As filed with the Securities and Exchange Commission on June 3, 2004
Securities Act Registration No. 333-112862
Investment Company Act File Number 814-176
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933: |_|
PRE-EFFECTIVE AMENDMENT NO. 4 |x|
POST-EFFECTIVE AMENDMENT NO. |_|
AND/OR
___________
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)
___________
Copies to:
Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(212) 735-3000
__________________
Approximate Date of Proposed Public Offering:
From time to time after the effective date of this Registration Statement
___________
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. |X|
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 7,000,000 $14.18 $99,260,000 $12,576.25(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 June 2, 2004.
(2) $6,189 previously paid.
___________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8,
MAY DETERMINE.
HARRIS & HARRIS GROUP, INC.
CROSS-REFERENCE SHEET
PART A-PROSPECTUS
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover Front Cover Page
Item 2. Inside Front and Outside Back Cover Page Front Cover Page; Inside Front Cover Page
Item 3. Fee Table and Synopsis Prospectus Summary; Table of Fees and Expenses
Item 4. Financial Highlights Financial Highlights
Item 5. Plan of Distribution Prospectus Summary; Underwriting
Item 6. Selling Shareholders Not Applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the Registrant Business; Risk Factors; Investment Policies
Item 9. Management Management of the Company
Item 10. Capital Stock, Long-Term Debt and Other Securities Prospectus Summary; Capitalization; Dividends and
Distributions; Taxation; Risk Factors
Item 11. Defaults and Arrears on Senior Securities Not Applicable
Item 12. Legal Proceedings Management of the Company
Item 13. Table of Contents of the Statement of Additional Not Applicable
Information
Items in Part B of Form N-2(1) Location in Prospectus
----------------------------- ----------------------
Item 14. Cover Page Not Applicable
Item 15. Table of Contents Not Applicable
Item 16. General Information and History Business; Our History
Item 17. Investment Objective and Policies Business; Investment Policies
Item 18. Management of the Company Management of the Company
Item 19. Control Persons and Principal Shareholders Management of the Company
Item 20. Investment Advisory and Other Services Not Applicable
Item 21. Brokerage, Allocation and Other Practices Investment Policies; Underwriting
Item 22. Tax Status Taxation
Item 23. Financial Statements Financial Statements
PART C-OTHER INFORMATION
Items 24-33 have been answered in Part C of this Registration Statement.
-------------------
(1) Pursuant to General Instructions to Form N-2, all information
required by Part B: Statement of Additional Information has been
incorporated into Part A: The Prospectus of the Registration
Statement.
[FLAG]
The information in this Prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 2, 2004
HARRIS & HARRIS GROUP, INC.
7,000,000 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 may offer, from time to time, up to
7,000,000 shares of our common stock, $0.01 par value per share ("Common
Stock"), in one or more offerings. The Common Stock may be offered at prices
and on terms to be set forth in one or more supplements to this Prospectus
(each a "Prospectus Supplement"). The offering price per share of our Common
Stock less any underwriting commissions or discounts will not be less than the
net asset value per share of our Common Stock at the time we make the
offering. You should read this Prospectus and the applicable Prospectus
Supplement carefully before you invest in our Common Stock.
Our Common Stock may be offered directly to one or more purchasers
through agents designated from time to time by us, or to or through
underwriters or dealers. The Prospectus Supplement relating to the offering
will identify any agents or underwriters involved in the sale of our Common
Stock, and will set forth any applicable purchase price, fee, commission or
discount arrangement between us and our agents or underwriters, or among our
underwriters or the basis upon which such amount may be calculated. We may not
sell any of our Common Stock through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the
particular offering of our Common Stock. Our common stock is listed on the
Nasdaq National Market under the symbol "TINY." On June 1, 2004, the last
reported sale price of our Common Stock was $14.65.
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 our 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.
This Prospectus may not be used to consummate sales of Common Stock
by us through agents, underwriters or dealers unless accompanied by a
Prospectus Supplement.
The date of the Prospectus is , 2004.
You should rely only on the information contained or incorporated by
reference in this Prospectus. We have not authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not 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.
___________________
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................1
TABLE OF FEES AND EXPENSES....................................................5
INCORPORATION BY REFERENCE....................................................6
RISK FACTORS..................................................................7
FORWARD-LOOKING INFORMATION..................................................13
USE OF PROCEEDS..............................................................14
PRICE RANGE OF COMMON STOCK..................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................15
BUSINESS.....................................................................26
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES...............................30
DETERMINATION OF NET ASSET VALUE.............................................34
INVESTMENT POLICIES..........................................................36
MANAGEMENT OF THE COMPANY....................................................42
DIVIDENDS AND DISTRIBUTIONS..................................................54
TAXATION.....................................................................55
CERTAIN GOVERNMENT REGULATIONS...............................................57
CAPITALIZATION...............................................................59
PLAN OF DISTRIBUTION.........................................................60
LEGAL MATTERS................................................................61
EXPERTS......................................................................61
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 and in the documents to which we have referred.
It may not contain all of the information that is important to you. To
understand the offering fully, you should read the entire document carefully,
including the risk factors beginning on page .
Our Business
Harris & Harris Group, Inc. is a venture capital 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 initial 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 four full time members of
management, each of whom are designated as Managing
Directors and vote on all purchases and sales of private
equity investments, Charles E. Harris, Mel P. Melsheimer,
Daniel V. Leff 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;
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; and
o pay operating expenses, including due diligence expenses on
potential investments.
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 business development company. Recognizing the potential of tiny
technology, we continued to monitor developments in the field, and since 2001,
we have made tiny technology our exclusive focus for initial investments.
Since August 2001, all 15 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 19 companies, 14 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 generally 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.
In-kind distributions are primarily made in additional shares of convertible
preferred stock , and we would expect to continue to invest in convertible
preferred shares even if a portfolio company were to issue debt securities.
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
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 32% of the net asset value attributable to our
venture capital investment portfolio, or 16% of our net
asset value, as of March 31, 2004, is concentrated in one
company, NeuroMetrix, Inc., which is not a tiny technology
company.
o Approximately 36% of the net asset value attributable to our
venture capital investment portfolio, or 19% of our net
asset value, as of March 31, 2004, is invested in venture
capital investments which are not tiny technology companies.
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. The use
of debt would leverage our available common equity capital,
magnifying the impact of changes in the value of our
investment portfolio on our net asset value. In addition,
the cost of debt or preferred stock financing may exceed the
return on the assets the proceeds are used to acquire, in
which case the use of leverage will have an adverse impact
on the holders of our common stock.
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 that may not be sustainable over the long term.
