferred Stock outstanding), 499,996 shares of Series E
Convertible Preferred Stock (representing 6.0% of the total Series E
Convertible Preferred Stock outstanding) and 235,521 shares of Series E-1
Convertible Preferred Stock (representing 17.66% of the total Series E-1
Convertible Preferred Stock outstanding) of NeuroMetrix. As of the date
above, our valuation committee valued the total amount of shares of
NeuroMetrix held by us at $5,075,426. Charles E. Harris serves as a
Director of the company. The Chief Executive Officer of the company is Dr.
Shai N. Gozani. The Chief Operating Officer is Gary Gregory. Senior Vice
President of Engineering is Michael Williams.
*Questech Corporation ("Questech"), located at 92 Park Street, Rutland,
Vermont 05701, manufactures and sells custom tile lines and trim products,
based on its proprietary technology, with revenue generated primarily from
stock products. We originally invested in Questech on May 26, 1994. We did
not invest in Questech as a tiny technology company, but Questech's
proprietary technology is dependent on micro-scale processes. Thus,
Questech may be regarded as a tiny technology holding. As of June 30,
2003, we held 646,954 shares of Common Stock (representing 8.54% of the
total Common Stock outstanding) of Questech, as well as warrants to
purchase 1,966 shares of Common Stock of the company at $5.00 per share
and 13,500 shares of Common Stock of the company at $1.50 per share. As of
the date above, our valuation committee valued the Common Stock of
Questech held by us at $724,588. Mel P. Melsheimer serves as a Director of
the company. The Chief Executive Officer of the company is Barry J.
Culkin.
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Unaffiliated Companies:
Alpha Simplex Group, LLC ("Alpha"), located at One Cambridge Center, 9th
Floor, Cambridge, Massachusetts 02139, is an investment advisory firm. The
company conducts a quantitative based hedge-fund operation. Alpha was
founded by Dr. Andrew W. Lo, the Harris & Harris Group Professor at the
MIT Sloan School. Charles E. Harris serves as an adviser to the company.
As of June 30, 2003, we held 50,000 units (representing 0.5% of the total
units outstanding) of Alpha, at no cost, subject to vesting at the rate of
2,500 units per quarter. As of June 30, 2003, 42,500 units were fully
vested at a valuation of $106,250. The Managing Member of the company is
Dr. Andrew W. Lo.
*Continuum Photonics, Inc. ("Continuum"), located at 45 Manning Road,
Billerica, Massachusetts 01821, is developing a family of MEMS switches
for optical network applications. The switches are based on continuum's
proprietary piezoelectric ceramic substrates. As of June 30, 2003, we held
2,000,000 shares of the Series B Convertible Preferred Stock (representing
6.91% of the total Series B Preferred Stock outstanding) of Continuum. As
of the date above, our valuation committee valued the Series B Preferred
Stock of Continuum held by us at $86,380. The Chief Executive Officer of
the company is Jeffrey D. Farmer.
Exponential Business Development Company ("EBDC"), located at 216 Walton
Street, Syracuse, New York 13202, is a venture capital partnership that
invests in early stage manufacturing, software development and
communication technology industries in New York's Capitol region. As of
June 30, 2003, we held one Limited Partnership Unit (representing 0.87% of
the total Limited Partnership Units outstanding) of EBDC. As of the date
above, our valuation committee valued the Limited Partnership Unit of EBDC
held by us at $25,000. The Administrative Partner of the company is Dirk
E. Sonneborn.
Heartware, Inc. ("Heartware"), located at 3351 Executive Way, Miramar,
Florida 33025, is a privately held company engaged in research and
development of implantable rotary blood pumps for patients who suffer from
congestive heart failure. On July 10, 2003, we received 47,620 shares of
Series A-2 Non-Voting Preferred stock of Heartware, Inc., a new company
formed to acquire the assets and assume certain liabilities of Kriton
Medical, Inc. ("Kriton") as part of Kriton's bankruptcy. As of September
30, 2003, we held 47,620 shares of Series A-2 Non-Voting Preferred Stock
(representing 10.90% of the total Series A-2 Non-Voting Preferred Stock
outstanding) of Heartware. As of the date above, our valuation committee
valued the Series A-2 Non-Voting Preferred Stock of Heartware held by us
at $0. The Chief Executive Officer of the company is Seth Harrison.
*NanoGram Corporation ("NanoGram"), located at 2911 Zanker Road, San Jose,
California 95134, owns a patent portfolio of approximately 75 patents and
a complementary family of trademarks. NanoGram plans to license its broad
intellectual property portfolio in fields including, nanomaterials-based
films, discovery of new nanomaterials compositions, and rapid synthesis of
nanopowders and films. As of June 30, 2003 we held 63,210 shares of Series
1 Preferred Stock (representing 1.81% of the total shares of Series 1
Preferred Stock outstanding) of NanoGram. As of the date above, our
valuation committee valued the Series 1 Preferred Stock of NanoGram held
by us at $21,672. The Chief Executive Officer of the company is Timothy S.
Jenks.
*NanoOpto Corporation ("NanoOpto"), located at 1600 Cottontail Lane,
Somerset, New Jersey 08873, is developing and manufacturing high
performance, integrated optical communications and optical drive
sub-components in a chip, based on patented technology. As of June 30,
2003, we held 267,857 shares of Series A-1 Convertible Preferred Stock
(representing 7.81% of the total Series A-1 Convertible Preferred Stock
outstanding) of NanoOpto. As of the date above, our valuation committee
valued the Series A-1 Convertible Preferred Stock of NanoOpto held by us
at $128,292. The Chief Executive Officer of the company is Barry J.
Weinbaum.
*Nanosys, Inc. ("Nanosys"), located at 2625 Hanover Street, Palo Alta,
California 94304, is a company with broad-based intellectual property that
is initially commercializing applications in macroelectronics,
photovoltaics, and chemical and biological sensing. These applications
incorporate novel zero and one-dimensional, nanometer-scale materials,
such as nanowires and nanodots (quantum dots), as their principal active
elements. As of June 30, 2003, we held 803,428 shares of Series C
Convertible Preferred Stock (representing 4.03% of the total Series C
Convertible Preferred Stock outstanding) of Nanosys. As of the date above,
our valuation committee valued the Series C Preferred Stock of Nanosys
held by us at $1,500,000. The Chief Executive Officer of the company is
Lawrence A. Bock.
29
*Nantero, Inc. ("Nantero"), located at 25-D Olympia Avenue, Woburn,
Massachusetts 01801, is a spin-off from Harvard University. Nantero
intends to be a fabless semiconductor company, focusing on the development
of non-volatile random access memory (NRAM) based on carbon nanotubes. As
of June 30, 2003, we held 345,070 shares of Series A Preferred Stock
(representing 8.17% of the total Series A Preferred Stock outstanding) of
Nantero. As of the date above, our valuation committee valued the Series A
Preferred Stock of Nantero held by us at $489,999. The Chief Executive
Officer of the company is Greg Schmergel.
*NeoPhotonics Corporation ("Neo"), located at 2911 Zanker Road, San Jose,
California 95134, is developing planar optical devices and components to
manufacture and offer to leading optical component manufacturers using its
patented nanomaterials deposition technology. The company is developing
functional component arrays to offer integrated optical "systems on a
chip" to component vendors. As of June 30, 2003, we held 1,498,802 shares
of Series D Convertible Preferred Stock (representing 3.48% of the total
Series D Convertible Preferred Stock outstanding) of Neo. As of the date
above, our valuation committee valued the total amount of shares of Neo
held by us at $106,276. The Chief Executive Officer of the company is
Timothy S. Jenks.
*Optiva, Inc. ("Optiva"), located at 377 Oyster Point Boulevard, Suite 13,
South San Francisco, California 94080, is developing and commercializing a
new class of nanomaterials for advanced optical applications initially for
the flat panel display industry. As of June 30, 2003, we held 1,249,999
shares of the Series C Preferred Stock (representing 4.13% of the total
Series C Preferred Stock outstanding) of Optiva. As of the date above, our
valuation committee valued the Series C Preferred Stock of Optiva held by
us at $1,250,000. The Chief Executive Officer of the company is Alan
Marty.
With the exceptions of Alpha, NeuroMetrix, Questech and Experion, each
of the foregoing portfolio companies is in its developmental stage or is a
start-up business. Although Alpha, NeuroMetrix, Questech and Experion are each
generating revenues that are material to them, they are still relatively
early-stage companies with the attendant risks. Any of the companies may
require additional funding that may not be obtainable at all or on the terms of
their most recent fundings, which would result in partial or complete
write-downs in value. In general, private equity is difficult to obtain,
especially in the current economic environment. Each company is dependent upon
a single or small number of customers and/or key operating personnel. All of
the foregoing companies rely heavily upon the technology associated with their
respective business or, in the case of EBDC, with the companies in which it
invests. Therefore, each company places great importance on its relevant
patents, trademarks, licenses, algorithms, trade secrets, franchises or
concessions. Lastly, each company is particularly vulnerable to general
economic, private equity and capital markets conditions and to changes in
government regulation, interest rates or technology.
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DETERMINATION OF NET ASSET VALUE
Our investments can be classified into five broad categories for
valuation purposes:
o Equity-related securities;
o Investments in intellectual property or patents or research
and development in technology or product development;
o Long-term fixed-income securities;
o Short-term fixed-income investments; and
o All other investments
The 1940 Act requires periodic valuation of each investment in our
portfolio to determine net asset value. Under the 1940 Act, unrestricted
securities with readily available market quotations are to be valued at the
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.
Our board of directors is responsible for (1) determining overall
valuation guidelines and (2) ensuring the valuation of investments within the
prescribed guidelines.
Our valuation committee, comprised of at least three or more
independent board members, is responsible for reviewing and approving the
valuation of our assets within the guidelines established by the board of
directors.
Fair value is generally defined as the amount that an investment could
be sold for in an orderly disposition over a reasonable time. Generally, to
increase objectivity in valuing our assets, external measures of value, such as
public markets or third-party transactions, are utilized whenever possible.
Valuation is not based on long-term work-out value, nor immediate liquidation
value, nor incremental value for potential changes that may take place in the
future.
The values assigned to these investments are based on available
information and do not necessarily represent amounts that might ultimately be
realized, as such amounts depend on future circumstances and cannot reasonably
be determined until the individual investments are actually liquidated.
Our valuation policy with respect to the five broad investment
categories is as follows:
Equity-Related Securities
Equity-related securities are carried at fair value using one or more
of the following basic methods of valuation:
Cost. The cost method is based on our original cost. This method is
generally used in the early stages of a company's development until significant
positive or negative events occur subsequent to the date of the original
investment that dictate a change to another valuation method. Some examples of
such events are: (1) a major recapitalization; (2) a major refinancing; (3) a
significant third-party transaction; (4) the development of a meaningful public
market for the company's common stock; and (5) significant positive or negative
changes in the company's business.
Private Market. The private market method uses actual third-party
transactions in the company's securities as a basis for valuation, using
actual, executed, historical transactions in the company's securities by
responsible third parties. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
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Public Market. The public market method is used when there is an
established public market for the class of the company's securities held by us.
We discount market value for securities that are subject to significant legal
and contractual restrictions. Other securities, for which market quotations are
readily available, are carried at market value as of the time of valuation.
Market value for securities traded on securities exchanges or on the Nasdaq
National Market is the last reported sales price on the day of valuation. For
other securities traded in the over-the-counter market and listed securities
for which no sale was reported on that day, market value is the mean of the
closing bid price and asked price on that day. This method is the preferred
method of valuation when there is an established public market for a company's
securities, as that market provides the most objective basis for valuation.
Analytical Method. The analytical method is generally used to value an
investment position when there is no established public or private market in
the company's securities or when the factual information available to us
dictates that an investment should no longer be valued under either the cost or
private market method. This valuation method is inherently imprecise and
ultimately the result of reconciling the judgments of our valuation committee
members, based on the data available to them. The resulting valuation, although
stated as a precise number, is necessarily within a range of values that vary
depending upon the significance attributed to the various factors being
considered. Some of the factors considered may include the financial condition
and operating results of the company, the long-term potential of the business
of the company, the values of similar securities issued by companies in similar
businesses, the proportion of the company's securities we own and the nature of
any rights to require the company to register restricted securities under
applicable securities laws.
