as filed with the Securities and Exchange Commission on December 24, 2003
Securities Act Registration No. 333-110064
Investment Company Act File Number 814-176
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933: [ ]
PRE-EFFECTIVE AMENDMENT NO. 5 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
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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)
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Copies 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
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Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
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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 2,300,000 $8.42 $19,366,000 $1,567(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 December 19, 2003.
(2) Previously paid.
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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.
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(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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 24, 2003
HARRIS & HARRIS GROUP, INC.
2,000,000 Shares
Common Stock
Harris & Harris Group, Inc. is a venture capital business development
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 December 19, 2003, the last reported
sale price of our common stock was $8.65.
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 7.
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 $ .
The shares of common stock will be ready for delivery on or
about , 2003 at the offices of in New York.
PUNK, ZIEGEL & COMPANY
The date of the prospectus is , 2003.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriter has 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 underwriter is not, making an offer to sell these
securities in any jurisdiction in which the offer or sale is not permitted.
In this prospectus, unless otherwise indicated, "Harris & Harris,"
"Company," "us," "our" and "we" refer to Harris & Harris Group, Inc. This
prospectus also includes trademarks owned by other persons.
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TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY................................................................................................1
TABLE OF FEES AND EXPENSES........................................................................................5
RISK FACTORS......................................................................................................8
FORWARD-LOOKING INFORMATION......................................................................................14
USE OF PROCEEDS..................................................................................................15
PRICE RANGE OF COMMON STOCK......................................................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................16
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA...................................................................18
BUSINESS 26
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES...................................................................27
DETERMINATION OF NET ASSET VALUE.................................................................................31
INVESTMENT POLICIES..............................................................................................35
MANAGEMENT OF THE COMPANY........................................................................................37
DIVIDENDS AND DISTRIBUTIONS......................................................................................43
TAXATION 54
CERTAIN GOVERNMENT REGULATIONS...................................................................................54
CAPITALIZATION...................................................................................................55
UNDERWRITING.....................................................................................................57
LEGAL MATTERS....................................................................................................59
EXPERTS 60
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS.........................................................................61
FURTHER INFORMATION..............................................................................................61
PRIVACY PRINCIPLES OF THE COMPANY................................................................................62
PART C-- OTHER INFORMATION......................................................................................C-1
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 7.
Our Business
Harris & Harris Group, Inc. is a venture capital company specializing
in tiny technology that operates as a non-diversified business development
company under the Investment Company Act of 1940, which we refer to as the 1940
Act. For tax purposes, we operate as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, which we refer to as 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
(which we refer to as MEMS) and nanotechnology. We consider a company to be a
tiny technology company if the company employs intellectual property which we
consider to be at the microscale or smaller and which is material to its
business plan. 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 specific focus on tiny technology through a
portfolio of venture capital investments that address a variety of markets and
products. 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, as we believe it
will likely become increasingly difficult to create new intellectual property in
tiny technology. 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 team of professionals including three full time members of
management, Charles E. Harris, Mel P. Melsheimer and Douglas
W. Jamison, and two directors who are also consultants, Dr.
Kelly S. Kirkpatrick and Lori D. Pressman, who collectively
have 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
o through the ownership of our publicly traded shares, a measure
of liquidity not available in typical underlying venture
capital portfolio 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 types of tiny technology companies in our
portfolio;
o increase the percentage of our total assets invested in tiny
technology; and
o lower our expenses as a percentage of assets and otherwise
achieve certain economies and advantages of scale in our
operations since our costs are primarily fixed. Therefore, as
our assets increase by the net proceeds of this offering,
those fixed costs will represent a smaller percentage of our
assets.
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. In 1995, we elected to be regulated
as a BDC. 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 of directors.
As is usual in the venture capital industry, our venture capital
investments are primarily in convertible preferred stock, which is usually the
most senior security in a portfolio company's equity capital structure until the
company has substantial revenues, and which gives us seniority over the holders
of common stock (usually the founders) while preserving fully our participation
in the upside potential of the portfolio company through the conversion feature
and, in many cases, a dividend right payable in kind (which increases our
participation in the portfolio company) or potentially in cash.
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 ultraviolet
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.
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 36% of the net asset value attributable to our
venture capital investment portfolio, or 21% of our net asset
value, as of September 30, 2003, is concentrated in one
company, NeuroMetrix, Inc., which is not a tiny technology
company.
o Approximately 44% of the net asset value attributable to our
venture capital investment portfolio, or 67% of our net asset
value, as of September 30, 2003, is not invested in tiny
technology.
o 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.
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.
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
$ . Although we will make initial investments exclusively in
tiny technology, we can make follow-on investments in non-tiny
technology companies. Further, while considering venture capital
investments, we may invest the proceeds in U.S. government and
government agency securities, which are likely to yield less
than our operating expense ratio. We expect to invest or earmark for
potential follow-on investment the net proceeds within approximately
one year, 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
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 actual amounts, except for Other
Expenses, for our current fiscal year after giving effect to anticipated net
proceeds of the offering, assuming that we incur the estimated offering
expenses.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) 6.00%
Offering Expenses (as a percentage of offering price) 3.56
Annual Expenses (as a percentage of net assets attributable to common stock)
Management Fees(1) N/A
Interest Payments on Borrowed Funds .05%
Other Expenses(2)
Profit-Sharing Accrual(3) .00
Accrual for Mandatory Retirement(4) .57
Salaries and Benefits(5) 3.34
Administration and Operations(6) 1.96
Professional Fees .84
Total Annual Expenses (7) 6.76%
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(1) The Company has no external management fees because it is internally
managed.