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 (which are not incorporated by reference
unless specifically stated in this Prospectus) 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..................... We may offer, from time to time, up to a total of 7,000,000 shares
of our Common Stock on terms to be determined at the time of the
offering. Our Common Stock may be offered at prices and on terms
to be set forth in one or more Prospectus Supplements. The
offering price per share of our Common Stock before any
underwriting commissions or discounts will not be less than the
net asset value per share of our Common Stock.
Use of proceeds.......................... Although we will make initial investments exclusively in tiny
technology, we can make follow-on investments in non-tiny
technology companies currently in our portfolio. 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 reserve for potential follow-on investment
the net proceeds of any sale of shares under this Prospectus
within two years from the completion of such sales. We may also
use the proceeds of this offering for operating expenses,
including due diligence expenses on potential investments.
Reserves for follow-on investments referred to above in any
particular portfolio holding may be no more than the greater of
twice the investment to date in that portfolio holding or five
times the initial investment in the case of seed-stage
investments.
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 for the 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(1) (as a percentage of offering price) 0.00
Offering Expenses (as a percentage of offering price) 0.60
Annual Expenses (as a percentage of net assets attributable to Common Stock)
Management Fees(2) N/A
Other Expenses(3)
Salaries and Benefits(4)(5)(6) 1.36
Administration and Operations(7) .61
Professional Fees .18
Total Annual Expenses (8) 2.15%
_______________________________
(1) In the event that the shares of Common Stock to which this Prospectus
relates are sold to or through underwriters, a corresponding Prospectus
Supplement will disclose the sales load.
(2) The Company has no external management fees because it is internally
managed.
(3) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(4) 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. At December 31, 2003, we did not have realized net
income for that year and accordingly the expense accrual associated with
this liability for 2003 was $0 or 0% of net assets. Under no
circumstances may this expense exceed 20% of the net after-tax income we
realize.
(5) 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.
(6) 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 2004,
including the amortization of his retirement benefit, will total
approximately $517,300, or 0.36% of net assets attributable to Common
Stock.
(7) "Administration and Operations" include expenses incurred for
administration, operations, rent, directors' fees and expenses,
depreciation and custodian fees.
(8) Total annual expenses after December 31, 2004 will not include $517,300
for our President, Chief Operating Officer and Chief Financial Officer,
but will include a $100,000 increase in annual salary for Douglas W.
Jamison, a Vice President of the Company who has been designated by the
Board of Directors to replace our current President, Chief Operating
Officer and Chief Financial Officer as of January 1, 2005, and to receive
an increase in annual salary of $100,000 at that time.
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 $517,300 of remuneration and non-continuing benefits for our
President, Chief Operating Officer and Chief Financial Officer in the first
year.
You would pay the following expenses on a $10,000 investment,
assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$277 $695 $1,138 $2,369
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 for the fiscal years ended December 31,
2003, 2002 and 2001 and the fiscal periods ended March 31, 2004 and 2003 and
the financial statements for each fiscal period ended thereafter have been
incorporated by reference into the Prospectus from the Company's Annual Report
on Form 10-K and Quarterly Report on Form 10-Q, each of which either
accompanies this Prospectus or has previously been provided to the person to
whom this Prospectus is being sent. We will furnish, without charge, a copy of
such financial statements upon request by writing to 111 West 57th Street,
Suite 1100, New York, New York 10019, Attention: Investor Relations, or
calling 212-582-0900.
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 that currently have 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 those companies' values 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. Such adverse health and
environmental effects 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 less opportunity for liquidity events than at times in the
past when there was more robust demand for initial public offerings, 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 from private
sources.
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 any net after-tax realized income as reflected
on our consolidated statements of operations for that year, less any
non-qualifying gain. These distributions may have a significant effect on the
amount of distributions made to our shareholders, if any.
Approximately 32% of the net asset value attributable to our venture
capital investment portfolio, or 16% of our net asset value, as of March 31,
2004, is concentrated in one company, NeuroMetrix, Inc., which is not a tiny
technology company.
At March 31, 2004, we valued our investment in NeuroMetrix, Inc.,
which is not a tiny technology company, at $6,825,426, which represents 31.85%
of the net asset value attributable to our venture capital investment
portfolio, or 16.45% 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 36% of the net asset value attributable to our venture
capital investment portfolio, or 19% of our net asset value, as of March 31,
2004, is invested in venture capital investments which are not tiny technology
companies.
Although all 15 of our investments added since August 2001 have been
in tiny technology companies, and although we consider 14 of the companies in
our venture capital investment portfolio to be tiny technology companies, at
March 31, 2004, only 63.56% of the net asset value attributable to our venture
capital investment portfolio, or 32.82% 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 venture capital and/or 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 Code, which would
in most circumstances 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 intend to qualify as a RIC for 2003 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 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. Our Common Stock may
not trade at a price higher than or equal to net asset value. On June 1, 2004,
our stock closed at $14.65 per share, a premium of $11.64 over our net asset
value per share of $3.01 as of March 31, 2004.
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 year ended December 31,
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 year ended December 31,
2001. Rule 437(a) 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.
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 total net proceeds of the offering to be up to
$112,000,000.
We expect to invest or reserve for potential follow-on investment the
net proceeds of any offering within two years from the completion of such
offerings. Reserves for follow-on investments referred to above in any
particular initial investment may be no more than the greater of twice the
investment to date or five times the initial investment in the case of
seed-stage investments. 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 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 use the proceeds of this offering for
operating expenses, including due diligence expenses on potential investments.
If we pay operating expenses from the proceeds, it will reduce the net
proceeds of the 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.
Premium or Discount as a
Market Price Net Asset Value % of NAV
------------ ("NAV") Per Share at ---------------------------
Quarter Ended High Low End of Period High Low
----------------------------------------------------------------------------------------------------------------
March 31, 2000 35.75 9.00 5.08 603.7 77.2
June 30, 2000 18.50 5.13 3.88 376.8 32.2
September 30, 2000 10.75 5.50 4.64 131.7 18.5
December 31, 2000 7.13 2.25 3.51 103.1 (35.9)
March 31, 2001 4.25 2.06 3.09 37.5 (33.3)
June 30, 2001 3.29 2.01 3.29 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
December 31, 2003 12.29 6.18 2.95 316.6 109.5
March 31, 2004 20.70 11.47 3.01 587.7 281.1
The last reported price for our common stock on June 1, 2004 was
$14.65 per share. As of May 12, 2004, we had approximately 130 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 2003 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. We have made early stage venture capital investments in a variety of
industries since 1983. In 1994, we made our first tiny technology investment.
Since August 2001, we have made initial investments exclusively in tiny
technology, including our last 15 initial investments.