Investments in Intellectual Property or Patents or Research and Development in
Technology or Product Development
Such investments are carried at fair value using the following basic
methods of valuation:
Cost. The cost method is based on our original cost. Such method is
generally used in the early stages of commercializing or developing
intellectual property or patents or research and development in technology or
product development until significant positive or adverse events occur
subsequent to the date of the original investment that dictate a change to
another valuation method.
Private Market. The private market method uses actual third-party
investments in intellectual property or patents or research and development in
technology or product development as a basis for valuation, using actual
executed historical transactions by responsible third parties. The private
market method may also use, where applicable, unconditional firm offers by
responsible third parties as a basis for valuation.
Analytical Method. The analytical method is used to value an
investment after analysis of the best available outside information where the
factual information available to us dictates that an investment should no
longer be valued under either the cost or private market method. This valuation
method is inherently imprecise and ultimately the result of reconciling the
judgments of our valuation committee members. The resulting valuation, although
stated as a precise number, is necessarily within a range of values that vary
depending upon the significance attributed to the various factors being
considered. Some of the factors considered may include the results of research
and development, product development progress, commercial prospects, term of
patent and projected markets.
As of June 30, 2003, we do not have any such investments.
Long-Term Fixed-Income Securities
Fixed-income securities for which market quotations are readily
available are carried at market value as of the time of valuation using the
most recent bid quotations when available. Securities for which market
quotations are not readily available are carried at fair value using one or
more of the following basic methods of valuation:
o Fixed-income securities are valued by independent pricing
services that provide market quotations based primarily on
quotations from dealers and brokers, market transactions, and
other sources.
o Other fixed-income securities that are not readily marketable
are valued at fair value by the valuation committee.
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Short-Term Fixed-Income Investments
Short-term fixed-income investments are valued at market value at the
time of valuation. Short-term debt with remaining maturity of 60 days or less
is valued at amortized cost.
All Other Investments
All other investments are reported at fair value as determined in good
faith by the valuation committee.
The reported values of securities for which market quotations are not
readily available and for other assets reflect the valuation committee's
judgment of fair values as of the valuation date using the outlined basic
methods of valuation. They do not necessarily represent an amount of money that
would be realized if the securities had to be sold in an immediate liquidation.
Thus valuations as of any particular date are not necessarily indicative of
amounts that may ultimately be realized as a result of future sales or other
dispositions of investments held.
INVESTMENT POLICIES
Investments and Strategies
The following is a summary description of the types of assets in which
we may invest, the investment strategies we may utilize and the attendant risks
associated with our investments and strategies. For a full description of our
investments and strategies, please refer to our Annual Report on Form 10-K
incorporated by reference to this prospectus.
Equity, Equity-Related Securities and Debt with Equity Features
We may invest in equity, equity-related securities and debt with
equity features ("Equity Securities"). Equity Securities include common stock,
preferred stock, debt instruments convertible into common or preferred stock,
limited partnership interests, other beneficial ownership interests and
warrants, options or other rights to acquire any of the foregoing.
Investments may be made in companies with operating histories that are
unprofitable or marginally profitable, that have negative net worth or that are
involved in bankruptcy or reorganization proceedings. These investments would
involve businesses that management believes have turnaround potential through
the infusion of additional capital and management assistance. In addition, we
may make investments in connection with the acquisition or divestiture of
companies or divisions of companies. There is a significantly greater risk of
loss with these types of securities than is the case with traditional
investment securities.
We may also invest in publicly traded securities of whatever nature,
including relatively small, emerging growth companies that management believes
have long-term growth possibilities.
Warrants, options and convertible or exchangeable securities generally
give the investor the right to acquire specified equity securities of an issuer
at a specified price during a specified period or on a specified date. Warrants
and options fluctuate in value in relation to the value of the underlying
security and the remaining life of the warrant or option, while convertible or
exchangeable securities fluctuate in value both in relation to the intrinsic
value of the security without the conversion or exchange feature and in
relation to the value of the conversion or exchange feature, which is like a
warrant or option. When we invest in these securities, we incur the risk that
the option feature will expire worthless, thereby either eliminating or
diminishing the value of our investment.
Investments in equity securities of private companies involve
securities that are restricted as to sale and cannot be sold in the open market
without registration under the Securities Act of 1933 or pursuant to a specific
exemption from these registrations. Opportunities for sale are more limited
than in the case of marketable securities, although these investments may be
purchased at more advantageous prices and may offer attractive investment
opportunities. Even if one of our portfolio companies completes an initial
public offering, we are typically subject to a lock-up agreement, and the stock
price may decline substantially before we are free to sell. Even if we have
registration rights to make our investments more marketable, a considerable
amount of time may elapse between a decision to sell or register the securities
for sale and the time when we are able to sell the securities. The prices
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obtainable upon sale may be adversely affected by market conditions or negative
conditions affecting the issuer during the intervening time.
Venture Capital Investments
We expect to invest in development stage or start-up businesses.
Substantially all of our long-term investments are in thinly capitalized,
unproven, small companies focused on risky technologies. These businesses also
tend to lack management depth, to have limited or no history of operations and
to have not attained profitability. Because of the speculative nature of these
investments, these securities have a significantly greater risk of loss than
traditional investment securities. Some of our venture capital investments are
likely to be complete losses or unprofitable and some will never realize their
potential.
We may own 100% of the securities of a start-up investment for a
period of time and may control the company for a substantial period. Start-up
companies are more vulnerable than better capitalized companies to adverse
business or economic developments. Start-up businesses generally have limited
product lines, service niches, markets and/or financial resources. Start-up
companies are not well-known to the investing public and are subject to
potential bankruptcy, general movements in markets and perceptions of potential
growth.
In connection with our venture capital investments, we may participate
in providing a variety of services to our portfolio companies, including the
following:
o recruiting management;
o formulating operating strategies;
o creating marketing and advertising campaigns;
o assisting in financial planning;
o providing management in the initial start-up stages; and
o establishing corporate goals.
We may assist in raising additional capital for these companies from
other potential investors and may subordinate our own investment to that of
other investors. We may also find it necessary or appropriate to provide
additional capital of our own. We may introduce these companies to potential
joint venture partners, suppliers and customers. In addition, we may assist in
establishing relationships with investment bankers and other professionals. We
may also assist with mergers and acquisitions. We do not derive income from
these companies for the performance of any of the above services.
We may control, be represented on or have observer rights on the board
of directors of a portfolio company by one or more of our officers or
directors, who may also serve as officers of the company. We indemnify our
officers and directors for serving on the boards of directors or as officers of
portfolio companies, which exposes us to additional risks. Particularly during
the early stages of an investment, we may in effect be conducting the
operations of the company. As a venture company emerges from the developmental
stage with greater management depth and experience, we expect that our role in
the company's operations will diminish. Our goal is to assist each company in
establishing its own independent capitalization, management and board of
directors. We expect to be able to reduce our interest in those start-up
companies which become successful.
Debt Obligations
We may hold debt securities for income and as a reserve pending more
speculative investments. Debt obligations may include U.S. government and
government agency securities, commercial paper, bankers' acceptances,
receivables or other asset-based financing, notes, bonds, debentures, or other
debt obligations of any nature and repurchase agreements related to these
securities. These obligations may have varying terms with respect to security
or credit support, subordination, purchase price, interest payments and
maturity from private, public or governmental issuers of any type located
anywhere in the world. We may invest in debt obligations of companies
34
with operating histories that are unprofitable or marginally profitable, that
have negative net worth or are involved in bankruptcy or reorganization
proceedings, or that are start-up or development stage entities. In addition,
we may participate in the acquisition or divestiture of companies or divisions
of companies through issuance or receipt of debt obligations.
It is likely that our investments in debt obligations will be of
varying quality, including non-rated, highly speculative debt investments with
limited marketability. Investments in lower-rated and non-rated securities,
commonly referred to as "junk bonds," are subject to special risks, including a
greater risk of loss of principal and non-payment of interest. Generally,
lower-rated securities offer a higher return potential than higher-rated
securities but involve greater volatility of price and greater risk of loss of
income and principal, including the possibility of default or bankruptcy of the
issuers of such securities. Lower-rated securities and comparable non-rated
securities will likely have large uncertainties or major risk exposure to
adverse conditions and are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The occurrence of adverse conditions and uncertainties
to issuers of lower-rated securities would likely reduce the value of
lower-rated securities held by us, with a commensurate effect on the value of
our shares.
The markets in which lower-rated securities or comparable non-rated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict our ability to obtain accurate market quotations for
the purposes of valuing lower-rated or non-rated securities and calculating net
asset value or to sell securities at their fair value. The public market for
lower-rated securities and comparable non-rated securities is relatively new
and has not fully weathered a major economic recession. Any economic downturn
could adversely affect the ability of issuers' lower-rated securities to repay
principal and pay interest thereon. The market values of lower-rated and
non-rated securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities.
In addition, lower-rated securities and comparable non-rated securities
generally present a higher degree of credit risk. Issuers of lower-rated
securities and comparable non-rated securities are often highly leveraged and
may not have more traditional methods of financing available to them, so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss owing to default by these issuers is significantly greater because
lower-rated securities and comparable non-rated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. We may incur additional expenses to the extent that we are
required to seek recovery upon a default in the payment of principal or
interest on our portfolio holdings.
The market value of investments in debt securities that carry no
equity participation usually reflects yields generally available on securities
of similar quality and type at the time purchased. When interest rates decline,
the market value of a debt portfolio already invested at higher yields can be
expected to rise if the securities are protected against early call. Similarly,
when interest rates increase, the market value of a debt portfolio already
invested at lower yields can be expected to decline. Deterioration in credit
quality also generally causes a decline in market value of the security, while
an improvement in credit quality generally leads to increased value.
Foreign Securities
We may make investments in securities of issuers whose principal
operations are conducted outside the United States, and whose earnings and
securities are stated in foreign currency.
Compared to otherwise comparable investments in securities of U.S.
issuers, currency exchange risk of securities of foreign issuers is a
significant variable. The value of these investments to us will vary with the
relation of the currency in which they are denominated to the U.S. dollar, as
well as with intrinsic elements of value such as credit risk, interest rates
and performance of the issuer. Investments in foreign securities also involve
risks relating to economic and political developments, including
nationalization, expropriation, currency exchange freezes and local recession.
Securities of many foreign issuers are less liquid and more volatile than those
of comparable U.S. issuers. Interest and dividend income and capital gains on
our foreign securities may be subject to withholding and other taxes that may
not be recoverable by us. We may seek to hedge all or part of the currency risk
of our investments in foreign securities through the use of futures, options
and forward currency purchases or sales.
35
Intellectual Property
We believe there is a role for organizations that can assist in
technology transfer. Scientists and institutions that develop and patent
intellectual property perceive the need for and rewards of entrepreneurial
commercialization of their inventions. We believe that our experience in
technology transfer and in organizing and developing new companies, our
willingness to invest our own capital at the highest-risk seeding stage, our
access to high-grade institutional sources of intellectual property, our
knowledge of the capital markets, our experience with business incubators and
our willingness, on a selective basis, to do as much of the early work as we
are qualified to do, combine to give us a value-added role to play in the
commercialization of technology.
Our form of investment may be:
o funding research and development in the development of a
technology;
o obtaining licensing rights to intellectual property or patents;
o acquiring intellectual property or patents; or
o forming and funding companies or joint ventures to further
commercialize intellectual property.
Income from our investments in intellectual property or its
development may take the form of participation in licensing or royalty income,
fee income, or some other form of remuneration. Investment in developmental
intellectual property rights involves a high degree of risk that can result in
loss of our entire investment as well as additional risks including
uncertainties as to the valuation of an investment and potential difficulty in
liquidating an investment. Further, investments in intellectual property
generally require investor patience as investment return may be realized only
after or over a long period. At some point during the commercialization of a
technology, our investment may be transformed into ownership of securities of a
development stage or start-up company as discussed under "Venture Capital
Investments" above.
Other Strategies
In pursuit of our investment strategy, we may employ one or more of
the following strategies in order to enhance investment results.