(2) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(3) We have an Employee Profit-Sharing Plan that provides for profit sharing
equal to 20% of the net after-tax income we realize as reflected on our
Consolidated Statement of Operations for each year, less non-qualifying
gains, if any. Under the Employee Profit-Sharing Plan, the net income we
realize includes investment income, gains and losses we realize and
operating expenses (including taxes paid or payable by us), but does not
include dividends paid or distributions made to shareholders, payments
under the plan, gains and losses we have not realized and loss carryovers
from other years. The portion of net after-tax realized gains attributable
to asset values as of September 30, 1997 is considered non-qualifying gain.
As of September 30, 2003, we have not realized any net income for this year
and accordingly the expense accrual associated with this liability for 2003
is $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
than the amount stated above. Under no circumstances may this expense
exceed 20% of the net after-tax income we realize.
(4) We established a Mandatory Retirement Plan on March 20, 2003. In
conjunction with this plan, we are required 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.
(5) Our President, Chief Operating Officer and Chief Financial Officer is
scheduled to retire on December 31, 2004, pursuant to the Mandatory
Retirement Plan. His salary and non-continuing benefits in 2003, including
the amortization of his retirement benefit, will total approximately
$503,200, or 1.28% of net assets attributable to common stock.
(6) "Administration and Operations" include expenses incurred for
administration, operations, rent, directors' fees and expenses,
depreciation and custodian fees.
(7) Total annual expenses after December 31, 2004 will not include $225,000 for
our President, Chief Operating Officer and Chief Financial Officer's
non-continuing benefits.
Example
The following examples illustrate the 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
$225,000 of 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 $10,000 investment, assuming
a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$1,560 $2,650 $3,710 $6,250
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. The above
example should not be considered a representation of future expenses, and actual
expenses and annual rates of return may be more or less than those assumed for
purposes of the example. The foregoing table does not include the expenses of
our Employee Profit Sharing plan, which would increase the amounts shown in the
table if we achieved returns in excess of our expenses.
INCORPORATION BY REFERENCE
The financial statements included in our annual reports for the fiscal
years ended December 31, 2002, 2001, 2000 on Form 10-K and the financial
statements included in our quarterly reports for the fiscal quarters ended
March 31, 2002 and 2003, June 30, 2002 and 2003 and September 30, 2002 and
2003, each of which either accompanies this prospectus or has previously been
provided to the person to whom this prospectus is being sent, are incorporated
herein by reference. We will furnish, without charge, a copy of such financial
staetments, upon request by writing to 111 West 57th Street, Suite 1100, New
York, New York 10019, Attention: Investor Relations, or calling 312-582-0900.
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 litigation.
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 these products are
based may be contested. Any litigation 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 successfully market their products.
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. These conditions may lead to financial losses in our portfolio, which
could have a material adverse effect on the value of our common stock.
The value of our portfolio and the value of our common stock could be
adversely affected if the technologies utilized by our portfolio companies are
found to cause health or environmental risks.
Our portfolio companies work with new technologies, which could have
potential environmental and health impacts. Tiny technology in general and
nanotechnology in particular are currently the subject of health and
environmental impact research. If health or environmental concerns about tiny
technology or nanotechnology were to arise, our portfolio companies may incur
additional research, legal and regulatory expenses, might have difficulty
raising capital or could be forced out of business. This would have an adverse
effect on the value of our portfolio and on the value of our common stock.
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 our
portfolio companies 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 opportunities to sell
investments in privately held companies also has an adverse effect on the
ability of these companies to raise capital.
Even if our portfolio companies complete initial public offerings, 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 investments into the public market for specified periods of time
after initial public offerings. 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 Investment Company Act of 1940,
which we refer to as 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 our 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 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."
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 36% of the net asset value attributable to our
venture capital investment portfolio, or 21% of our net asset value, as of
September 30, 2003, is concentrated in one company, NeuroMetrix, Inc., which
is not a tiny technology company.
At September 30, 2003, we valued our investment in NeuroMetrix, Inc.,
which is not a tiny technology company, at $5,075,426, which represents 35.76%
of the net asset value attributable to our venture capital investment
portfolio, or 20.95% of our net asset value. 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 44% of the net asset value attributable to our venture
capital investment portfolio, or 67% of our net asset value, as of September
30, 2003, is not invested in tiny technology.
Although all 12 of our investments added since August 2001 have been
in tiny technology companies, and although we consider 13 of the companies in
our venture capital investment portfolio to be tiny technology companies, at
September 30, 2003, only 55.96% of the net asset value attributable to our
venture capital investment portfolio, or 32.78% of our net asset value, was
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. Our
President, Chief Operating Officer and Chief Financial Officer, Mel P.
Melsheimer, is scheduled to retire on December 31, 2004, pursuant to the
Mandatory Retirement Plan. We could be adversely affected by his retirement.
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.
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 names and business
descriptions 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 a portfolio company, we may make
additional investments in that portfolio company 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 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.
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 regulated
investment company, or RIC, under the tax 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. These shares would have a preference over our common stock 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 stock
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 RIC under the tax 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, these 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 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. These 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
these requirements.
Investment in foreign securities could result in additional risks.
The Company may invest in foreign securities, although 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. Shares of our common stock
may not trade at a price higher than or equal to net asset value. On December
19, 2003, our stock closed at $8.65 per share, a premium of $6.54 over our net
asset value per share of $2.11 as of September 30, 2003.
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,
1998, 1999, 2000 and 2001 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 incorporate
by reference in this prospectus its report with respect to our audited
consolidated financial statements as of and for the years ended December 31,
1998, 1999, 2000 and 2001. 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 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
the 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 one year, 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, which are likely to yield less than our operating expense
ratio. 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.