Since our investment in Otisville in 1983, we have made a total of 57
venture capital investments, including four investments, via private
placements, in securities of publicly traded companies. We have sold 38 of
these 57 investments, realizing total proceeds of $108,159,142 on our invested
capital of $40,094,851. Seventeen of these 38 investments were profitable. The
average and median holding periods for these 38 investments were 3.5 years and
3.2 years, respectively. At March 31, 2004, we valued the 18 venture capital
investments remaining in our portfolio at $21,428,191, or 51.6%, of our net
assets, net of unrealized depreciation of $1,563,651. At March 31, 2004, the
average and median holding periods for our 18 current venture capital
investments were 2.9 years and 2.0 years, respectively. Because most of these
investments entailed more than one round of financing, the average and median
periods of time that our money was invested were shorter than the average and
median holding periods as measured from first dollar invested to last dollar
received.
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 March 31, 2004, $21,428,191, or 51.6%, of our net assets consisted of
venture capital investments at fair value, net of unrealized depreciation of
$1,563,651. At December 31, 2003, $15,106,576, or 37.1%, of our net assets
consisted of venture capital investments at fair value, of which net
unrealized depreciation was $2,375,303. 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 appreciation was $2,718,389.
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 were
adverse for the venture capital industry. There were few opportunities to take
venture capital-backed companies public or sell them to established companies.
During this period, it was also 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:
Net Operating Income / (Loss) - the difference between our income
from interest, dividends, and fees and our operating expenses.
Net Realized Gain / (Loss) on Investments - the difference between
the net proceeds of sales of portfolio securities and their stated cost.
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: December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total assets $ 44,115,128 $ 35,951,969 $ 39,682,367 $ 43,343,423 $ 65,320,768
Total liabilities $ 3,432,390 $ 8,695,923 $ 15,347,597 $ 11,509,948 $ 11,685,963
Net assets $ 40,682,738 $ 27,256,046 $ 24,334,770 $ 31,833,475 $ 53,634,805
Cash dividends paid $ 0 $ 0 $ 0 $ 184,817 $ 3,647,017
Net asset value per
outstanding share $ 2.95 $ 2.37 $ 2.75 $ 3.51 $ 5.80
Cash dividends paid per
outstanding share $ 0.00 $ 0.00 $ 0.00 $ 0.02 $ 0.35
Shares outstanding $ 13,798,845 $ 11,498,845 $ 8,864,231 $ 9,064,231 $ 9,240,831
OPERATING DATA
For the twelve months ended
December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total investment income $ 167,785 $ 253,461 $ 510,661 $ 687,050 $ 287,684
Total expenses(1) $ 2,731,527 $ 2,124,549 $ 1,035,221 $ (2,623,200) $ 9,924,020
Net operating (loss) income $ (2,563,742) $ (1,871,088) $ (524,560) $ 3,310,250 $ (9,636,336)
Total tax expense (benefit) $ 13,761 $ 199,309 $ 27,951 $ (51,869) $ 733,970
Net realized gain (loss)
on investments $ (984,925) $ 2,390,302 $ 1,276,366 $ 18,963,832 $ 8,615,670
Net realized income (loss) $ (3,548,667) $ 519,214 $ 751,806 $ 22,274,082 $ (1,020,666)
Net increase (decrease) in
unrealized appreciation
on investments $ 343,397 $ (3,241,408) $ (7,641,044) $ (37,781,289) $ 38,102,047
Net increase (decrease)
in net assets resulting
from operations $ (3,205,270) $ (2,722,194) $ (6,889,238) $ (15,507,204) $ 37,081,381
Increase (decrease) in net
assets resulting from
operations per
outstanding share $ (0.28) $ (0.24) $ (0.78) $ (1.71) $ 4.01
(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; and $8,110,908 in 1999.
SELECTED QUARTERLY DATA (UNAUDITED)
2004 2003
----------- ----------------------------------------------------------------
1st Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- ----------- -----------
Total investment
income $ 56,536 $ 64,676 $ 50,564 $ 30,612 $ 21,933
Net operating loss $ 749,865 $ 584,460 $ 726,989 $ 572,346 $ 679,947
Net increase
(decrease) in net
assets resulting
from operations $ 820,515 $ (1,215,127) $ (544,709) $ (1,270,298) $ (175,136)
Net increase
(decrease) in net
assets resulting
from operations per
outstanding share $ 0.06 $ (0.11) $ (0.05) $ (0.11) $ (0.01)
2002
-------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------- ---------------- -------------- -----------------
Total investment income $ 59,462 $ 60,368 $ 77,413 $ 56,218
Net operating loss $ 556,233 $ 654,718 $ 479,433 $ 180,704
Net Increase (decrease) increase
in net assets resulting from
operations $ (1,036,934) $ 434,289 $ 660,988 $ (2,780,537)
Net Increase (decrease) increase
in net assets resulting from
operations per outstanding share $ (0.12) $ 0.05 $ 0.06 $ (0.24)
Results of Operations
Three months ended March 31, 2004, as compared to the three months ended March
31, 2003
We had a net increase in net assets resulting from operations of
$820,515 in the three months ended March 31, 2004, as compared with a net
decrease in net assets resulting from operations of $1,215,127 in the three
months ended March 31, 2003.
Investment Income and Expenses:
We had net operating losses of $749,865 and $584,460 for the three
months ended March 31, 2004, and March 31, 2003, respectively. In the three
months ended March 31, 2004, our larger net operating loss reflected a net
increase in expenses primarily related to increases in salaries and benefits
and in expenses for administration and operations.
Operating expenses were $806,401 and $649,136 for the three months
ended March 31, 2004, and March 31, 2003, respectively. In the three months
ended March 31, 2004, as compared with the three months ended March 31, 2003,
salaries and benefits increased by $107,879 or 29.8%, primarily as a result of
an additional employee; administration and operations increased by $64,187, or
67.5%, primarily as a result of an increase in travel and entertainment
expenses for due diligence work on potential portfolio companies and a shift
in the timing of an annual contribution to the MIT Entrepreneurship Center
that we made in the first quarter of 2004 and in the second quarter of 2003.
Realized Gains and Losses on Portfolio Securities:
During the three months ended March 31, 2004, and March 31, 2003, we
realized gains of $793,389 and $432, respectively.
During the three months ended March 31, 2004, we realized net gains
of $793,389, consisting primarily of a realized gain of $1,681,259 resulting
from the sale of our investment in NanoGram Devices Corporation, offset by a
realized loss of $915,108 resulting from the sale of our shares of Series D
Convertible Preferred Stock in NeoPhotonics Corporation.
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized depreciation on investments decreased by $783,787, or
33.0%, during the three months ended March 31, 2004, from $2,376,716 at
December 31, 2003, to $1,592,929 at March 31, 2004.
During the three months ended March 31, 2004, we recorded a net
decrease of $811,652 in unrealized depreciation of our venture capital
investments, primarily as a result of the realization of the loss of $915,108
on the sale of our shares of Series D Convertible Preferred stock in
NeoPhotonics Corporation.