Borrowing and Margin Transactions
We may from time to time borrow money or obtain credit by any lawful
means from banks, lending institutions, other entities or individuals, in
negotiated transactions. We may issue, publicly or privately, bonds, debentures
or notes, in series or otherwise, with such interest rates and other terms and
provisions, including conversion rights, on a secured or unsecured basis, for
any purpose, up to the maximum amounts and percentages permitted for closed-end
investment companies under the 1940 Act. The 1940 Act currently prohibits us
from borrowing any money or issuing any other senior securities (other than
preferred stock and other than temporary borrowings of up to 5% of our assets),
if in giving effect to the borrowing or issuance, the value of our total assets
would be less than 200% of our total liabilities (other than liabilities not
constituting senior securities). We may pledge assets to secure any borrowings.
A primary purpose of our borrowing power is for leverage, to increase
our ability to acquire investments both by acquiring larger positions and by
acquiring more positions. Borrowings for leverage accentuate any increase or
decrease in the market value of our investments and thus our net asset value.
Since any decline in the net asset value of our investments will be borne first
by holders of common stock, the effect of leverage in a declining market would
be a greater decrease in net asset value applicable to the common stock than if
we were not leveraged. Any decrease would likely be reflected in a decline in
the market price of the common stock. To the extent the income derived from
assets acquired with borrowed funds exceeds the interest and other expenses
associated with borrowing, our total income will be greater than if borrowings
were not used. Conversely, if the income from assets is not sufficient to cover
the borrowing costs, our total income will be less than if borrowings were not
used. If our current income is not sufficient to meet our borrowing costs
(repayment of principal and interest), we might have to
36
liquidate our investments when it may be disadvantageous to do so. Our
borrowups for the purpose of buying most liquid equity securities will be
subject to the margin rules, which require excess liquid collateral marked to
market daily. If we are unable to post sufficient collateral, we would be
required to sell securities to remain in compliance with the margin rules.
These sales might be at disadvantageous times or prices.
Repurchase of Shares
Our shareholders do not have the right to compel us to redeem our
shares. We may, however, purchase outstanding shares of our common stock from
time to time, subject to approval of our board of directors and compliance with
applicable corporate and securities laws. The board of directors may authorize
purchases from time to time when they are deemed to be in the best interests of
our shareholders, but could do so only after notification to shareholders. The
board of directors may or may not decide to undertake any purchases of our
common stock.
Our repurchases of our common shares would decrease our total assets
and would therefore likely have the effect of increasing our expense ratio.
Subject to our investment restrictions, we may borrow money to finance the
repurchase of our common stock in the open market pursuant to any tender offer.
Interest on any borrowings to finance share repurchase transactions will reduce
our net assets. If, because of market fluctuations or other reasons, the value
of our assets falls below the required 1940 Act coverage requirements, we may
have to reduce our borrowed debt to the extent necessary to comply with the
requirement. To achieve a reduction, it is possible that we may be required to
sell portfolio securities at inopportune times when it may be disadvantageous
to do so. Since 1998, we have repurchased a total of 1,828,740 shares of our
common stock at a total cost of $3,405,531, or $1.86 per share. Because we
intend to continue investing in tiny technology, our board of directors does
not currently intend to authorize the purchase of additional shares of our
common stock.
Portfolio Company Turnover
Changes with respect to portfolio companies will be made as our
management considers necessary in seeking to achieve our investment objective.
The rate of portfolio turnover will not be treated as a limiting or relevant
factor when circumstances exist which are considered by management to make
portfolio changes advisable.
Although we expect that many of our investments will be relatively
long term in nature, we may make changes in our particular portfolio holdings
whenever it is considered that an investment no longer has substantial growth
potential or has reached its anticipated level of performance, or (especially
when cash is not otherwise available) that another investment appears to have a
relatively greater opportunity for capital appreciation. We may also make
general portfolio changes to increase our cash to position us in a defensive
posture. We may make portfolio changes without regard to the length of time we
have held an investment, or whether a sale results in profit or loss, or
whether a purchase results in the reacquisition of an investment which we may
have only recently sold.
If management's evaluation of particular investments or general
conditions changes frequently, portfolio changes may be expected to occur
rapidly and with great frequency. The portfolio turnover rate may vary greatly
from year to year as well as during a year and may also be affected by cash
requirements.
Investment Restrictions
When we were a regulated investment company, pursuant to a requirement
under the 1940 Act, we provided that our investment objective and the following
investment restrictions were fundamental and could not be changed without the
approval of the holders of a majority of our outstanding voting securities
(defined in the 1940 Act as the lesser of (a) more than 50% of the outstanding
shares or (b) 67% or more of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented). The provisions of the 1940
Act regarding fundamental investment restrictions and objectives are not
applicable to business development companies and accordingly we believe that
the following restrictions do not apply to us although we have as a matter of
fact conducted our operations consistently with them. Satisfaction of these
restrictions was measured only at the time of a transaction, with the result
that later changes in percentage resulting from changing market values, for
example, would not be considered a deviation from policy. Under these
restrictions, prior to becoming a business development company, we could not:
(1) invest more than 25% of the value of our total assets in any one
industry;
37
(2) issue senior securities other than:
(a) preferred stock not in excess of the excess of 50% of our
total assets over any senior securities described in clause
(b) below that are outstanding,
(b) senior securities other than preferred stock (including
borrowing money, including on margin if margin securities
are owned and through entering into reverse repurchase
agreements, and providing guaranties) not in excess of 33
1/3% of our total assets, and
(c) borrowings of up to 5% of our total assets for temporary
purposes without regard to the amount of senior securities
outstanding under clauses (a) and (b) above; provided,
however, that our obligations under interest rate swaps,
when issued and forward commitment transactions and similar
transactions are not treated as senior securities if
covering assets are appropriately segregated; or pledge our
assets other than to secure the issuances or in connection
with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment
strategies.
For purposes of clauses (a), (b) and (c) above, "total
assets" shall be calculated after giving effect to the net
proceeds of any issuance and net of any liabilities and
indebtedness that do not constitute senior securities except
for liabilities and indebtedness as are excluded from
treatment as senior securities by the proviso to this item
(2);
(3) make loans of money or property to any person, except through
loans and guaranties to entities, loans of portfolio securities,
the acquisition of fixed income obligations consistent with our
investment objective and policies or the acquisition of
securities subject to repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities
or the sale of our own securities we may be deemed to be an
underwriter;
(5) purchase or sell real estate or interests therein in excess of
our total assets;
(6) purchase or sell commodities or purchase or sell commodity
contracts except for hedging purposes or in connection with
business operations and except for precious metals and coins; or
(7) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, in giving
effect to the sale, the market value of all securities sold
short does not exceed 25%, except short sales "against the box"
which are not subject to the limitation, of the value of our
total assets and our aggregate short sales of a particular class
of securities does not exceed 25% of the then-outstanding
securities of that class.
MANAGEMENT OF THE COMPANY
Board of Directors and Certain Executive Officers
Set forth below are the names, ages and positions held with the
Company and principal occupations during the past five years of our directors
and certain of our executive officers. We have no advisory board. Our business
address and that of our officers and directors is 111 West 57th Street, Suite
1100, New York, New York 10019.
38
Positions(s) Term of Office
Held With and Length of Principal Occupations Other Directorships
Name and Age Registrant Time Served During Past 5 Years Held by Director
---------------- ------------ --------------- ----------------------------- --------------------
INTERESTED DIRECTORS:
Charles E. Harris* Director, Director, Chief Executive Officer of Harris & Harris
Age: 60 Chief Chairman and the Company. Enterprises, Inc.,
Executive Chief Executive NeuroMetrix, Inc. and
Officer and Officer since Experion Systems,
Chairman of 1984; Chief Inc.
the Board Compliance
Officer from
1997 to 2001
Dr. Kelly S. Director Since 2002 Business consultant. Director, None
Kirkpatrick* Columbia Nanotechnology
Age: 37 Initiative and Director for
Research and Technology
Initiatives, Office of the
Executive Vice Provost,
Columbia University, 2000 to
2002. White House Office of
Science and Technology Policy,
1998 to 2000.
Lori D. Pressman* Director and Since 2002 Business consultant. None
Age: 45 Consultant Technology Licensing Officer,
1989 to 1995; Assistant
Director, 1996 to 2000;
Technology Licensing Office,
Massachusetts Institute of
Technology.
INDEPENDENT DIRECTORS:
Dr. C. Wayne Bardin Director Since 1994 Consultant. President, Thyreos None
Age: 68 Corp., 1998 to 2003.
Dr. Phillip A. Bauman Director Since 1998 Orthopedic surgeon. Assistant None
Age: 48 Professor, Columbia
University.
G. Morgan Browne Director Since 1992 Chief Financial Officer, Cold OSI
Age: 68 Spring Harbor Laboratory since Pharmaceuticals, Inc.
2001, Administrative Director,
Cold Spring Harbor Laboratory,
1995 to 2000.
Dugald A. Fletcher Director Since 1996 President and Director, Gabelli Convertible
Age: 73 Fletcher & Company, Inc. Securities and Income
Fund. Trustee of the
Gabelli Growth Fund.
Glenn E. Mayer Director Since 1981 Senior Vice President, Jesup None
Age: 77 & Lamont Securities Co.,
since 2001. Senior Vice
President, Reich &
Company, 1991 to 2001.
39
Positions(s) Term of Office
Held With and Length of Principal Occupations Other Directorships
Name and Age Registrant Time Served During Past 5 Years Held by Director
---------------- ------------ --------------- ----------------------------- --------------------
Charles E. Ramsey Director Since 2002 Retired Founder and Principal Experion Systems,
Age: 60 of Ramsey/Beirne Associates, Inc., The Seedling
Inc. Chair of Bridges to Group, Inc.
Community.
James E. Roberts Director Since 1995 Executive Vice President and None
Age: 57 Underwriting officer, Alea
North America Company -
Reinsurance Division, since
2002. Vice Chairman, Chartwell
Reinsurance Company; Chief
Executive Officer, The
Insurance Corporation of New
York, Dakota Specialty
Insurance Co. and ReCor
Insurance Company, Inc.; 1999
to 2000. Vice Chairman,
Trenwick America Reinsurance
Corporation, 1995 to 2000.
OFFICERS:
Charles E. Harris* Director, Director, Chief Executive Officer of Harris & Harris
Age: 60 Chief Chairman and the Company. Enterprises, Inc.,
Executive Chief Executive NeuroMetrix, Inc. and
Officer and Officer since Experion Systems,
Chairman of 1984; Chief Inc.
the Board Compliance
Officer from
1997 to 2001
Mel P. Melsheimer President, President, Chief President, Chief Operating Questech Corporation,
Age: 64 Chief Operating Officer, Chief Financial Harris & Harris
Operating Officer and Officer, Chief Compliance Enterprises, Inc.
Officer, Chief Chief Financial Officer and Treasurer of the
Financial Officer since Company. President of Harris &
Officer, Chief 1997, Chief Harris Enterprises, Inc.
Compliance Compliance
Officer and Officer and
Treasurer Treasurer since
2001
Douglas W. Jamison Vice President Since September Vice President of the Company. None
Age: 33 2002 Senior technology manager,
University of Utah Technology
Transfer Office, 1997 to 2002.
40
Positions(s) Term of Office
Held With and Length of Principal Occupations Other Directorships
Name and Age Registrant Time Served During Past 5 Years Held by Director
---------------- ------------ --------------- ----------------------------- --------------------
Helene B. Shavin Vice Vice President Vice President and Controller None
Age: 50 President, and Controller of Harris & Harris
Controller and since 2001, Enterprises, Inc. since 2001.
Assistant Assistant Vice President, Citicorp
Secretary Secretary since Venture Capital, 1986 to 2000.
2002
________________
* Charles E. Harris is an "interested person" of the Company, as
defined in the 1940 Act, as a beneficial owner of more than 5% of the Company's
stock, as a control person of the Company and as an officer of the Company. In
addition, each of Dr. Kelly S. Kirkpatrick and Lori D. Pressman may be
considered to be an "interested person" of the Company because of the work each
does consulting for the Company.
Messrs. Harris, Melsheimer and Jamison are primarily responsible for
the day to day management of our portfolio, and have served in this capacity
since 1984, 1997 and 2002, respectively.
We do not consider that any person other than Charles E. Harris
"controls" the Company within the meaning of this item.