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.
Net Asset Value
("NAV") Per Share at Premium or Discount as a
Market Price End of Period % of NAV
Quarter Ended High Low 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 0.0 (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
Fourth Quarter through
December 19, 2003 10.72 6.50 - - -
The last reported price for our common stock on December 19, 2003 was
$8.65 per share. As of December 19, 2003, we had approximately 153 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 September 30, 2003 Summary Financial Statements and our 2002
Consolidated Financial Statements and the Notes thereto. In addition, this
Prospectus 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., 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 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, 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 54
venture capital investments, including four investments, via private placements,
in securities of publicly traded companies. We have sold 36 of these 54
investments, realizing total proceeds of $105,659,158 on our invested capital of
$38,366,523. Sixteen of these 36 investments were profitable. The average and
median holding periods for these 36 investments were 3.6 years and 3.2 years,
respectively. At September 30, 2003, we valued the 18 venture capital
investments remaining in our portfolio at $14,192,218, or 58.6%, of our net
assets, net of unrealized depreciation of $2,891,452. At September 30, 2003, the
average and median holding periods for our 18 current venture capital
investments were 2.6 years and 1.6 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
September 30, 2003, $14,192,218, or 58.6%, of our net assets consisted of
venture capital investments at fair value, net of unrealized depreciation of
$2,891,452. 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.
Because none of our current venture capital investments have readily
available market values, we value our venture capital 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 income 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
we earn 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.
(2) Net Realized Gain / (Loss) on Investments - the difference
between the net proceeds of sales 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 sales of our
investments are unpredictable, we attempt to maintain adequate working capital
to provide for fiscal periods when we have no sales of investments.
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
BALANCE SHEET DATA
Financial Position as of: September 30, December 31,
2003 2002 2001 2000
-------------- ------------------------------------------------
(unaudited) (audited)
Total assets $ 34,392,032 $ 35,951,969 $ 39,682,367 $ 43,343,423
Total liabilities $ 10,166,120 $ 8,695,923 $ 15,347,597 $ 11,509,948
Net assets $ 24,225,912 $ 27,256,046 $ 24,334,770 $ 31,833,475
Cash dividends paid $ 0 $ 0 $ 0 $ 184,817
Net asset value per outstanding share $ 2.11 $ 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 nine For the twelve
months ended months ended
September 30, December 31,
2003 2002 2001 2000
-------------- ------------------------------------------------
(unaudited) (audited)
Total investment income $ 145,852 $ 253,461 $ 510,661 $ 687,050
Total expenses(1) $ 2,029,647 $ 2,124,549 $ 1,035,221 $ (2,623,200)
Net operating income (loss) $ (1,883,795) $ (1,871,088) $ (524,560) $ 3,310,250
Total tax expense (benefit) $ 13,822 $ 199,309 $ 27,951 $ (51,869)
Net realized gain (loss)
on investments $ (989,169) $ 2,390,302 $ 1,276,366 $ 18,963,832
Net realized income (loss) $ (2,872,964) $ 519,214 $ 751,806 $ 22,274,082
Net (decrease) increase in unrealized
appreciation on investments $ (157,170) $ (3,241,408) $ (7,641,044) $ (37,781,289)
Net (decrease) increase in net assets
resulting from operations $ (3,030,134) $ (2,722,194) $ (6,889,238) $ (15,507,207)
(Decrease) increase in net assets
resulting from operations per
outstanding share $ (0.26) $ (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.
Results of Operations
Three Months Ended September 30, 2003, and September 30, 2002
We had a net decrease in net assets resulting from operations of
$1,270,298 in the three months ended September 30, 2003, compared to a net
increase in net assets resulting from operations of $660,988 in the three months
ended September 30, 2002. We had a net increase in net assets resulting from
capital stock transactions of $0 in the three months ended September 30, 2003,
compared to a net increase in net assets resulting from capital stock
transactions of $5,665,970 in the three months ended September 30, 2002.
Investment Income and Expenses:
-------------------------------
We had net operating losses of $572,346 and $479,433 for the three
months ended September 30, 2003, and September 30, 2002, respectively. In the
three months ended September 30, 2003, our larger net operating loss reflected a
net increase to expenses primarily related to an increase in salaries and
benefits offset by a decrease in professional fees.
Operating expenses were $602,958 and $556,846 for the three months
ended September 30, 2003, and September 30, 2002, respectively. In the three
months ended September 30, 2003, as compared with the three months ended
September 30, 2002, salaries and benefits increased by $100,142, or 38.5%,
primarily as a result of an additional employee, and as a result of a mandatory
retirement plan pension expense that is being amortized through December 31,
2004. In the three months ended September 30, 2003, as compared with the three
months ended September 30, 2002, professional fees decreased by $61,626, or
51.0%, primarily as a result of a shift in the timing of the expenses associated
with the preparation of our proxy statement.
Realized Gains and Losses on Sales of Portfolio Securities:
-----------------------------------------------------------
During the three months ended September 30, 2003, and September 30,
2002, we realized losses of $1,003,919 and gains of $252,750, respectively.
During the three months ended September 30, 2003, we realized net
losses of $1,003,919, consisting primarily of a loss of $1,000,001 on the
realized loss resulting from the bankruptcy of Kriton Medical, Inc., from which
we did not receive any direct distribution. During the three months ended
September 30, 2002, we realized a net gain of $252,750, consisting primarily of
a gain of $553,666 from our partnership interest in PHZ Capital Partners L.P.,
offset by a realized loss of $360,249 on the sale of Schwoo, Inc. convertible
bridge loans.