Years Ended December 31, 2003, 2002, and 2001
During the three years ended December 31, 2003, 2002, and 2001, we
had net decreases in net assets resulting from operations of $3,205,270,
$2,722,194 and $6,889,238, respectively.
Investment Income and Expenses:
During the three years ended December 31, 2003, 2002, and 2001, we
had net operating losses of $2,563,742, $1,871,088 and $524,560, respectively.
The variation in these results is primarily owing to the changes in operating
expenses. During the three years ended December 31, 2003, 2002, and 2001,
operating expenses were $2,731,527, $2,124,549 and $1,035,221, respectively.
The increase during 2003 was primarily owing to increases in salary and
benefits. During 2003, the full year effect of a new employee who started in
September 2002 was realized. In addition, we recorded expense of $225,000
owing to the establishment of a Mandatory Retirement Plan in 2003 to be
amortized over the two-year period of 2003 and 2004 at the rate of $225,000
per annum. The increase in expenses in 2002 was primarily owing to the
$163,049 reversal of the profit sharing accrual in 2002 versus the $984,021
reversal of the profit sharing accrual in 2001, 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.
Realized Gains and Losses on Sales of Portfolio Securities:
During the three years ended December 31, 2003, 2002, and 2001, we
realized net (losses) gains on sales of portfolio securities of ($971,164),
$3,284,737 and $1,394,781, respectively.
During 2003, we realized a loss of $1,000,001 on the tax write-off of
our investment in Kriton Medical, Inc., which had been previously written-off
for book purposes. As a result of the loss realized in 2003 on the tax
write-off of Kriton Medical, Inc., unrealized appreciation increased by
$1,000,001.
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., in the amount of $1,349,512; shares of SciQuest.com, Inc.
purchased in the open market, in the amount of $1,258,679; and MedLogic Global
Corporation, in the amount of $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
decreased by $3,948,271.
Unrealized Appreciation and Depreciation of Portfolio Securities:
During the year ended December 31, 2003, net unrealized depreciation
on investments decreased by $343,397. During the years ended December 31,
2002, and 2001, net unrealized appreciation decreased by $3,936,534 and
$7,731,508, respectively. The decrease in net unrealized depreciation during
2003 was primarily owing to decreases in the valuations of our venture capital
investments of $1,421,220, including increases in unrealized depreciation of
Agile Material and Technologies, Inc., of $750,000, Experion Systems, Inc., of
$325,662 and NeoPhotonics Corporation of $345,558, offset by a decrease in
unrealized depreciation of Continuum Photonics, Inc., of $226,046 and an
increase in unrealized appreciation in Nanotechnologies, Inc., of $357,963. In
addition, unrealized appreciation increased by $1,000,001 as a result of the
loss realized in 2003 on the tax write-off of Kriton Medical, Inc., which had
previously been written off for book purposes.
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 net unrealized appreciation during 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.
Financial Condition
Three Months ended March 31, 2004
Our total assets and net assets were $55,105,581 and $41,503,253,
respectively, at March 31, 2004, compared with $44,115,128 and $40,682,738 at
December 31, 2003.
Net asset value per share ("NAV") was $3.01 at March 31, 2004, versus
$2.95 at December 31, 2003. Our shares outstanding remained unchanged during
the three months ended March 31, 2004.
Significant developments in the three months ended March 31, 2004,
were an increase in payable to broker for unsettled trade of $10,583,080 and
an increase in the value of our investment in U.S. government and government
obligations of $4,492,780.
The increase in the value of our venture capital investments, from
$15,106,576 at December 31, 2003, to $21,428,191 at March 31, 2004, resulted
primarily from two new venture capital investments and five follow-on
investments, partially offset by a net decrease in the net value of our
previous venture capital investments, reflecting the sale of NanoGram Devices.
The following table is a summary of additions to our portfolio of
venture capital investments during the three months ended March 31, 2004:
New Investment Amount
-------------- ------
Molecular Imprints, Inc. $2,000,000
NeoPhotonics Corporation $1,925,000
Follow-on Investment
--------------------
Agile Materials & Technologies, Inc. $ 75,901
Continuum Photonics, Inc. $ 739,000
Experion Systems, Inc. $ 121,262
NanoOpto Corporation $ 612,500
NeuroMetrix, Inc. $1,749,999
----------
Total $7,223,662
==========
The following tables summarize the fair values of our portfolios of
venture capital investments and U.S. Government and agency Obligations, as
compared with their cost, at March 31, 2004, December 31, 2003, and December
31, 2002:
March 31, December 31,
2004 2003 2002
------------ ----------- ------------
Venture capital investments,
at cost $22,991,842 $17,481,879 $14,754,466
Unrealized depreciation(1) 1,563,651 2,375,303 2,718,389
-- ----------- ----------- -----------
Venture capital investments,
at fair value $21,428,191 $15,106,576 $12,036,077
=========== =========== ===========
March 31, December 31,
2004 2003 2002
------------ ----------- -------------
U.S. Government and Agency
Obligations, at cost 31,642,544 $27,121,899 $15,452,469
Unrealized depreciation(1) 29,278 1,413 1,724
-- ----------- ----------- -----------
U.S. Government and Agency
Obligations, at fair value $31,613,266 $27,120,486 $15,450,745
=========== =========== ===========
(1) At March 31, 2004, December 31, 2003, and December 31, 2002, the accumulated
unrealized depreciation on investments, including deferred taxes, was
$2,437,848, $3,221,635 and $3,565,032, respectively.
The following table summarizes the fair value composition of our
venture capital investment portfolio at March 31, 2004, December 31, 2003, and
December 31, 2002:
March 31, December 31,
Category 2004 2003 2002
-------- ---- ---- ----
Tiny Technology 63.6% 60.7% 49.0%
Other Venture Capital Investments 36.4% 39.3% 51.0%
------ ------ ------
Total Venture Capital Investments 100.0% 100.0% 100.0%
====== ====== ======
Year ended December 31, 2003
At December 31, 2003, our total assets and net assets were
$44,115,128 and $40,682,738, respectively. Our NAV per share at that date was
$2.95, and our shares outstanding increased to 13,798,845 versus 11,498,845 at
December 31, 2002.
During the 12 months ended December 31, 2003, significant financial
developments included the receipt of net proceeds of $16,631,962 pursuant to
the issuance of 2,300,000 new shares of our common stock and a decrease in
payable to broker for unsettled trade of $5,696,725. In addition, the value of
our venture capital investments increased by $3,070,499, to $15,106,576 at
December 31, 2003, primarily owing to three new venture capital investments
and five follow-on investments totaling $3,727,718 and increases in the
valuations of our venture capital investments of $848,883, offset by
write-downs in the valuations of our venture capital investments of
$1,506,102.