Executive Officers
Charles E. Harris. Mr. Harris currently serves as our Chairman and
Chief Executive Officer. He has served as our Chief Executive Officer since
July 1984. He has been a member of our board of directors and served as
Chairman of the board since April 1984. He also served as our Chief Compliance
Officer from February 1997 to February 2001. He was a member of the Advisory
Panel for the Congressional Office of Technology Assessment. Prior to joining
us, he was Chairman of Wood, Struthers and Winthrop Management Corporation, the
investment advisory subsidiary of Donaldson, Lufkin and Jenrette. He is
currently a member of the New York Society of Security Analysts. He acts as a
Trustee and head of the audit committee of Cold Spring Harbor Laboratory, a
not-for-profit institution that conducts research and education programs in the
fields of molecular biology and genetics. He also serves as a Trustee and head
of the audit committee of the Nidus Center, a life sciences business incubator
in St. Louis, Missouri, and as a life-sustaining fellow of MIT and as a
Shareholder of its Entrepreneurship Center. He is an "interested person" as
defined in Section 2(a)(19) of the 1940 Act, as a beneficial owner of more than
5% of our common stock, as a control person and as one of our officers.
Mel P. Melsheimer. Mr. Melsheimer has served as our President, Chief
Operating Officer and Chief Financial Officer since February 1997. Since
February 2001, he has also served as our Chief Compliance Officer and since
July 2001, as Treasurer. From March 1994 to February 1997, he served as a
nearly full-time consultant to us or as an officer to one of our portfolio
companies. From November 1992 to February 1994, he served as Executive Vice
President, Chief Operating Officer and Secretary of Dairy Holdings, Inc.
Douglas W. Jamison. Mr. Jamison has served as our Vice President since
September 2002. Prior to joining us, he worked for five years as a Senior
Technology Manager at the University of Utah Technology Transfer Office, where
he managed intellectual property.
Helene B. Shavin. Ms. Shavin has served as our Vice President and
Controller since 2001. Prior to joining us, she was a Vice President with
Citicorp Venture Capital from 1986 to 2000.
Board of Directors
Our board of directors supervises our management. The responsibilities
of each director include, among other things, the oversight of the investment
approval process, the quarterly valuation of our assets, and oversight of our
financing arrangements.
41
Interested Directors:
Charles E. Harris. See biography under "Executive Officers."
Kelly S. Kirkpatrick. Dr. Kirkpatrick has served as a member of our
board of directors since March 2002. She has served as a consultant to us on
nanotechnology and in our due diligence work on Agile Materials & Technologies,
Inc. and Optiva, Inc. She is an independent business consultant assessing and
advising on early stage, technology start-ups for venture capital companies.
From 2000 to 2002, she served in the Office of the Executive Vice Provost of
Columbia University as Director of the Columbia University Nanotechnology
Initiative and as Director for Research and Technology Initiatives. From 1998
to 2000, she served in the White House Office of Science and Technology Policy
as a Senior Policy Analyst involved in the National Nanotechnology Initiative.
From 1997 to 1998, she was a Science Policy Coordinator for Sandia National
Laboratories. From 1995 to 1996, she served in the office of Senator Joseph
Lieberman as Legislative Assistant, Congressional Science and Engineering
Fellow. She may be considered to be an "interested person" of the Company
because of the consulting work she does for us.
Lori D. Pressman. Ms. Pressman has served as a member of our board of
directors since March 2002. She has served as a consultant to us on tiny
technology, intellectual property and in our due diligence work on Chlorogen,
Inc., Continuum Photonics, Inc., NanoOpto Corporation, Nanopharma Corp.,
Nanosys, Inc., Nantero, Inc. and NeoPhotonics Corporation. She also acts as an
observer for us at board meetings of certain investee companies in the Boston
area. She is a business consultant providing advisory services to start-ups and
venture capital companies. She consults internationally on technology transfer
practices and metrics for non-profit and government organizations. From 1999 to
2001, she was Chair of the Survey Statistics and Metrics Committee of the
Association of University Technology Managers. From September 1989 to July
2000, she was employed by MIT in its Technology Licensing Office. She served as
its Technology Licensing Officer from 1989 to 1995 and as Assistant Director
from 1996 to 2000. From September 1984 to September 1989, she was Senior
Development Engineer at Lasertron, Inc. She may be considered to be an
"interested person" of the Company because of the consulting work she does for
us.
Independent Directors:
C. Wayne Bardin. Dr. Bardin has served as a member of our board of
directors since December 1994. From 1998 to 2003, he served as President of
Thyreos Corp., a privately held, start-up pharmaceutical company. From 1978
through 1996, he was Vice President of The Population Council. Dr. Bardin's
professional appointments have included: Professor of Medicine, Chief of the
Division of Endocrinology, The Milton S. Hershey Medical Center of Pennsylvania
State University and Senior Investigator, Endocrinology Branch, National Cancer
Institute. He has also served as a consultant to several pharmaceutical
companies. He has been appointed to the editorial boards of 15 journals. He has
also served on national and international committees and boards for the
National Institutes of Health, World Health Organization, The Ford Foundation
and numerous scientific societies.
Phillip A. Bauman. Dr. Bauman has served as a member of our board of
directors since February 1998. He is Senior Attending in Orthopaedic Surgery at
St. Luke's/Roosevelt Hospital Center in Manhattan and has served as an elected
member of the executive committee of the Medical Board since 2000. He has been
Assistant Professor of Orthopaedic Surgery at Columbia University since 1998
and a Vice President of Orthopaedic Associates of New York since 1994. He was
elected a fellow of the American Academy of Orthopedic Surgeons in 1991. He is
an active member of the American Orthopaedic Society for Sports Medicine, the
New York State Society of Orthopaedic Surgeons and the American Medical
Association.
G. Morgan Browne. Mr. Browne has served as a member of our board of
directors since June 1992. Mr. Browne has served as Chief Financial Officer
since January 2001 of Cold Spring Harbor Laboratory, a not-for-profit
institution that conducts research and education programs in the fields of
molecular biology and genetics. From 1985 to 2001, he was the Administrative
Director of Cold Spring Harbor Laboratory. In prior years, he was active in the
management of numerous scientifically based companies as an officer, as an
individual consultant and as an associate of Laurent Oppenheim Associates,
Industrial Management Consultants. He is a Director of OSI Pharmaceuticals,
Inc., a publicly held company principally engaged in drug discovery based on
gene transcription. He was a founding director of the New York Biotechnology
Association and a founding director of the Long Island Research Institute.
42
Dugald A. Fletcher. Mr. Fletcher has served as a member of our board
of directors since 1996. He has served as President of Fletcher & Company,
Inc., a management consulting firm since 1984. Until the end of 1997, he was
Chairman of Binnings Building Products Company, Inc. Mr. Fletcher's previous
business appointments include: adviser to Gabelli/Rosenthal LP, a leveraged
buyout fund; Chairman of Keller Industries, building and consumer products;
Senior Vice President of Booz-Allen & Hamilton; President of Booz-Allen
Acquisition Services; Executive Vice President and a Director of Paine Webber,
Inc.; and President of Baker, Weeks and Co., Inc., a New York Stock Exchange
member firm. He is currently a Trustee of the Gabelli Growth Fund and a
Director of the Gabelli Convertible and Income Securities Fund, Inc.
Glenn E. Mayer. Mr. Mayer has served as a member of our board of
directors since 1981. In May 2001, he joined Jesup & Lamont Securities Co. as a
Senior Vice President. From December 1991 to May 2001, he was a Senior Vice
President of Reich & Company, a division of Fahnestock & Company, Inc., a
member firm of the New York Stock Exchange. For 15 years prior to that, he was
employed by Jesup & Lamont Securities Co. and its successor firms, in the
Corporate Finance department.
Charles E. Ramsey. Mr. Ramsey has served as a member of our board of
directors since October 2002. He is a retired founder and principal of
Ramsey/Beirne Associates, Inc., an executive search firm that specialized in
recruiting top officers for high technology companies, many of which were
backed by venture capital. An active investor, he is a director of three
privately held companies, including Experion Systems, Inc., in which we own an
equity interest. He works on construction projects in Nicaragua as a member of
the Nicaraguan Initiative Committee for the Presbyterian Churches of the Hudson
River and as Chair of Bridges to Community, a non-governmental organization
dedicated to construction projects in Nicaragua.
James E. Roberts. Mr. Roberts has served as a member of our board of
directors since 1995. Since 2002, he has been Executive Vice President and
Chief Underwriting Officer of the Reinsurance Division of Alea North America
Company. From October 1999 to November 2002, he was Chairman and Chief
Executive Officer of the Insurance Corporation of New York, Dakota Specialty
Insurance Company, and Recor Insurance Company Inc., all members of the
Trenwick Group, Ltd. From October 1999 to March 2000, he served as Vice
Chairman of Chartwell Reinsurance Company. Prior to assuming those positions,
he was Vice Chairman of Trenwick America Reinsurance Corporation from May 1995
to March 2000.
Committees of the Board of Directors
Our board of directors maintains an Executive Committee, an Audit
Committee, a Compensation Committee, a Nominating Committee, a Valuation
Committee and an Ad Hoc Long-Term Planning Committee.
The Executive Committee has and may exercise those rights, powers, and
authority that the board of directors from time to time grants to it, except
where action by the full board is required by statute, an order of the SEC or
our charter or bylaws. The Executive Committee did not meet as a separate
committee and did not act by unanimous written consent in 2002. The members of
the Executive Committee are Messrs. Harris (Chairman), Roberts and Mayer and
Dr. Bardin.
The Audit Committee operates pursuant to a charter approved by the
board of directors, a copy of which is included as Exhibit A to our proxy
statement for the 2001 Annual Meeting of Stockholders. The charter sets forth
the responsibilities of the Audit Committee. The Audit Committee's
responsibilities include recommending the selection of our independent public
accountants, reviewing with the independent public accountants the planning,
scope and results of their audit and our financial statements and the fees for
services performed, reviewing with the independent public accountants the
adequacy of internal control systems, reviewing our annual financial statements
and receiving our audit reports and financial statements. The Audit Committee
met four times during 2002. The members of the Audit Committee are Messrs.
Fletcher (Chairman), Mayer and Dr. Bauman, all of whom are considered
independent under the rules promulgated by the Nasdaq National Market.
The Compensation Committee determines the compensation for our
executive officers and the amount of salary and bonus to be included in the
compensation package for each of our officers and employees. The Compensation
Committee met one time during 2002. The members of the Compensation Committee
are Messrs. Roberts (Chairman), Browne, Ramsey and Dr. Bauman.
43
The Nominating Committee recommends candidates for election as
directors to the board of directors and makes recommendations to the board as
to our corporate governance policies. The Nominating Committee met four times
during 2002. The members of the Nominating Committee are Messrs. Browne
(Chairman) and Ramsey, and Drs. Bauman and Bardin.
The Valuation Committee reviews and approves the valuation of our
assets, from time to time, as prescribed by the 1940 Act, pursuant to the
guidelines established by our board of directors. The Valuation Committee met
four times during 2002. The members of the Valuation Committee are Messrs.
Fletcher (Chairman), Browne, Roberts and Dr. Bardin, all of whom are
non-interested directors (as defined in Section 2(a)(19) of the 1940 Act).
The board of directors approved the appointment of an Ad Hoc Long-Term
Planning Committee on February 5, 2003, which will act as an advisory committee
to the board. The members of the Ad Hoc Long-Term Planning Committee are
Messrs. Browne (Chairman), Mayer, Ramsey and Dr. Bardin.
The following table sets forth the dollar range of equity securities
beneficially owned by each director as of July 23, 2003.
Dollar Range of Equity Securities
Name of Director Beneficially Owned (1) (2)
Dr. C. Wayne Bardin Over $100,000
Dr. Phillip A. Bauman Over $100,000
G. Morgan Browne Over $100,000
Dugald A. Fletcher $50,001 - $100,000
Glenn E. Mayer Over $100,000
Charles E. Ramsey Over $100,000
James E. Roberts $50,001 - $100,000
Charles E. Harris (3) Over $100,000
Dr. Kelly S. Kirkpatrick (4) $10,001 - $50,000
Lori D. Pressman (4) $10,001 - $50,000
___________________
(1) Beneficial ownership has been determined in accordance with Rule
16a-1(a)(2) of the 1934 Act.
(2) The dollar ranges are: none, $1-$10,000, $10,001-$50,000,
$50,001-$100,000 and over $100,000.
(3) Denotes an individual who is an "interested person" as defined in the
1940 Act.
(4) Denotes an individual who may be considered an "interested person"
because of consulting work performed for us.