Unrealized Appreciation and Depreciation of Portfolio Securities:
----------------------------------------------------------------
Net unrealized depreciation on investments decreased by $302,467, or
9.5%, during the three months ended September 30, 2003, from $3,179,750 at June
30, 2003, to $2,877,283 at September 30, 2003.
During the three months ended September 30, 2003, we recorded a net
decrease of $288,871 in unrealized depreciation of our venture capital
investments.
Nine Months Ended September 30, 2003, and September 30, 2002
We had a net decrease in net assets resulting from operations of
$3,030,134 in the nine months ended September 30, 2003, and a net increase in
net assets resulting from operations of $58,343 in the nine months ended
September 30, 2002.
Investment Income and Expenses:
-------------------------------
We had net operating losses of $1,883,795 and $1,690,384 for the nine
months ended September 30, 2003, and September 30, 2002, respectively.
Operating expenses were $2,029,647 and $1,887,627 for the nine months
ended September 30, 2003, and September 30, 2002, respectively. Operating
expenses in the nine months ended September 30, 2003, as compared with the nine
months ended September 30, 2002, changed primarily for the following reasons:
(1) Operating expenses for the nine months ended September 30,
2003, included no expense for employee profit-sharing, as
compared with $248,765 of employee profit-sharing expense for
the nine months ended September 30, 2002.
(2) Salaries and benefits increased by $304,076, or 39.0%,
primarily as a result of the addition of an employee and
mandatory retirement plan pension expense that is being
amortized through December 31, 2004.
(3) Rent expense increased by $39,583, or 30.5%, as a result of
expenses incurred during the transition period to our new
office space.
Realized Gains and Losses on Portfolio Securities:
-------------------------------------------------
During the nine months ended September 30, 2003, we realized net losses
of $975,347. During the nine months ended September 30, 2002, we realized net
gains of $1,052,110.
During the nine months ended September 30, 2003, we realized a loss of
$1,000,001 resulting from the bankruptcy of Kriton Medical, Inc. from which we
did not receive any direct distribution.
During the nine months ended September 30, 2002, we realized net gains
of $1,052,110 consisting primarily of $1,661,892 from our partnership interest
in PHZ Capital Partners L.P., offset by a loss of $350,583 on the dissolution of
Informio, Inc. and a loss of $360,249 on the sale of Schwoo, Inc. convertible
bridge loans.
Unrealized Appreciation and Depreciation of Portfolio Securities:
----------------------------------------------------------------
Net unrealized depreciation on investments increased by $157,170 during
the nine months ended September 30, 2003, from $2,720,113 at December 31, 2002,
to $2,877,283 at September 30, 2003.
During the nine months ended September 30, 2003, we recorded a net
increase of $173,063 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 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
Nine Months ended September 30, 2003
Our total assets and net assets were $34,392,032 and $24,225,912,
respectively, at September 30, 2003, compared with $35,951,969 and $27,256,046
at December 31, 2002.
Net asset value per share ("NAV") was $2.11 at September 30, 2003,
versus $2.37 at December 31, 2002. Our shares outstanding remained unchanged
during the nine months ended September 30, 2003.
Significant developments in the nine months ended September 30, 2003,
were an increase in bank loan payable of $7,609,500 and an increase in the value
of our investment in U.S. Treasury obligations of $2,989,888.
The increase in the value of our venture capital investments, from
$12,036,077 at December 31, 2002, to $14,192,218 at September 30, 2003, resulted
primarily from our three new venture capital investments and three follow-on
investments, partially offset by a net decrease in the value of our venture
capital investments.
The following table is a summary of additions to our portfolio of
venture capital investments during the nine months ended September 30, 2003:
New Investment Amount
-------------- -----------
Chlorogen, Inc. $ 525,900
NanoGram Devices Corporation $ 750,000
Nanosys, Inc. $ 1,500,000
Follow-on Investment
--------------------
NanoOpto Corporation $ 62,500
Nanotechnologies, Inc. $ 169,718
Nantero, Inc. $ 323,000
--------------
Total $ 3,331,118
==============
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.
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
===========
The following table summarizes the fair value of our entire investment
portfolio, as compared with its cost, at September 30, 2003, December 31, 2002,
and December 31, 2001:
September 30, December 31,
2003 2002 2001
-------------- -----------------------------
Investments, at cost $35,510,134 $30,206,935 $37,714,285
Unrealized (depreciation) appreciation(1) (2,877,283) (2,720,113) 1,216,420
----------- ----------- ---------
Investments, at fair value $32,632,851 $27,486,822 $38,930,705
=========== =========== ===========
(1) At September 30, 2003, December 31, 2002, and December 31, 2001, the
accumulated unrealized depreciation on investments, net of deferred taxes,
was $3,722,202, $3,565,032 and $323,624, respectively.
The following table summarizes the fair value composition of our
venture capital investment portfolio at September 30, 2003, December 31, 2002,
and December 31, 2001:
September 30, December 31,
Category 2003 2002 2001
-------- -------------- -----------------------------
Tiny Technology 56.0% 49.0% 9.3%
Other Venture Capital Investments 44.0% 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. We
currently have no restricted securities of companies that are publicly traded.
Nine Months Ended September 30, 2003
At September 30, 2003, and December 31, 2002, our total net primary
liquidity was $11,154,675 and $16,508,057, respectively. On both of the
corresponding dates, our secondary liquidity was $0, as we had no restricted
securities of companies that are publicly traded. 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.
The decrease in our net primary sources of liquidity from December 31,
2002, to September 30, 2003, is primarily owing to: (1) payment of federal,
state and local taxes; (2) investment in Chlorogen, Inc.; (3) investment in
Nanosys, Inc.; (4) investment in NanoOpto Corporation; (5) investment in
Nanotechnologies, Inc.; (6) investment in Nantero, Inc.; and (7) use of funds
for net operating expenses.