The following table is a summary of additions to our portfolio of
venture capital investments during the year ended December 31, 2003:
New Investment Amount
-------------- ------
Chlorogen, Inc. $ 525,900
NanoGram Devices Corporation $ 750,000
Nanosys, Inc. $ 1,500,000
Follow-on Investment
--------------------
Chlorogen, Inc. $ 259,100
NanoOpto Corporation $ 125,000
Nanotechnologies, Inc. $ 169,718
Nantero, Inc. $ 323,000
NeoPhotonics, Inc. $ 75,000
-----------
Total $ 3,727,718
===========
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 financial
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
==========
The following tables summarize the fair value of our portfolios of
venture capital investments and U.S. Government and Agency Obligations, as
compared with their cost, at December 31, 2003, and December 31, 2002:
December 31,
2003 2002
----------------------------------------
Venture capital investments, at cost $17,481,879 $14,754,466
Unrealized depreciation(1) 2,375,303 2,718,389
-- ----------- -----------
Venture capital investments, at fair value $15,106,576 $12,036,077
=========== ===========
December 31,
2003 2002
----------------------------------------
U.S. Government and Agency Obligations, at cost $27,121,899 $15,452,469
Unrealized depreciation(1) 1,413 1,724
-- ----------- -----------
U.S. Government and Agency Obligations,
at fair value $27,120,486 $15,450,745
=========== ===========
(1) At December 31, 2003, and December 31, 2002, the accumulated unrealized
depreciation on investments, including deferred taxes, was $3,221,635 and
$3,565,032, respectively.
The following table summarizes the fair value composition of our
venture capital investment portfolio at December 31, 2003, and December 31,
2002:
December 31,
Category 2003 2002
-------- ---------------------------------
Tiny Technology 60.7% 49.0%
Other Venture Capital Investments 39.3% 51.0%
------ ------
Total Venture Capital Investments 100.0% 100.0%
====== ======
Cash Flow
Year Ended December 31, 2003
Cash flow used in operating activities for the year ended December
31, 2003, was $6,592,321, reflecting the following changes from December 31,
2002, to December 31, 2003: an increase to restricted funds of $455,134; a
payment of a payable to a broker for an unsettled trade of $5,696,725; and a
decrease to current income tax liability of $857,656. In addition, net
realized and unrealized loss on investments was $1,047,140, and the net
decrease in net assets resulting from operations was $3,624,643.
Cash used in investing activities for the year ended December 31,
2003, was $15,582,923, primarily reflecting an increase in our investment in
U.S. Treasury Bills of $11,669,430 and investments in private placements of
$3,727,718.
Cash provided by financing activities for the year ended December 31,
2003, was $16,633,462, primarily reflecting net proceeds of $16,631,962 from
the issuance of 2,300,000 new shares of our common stock. We expect to invest
or earmark for investment the net proceeds of this issuance 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 of a government owned
corporation, which are likely to yield less than our operating expenses. We
may also pay operating expenses, including due diligence expenses on potential
investments, from the proceeds, which will reduce the net proceeds of any
offering of shares of our common stock that we will have available for
investment.
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: 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 our 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.
Three Months ended March 31, 2004
At March 31, 2004, and December 31, 2003, our total net primary
liquidity was $21,451,597 and $27,563,886, respectively.
The decrease in our primary source of liquidity from December 31,
2003, to March 31, 2004, is primarily owing to the receipt of the proceeds
from the sale of our investment in NanoGram Devices Corporation offset by our
investments in Agile Materials & Technologies, Inc., Continuum Photonics,
Inc., Experion Systems, Inc., Molecular Imprints, Inc., NanoOpto Corporation,
NeoPhotonics Corporation and NeuroMetrix, Inc., and use of funds for net
operating expenses.
Year Ended December 31, 2003
At December 31, 2003, 2002, and 2001, our net primary liquidity was
$27,563,886, $16,508,057 and $13,459,654, respectively. On each of those
corresponding dates, our secondary liquidity was $0, as we had no restricted
securities of companies that are publicly traded.
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 $2,455,454, $2,256,991 and $1,992,341 in 2003, 2002
and 2001, respectively.
During the year ended December 31, 2003, the increase in our net
primary liquidity was primarily owing to: (1) our payment of federal, state
and local taxes; (2) our investments in Chlorogen, Inc., NanoGram Devices
Corporation, NanoOpto Corporation, Nanosys, Inc., Nanotechnologies, Inc.,
Nantero, Inc., and NeoPhotonics, Inc.; and (3) our use of funds for operating
expenses; offset by our receipt of $16,631,962 of net proceeds from an
offering of our common stock that closed on December 30, 2003.
On November 19, 2001, we established an asset account line of credit.
The asset account line of credit is secured by our U.S. government and
government agency securities with which we secure the line. 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 both December 31, 2003, and December 31,
2002, was $0. When utilized, the asset line of credit bears interest at a rate
of the Broker Call Rate plus 50 basis points.
Year Ended December 31, 2002
At December 31, 2002, and 2001, our net primary liquidity was
$16,508,057 and $13,459,654, respectively. On each of the corresponding dates,
our secondary liquidity was $0. Our tertiary source of liquidity was our
partnership interest in PHZ Capital Partners L.P., from which we received cash
distributions in 2002 and 2001 of $6,588,661 and $172,068, 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.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and 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
On April 13, 2004, we made a $150,000 follow-on investment in the
form of a Convertible Bridge Note of a privatley held portfolio company.
On April 20, 2004, we made a $75,901 follow-on investment in the form
of a Convertible Bridge Note of a privately held portfolio company.
On May 7, 2004, we made a $50,000 follow-on investment in a privately
held portfolio company and a $250,000 initial investment in a privately held
portfolio company.
On May 10, 2004, we made a $12,091 follow-on investment in a
privately held portfolio company by purchasing shares from selling
shareholders.
On May 27, 2004, we made a $1,000,000 new investment in a privately
held company.
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. Unlike most private equity and venture
capital funds, we will not be subject to any requirement to return capital to
investors. Such requirements typically stipulate that these funds can only be
invested once and, together with any capital gains on such investment, must be
returned to investors after a pre-agreed time period. These provisions often
force private equity and venture capital funds to seek investments that are
likely to be able to be sold relatively quickly or to seek returns on their
investments through mergers, public equity offerings or other liquidity events
more quickly than they otherwise might, potentially resulting in both a lower
overall return to investors and an adverse impact on their portfolio
companies.
In addition, 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 four full time
members of management, each of whom are designated as
Managing Directors and vote on all purchases and sales of
private equity investments, Charles E. Harris, Mel P.