Principal Shareholders
Set forth below is information as of August 28, 2003 with respect to
the beneficial ownership of our common stock by (i) each person who is known by
us to be the beneficial owner of more than 5% of the outstanding shares of the
common stock, (ii) each of our directors and (iii) all of our directors and
executive officers as a group. Except as otherwise indicated, to our knowledge,
all shares are beneficially owned and investment and voting power is held by
the persons named as owners. At this time, we are unaware of any shareholder
owning 5% or more of the outstanding shares of common stock other than the ones
noted below. Unless otherwise provided, the address of each holder is c/o
Harris & Harris Group, Inc., 111 West 57th Street, Suite 1100, New York, New
York 10019.
Amount and Nature of Percentage of Outstanding
Name and Address of Beneficial Owner Beneficial Ownership Common Shares Owned
------------------------------------ -------------------- -------------------
Directors and Executive Officers:
Charles E. and Susan T. Harris......... 1,050,893 (1) 9.1
Dr. C. Wayne Bardin.................... 20,828 (2) *
44
Dr. Phillip A. Bauman.................. 22,151 (3) *
G. Morgan Browne....................... 34,172 *
Dugald A. Fletcher..................... 12,620 *
Douglas W. Jamison .................... -- *
Dr. Kelly S. Kirkpatrick .............. 2,837 *
Glenn E. Mayer ........................ 100,000 *
Mel P. Melsheimer ..................... 80,210 (4) *
Lori D. Pressman ...................... 3,400 *
Charles E. Ramsey ..................... 27,666
James E. Roberts ...................... 15,811 *
Helene Shavin ......................... 3,000 *
All directors and executive officers
as a group (14 persons) ............... 1,373,588 11.9
5% Shareholders:
Estate of Edwin S. Marks
135 East 57th Street
New York, New York 10022 ............. 656,834 5.7
Jonathan Rothschild
c/o Arterio, Inc.
1061-B Shary Circle
Concord, California 94518 ............ 795,043 6.9
Masters Capital Management LLC/
Michael Masters (5)
3060 Peachtree Road, N.E.,
Suite 1815
Atlanta, Georgia 30305 ............... 955,000 (6) 8.3
________________
* Less than 1%.
(1) Includes 1,039,559 shares owned by Mrs. Harris and 11,334 shares owned by
Mr. Harris.
(2) Includes 4,732 shares owned by Bardin LLC for the Bardin LLC Profit-
Sharing Keogh.
(3) Includes 5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's wife, 100
shares owned by Adelaide Polk-Bauman, Dr. Bauman's daughter, 100 shares
owned by Milbry Polk-Bauman, Dr. Bauman's daughter, and 100 shares owned
by Mary Polk-Bauman, Dr. Bauman's daughter. Ms. Milbry C. Polk is the
custodian for the accounts of the three children.
(4) Includes 16,668 shares which are owned jointly by Mel P. Melsheimer and
his wife.
(5) Pursuant to a Schedule 13G dated August 6, 2002, Masters Capital
Management LLC ("Masters") and Michael Masters beneficially owned
1,000,000 shares and Marlin Fund Offshore, Ltd. beneficially owned 600,000
shares (all with shared voting and dispositive power). A Form 13F filed on
August 15, 2003 by Masters indicated that it beneficially owned 955,000
shares.
(6) See Footnote 5.
Remuneration of Directors and Others
The following table sets forth the compensation paid by us for the
fiscal year ended December 31, 2002 to our directors and others. During the
fiscal year ended December 31, 2002, we did not pay any pension or retirement
benefits.
45
Total Compensation
Paid to
Name of Director Aggregate Compensation ($) Directors ($)
-------------------------- -------------------------- ----------------
Dr. C. Wayne Bardin 16,000 16,000
Dr. Phillip A. Bauman 20,000 20,000
G. Morgan Browne (1) 20,461 20,461
Harry E. Ekblom (2) 17,781 17,781
Dugald A. Fletcher 17,000 17,000
Dr. Kelly S. Kirkpatrick (3) 48,489 48,489
Glenn E. Mayer 17,000 17,000
Lori D. Pressman (4) 72,440 72,440
Charles E. Ramsey 2,242 2,242
James E. Roberts 17,000 17,000
Charles E. Harris 0 0
(1) Includes $461 for reimbursement for travel expenses to attend board
meetings.
(2) Includes $2,039 for reimbursement for travel expenses to attend board
meetings.
(3) Includes $2,696 for reimbursement for travel expenses to attend board
meetings and $33,906 for consulting services.
(4) Includes $953 for reimbursement for travel expenses to attend board
meetings and $59,825 for consulting services.
Effective June 18, 1998, directors who were not officers received
$1,000 for each meeting of the board of directors and $1,000 for each committee
meeting they attended in addition to a monthly retainer of $500. Prior to June
18, 1998, the directors were paid $500 for committee meetings and no monthly
retainer. We also reimburse our directors for travel, lodging and related
expenses they incur in attending board and committee meetings. The total
compensation and reimbursement for expenses paid to all directors in 2002 was
$159,682.
In 1998, the board of directors approved that effective January 1,
1998, 50% of all director fees be used to purchase our common stock from us.
However, effective on March 1, 1999, the board of directors approved that
directors purchase our common stock in the open market, rather than from us. In
2001, the outside directors (i.e., all directors except Mr. Harris) bought a
total of 7,944 shares in the open market. In 2002, the outside directors bought
9,524 shares in the open market and 43,426 shares through exercise of rights in
a public offering of our common stock.
Remuneration of Chief Executive Officer and Other Executive Officers
The following table sets forth a summary for each of the last three
years ended December 31 of the cash and non-cash compensation paid to our chief
executive officer and our other executive officers.
Annual Compensation
----------------------------------------
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($)(1) ($)(2) ($)(3)
--------------------------------- ------- --------- ---------- ------------ -------------
Charles E. Harris 2002 221,217 10,503 46,570 165,468
Chairman of the board & Chief 2001 215,510 0 48,453 232,000
Executive Officer(4) 2000 208,315 1,600,287 43,267 224,805
Mel P. Melsheimer 2002 250,327 3,224 0 12,000
President, Chief Operating 2001 243,869 0 0 10,500
Officer, Chief Financial 2000 235,727 491,227 0 10,500
Officer, Treasurer & Chief
Compliance Officer
Helene B. Shavin 2002 85,353 1,161 0 11,000
Controller 2001 13,333 0 0 1,867
Susan T. Harris 2002 12,703 0 0 2,332
Secretary 2001 12,376 0 0 1,578
46
Annual Compensation
----------------------------------------
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($)(1) ($)(2) ($)(3)
--------------------------------- ------- --------- ---------- ------------ -------------
Douglas W. Jamison (5) 2002 35,936 0 0 1,050
Vice President
________________
(1) For 2002, these amounts represent the approximate amounts earned as a
result of realized gains during the year ended December 31, 2002 under the
Harris & Harris Group, Inc. Employee Profit-Sharing Plan. For 2000, these
amounts represent the actual amounts earned for the year ended December
31, 2000 and paid out in 2001. The Harris & Harris Group Employee
Profit-Sharing Plan is described under Incentive Compensation Plans.
(2) Other than Mr. Harris, amounts of "Other Annual Compensation" earned by
the named executive officers for the periods presented did not meet the
threshold reporting requirements.
(3) Except for Mr. Harris, amounts reported represent our contributions on
behalf of the named executive to the Harris & Harris Group, Inc. 401(k)
Plan. Mr. Harris's 2002 "All Other Compensation" consists of: $12,000
401(k) Plan employer contribution; $147,478 for his 2002 SERP
contribution; and $5,990 in life insurance premiums for the benefit of his
beneficiaries.
(4) Mr. Harris has an employment agreement with us.
(5) Because Mr. Jamison joined us in September 2002, his salary reflects
partial compensation for 2002.
Incentive Compensation Plans
As of January 1, 1998, we began implementing the Harris & Harris
Group, Inc. Employee Profit-Sharing Plan (the "1998 Plan"), which provided for
profit sharing equal to 20% of our net realized income as reflected on the
Consolidated Statements of Operations for that year, less the nonqualifying
gain, if any. We terminated the 1998 Plan as of December 31, 1999, subject to
the payment of any amounts owed on the 1999 realized gains under the 1998 Plan.
In March 2000, we paid out 90% of the profit sharing in the amount of
$1,024,696 on the 1999 realized gains; the remaining 10% or $113,855 was paid
out in September 2000, upon the completion and filing of our 1999 federal tax
return.
As of January 1, 2000, we implemented the Harris & Harris Group, Inc.
Employee Profit-Sharing Plan (the "Plan"), which provides for profit sharing by
our officers and employees equal to 20% of our net realized income as reflected
on our consolidated statements of operations for that year, less the
nonqualifying gain, if any.
On April 26, 2000, our shareholders approved the performance goals
under the Plan in accordance with Section 162(m) of the Code, effective as of
January 1, 2000. The Code generally provides that a public company such as we
are may not deduct compensation paid to its chief executive officer or to any
of its four most highly compensated officers to the extent that the
compensation paid to any such officer/employee exceeds $1,000,000 in any tax
year, unless the payment is made upon the attainment of objective performance
goals that are approved by our shareholders.
Under the Plan, our net realized income includes investment income,
realized gains and losses, and operating expenses (including taxes paid or
payable by us), but is calculated without regard to dividends paid or
distributions made to shareholders, payments under the Plan, unrealized gains
and losses, and loss carry-overs from other years, which we refer to as
qualifying income. The portion of net after-tax realized gains attributable to
asset values as of September 30, 1997 is considered nonqualifying gain, which
reduces qualifying income.
As soon as practicable following the year-end audit, the Audit
Committee will determine whether, and if so how much, qualifying income exists
for a plan year, and 90% of the qualifying income will be paid out to Plan
participants pursuant to the distribution percentages set forth in the Plan.
The remaining 10% will be paid out after we have filed our federal tax return
for that year in which qualifying income exists. At December 31, 2002, the
distribution amounts for each officer and employee were as follows: Charles E.
Harris, 13.790%; Mel P. Melsheimer, 4.233%; Helene B. Shavin, 1.524%; and
Jacqueline M. Matthews, 0.453%. In one case, for a former
47
employee, who left other than due to termination for cause, any amount earned
will be accrued and may subsequently be paid to such participant.
As of January 1, 2003, we implemented the Amended and Restated Harris
& Harris Group, Inc. Employee Profit-Sharing Plan (the "2002 Plan").
On October 15, 2002, our shareholders approved the performance goals
under the 2002 Plan in accordance with Section 162(m) of the Code, effective as
of January 1, 2003.
Under the 2002 Plan, our net realized income includes investment
income, realized qualifying gains and losses, and operating expenses (including
taxes paid or payable by us), but is calculated without regard to dividends
paid or loss carry-overs from other years, which we refer to as qualifying
income.
Under the 2002 Plan, awards previously granted to the four current
Participants (Messrs. Harris and Melsheimer and Mss. Shavin and Matthews,
herein referred to as the "grandfathered participants") will be reduced by 10%
with respect to "Non-Tiny Technology Investments" (as defined in the 2002 Plan)
and by 25% with respect to "Tiny Technology Investments" (as defined in the
2002 Plan) and will become permanent. These reduced awards are herein referred
to as "grandfathered participations." The amount by which the awards are
reduced will be allocable and reallocable each year by the Compensation
Committee among current and new participants as awards under the 2002 Plan. The
grandfathered participations will be honored by us whether or not the
grandfathered participant is still employed by us or is still alive (in the
event of death, the grandfathered participations will be paid to the
grandfathered participant's estate), unless the grandfathered participant is
dismissed for cause, in which case all awards, including the grandfathered
participations, will be immediately cancelled and forfeited. With regard to new
investments and follow-on investments made after the date on which the first
new employee begins participating in the 2002 Plan, both current and new
participants will be required to be employed by us at the end of a plan year in
order to participate in profit-sharing on such investments with respect to that
year.
Notwithstanding any provisions of the 2002 Plan, in no event may the
aggregate amount of all awards payable for any Plan Year during which we remain
a "business development company" within the meaning of the 1940 Act be greater
than 20% of our "net income after taxes" within the meaning of Section
57(n)(1)(B) of the 1940 Act. In the event the awards as calculated exceed that
amount, the awards will be reduced pro rata.