At September 30, 2003, our liability for accrued employee profit
sharing was $0, as compared with $15,233 at December 31, 2002, as a result of
the payment of $15,233 for the 2002 profit sharing.
Our total net income tax liability decreased by $941,251, from
$1,527,000 at December 31, 2002 to $585,749 at September 30, 2003, primarily as
a result of federal, state and local tax 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. Our 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.
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
on a quarterly basis. 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 for 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 the
preferred stock of Nantero, Inc.
Recent Developments -- Other
Our qualification as a RIC under Subchapter M of the Code depends on
our satisfying certain technical requirements regarding our income, investment
portfolio and distributions. SEC certification as to the nature of our
operations enables us to obtain additional flexibility in satisfying the
Subchhapter M requirements. On April 2, 2003, we received SEC certification for
2002, as we have for all prior years since 1999. We may not receive this
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 some circumstances,
even if we qualified for Subchapter 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.
On July 22, 2003, the board of directors approved a resolution stating
that we are committed to maintaining the privacy of our shareholders and to
safeguarding their non-public personal information. 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.
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 specific focus on tiny technology through a portfolio of venture
capital investments that address a variety of markets and products. We believe
that we are the only publicly traded U.S. venture capital company specializing
in tiny technology.
As is usual in the venture capital industry, our venture capital
investments are primarily in convertible preferred stock, which is usually the
most senior security in a portfolio company's equity capital structure until the
company has substantial revenues, and which gives us seniority over the holders
of common stock (usually the founders) while preserving fully our participation
in the upside potential of the portfolio company through the conversion feature
and, in many cases, a dividend right payable in kind (which increases our
participation in the portfolio company) or potentially in cash.
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 qualified team of professionals including three full time
members of management, Charles E. Harris, Mel P. Melsheimer
and Douglas W. Jamison, and two directors who are also
consultants, Dr. Kelly S. Kirkpatrick and Lori D. Pressman,
who collectively have expertise in venture capital,
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
o through the ownership of our publicly traded shares, a measure
of liquidity not available in typical underlying venture
capital portfolio investments.
Microsystems, microelectromechanical systems, which we refer to as
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, as we believe it will
likely become increasingly difficult to create new intellectual property in tiny
technology.
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. In 1995, we elected to be regulated
as a BDC. 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 written 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 portfolio
companies, in addition to our investment. For tax purposes, we are a RIC under
the Internal Revenue Code of 1986. Because we do not have a diversification
policy, both our status as a business development company and our status as a
RIC allow us to commit all of our assets to relatively few investments in
comparison to a company that is required to diversify its assets.
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 our assets
increase. Each due diligence investigation entails expenses whether or not we
complete the transaction, and the cost of due diligence, 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 deploy airbags, cosmetics with ingredients that block ultraviolet
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 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.
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-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
0.000000001 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 ultraviolet 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, fast 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. Patent applications 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 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 invest in the best of these tiny technology
companies, with 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 the
portfolio company and where we have no other affiliations. The value described
below for each portfolio company is its fair value. 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., 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 September 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 fair valued the Series A Preferred
Stock of Agile held by us at $500,000. The Chief Executive Officer of the
company is Charles A. Bischof.
*Chlorogen, Inc., 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 September 30, 2003, we held 3,000,000 shares of
Series A Convertible Preferred Stock (representing 10.46% of the total
Series A Convertible Preferred Stock outstanding) of Chlorogen. As of the
date above, our valuation committee fair 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., located at 8 Clock Tower Place, Maynard,
Massachusetts 01754, develops and sells an e-business software package
known as Guided Selling Systems for financial institutions to sell
mortgages and other financial products to their members. Experion's initial
customers are credit unions. As of September 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 fair 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, located at 46774 Lakeview Boulevard,
Fremont, California 94538, is a spinoff from NeoPhotonics. NanoGram Devices
is commercializing specialized power sources for medical devices and other
medical equipment based on its patented, laser-based nanomaterial synthesis
technology. As of September 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 NanoGram Devices. As of the
date above, our valuation committee fair valued the total amount of shares
of NanoGram Devices held by us at $813,210. The Chief Executive Officer of
the company is Barry Cheskin.
*Nanopharma Corp., 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 September 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 fair 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., 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 September 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 fair 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. Mel P. Melsheimer serves as a
Director of the company.
NeuroMetrix, Inc., 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 September 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 100.00% of the
total Series C-2 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 fair 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 company's Chief Executive Officer is Dr.
Shai N. Gozani, the Chief Operating Officer is Gary Gregory and the Senior
Vice President of Engineering is Michael Williams.
*Questech Corporation, located at 92 Park Street, Rutland, Vermont 05701,
manufactures and sells tile and trim products, based on its proprietary
technology, with revenue generated 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 September 30, 2003, we held 646,954 shares of
Common Stock (representing 8.09% 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
fair 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.
Unaffiliated Companies:
Alpha Simplex Group, LLC, 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
September 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 September 30, 2003, 45,000 units were fully
vested at a valuation of $112,500. The Managing Member of the company is
Dr. Andrew W. Lo.
*Continuum Photonics, Inc., 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 September 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 fair valued the Series B
Preferred Stock of Continuum held by us at $0. The Chief Executive Officer
of the company is Jeffrey D. Farmer.
Exponential Business Development Company, 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 September 30,
2003, we held one Limited Partnership Unit (representing 0.87% of the total
Limited Partnership Units outstanding) of the company. As of the date
above, our valuation committee fair valued the Limited Partnership Unit
held by us at $25,000. The Administrative Partner of the company is Dirk E.