Melsheimer, Daniel V. Leff 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 business development company. Recognizing the potential of tiny
technology, we continued to monitor developments in the field, and since 2001
we have made tiny technology the exclusive focus of our initial investment
activity. Since August 2001, all 15 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 19 companies, of which we
consider 14 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 regarding the types of investments we
make and our relationship with our portfolio companies, 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. In addition, with more assets, we expect the average size of our
investments to 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 March 31, 2004, we held
3,732,736 shares of Series A Convertible Preferred Stock (representing
14.76% of the total Series A Convertible Preferred Stock outstanding) and
a $75,901 Convertible Bridge Note with warrants of Agile. As of the date
above, our valuation committee fair valued the Series A Preferred Stock
and Convertible Bridge Note with warrants of Agile held by us at
$187,284. The Chief Executive Officer of the company is Charles A.
Bischof. On April 20, 2004, we invested an additional $75,901 in Agile in
exchange for a Convertible Bridge Note with Warrants.
*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 March 31, 2004, we held 4,478,038 shares of
Series A Convertible Preferred Stock (representing 13.57% 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 $785,000. 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 March 31, 2004, we held
294,118 shares of Series A Convertible Preferred Stock (representing
22.86% of the total shares of Series A Convertible Preferred Stock
outstanding), 35,294 shares of Series B Convertible Preferred Stock
(representing 8.31% of the total shares of Series B Convertible Preferred
Stock outstanding), 222,184 shares of Series C Convertible Preferred
Stock (representing 16.71% of the total shares of Series C Convertible
Preferred Stock outstanding) and 64,501 shares of Series D Convertible
Preferred Stock (representing 16.17% of the total shares of Series D
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 $832,600. 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.
*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 March 31, 2004, we held 267,857
shares of Series A-1 Convertible Preferred Stock (representing 11.49% of
the total Series A-1 Convertible Preferred Stock outstanding) and
1,733,664 shares of Series B Convertible Preferred Stock (representing
9.51% 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 $785,067. The Chief
Executive Officer of the company is Barry J. Weinbaum.
*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 March 31,
2004, 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 $700,000. Charles E. Harris is a Director of the company. The
Chief Executive Officer of the company is Michael Tarnow. On April 13,
2004, we invested an additional $150,000 in Nanopharma in exchange for a
Convertible Bridge Note.
*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 March 31, 2004,
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
March 31, 2004, 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 1,402,187 shares of Series E-1 Convertible
Preferred Stock (representing 16.72% 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 $6,825,426. 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 March 31, 2004, 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 18,500 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 March 31, 2004, we held 50,000 units (representing 0.5% of the
total units outstanding) of Alpha, at no cost. As of the date above, our
valuation committee fair valued the units held by us at $125,000. 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 March 31, 2004, we held 2,000,000
shares of the Series B Convertible Preferred Stock (representing 5.56% of
the total Series B Convertible Preferred Stock outstanding) and 2,368,590
shares of Series C Convertible Preferred Stock (representing 4.29% of the
total Series C Convertible Preferred Stock outstanding) of Continuum. As
of the date above, our valuation committee fair valued the total amount
of Shares of Continuum held by us at $1,515,119. 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 March 31, 2004,
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 March 31, 2004, 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.
Molecular Imprints, Inc., located at 1807-C West Braker Lane, Austin, TX
78758, is a privately held company that is providing enabling lithography
systems and technology for manufacturing applications in the areas of
nano devices, micro structures, advanced packaging, bio devices, optical
components and semiconductor devices. As of March 31, 2004, we held
1,333,333 shares of Series B Convertible Preferred Stock (representing
6.79% of the total shares of Series B Preferred Stock outstanding) of
Molecular Imprints. As of the date above, our valuation committee fair
valued the Series B Convertible Preferred Stock of Moleculac Imprints
held by us at $2,000,000. The Chief Executive Officer of the company is
Dr. Norman E. Schumaker.
*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 March 31, 2004 we held 63,210 shares of
Series 1 Preferred Stock (representing 1.81% of the total shares of
Series 1 Convertible Preferred Stock outstanding) of NanoGram. As of the
date above, our valuation committee fair valued the Series 1 Convertible
Preferred Stock of NanoGram held by us at $21,672. On May 7, 2004, we
invested an additional $50,000 in exchange for a Convertible Bridge Note.
The Chief Executive Officer of the company is Timothy S. Jenks.
*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 March 31, 2004, we held 803,428 shares of Series C
Convertible Preferred Stock (representing 4.02% 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 Calvin Chow.
*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 March
31, 2004, 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 March 31, 2004, we held
56,250 shares of Common Stock (representing 7.25% of the total Common
Stock outstanding), 1,821,155 shares of Series 1 Convertible Preferred
Stock (representing 4.22% of the total Series 1 Convertible Preferred
Stock) and Warrants to purchase 28,636 shares of Common Stock
(representing 10.50% of the total Warrants outstanding). As of the date
above, our valuation committee fair valued the total amount of shares of
NeoPhotonics held by us at $2,012,445. On May 10, 2004, for a total of
$12,091, we purchased from a selling shareholder, 4,330 shares of Common
Stock, bringing our total ownership of Common Stock to 60,580 shares
(representing 7.80% of the total shares of Common Stock outstanding);
10,101 shares of Series 1 Convertible Preferred Stock bringing our total
ownership of Series 1 Convertible Preferred Stock to 1,828,283 shares
(representing 4.24% of the total shares of Series 1 Convertible Preferred
Stock outstanding); and Warrants to purchase 1,790 shares of Common Stock
bringing our total ownership of Warrants to purchase shares of Common
Stock to 30,426 (representing 11.2% of the total Warrants to purchase
Common Stock outstanding) of NeoPhotonics. 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 March 31, 2004, we held 1,249,999
shares of the Series C Preferred Stock (representing 4.13% of the total
Series C Convertible Preferred Stock outstanding) of Optiva. As of the
date above, our valuation committee fair valued the Series C Convertible
Preferred Stock of Optiva held by us at $1,250,000. The Chief Executive
Officer of the company is Peter Hopper.
*Starfire Systems, Inc., located at 10 Hermes Road, Malta, New York
12020, offers a family of patented silicon carbide forming polymers for
the manufacture of advanced ceramic materials applications. On May 7,
2004, we made our initial investment of $250,000 in exchange for 125,000
shares of Common Stock (representing 1.06% of the total shares of Common
Stock outstanding) and 200,000 shares of Series A-1 Convertible Preferred
Stock (representing 5.64% of the total shares of Series A-1 Convertible
Preferred Stock outstanding). The Chief Executive Officer of the company
is Richard Saburro.
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 March 31, 2004, 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 March 31, 2004, 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 formulating intellectual property strategies;
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 and Harris & Harris
Age 61 Chief Chairman and Managing Director of the Enterprises, Inc.,
Executive Chief Executive Company. NeuroMetrix, Inc.,
Officer, Officer since Experion Systems,
Managing 1984; Chief Inc. and Nanopharma
Director and Compliance Corp.