The 2002 Plan may be modified, amended or terminated by the
Compensation Committee at any time. Notwithstanding the foregoing, the
grandfathered participations may not be further modified. Nothing in the 2002
Plan will preclude the Compensation Committee from naming additional
participants in the 2002 Plan or, except for grandfathered participations,
changing the Award Percentage of any Participant (subject to the overall
percentage limitations contained in the 2002 Plan). Under the 2002 Plan, the
distribution amounts for non-grandfathered investments for each officer and
employee currently are as follows: Charles E. Harris, 10.790%; Mel P.
Melsheimer, 4.233%; Douglas W. Jamison, 3.0%; Helene B. Shavin, 1.524%; and
Jacqueline M. Matthews, 0.453%.
The grandfathered participations are set forth below:
Grandfathered Participations
-------------------------------------------------
Name of Officer/Employee Non-Tiny Technology(%) Tiny Technology(%)
------------------------ ---------------------- ------------------
Charles E. Harris 12.41100 10.34250
Mel P. Melsheimer 3.80970 3.17475
Helene B. Shavin 1.37160 1.14300
Jacqueline M. Matthews 0.40770 0.33975
TOTAL 18.00000 15.00000
Accordingly, an additional 2% of Qualifying Income with respect to
grandfathered Non-Tiny Technology Investments, 5% of Qualifying Income with
respect to grandfathered Tiny Technology Investments and the full 20% of
Qualifying Income with respect to new investments are available for allocation
and reallocation from year to year. Currently Douglas W. Jamison is allocated
0.80% of the Non-Tiny Technology Grandfathered Participations and 2% of the
Tiny Technology Grandfathered Participations.
48
During 2002, we decreased the profit-sharing accrual by $163,049,
bringing the cumulative accrual under the Plan to $15,233 at December 31, 2002.
The amounts payable under the Plan for net realized income during the year
ended December 31, 2002 are $15,233. We will pay out 90% in March 2003 and the
remaining 10% upon the completion and filing of our 2002 federal tax return.
On April 26, 2000, the shareholders approved the performance goals
under the Plan in accordance with Section 162(m) of the Code.
Other Information
We are not subject to any material pending or, to our knowledge,
threatened legal proceedings.
Our custodian is J.P. Morgan Chase Bank, 345 Park Avenue, New York,
New York 10154-1002.
Our transfer and dividend-paying agent is The Bank of New York, 101
Barclay Street, New York, New York 10286.
DIVIDENDS AND DISTRIBUTIONS
As a regulated investment company under the Code, we will not be
subject to U.S. federal income tax on our investment company taxable income
that we distribute to shareholders, provided that at least 90% of our
investment company taxable income for that taxable year is distributed to its
shareholders. We may choose to retain our net capital gains for investment and
pay the associated federal corporate income tax.
We may also pay deemed dividends to shareholders. If we do pay a
deemed dividend, you will not receive a cash distribution, but instead you will
receive a tax credit equal to your proportionate share of the tax paid by us.
When we declare a deemed dividend, our dividend-paying agent will send you an
IRS Form 2439 which will reflect receipt of the deemed dividend income and the
tax credit. This tax credit, which we pay at the applicable corporate rate, is
normally at a higher rate than the rate payable by individual shareholders on
the deemed dividend income. The excess credit can be used by the shareholder to
offset other taxes due in that year or to generate a tax refund to the
shareholder. In addition, each shareholder's tax basis in his shares of common
stock is increased by the excess of the capital gain on which we paid taxes
over the amount of taxes we paid. See "Taxation."
We did not pay a cash dividend or declare a deemed dividend for 2002.
On January 22, 2002, we announced a deemed dividend for 2001 of $0.0875 per
share for a total of $775,620.
TAXATION
Taxation of the Company
We have elected and qualified and intend to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Code.
Accordingly, we must, among other things, (a) derive in each taxable year at
least 90% of our gross income (including tax-exempt interest) from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including but not limited to gain from options, futures and forward
contracts) derived with respect to our business of investing in stock,
securities or currencies; and (b) diversify our holdings so that, at the end of
each fiscal quarter (i) at least 50% of the market value of our total assets is
represented by cash and cash items, U.S. Government securities, the securities
of other regulated investment companies and other securities, with other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of our total assets and not more than 10% of the outstanding
voting securities of any issuer (subject to the exception described below), and
(ii) not more than 25% of the market value of our total assets is invested in
the securities of any issuer (other than U.S. Government securities and the
securities of other regulated investment companies) or of any two or more
issuers that we control and that are determined to be engaged in the same
business or similar or related trades or businesses.
In the case of a regulated investment company which furnishes capital
to development corporations, there is an exception to the rule relating to the
diversification of investments described above. This exception is available
49
only to registered management investment companies which the SEC determines to
be principally engaged in the furnishing of capital to other corporations which
are principally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not previously generally
available ("SEC Certification"). We have received SEC Certification since 1999,
including for 2002, but it is possible that we may not receive SEC
Certification in future years. Pursuant to the SEC Certification, we are
generally entitled to include, in the computation of the 50% value of our
assets (described in (b)(i) above), the value of any securities of an issuer,
whether or not we own more than 10% of the outstanding voting securities of the
issuer, if the basis of the securities, when added to our basis of any other
securities of the issuer that we own, does not exceed 5% of the value of our
total assets.
As a regulated investment company, in any fiscal year with respect to
which we distribute at least 90% of the sum of our (i) investment company
taxable income (which includes, among other items, dividends, interest and the
excess of any net short-term capital gains over net long-term capital losses
and other taxable income other than any net capital gain reduced by deductible
expenses) determined without regard to the deduction for dividends paid and
(ii) net tax exempt interest (the excess of its gross tax exempt interest over
certain disallowed deductions), we (but not our shareholders) generally will
not be subject to U.S. federal income tax on net investment income and net
capital gains that we distribute to shareholders. To the extent that we retain
our net capital gains for investment, they will be subject to U.S. federal
income tax (as discussed below under "Taxation of Shareholders"). We may choose
to retain our net capital gains for investment and pay the associated federal
corporate income tax.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax payable by us. To avoid this tax, we must distribute (or be deemed to have
distributed) during each calendar year an amount equal to the sum of:
(1) at least 98% of our ordinary income (not taking into account any
capital gains or losses) for the calendar year;
(2) at least 98% of our capital gains in excess of our capital
losses (adjusted for certain ordinary losses) for a one-year
period generally ending on October 31 of the calendar year
(unless an election is made by a company with a November or
December year-end to use the company's fiscal year); and
(3) some undistributed amounts from previous years on which we paid
no U.S. federal income tax.
While we intend to distribute any income and capital gains in the
manner necessary to minimize imposition of the 4% excise tax, sufficient
amounts of our taxable income and capital gains may not be distributed to avoid
entirely the imposition of the tax. In that event, we will be liable for the
tax only on the amount by which we do not meet the foregoing distribution
requirement.
In any particular taxable year, we may not qualify as a regulated
investment company. For that such taxable year, all of our taxable income
(including its net capital gains) will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders, and
distributions will be taxable to the shareholders as ordinary dividends to the
extent of our current and accumulated earnings and profits.
We may decide to be taxed as a corporation even if we would otherwise
qualify as a regulated investment company.
Taxation of Shareholders
Distributions we pay to you from our ordinary income or from an excess
of net short-term capital gains over net long-term capital losses (together
referred to hereinafter as "ordinary income dividends") are taxable to you as
ordinary income to the extent of our earnings and profits. Distributions made
to you from an excess of net long-term capital gains over net short-term
capital losses ("capital gain dividends"), including capital gain dividends
credited to you but retained by us, are taxable to you as long-term capital
gains, regardless of the length of time you have owned our shares.
Distributions in excess of our earnings and profits will first reduce the
adjusted tax basis of your shares and, after the adjusted tax basis is reduced
to zero, will constitute capital gains to you (assuming the shares are held as
a capital asset). Generally, you will be provided with a written notice
designating the amount of
50
any (i) ordinary income dividends no later than 30 days after the close of the
taxable year, and (ii) capital gain dividends or other distributions no later
than 60 days after the close of the taxable year.
In the event that we retain any net capital gains, we may designate
the retained amounts as undistributed capital gains in a notice to our
shareholders. If a designation is made, shareholders would include in income,
as long-term capital gains, their proportionate share of such undistributed
amounts, but would be allowed a credit or refund, as the case may be, for their
proportionate share of the corporate tax paid by us. In addition, the tax basis
of shares owned by a shareholder would be increased by an amount equal to the
difference between (i) the amount included in the shareholder's income as
long-term capital gains and (ii) the shareholder's proportionate share of the
corporate tax paid by us.
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional shares of our common stock. If we pay
you a dividend in January which was declared in the previous October, November
or December to shareholders of record on a specified date in one of these
months, then the dividend will be treated for tax purposes as being paid by us
and received by you on December 31 of the year in which the dividend was
declared.
A shareholder will realize gain or loss on the sale or exchange of our
common shares in an amount equal to the difference between the shareholder's
adjusted basis in the shares sold or exchanged and the amount realized on their
disposition. Generally, gain recognized by a shareholder on the sale or other
disposition of our common shares will result in capital gain or loss to you,
and will be long-term capital gain or loss if the shares have been held for
more than one year at the time of sale. Any loss upon the sale or exchange of
our shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received (including amounts
credited as an undistributed capital gain dividend) by you. A loss realized on
a sale or exchange of our shares will be disallowed if other of our shares are
acquired (whether through the automatic reinvestment of dividends or otherwise)
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of. In this case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss.
In general, federal withholding taxes at a 30% rate (or a lower rate
pursuant to a tax treaty) will apply to distributions to shareholders (except
to those distributions designated by us as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the
extent that such income is not "effectively connected" with a U.S. trade or
business carried on by such shareholders.
Backup Withholding
We are required in some circumstances to backup withhold on taxable
dividends and other payments paid to non-corporate holders of our shares who do
not furnish us with their correct taxpayer identification number and
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made
to you may be refunded or credited against your U.S. federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service.
The foregoing is a general discussion of the provisions of the Code
and the Treasury regulations in effect as they directly govern our taxation and
our shareholders. These provisions are subject to change by legislative or
administrative action, and any change may be retroactive. The discussion does
not purport to deal with all of the federal income tax consequences applicable
to us, or which may be important to particular shareholders in light of their
individual investment circumstances or to some types of shareholders subject to
special tax rules, such as financial institutions, broker-dealers, insurance
companies, tax-exempt organizations, partnerships or other pass-through
entities, persons holding notes in connection with a hedging, straddle,
conversion or other integrated transaction, persons engaged in a trade or
business in the United States or persons who have ceased to be U.S. citizens or
to be taxed as resident aliens. Shareholders are urged to consult their tax
advisers regarding specific questions as to U.S. federal, foreign, state, local
income or other taxes.
CERTAIN GOVERNMENT REGULATIONS
A business development company is regulated by the 1940 Act. A
business development company must be organized in the United States for the
purpose of investing in or lending to primarily private companies and making
managerial assistance available to them. A business development company may use
capital provided by public
51
shareholders and from other sources to invest in private investments. A
business development company provides shareholders the ability to retain the
liquidity of a publicly traded stock, while sharing in the possible benefits,
if any, of investing primarily in privately owned companies.
As a business development company, we may not acquire any assets other
than "qualifying assets" unless, at the time we make the acquisition, the value
of our qualifying assets represents at least 70% of the value of our total
assets. The principal categories of qualifying assets relevant to our business
are:
o securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio company;
o securities received in exchange for or distributed with respect
to securities described in the bullet above or pursuant to the
exercise of options, warrants or rights relating to the
securities; and
o cash, cash items, government securities or high quality debt
securities (within the meaning of the 1940 Act), maturing in one
year or less from the time of investment.
An eligible portfolio company is generally a domestic company that is
not an investment company (other than a small business investment company
wholly owned by a business development company) and that:
o does not have a class of securities registered on an exchange or
a class of securities with respect to which a broker may extend
margin credit;
o is actively controlled by the business development company and
has an affiliate of a business development company on its board
of directors; or
o meets other criteria as may be established by the SEC.
Control under the 1940 Act is presumed to exist where a business
development company beneficially owns more than 25% of the outstanding voting
securities of the portfolio company.