Sonneborn.
Heartware, Inc., 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 fair 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, 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 September 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 fair 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, located at 1600 Cottontail Lane, Somerset, New
Jersey 08873, is developing and manufacturing high performance, integrated
optical communications and optical drive sub-components on a chip, based on
patented technology. As of September 30, 2003, we held 267,857 shares of
Series A-1 Convertible Preferred Stock (representing 10.22% of the total
Series A-1 Convertible Preferred Stock outstanding) and 146,921 shares of
Series B Convertible Preferred Stock (representing 3.54% of the total
Series B Convertible Preferred Stock outstanding) of NanoOpto. As of the
date above, our valuation committee fair valued the total amount of shares
of NanoOpto held by us at $110,067. The Chief Executive Officer of the
company is Barry J. Weinbaum.
*Nanosys, Inc., located at 2625 Hanover Street, Palo Alto, 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
September 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 fair 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.
*Nantero, Inc., 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 based on carbon nanotubes. As of September 30, 2003,
we held 345,070 shares of Series A Convertible Preferred Stock
(representing 8.17% of the total Series A Preferred Stock outstanding) and
207,051 shares of Series B Convertible Preferred Stock (representing 3.08%
of the total Series B Convertible Preferred Stock outstanding of Nantero.
As of the date above, our valuation committee fair valued the total amount
of shares of Nantero held by us at $861,309. The Chief Executive Officer of
the company is Greg Schmergel.
*NeoPhotonics Corporation, 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 September 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 NeoPhotonics. As of
the date above, our valuation committee fair valued the total amount of
shares of Neo held by us at $7,865. The Chief Executive Officer of the
company is Timothy S. Jenks.
*Optiva, Inc., 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 September 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 fair 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 Exponential, 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.
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 these 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
these 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 a company's business.
Private Market. The private market method uses actual, executed,
historical transactions in a company's securities by responsible third parties
as a basis for valuation. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
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
These investments are carried at fair value using 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 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 September 30, 2003, we do not have any investments in
intellectual property or patents or research and development in technologies or
products.
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 our valuation committee.
Short-Term Fixed-Income Investments
Short-term fixed-income investments are valued at market value at the
time of valuation. We value short-term debt with remaining maturity of 60 days
or less 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 we had to sell the securities in an immediate liquidation.
Thus, valuations as of any particular date are not necessarily indicative of
amounts that we may ultimately realize as a result of future sales or other
dispositions of investments we hold.
As of September 30, 2003, we do not have any of these investments.
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. These 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.
We may make investments 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
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 portfolio 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 portfolio company. As a venture company emerges from the developmental
stage with greater management depth and experience, we expect that our role in
the portfolio 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 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 these 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. 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. In order to maintain our status as a
business development company, our investments in the stocks of companies
organized outside the U.S. would be limited to 30% of our assets, because we
must invest at least 70% of our assets in "qualifying assets" and foreign
companies are not "qualifying assets." We do not anticipate investing a
significant portion of our assets in foreign companies.
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.
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.
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 the 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 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.
We currently have no leverage and have no current intention to issue preferred
stock.
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 liquidate our
investments when it may be disadvantageous to do so. Our borrowings 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.
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;
(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, positions and principal
occupations during the past five years of our directors and 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.
Positions(s) Term of Office
Held with and Length of Principal Occupations During Other Directorships
Name and Age Registrant Time Served Past 5 Years Held by Director
-------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTORS:
Charles E. Harris* Director, Director, Chief Executive Officer of the Harris & Harris
Age: 60 Chief Chairman and Company. Enterprises, Inc.,
Executive Chief Executive NeuroMetrix, Inc.,
Officer and Officer since Experion Systems,
Chairman of 1984; Chief Inc. and Nanopharma
the Board Compliance Corp.
Officer from
1997 to 2001
Dr. Kelly S. Director and Since 2002 Business consultant. None
Kirkpatrick* Consultant Director, Columbia
Age: 37 Nanotechnology 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, None
Age: 68 Thyreos 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 Pharmaceuticals,
Age: 68 Spring Harbor Laboratory since 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.
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.
Mark A. Parsells Director Since November Chairman, President and Chief Fusura LLC, Experion
Age: 43 2003 Executive Officer of Fusura Systems, Inc.,
LLC. Wilmington
Renaissance
Corporation and
Winterthur Business
Associates.
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 the Harris & Harris
Age: 60 Chief Chairman and Company. Enterprises, Inc.,
Executive Chief Executive NeuroMetrix, Inc.
Officer and Officer since Experion Systems,
Chairman of 1984; Chief Inc. and Nanopharma
the Board Compliance Corp.
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. and
Officer, Chief Chief Financial Officer and Treasurer of the Nanotechnologies, Inc.
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 None
Age: 33 2002 Company. Senior technology
manager, University of Utah
Technology Transfer Office,
1997 to 2002.
Helene B. Shavin Vice Vice President Vice President, Controller and None
Age: 50 President, and Controller Assistant Secretary of the
Controller and since 2001; Company. Vice President and
Assistant Assistant Controller of Harris & Harris
Secretary Secretary since Enterprises, Inc. since 2001.
2002 Vice President, Citicorp
Venture Capital, 1986 to 2000.
----------------
* 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 our stock, as
a control person of ours and as one of our officers. 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 and as our Assistant Secretary since 2002. 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 the oversight of
our financing arrangements.
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 Orthopaedic 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 since January 2001 as Chief
Financial Officer 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.
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.
Mark A. Parsells. Mr. Parsells has served as a member of our board of
directors since November 2003. He is the Chairman, President and Chief Executive
Officer of Fusura LLC, an AIG company that is an Internet-based, direct to
consumer auto insurance business. He graduated from Emory University (BA),
Cornell University (MBA) and Vlerick Leuven Gent Business School (MBA).