Chairman of Officer from
the Board 1997 to 2001;
Managing
Director since
2004
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: 46 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: 69 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 Former Chief Financial OSI Pharmaceuticals,
Age: 68 Officer, Cold Spring Harbor Inc.
Laboratory, 2001 to 2003,
Administrative Director, Cold
Spring Harbor Laboratory, 1995
to 2000.
Dugald A. Fletcher Director Since 1996 President and Director, Gabelli Convertible
Age: 74 Fletcher & Company, Inc. Securities and Income
Fund. Trustee of the
Gabelli Growth Fund.
Mark A. Parsells Director Since November Chairman, President and Chief Fusura LLC, Experion
Age: 44 2003 Executive Officer of Fusura Systems, Inc.,
LLC. Wilmington
Renaissance
Corporation and
Winterthur Business
Associates.
Charles E. Ramsey Director Since 2002 Retired Founder and Principal Experion Systems,
Age: 61 of Ramsey/Beirne Associates, Inc., The Seedling
Inc. Chair of Bridges to Group, Inc.
Community.
James E. Roberts Director Since 1995 Executive Vice President and None
Age: 58 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: 61 Chief Chairman and Company. Enterprises, Inc.,
Executive Chief Executive NeuroMetrix, Inc.
Officer, Officer since Experion Systems,
Managing 1984; Chief Inc. and Nanopharma
Director and Compliance Corp.
Chairman of Officer from
the Board 1997 to 2001;
Managing
Director since
2004.
Mel P. Melsheimer President, President, Chief President, Managing Director, Questech Corporation,
Age: 64 Managing Operating Chief Operating Officer, Chief Harris & Harris
Director, Officer and Financial Officer, Chief Enterprises, Inc. and
Chief Chief Financial Compliance Officer and Nanotechnologies, Inc.
Operating Officer since Treasurer of the Company.
Officer, Chief 1997; Chief President of Harris & Harris
Financial Compliance Enterprises, Inc.
Officer, Chief Officer and
Compliance Treasurer since
Officer and 2001; Managing
Treasurer Director since
2004
Daniel V. Leff Executive Vice Since January Executive Vice President and None
Age: 35 President, 2004 Managing Director of the
Managing Company. Senior Associate at
Director Sevin Rosen Funds from 2001 to
2003. Venture
Capital Consultant
for Redpoint
Ventures from 2000
- 2001. Manager,
Strategic
Investments of
Intel Corporation
from 1997 to 2000.
Douglas W. Jamison Vice President Vice President Vice President and Managing None
Age: 34 and Managing since September Director of the Company.
Director 2002; Managing Senior technology
manager, Director since University of
Utah Technology 2004 Transfer Office,
1997 to 2002.
Daniel B. Wolfe Vice President Vice President Vice President of the
Age: 27 beginning July Company. Consultant for
2004 Nanosys, Inc. from 2002
through 2004. Consultant for
CW Group 2001 through 2004.
Consultant for Bioscale, Inc.
January 2003 through 2004.
Co-Founder and President of
Scientific Venture
Assessments, Inc., February
2002 through January 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, Leff and Jamison are primarily
responsible for the day to day management of our portfolio, and have served in
this capacity since 1984, 1997, 2004 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, Chief
Executive Officer and as a Managing Director. He has served as our Chief
Executive Officer since July 1984 and as a Managing Director since January
2004. 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. He is a life-sustaining fellow of MIT and 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, since July
2001, as Treasurer and since January 2004, as a Managing Director. 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.
Daniel V. Leff. Mr. Leff has served as our Executive Vice President
and as a Managing Director since January 2004. Prior to joining us, he was a
Senior Associate with Sevin Rosen Funds in the firm's Dallas, Texas office,
where he focused on early-stage investment opportunities in semiconductors,
components, and various emerging technology areas. Previously he worked for
Redpoint Ventures in the firm's Los Angeles office. In addition, he previously
held engineering, marketing and strategic investment positions with Intel
Corporation. He received his Ph.D. degree in Physical Chemistry from UCLA's
Department of Chemistry and Biochemistry, where his thesis advisor was
Professor James R. Heath (recipient of the 2000 Feynman Prize in
Nanotechnology). He also received a B.S. in Chemistry from the University of
California, Berkeley and an MBA from The Anderson School at UCLA, where he was
an Anderson Venture Fellow. He has published several articles in peer-reviewed
scientific journals and has been awarded two patents in the field of
Nanotechnology. He is also a member of the business advisory boards of the
NanoBusiness Alliance and the California NanoSystems Institute (CNSI).
Douglas W. Jamison. Mr. Jamison has served as our Vice President
since September 2002 and as a Managing Director since January 2004. 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. On January 14, 2004, the Directors named Mr. Jamison as the future
President of the Company after Mr. Melsheimer's scheduled retirement on
December 31, 2004. He is a member of the Scientific Advisory Board of
Chlorogen, Inc., in which the Company has an investment. His professional
societies include the Association of University Technology Managers, for which
he serves on its Survey Statistics and Metrics Committee, the American
Association for the Advancement of Science and the Institute of Electrical and
Electronics Engineers. He is a member of the Advisory Board, Massachusetts
Technology Collaborative Nanotechnology Venture Forum, of the Advisory Board,
Converging Technology Bar Association and the Advisory Board, Nanotechnology
Law & Business (Journal for Attorneys, Entrepreneurs and Investors Involved in
Small Scale Technologies).
Daniel B. Wolfe. Mr. Wolfe will serve as a Vice President starting in
July 2004. Prior to joining us, he served as a consultant to Nanosys, Inc., CW
Group and Bioscale, Inc. From February 2000 to January 2002, he was the
Co-founder and President of Scientific Venture Assessments, Inc., a provider
of scientific analysis of prospective investments for private equity
placements and scientific expertise to high-technology companies. He is
completing a Ph.D. from Harvard University, where he is conducting research
under Professor George Whitesides.
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. His
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. From 2001 to 2003, he served 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. His 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.
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. Since February 2004, he is the
Chairman, President and Chief Executive Officer of Montpelier Ventures, a
management consulting firm. 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 Independent Directors 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 2003. The members of
the Executive Committee are Messrs. Harris (Chairman), Roberts and Browne 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, and approved by
the board of directors on March 10, 2004. The charter sets forth the
responsibilities of the Audit Committee. The Audit Committee's
responsibilities include recommending the selection of our registered public
accounting firm, reviewing with the registered public accounting firm the
planning, scope and results of their audit and our financial statements and
the fees for services performed, reviewing with the registered public
accounting firm the adequacy of internal control systems, reviewing our annual
financial statements and receiving our audit reports and financial statements.