To include securities described above as qualifying assets for the
purpose of the 70% test, a business development company must make available to
the issuer of those securities (whether directly or through cooperating
parties) significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company or making loans to a portfolio
company. We offer to provide managerial assistance to each of our portfolio
companies.
As a business development company, we are entitled to issue senior
securities in the form of stock or indebtedness, including bank borrowings and
debt securities, as long as our senior securities have an asset coverage of at
least 200% immediately after each issuance. See "Risk Factors."
We may also be prohibited under the 1940 Act from knowingly
participating in certain transactions with our affiliates without the prior
approval of members of our board of directors who are not interested persons
and, in some cases, may have to seek prior approval by the SEC.
We are periodically examined by the SEC for compliance with the 1940
Act.
As with other companies regulated by the 1940 Act, a business
development company must adhere to substantive regulatory requirements. A
majority of our directors must be persons who are not interested persons, as
that term is defined in the 1940 Act. Additionally, we are required to provide
and maintain a bond issued by a reputable fidelity insurance company to protect
us against larceny and embezzlement. Furthermore, as a business development
company, we are prohibited from protecting any director or officer against any
liability to us or our shareholders arising from willful malfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of that person's office.
We maintain a code of ethics that establishes procedures for personal
investment and restricts some transactions by our personnel. Our code of ethics
generally does not permit investment by our employees in private securities
that may be purchased or held by us. The code of ethics is filed as an exhibit
to our registration statement of which this prospectus is a part. You may read
and copy the code of ethics at the SEC's Public Reference Room in Washington,
D.C. You may obtain information on operations of the Public Reference Room by
calling the SEC at
52
(800) SEC-0330. In addition, the code of ethics is available on the EDGAR
Database on the SEC Internet site at http://www.sec.gov. You may obtain copies
of the code of ethics, after paying a duplicating fee, by electronic request
at the following email address: publicinfo@sec.gov, or by writing to the SEC's
Public Reference Section, 450 5th Street, N.W., Washington, D.C. 20549.
We may not change the nature of our business so as to cease to be, or
withdraw our election as, a business development company unless authorized by
vote of a "majority of the outstanding voting securities," as defined in the
1940 Act, of our shares. A majority of the outstanding voting securities of a
company is defined under the 1940 Act as the lesser of: (i) 67% or more of the
company's shares present at a meeting if more than 50% of the outstanding
shares of the company are present and represented by proxy or (ii) more than
50% of the outstanding shares of the company.
CAPITALIZATION
We are authorized to issue 25,000,000 shares of common stock, par
value $0.01 per share, and 2,000,000 shares of preferred stock, par value $0.10
per share. Each share within a particular class or series thereof has equal
voting, dividend, distribution and liquidation rights. When issued, in
accordance with the terms thereof, shares of common stock will be fully paid
and non-assessable. All shares issued as a result of exercise of the rights
will be newly issued shares. Shares of common stock are not redeemable and have
no preemptive, conversion or cumulative voting rights.
The following table shows the number of shares of (i) capital stock
authorized, (ii) the amount held by us or for our own account and (iii) capital
stock outstanding for each class of our authorized securities as of October 28,
2003.
Amount Held by
Company or for Amount
Title of Class Amount Authorized its Own Account Outstanding
-------------- ----------------- --------------- -----------
Common Stock 25,000,000 1,828,740 11,498,845
Preferred Stock 2,000,000 0 0
Issuance of Preferred Stock
Our board of directors is authorized by our Articles of Incorporation
to issue up to 2,000,000 shares of preferred stock having a par value of $0.10
per share. The board of directors is authorized to divide the preferred stock
into one or more series and to determine the terms of each series, including
but not limited to the voting rights, redemption provisions, dividend rate and
liquidation preference. Any terms must be consistent with the requirements of
the 1940 Act. The 1940 Act currently prohibits us from issuing any preferred
stock if after giving effect to the issuance the value of our total assets,
less all liabilities and indebtedness other than senior securities, would be
less than 200 % of the aggregate amount of senior securities representing
indebtedness plus the aggregate involuntary liquidation value of our preferred
stock (other than up to 5% borrowings for temporary purposes). Leveraging with
preferred stock raises the same general potential for loss or gain and other
risks as does leveraging with borrowings described above.
Options and Warrants
We have no options or warrants outstanding. Under the 1940 Act, we
cannot issue options and/or warrants for more than 25% of our outstanding
voting securities.
53
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement dated
, 2003, the underwriter named below has agreed to purchase from us the number
of shares of common stock set forth opposite its name below:
Underwriter Number of Shares
------------------------------ ----------------
Punk, Ziegel & Company, L.P.
The underwriting agreement provides that the obligations of the
underwriter are subject to certain conditions precedent, including the absence
of any significant negative change in our business and the receipt of certain
certificates, opinions and letters from us and our attorneys and independent
accountants. The nature of the underwriter's obligation is such that they are
committed to purchase all shares of common stock offered hereby if any of the
shares are purchased.
We have granted the underwriter the option, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of shares of
our common stock at the public offering price, less the underwriting discounts
and commissions set forth on the cover page of this prospectus. The underwriter
may exercise this option solely to cover unfilled customer orders, if any, in
connection with the sale of our common stock.
The following table summarizes the underwriting discounts and
commissions to be paid by us to the underwriter for each share of our common
stock and in total. This information is presented assuming either no exercise
or full exercise of the underwriter's option to purchase additional shares of
our common stock.
Per Aggregate Aggregate
Share Without Option With Option
-------- -------------- -----------
Underwriting discounts and
commissions payable by us
We have been advised that the underwriter proposes to offer the shares
of common stock to the public at the public offering price set forth on the
cover page of this prospectus and to certain dealers at that price less a
concession not in excess of $ per share. The underwriter may allow, and such
dealers may re-allow, a concession not in excess of $ per share to certain
other dealers. The offering of the shares of common stock is made for delivery
when, as and if accepted by the underwriter and subject to prior sale and to
withdrawal, cancellation or modification of this offering without notice. The
underwriter reserves the right to reject an order for the purchase of shares in
whole or in part.
We and our most senior executive officers and directors have agreed
that for a period of 90 days after the date of this prospectus, we and they
will not, without the prior written consent of Punk, Ziegel & Company directly
or indirectly: offer, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of or otherwise dispose of or transfer (subject to certain
exceptions) any shares of our common stock or securities convertible into or
exchangeable or exercisable for shares of our common stock, whether now owned
or acquired after the date of this prospectus by any such person or with
respect to which any such person acquires after the date of this prospectus the
power of disposition, or file any registration statement under the Securities
Act with respect to any of the foregoing, or enter into any swap or other
agreement or any other agreement that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of shares of our common
stock whether any such swap or transaction is to be settled by delivery of our
common stock or other securities, in cash or otherwise.
Until the offering of the shares of common stock is completed,
applicable rules of the Securities and Exchange Commission may limit the
ability of the underwriter and certain selling group members to bid for and
purchase the common stock. As an exception to these rules, the underwriter may
engage in certain transactions that stabilize the price of the common stock.
These transactions may include short sales, stabilizing transactions and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriter of a greater
54
number of shares of common stock than it is required to purchase in the
offering. Stabilizing transactions consist of certain bids or purchases made
for the purpose of preventing or retarding a decline in the market price of
the common stock while the offering is in progress.
The underwriter also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriter a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriter may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriter without notice at any time. These transactions may be effected
on the Nasdaq National Market, or otherwise.
We have agreed to indemnify the underwriter against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the underwriter may be required to make in respect thereof.
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York, our special counsel in connection with
the offering of common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriter by Greenberg Traurig LLP,
Miami, Florida.
EXPERTS
Our audited financial statements as of December 31, 2002 and for the
year then ended have been incorporated by reference from our 2002 Annual Report
on Form 10-K in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. PricewaterhouseCoopers LLP is located at 1177 Avenue
of the Americas, New York, New York 10036. At the 2003 annual meeting,
shareholders ratified the appointment of PricewaterhouseCoopers LLP as our
independent accountants to audit our December 31, 2003 financial statements.
The financial statements, as of December 31, 2000 and 2001 included in
our Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated by reference in this prospectus were audited by Arthur Andersen
LLP, independent public accountant, as indicated in their report with respect
thereto, are included herein in reliance upon the authority of said firm as
experts in giving said report. Arthur Andersen LLP has not consented to the
inclusion of their report in this prospectus, and we have not obtained their
consent to do so in reliance upon Rule 437a of the Securities Act of 1933.
Because Arthur Andersen LLP has not consented to the inclusion of their report
in this prospectus, you will not be able to recover against Arthur Andersen LLP
under Section 11(a) of the Securities Act for any untrue statements of a
material fact contained in the financial statements audited by Arthur Andersen
LLP or any omissions to state a material fact required to be stated therein.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On February 26, 2002, our Audit Committee approved the dismissal of
Arthur Andersen LLP as our independent public accountants effective upon
completion of the December 31, 2001 audit, and appointed PricewaterhouseCoopers
LLP to serve as our independent public accountants for the year ending
December 31, 2002. The appointment of PricewaterhouseCoopers LLP was ratified
at our 2002 annual meeting of stockholders held on October 15, 2002.
Arthur Andersen LLP's reports on our consolidated financial statements
for the years ended December 31, 2001 and 2000 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001 and 2000, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which, if not resolved to Arthur Andersen LLP's satisfaction, would have caused
them to make reference
55
to the subject matter in connection with their report on our consolidated
financial statements for such years; and there were no reportable events as
defined in Item 304(a) (1) (v) of Regulation S-K.
FURTHER INFORMATION
We are subject to the informational requirements of the 1934 Act and
in accordance therewith file reports, proxy statements and other information
with the SEC. Such reports, proxy statements and other information filed by us
can be inspected and copied at public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; and 500 West Madison
Street, Chicago, Illinois 60661. You can obtain information on the operation of
the Public Reference room by calling the SEC at (800) SEC-0330. The SEC also
maintains a website that contains reports, proxy statements, and other
information. The address of the SEC's website is http://www.sec.gov. Copies of
such material may also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Our common stock is listed on the
Nasdaq National Market and our reports, proxy statements and other information
concerning us can be inspected and copied at the library of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
PRIVACY PRINCIPLES OF THE COMPANY
We are committed to maintaining the privacy of our shareholders and to
safeguarding their non-public personal information. The following information
is provided to help you understand what personal information we collect, how we
protect that information and why, in some cases, we may share information with
select other parties.
Generally, we do not receive any non-public personal information
relating to our shareholders, although some non-public personal information of
our shareholders may become available to us. We do not disclose any non-public
personal information about our shareholders or former shareholders to anyone,
except as permitted by law or as is necessary in order to service shareholder
accounts (for example, to a transfer agent or third party administrator).
We restrict access to non-public personal information about our
shareholders to our employees and to employees of our service providers and
their affiliates with a legitimate business need for the information. We
maintain physical, electronic and procedural safeguards designed to protect the
non-public personal information of our shareholders.
56
Until , all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
This prospectus constitutes a part of a registration statement on Form
N-2 (together with all the exhibits and the appendix thereto, the "Registration
Statement") filed by us with the SEC under the Securities Act and the 1940 Act.
This prospectus does not contain all of the information set forth in the
Registration Statement. Reference is hereby made to the Registration Statement
and related exhibits for further information with respect to us and the shares
offered hereby. Statements contained herein concerning the provisions of
documents are necessarily summaries of the material terms of such documents.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SHARES OF COMMON STOCK
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL.
PUNK, ZIEGEL & COMPANY
The date of the prospectus is , 2003
57
PART C -- OTHER INFORMATION
C
Item 24. Financial Statements and Exhibits
-------------------------------------------
(1) Financial Statements - The following financial statements have been
incorporated by reference into the Registration Statement:
Page
----
(a) Annual Report on Form 10K
-------------------------
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001, and 2000
Selected Per Share Data and Ratios for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Changes in the Net Assets for
the years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Assets and Liabilities for
years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
(b) Quarterly Reports on Form 10Q
-----------------------------
Consolidated Statements of Assets and Liabilities as of
March 31, 2003 and June 30, 2003
Consolidated Statements of Operations for the quarters
ended March 31, 2003 and June 30, 2003
Consolidated Statements of Cash Flows for the quarters
ended March 31, 2003 and June 30, 2003
Consolidated Statements of Changes in the Net Assets for
the quarters ended March 31, 2003 and June 30, 2003
Consolidated Schedule of Investments as of March 31, 2003
and June 30, 2003
Footnote to Consolidated Schedule of Investments
C-1
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable, or not
required or the required information is shown in the financial statements or
notes thereto.