Previously, he was President and Chief Operating Officer of Citibank Online,
worked in executive positions for Bank One and American Express and acted as
Special Assistant to U.S. Senator John Heinz.
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, a Pricing Committee and an Ad Hoc Long-Term Planning Committee. All
of the members of each committee other than Mr. Harris (who sits on the
Executive Committee and the Pricing Committee) are non-interested directors (as
defined in Section 2(a)(19) of the 1940 Act).
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. The charter was
approved by the board of directors on March 13, 2003. The charter was revised on
November 13, 2003 and was approved by the Audit Committee, subject to approval
by the board of directors. 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) and 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 and Ramsey and Dr. Bauman.
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 and Roberts and Dr. Bardin.
The Pricing Committee was established by the board of directors on
October 21, 2003. The Pricing Committee is responsible for approving the price
of the offering of our shares of stock, approving the number of shares being
offered, providing final approval of the underwriting agreement and handling any
other details as are necessary to effect the transaction. The Pricing Committee
will cease to exist following the completion of the offering of our shares of
stock. The members of the Pricing Committee are Messrs. Harris (Chairman),
Fletcher and Mayer.
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 and Ramsey and Dr. Bardin.
The following table sets forth the dollar range of equity securities
beneficially owned by each director as of December 31, 2002.
Dollar Range of Equity Securities
Name of Director Beneficially Owned (1) (2)(3)
--------------------------- ----------------------------------------------------
Dr. C. Wayne Bardin $50,001 - $100,000
Dr. Phillip A. Bauman $50,001 - $100,000
G. Morgan Browne $50,001 - $100,000
Dugald A. Fletcher $10,001 - $50,000
Glenn E. Mayer Over $100,000
Charles E. Ramsey $50,001 - $100,000
James E. Roberts $10,001 - $50,000
Charles E. Harris (4) Over $100,000
Dr. Kelly S. Kirkpatrick (5) $1 - $10,000
Lori D. Pressman (5) $1 - $10,000
-------------------
(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) The dollar ranges are based on the price of the equity securities as of
December 31, 2002.
(4) Denotes an individual who is an "interested person" as defined in the
1940 Act.
(5) 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 November 30, 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. Except for holdings by directors and executive
officers, the information in the table below is from publicly available
information that may be as of dates earlier than November 30, 2003. 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 Common
Name and Address of Beneficial Owner Beneficial Ownership 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) *
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..................... 800,000(6) 7.0
---------------------
* 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 November 14, 2003
by Masters indicated that it beneficially owned 800,000 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.
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(5) 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. Ms. Kirkpatrick may be
considered an "interested person" because of consulting work performed for
us.
(4) Includes $953 for reimbursement for travel expenses to attend board
meetings and $59,825 for consulting services. Ms. Pressman may be
considered an "interested person" because of consulting work performed for
us.
(5) Mr. Harris is an "interested person" as defined in the 1940 Act.
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
$154,682.
In 1998, the board of directors approved that effective January 1,
1998, 50% of all director fees be used to purchase our common stock from us.
However, effective March 1, 1999, the board of directors approved that directors
purchase our common stock in the open market, rather than from us. In 2001, the
outside directors (i.e., all directors except Mr. Harris) bought a total of
7,944 shares in the open market. In 2002, the outside directors bought 9,524
shares in the open market and 43,426 shares through exercise of rights in a
public offering of our common stock.
Remuneration of Chief Executive Officer and Other Executive Officers
The following table sets forth a summary for each of the last three
years ended December 31 of the cash and non-cash compensation paid to our chief
executive officer and our other executive officers.
Annual Compensation
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($)(1) ($)(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
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. You may find more information on our Employee
Profit-Sharing Plan under Incentive Compensation Plans.
(2) Other than those for 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" consisted 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.
An additional $73,730 was accrued with respect to 2002 for Mr. Harris's
SERP account, but was not paid until 2003.
(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, which we refer to as 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 nonqualifying
gains, 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, which we refer to as the Plan, which provides for
profit sharing by our officers and employees equal to 20% of our "qualifying
income" for that plan year. For the purposes of the Plan, qualifying income is
defined as net realized income as reflected on our consolidated statements of
operations for that year, less nonqualifying gains, if any.
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 including dividends paid or
distributions made to shareholders, payments under the Plan, unrealized gains
and losses, and loss carry-overs from other years. 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. Once determined, 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 plan year. 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%, which together equal 20%. In one case, for a former employee who left
other than due to termination for cause, any amount earned will be accrued and
may subsequently be paid to the participant.
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 the 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.
As of January 1, 2003, we implemented the Amended and Restated Harris &
Harris Group, Inc. Employee Profit-Sharing Plan, which we refer to as 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 including 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 Ms. 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 our 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%, which together equal 20%.
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.
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 paid out 90% in March 2003 and the remaining
10% upon the completion and filing of our 2002 federal tax return.
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 our shareholders.
We may choose to retain our net capital gains for investment and pay the
associated federal corporate income tax.
To the extent that we retain any net capital gain, we may pay deemed
capital gain dividends to shareholders. If we do pay a deemed capital gain
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 capital gain
dividend for 2002. On January 22, 2002, we announced a deemed capital gain
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 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 investment company taxable income and
net capital gains that we distribute to shareholders. To the extent that we
retain our net capital gains for investment, we will be subject to U.S. federal
income tax. 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) any 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.
If in any particular taxable year, we do not qualify as a regulated
investment company, 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.
Company Investments
We may make certain investments which would subject us to special
provisions of the Code that, among other things, may affect the character of the
gains or losses realized by us and require us to recognize income or gain
without receiving cash with which to make distributions.
In the event we invest in foreign securities, we may be subject to
withholding and other foreign taxes with respect to those securities. We do not
expect to satisfy the requirement to pass through to the shareholders their
share of the foreign taxes paid by us.
Due to our expected investments, in general, distributions will not be
eligible for the dividends received deduction allowed to corporate shareholders
and will not qualify for the reduced rate of tax for qualified dividend income
allowed to individuals.
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 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 the 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 a 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 a 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 substantially identical
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 (a "non-U.S.
investor"). Different tax consequences may result if a non-U.S. investor is
engaged in a trade or business in the United States or, in the case of an
individual, is present in the United States for 183 or more days during a
taxable year and certain other conditions are met.
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 U.S. 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 and
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 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. 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 from the SEC.
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 (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
Title of Class Amount Authorized for its Own Account Amount 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.
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 some dealers at that price less a
concession not in excess of $ per share. The underwriter may allow, and these
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 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 person or with respect to which any 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 swap or transaction is to
be settled by delivery of our common stock or other securities, in cash or
otherwise.
At the request of the Company, the Underwriter has reserved for sale,
at the public offering price, up to shares offered hereby for directors,
officers and employees of the Company. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriter to the general public on the same
basis as the other shares offered hereby.
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 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 that 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, 1998, 1999, 2000 and 2001
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, 1998, 1999, 2000 and 2001 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, 1998, 1999, 2000 and 2001, 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 to the subject matter in connection with
their report on our consolidated financial statements for those 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. The 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, its Northeast Regional Office, 233
Broadway, New York, New York 10279 and its Chicago Regional Office, Suite 900,
175 West Jackson Boulevard, Chicago, Illinois 60604. 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 this 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.
HARRIS & HARRIS GROUP, INC.
2,000,000 Shares
Common Stock
PUNK, ZIEGEL & COMPANY
The date of the prospectus is , 2003
------------------
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, any information or representation must not be relied upon as
having been authorized by us. 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.
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
-------------------------------------------
(1) Financial Statements - The following financial statements have been
incorporated by reference into the Registration Statement:
(a) Annual Report on Form 10K
Consolidated Statements of Assets and Liabilities for years ended December 31, 2002, 2001
2000, 1999 and 1998
Consolidated Statements of Operations 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, 2000, 1999 and 1998
Consolidated Statements of Changes in the Net Assets for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998
Consolidated Schedule of Investments as of December 31, 2002, 2001 and 2000
Footnote to Consolidated Schedule of Investments
Notes to Consolidated Financial Statements
Financial Highlights for the years ended December 31,
2002, 2001, 2000, 1999, 1998
(b) Quarterly Reports on Form 10Q
Consolidated Statements of Operations for the quarters
ended March 31, 2003 and 2002, June 30, 2003 and 2002, and September 30, 2003 and 2002
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
the six months ended June 30, 2003 and 2002, and the nine months ended September 30, 2003 and 2002
Consolidated Statements of Changes in the Net Assets for the quarters ended March 31, 2003, and 2002
June 30, 2003, and 2002 and September 30, 2003 and 2002
Consolidated Schedule of Investments as of March 31, 2002 and 2003, June 30, 2002 and 2003,
and September 30, 2002 and 2003
Footnote to Consolidated Schedule of Investments
Notes to Consolidated Financial Statements
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.(1)
(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.
(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.(1)
(m) Not applicable.
(n) Consent of the Independent Accountant.(2)
(o) Not applicable
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics under 17j-1 under the 1940 Act.(1)
(1) Previously filed with Pre-Effective Amendment No. 3 on December 19,
2003.
(2) Filed herewith.
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 $ 1,652
Nasdaq listing fee $ 18,500
Printing (other than stock certificates) $ 3,750
Accounting fees and expenses $ 20,000
Legal fees and expenses $350,000
Miscellaneous $113,300
--------
Total $507,202
=========
Item 27. Persons Controlled by or Under Common Control with Company
--------------------------------------------------------------------
Percentage of voting
Organized securities owned
At December 31, 2002 under laws of by the Registrant
-------------------- ------------- -----------------
Harris & Harris Enterprises, Inc. Delaware 100%
Item 28. Number of Holders of Securities (as of December 19, 2003)
Title of class Number of record holders
-------------- ------------------------
Common stock, $.01 par value 153
The Company was advised by its transfer agent that there were 153
holders of record of the common stock that held the common stock for an
estimated 6,700 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.
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.
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
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.
EXHIBITS
(n) Consent of the Independent Accountant
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 24th day of December, 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)
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 December 24, 2003
------------------------------------- Chief Executive Officer
Charles E. Harris (Principal Executive Officer)
/s/ Mel P. Melsheimer President, Chief Operating Officer December 24, 2003
------------------------------------- and Chief Financial Officer
Mel P. Melsheimer (Principal Financial Officer)
* Director
-------------------------------------
Dr. C. Wayne Bardin
* Director
-------------------------------------
Dr. Phillip A. Bauman
* Director
-------------------------------------
G. Morgan Browne
* Director
-------------------------------------
Dugald A. Fletcher
* Director
-------------------------------------
Dr. Kelly S. Kirkpatrick
* Director
-------------------------------------
Glenn E. Mayer
* Director
-------------------------------------
Mark Parsells
* Director
-------------------------------------
Lori D. Pressman
* Director
-------------------------------------
Charles E. Ramsey
* Director
-------------------------------------
James E. Roberts
*By: /s/ Charles E. Harris
-----------------------------
Attorney-in-fact