(2) Exhibits:
--------
(a) Restated Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1(a) to the Company's Form 10-K for the
year ended December 31, 1995.
(b) Restated By-laws of the Company, incorporated by reference to
Exhibit 3.1(b) to the Company's Form 10-K for the year ended December 31, 1995
and the Company's Form 10-Q for the quarter ended September 30, 1998.
(c) Not applicable.
(d) Subscription Certificate, Beneficial Owner Listing Certification,
Notice of Guaranteed Delivery, DTC Participant Over-Subscription Certificate
and Specimen certificate of common stock certificate. The Specimen certificate
of common stock certificate is hereby incorporated by reference to Exhibit 4 of
the Company's registration statement on Form N-2 filed on October 29, 1992.
(e) Not applicable.
(f) Not applicable.
(g) Not applicable.
(h) Underwriting Agreement between the Company and Punk, Ziegel &
Company.(2)
(i) (1) Harris & Harris Group, Inc. Employee Profit-Sharing Plan,
incorporated by reference as Exhibit 10.22 to the Company's Form 10-K for the
year ended December 31, 1999.
(2) Harris & Harris Group, Inc. Directors Stock Purchase
Plan 2001, incorporated by reference as Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 2000.
(3) Employment Agreement by and between the Company and
Charles E. Harris dated October 19, 1999, incorporated by reference to Exhibit
(C) to the Company's Form 8-K filed on October 27, 1999.
(4) Severance Compensation Agreement by and between the
Company and Charles E. Harris dated August 15, 1990, incorporated by reference
to Exhibit 10 (s) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
(5) Deferred Compensation Agreement Between Harris &
Harris Group, Inc. and Charles E. Harris, incorporated by reference as Exhibit
10.19 to the Company's Form 10-K for the year ended December 31, 1999.
C-2
(6) Trust Under Harris & Harris Group, Inc. Deferred
Compensation Agreement, incorporated by reference as Exhibit 10.20 to the
Company's Form 10-K for the year ended December 31, 1999.
(7) Form of Indemnification Agreement which has been
established with all directors and executive officers of the Company,
incorporated by reference as Exhibit 10.14 to the Company's Form 10-K for the
year ended December 31, 1995.
(j) Harris & Harris Group, Inc. Custodian Agreement with JP Morgan,
incorporated by reference to Exhibit 9.1 to the Company's Form 10-K for the
year ended December 31, 1995.
(k) (1) Demand Promissory Note, Corporate Certificate-Borrowing,
Statement of Purpose for an Extension of Credit Secured by Margin Stock by and
among Harris & Harris Group, Inc. and J.P. Morgan incorporated by reference as
Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1997.
(2) Stock Purchase Agreement, Standstill Agreement and
Termination and Release by and among Harris & Harris Group, Inc. and American
Bankers Life Assurance Company of Florida dated May 18, 1995, incorporated by
reference as Exhibit 10.13 to the Company's Form 10-K for the year ended
December 31, 1995.
(l) Opinion letter of Skadden, Arps, Slate, Meagher & Flom, LLP.(2)
(m) Not applicable.
(n) Consent of the Independent Accountant.(1)
(o) Not applicable
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics under 17j-1 under the 1940 Act.(2)
(1) Filed herewith.
(2) To be filed by amendment.
Item 25. Marketing Arrangements
-------------------------------
Reference is made to the Form of Underwriting Agreement filed with this
registration statement.
Item 26. Other Expenses of Issuance and Distribution
----------------------------------------------------
The following table sets forth the expenses to be incurred in
connection with this offering described in this Registration Statement:
Registration fees $
NASDAQ listing fee $
Printing (other than stock certificates) $
Accounting fees and expenses $
C-3
Legal fees and expenses $
Information Agent fees and expenses $
Subscription Agent fees and expenses $
Miscellaneous $
-------
Total $
=======
C-4
Item 27. Persons Controlled by or Under Common Control with Company
--------------------------------------------------------------------
Percentage of voting
securities
Organized owned by
At December 31, 2002 under laws of the Registrant
-------------------- ------------ -------------------
Harris & Harris Enterprises, Inc. Delaware 100%
Item 28. Number of Holders of Securities (as of October 24, 2003)
-----------------------------------------------------------------
Title of class Number of record holders
-------------- ------------------------
Common stock, $.01 par value 143
The Company was advised by its transfer agent that there were 143
holders of record of the common stock that held the common stock for an
estimated 5,852 beneficial owners.
Item 29. Indemnification
-------------------------
Reference is made to the Form of Underwriting Agreement filed with
this registration statement.
Article 8 ("Article 8") of our Certificate of Incorporation, as
adopted by our board of directors in October 1992, and approved by our
shareholders in December, 1992, provides for the indemnification of our
directors and officers to the fullest extent permitted by applicable New York
law, subject to the applicable provisions of the 1940 Act.
Scope of Indemnification Under New York Law. BCL ss.ss. 721-726
provide that a director or officer of a New York corporation who was or is a
party or a threatened party to any threatened, pending or completed action,
suit or proceeding (i) shall be entitled to indemnification by the corporation
for all expenses of litigation when he is successful on the merits, (ii) may be
indemnified by the corporation for judgments, fines, and amounts paid in
settlement of, and reasonable expenses incurred in, litigation (other than a
derivative suit), even if he is not successful on the merits, if he acted in
good faith and for a purpose he reasonably believed to be in or not opposed to
the best interest of the corporation (and, in criminal proceedings, had no
reasonable cause to believe that his conduct was unlawful), and (iii) may be
indemnified by the corporation for amounts paid in settlement and reasonable
expenses incurred in a derivative suit (i.e., a suit by a shareholder alleging
a breach of a duty owed to the corporation by a director or officer) even if he
is not successful on the merits, if he acted in good faith, for a purpose which
he believed to be in, or not opposed to, the best interest of the corporation.
However, no indemnification may be made in accordance with clause (iii) if he
is adjudged liable to the corporation, unless a court determines that, despite
the adjudication of liability and in view of all of the circumstances, he is
entitled to indemnification. The indemnification described in clauses (ii) and
(iii) above and the advancement of litigation expenses, may be made only upon a
determination by (i) a majority of a quorum of disinterested directors, (ii)
independent legal counsel, or (iii) the shareholders that indemnification is
proper because the applicable standard of conduct has been met. In addition,
litigation expenses to a director or officer may only be made upon receipt of
an undertaking by the director or officer to repay the expenses if it is
ultimately determined that he is not entitled to be indemnified. The
indemnification and advancement of expenses provided for by BCL ss.ss. 721-726
are not deemed exclusive of any rights the indemnitee may have under any
by-law, agreement, vote of shareholders or disinterested directors, or
otherwise. When any action with respect to indemnification of directors is
taken by amendment to the by-laws, resolution of directors, or agreement, the
corporation must mail a notice of the action taken to its shareholders of
record by the earlier of (i) the date of the next annual meeting, or (ii)
fifteen months after the date of the action taken.
C-5
The foregoing provisions are subject to Section 17(h) of the 1940 Act,
which provides that neither the certificate of incorporation or by-laws nor any
agreement may protect any director or officer against any liability to the
Company or any of its stockholders to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Indemnification Agreements. Pursuant to the Indemnification
Agreement, the Company would indemnify the indemnified director or officer (the
"Indemnitee") to the fullest extent permitted by New York law as in effect at
the time of execution of the Indemnification Agreement and to such fuller
extent as New York law may permit in the future, subject in each case to the
applicable provisions of the 1940 Act. An Indemnitee would be entitled to
receive indemnification against all judgments rendered, fines levied, and other
assessments (including amounts paid in settlement of any claims, if approved by
the Company), plus all reasonable costs and expenses (including attorneys'
fees) incurred in connection with the defense of any threatened, pending, or
completed action or proceeding, whether civil, criminal, administrative, or
investigative (an "Action"), related to or arising from (i) any actual or
alleged act or omission of the Indemnitee at any time as a director, officer,
employee, or agent of the Company or any of its affiliates or subsidiaries, or
(ii) the Indemnitee's past, present, or future status as a director, officer,
employee or agent of the Company or any of its affiliates or subsidiaries. An
Indemnitee would also be entitled to advancement of all reasonable costs and
expenses incurred in the defense of any Action upon a finding by a court or an
opinion of independent counsel that the Indemnitee is more likely than not to
prevail. If the Company makes any payment to the Indemnitee under the
Indemnification Agreement and it is ultimately determined that the Indemnitee
was not entitled to be indemnified, the Indemnitee would be required to repay
the Company for all amounts paid to the Indemnitee under the Indemnification
agreement. An Indemnitee would not be entitled to Indemnification or
advancement of expenses under the Indemnification Agreement with respect to any
proceeding or claim brought by him against the Company.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
We maintain directors' and officers' liability insurance.
Item 30. Business and Other Connections of Investment Adviser
--------------------------------------------------------------
Not applicable, because the Company has no investment adviser.
Item 31. Location of Accounts and Records
------------------------------------------
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the 1940 Act and the Rules promulgated there under are
maintained at the offices of the Company at 111 West 57th Street, Suite 1100,
New York, New York 10019. Certain accounts, books and other documents
pertaining to the Company's subsidiaries are maintained at 111 West 57th
Street, Suite 1100, New York, New York 10019.
C-6
Item 32. Management Services
-----------------------------
None.
Item 33. Undertakings
----------------------
1. The Company undertakes to suspend the offering of its shares until
it amends its prospectus if:
(1) subsequent to the effective date of this
Registration Statement, the net asset value per
share declines more than 10 % from its net asset
value per share as of the effective date of the
Registration Statement; or
(2) the net asset value increases to an amount greater
than its net proceeds as stated in the prospectus.
2. The Company undertakes to file a post-effective amendment with
certified financial statements showing the initial capital received before
accepting subscriptions from more than 25 persons, if the Company proposes to
raise its initial capital under Section 14(a)(3) of the Investment Company Act
of 1940.
3. Not applicable.
4. The Company hereby undertakes:
(a) to file, during any period in which offers or sales
are being made, a post-effective amendment to this
Registration Statement:
(1) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(2) to reflect in the prospectus any facts or
events after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent
a fundamental change in the information set
forth in the Registration Statement; and
(3) to include any material information with
respect to the plan of distribution not
previously disclosed in the Registration
Statement or any material change to such
information in the Registration Statement.
(b) that for the purpose of determining any liability
under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof; and
(c) to remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
5. The Company hereby undertakes:
(a) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this
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Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company
pursuant to Rule 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as
of the time it was declared effective; and
(b) that for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
6. Not Applicable.
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EXHIBITS
(n) Consent of the Independent Accountant
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, and State of New York, on the 29th
day of October, 2003.
HARRIS & HARRIS GROUP, INC.
By: /s/ Charles E. Harris
-------------------------------
Name: Charles E. Harris
Title: Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1933,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
------------------------ ----------------------------------------- --------------------
/s/ Charles E. Harris Chairman of the Board and October 29, 2003
----------------------- Chief Executive Officer
Charles E. Harris (Principal Executive Officer)
/s/ Mel P. Melsheimer President, Chief Operating Officer October 29, 2003
----------------------- and Chief Financial Officer
Mel P. Melsheimer (Principal Financial Officer)
/s/ Dr. C. Wayne Bardin
------------------------
Dr. C. Wayne Bardin Director October 29, 2003
/s/ Dr. Phillip A. Bauman Director October 29, 2003
------------------------
Dr. Phillip A. Bauman
/s/ G. Morgan Browne Director October 29, 2003
------------------------
G. Morgan Browne
/s/ Dugald A. Fletcher
------------------------
Dugald A. Fletcher Director October 29, 2003
------------------------
Dr. Kelly S. Kirkpatrick Director October 29, 2003
/s/ Glenn E. Mayer Director October 29, 2003
------------------------
Glenn E. Mayer
/s/ Lori D. Pressman Director October 29, 2003
------------------------
Lori D. Pressman
/s/ Charles E. Ramsey Director October 29, 2003
------------------------
Charles E. Ramsey
/s/ James E. Roberts Director October 29, 2003
------------------------
James E. Roberts
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