The members of the Audit Committee are Messrs. Fletcher (Chairman) and Browne
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 members of
the Compensation Committee are Messrs. Roberts (Chairman), Parsells 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 members of the Nominating Committee
are Messrs. Bardin (Chairman), Parsells and Ramsey and Dr. Bauman.
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 members of the Valuation
Committee are Messrs. Fletcher (Chairman), Browne, Parsells 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 any offering of our shares of stock, approving the number of shares being
offered in such offering, providing final approval of the underwriting
agreement and handling any other details as are necessary to effect the
transaction. The members of the Pricing Committee are Messrs. Harris
(Chairman), Fletcher and Mayer.
The Board of Directors approved the appointment of an Independent
Directors Committee on March 10, 2004, which will have the responsibility of
proposing corporate governance and long-term planning matters to the Board of
Directors.
The following table sets forth the dollar range of equity securities
beneficially owned by each director as of December 31, 2003.
Dollar Range of Equity Securities
Name of Director Beneficially Owned (1)(2)(3)
------------------------------------------------------------------------------------------------
Interested Directors:
--------------------
Charles E. Harris Over $100,000
Dr. Kelly S. Kirkpatrick(4) $50,001 - $100,000
Lori D. Pressman(4) $50,001-$100,000
Independent Directors:
---------------------
Dr. C. Wayne Bardin Over $100,000
Dr. Phillip A. Bauman Over $100,000
G. Morgan Browne Over $100,000
Dugald A. Fletcher Over $100,000
Mark A. Parsells None
Charles E. Ramsey Over $100,000
James E. Roberts Over $100,000
___________________
(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, 2003.
(4) Denotes an individual who may be considered an "interested person"
because of consulting work performed for us.
Principal Shareholders
Set forth below is information as of May 13, 2004 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 executive 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 May
13, 2004. 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) 7.6
Dr. C. Wayne Bardin......................... 21,316(2) *
Dr. Phillip A. Bauman....................... 22,476(3) *
G. Morgan Browne............................ 34,172 *
Dugald A. Fletcher.......................... 13,370 *
Douglas W. Jamison.......................... 625 *
Dr. Kelly S. Kirkpatrick.................... 3,313 *
Daniel V. Leff.............................. 0 *
Mel P. Melsheimer........................... 80,210(4) *
Mark A. Parsells............................ 0 *
Lori D. Pressman............................ 3,871 *
Charles E. Ramsey........................... 28,046 *
James E. Roberts............................ 16,392 *
Helene Shavin............................... 3,000 *
All directors and executive officers as
a group (15 persons)........................ 1,277,684 9.3
5% Shareholders:
Jonathan Rothschild
c/o Arterio, Inc.
1061-B Shary Circle
Concord, California 94518.................. 770,330 5.6
Masters Capital Management LLC/Michael
Masters(5)
3060 Peachtree Road, N.E., Suite 1815
Atlanta, Georgia 30305..................... 886,962(6) 6.4
________________
* Less than 1%.
(1) Includes 1,039,559 shares owned by Mrs. Harris and 11,334 shares owned by
Mr. Harris.
(2) Includes 3,786 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 13,334 shares which are owned jointly by Mel P. Melsheimer and
his wife.
(5) Pursuant to a Schedule 13G/A dated February 9, 2004, Masters Capital
Management LLC ("Masters") and Michael Masters beneficially owned 568,200
shares and Marlin Fund Offshore, Ltd. beneficially owned 318,762 shares
(all with shared voting and dispositive power).
(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, 2003 to our directors and others. During the
fiscal year ended December 31, 2003, we did not pay any pension or retirement
benefits.
Total Compensation Paid to
Name of Director Aggregate Compensation ($) Directors ($)
--------------------------------------------------------------------------------------------------------------
Independent Directors:
Dr. C. Wayne Bardin 19,000 19,000
Dr. Phillip A. Bauman 18,000 18,000
G. Morgan Browne(1) 21,462 21,462
Dugald A. Fletcher 19,000 19,000
James E. Roberts 16,000 16,000
Glenn E. Mayer(6) 18,000 18,000
Mark A. Parsells(2) 1,214 1,214
Charles E. Ramsey 13,000 13,000
Interested Directors:
Charles E. Harris(3) 0 0
Dr. Kelly S. Kirkpatrick(4) 18,926 18,926
Lori D. Pressman(5) 75,725 75,725
--------------------
(1) Includes $462 for reimbursement for travel expenses to attend board
meetings.
(2) Includes $414 for reimbursement for travel expenses to attend board
meetings.
(3) Mr. Harris is an "interested person" as defined in the 1940 Act.
(4) Includes $1,613 for reimbursement for travel expenses to attend board
meetings and $1,313 for consulting services. Dr. Kirkpatrick may be
considered an "interested person" because of consulting work performed
for us.
(5) Includes $1,725 for reimbursement for travel expenses to attend board
meetings and $57,000 for consulting services. Ms. Pressman may be
considered an "interested person" because of consulting work performed
for us.
(6) Mr. Mayer was not a nominee for reelection at the Annual Meeting of
Shareholders held on May 12, 2004.
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
2003 was $162,014.
In 1998, the board of directors approved that effective January 1,
1998, 50% of all director fees be used to purchase our common stock from us.
However, effective March 1, 1999, the board of directors approved that
directors purchase our common stock in the open market, rather than from us.
In 2001, the outside directors (i.e., all directors except Mr. Harris) bought
a total of 7,944 shares in the open market. In 2002, the outside directors
bought 9,524 shares in the open market and 43,426 shares through exercise of
rights in a public offering of our common stock.
Remuneration of Chief Executive Officer and Other Executive Officers
The following table sets forth a summary for each of the last three
years ended December 31 of the cash and non-cash compensation paid to our
chief executive officer and our other executive officers.
Annual Compensation
-------------------
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($)(1) ($)(2) ($)(3)
------------------------------------------------------------------------------------------------------
Charles E. Harris 2003 224,567 0 43,006 318,296
Chairman of the board & Chief 2002 221,217 10,503 46,570 165,468
Executive Officer(4) 2001 215,510 0 48,453 232,000
Mel P. Melsheimer 2003 254,106 0 0 14,000
President, Chief Operating 2002 250,327 3,224 0 12,500
Officer, Chief Financial 2001 243,869 0 0 10,500
Officer, Treasurer & Chief
Compliance Officer
Helene B. Shavin 2003 89,241 0 0 14,000
Controller 2002 85,353 1,161 0 11,000
2001 13,333 0 0 1,867
Susan T. Harris 2003 9,522 0 0 0
Secretary(5) 2002 12,703 0 0 2,332
2001 12,376 0 0 1,578
Douglas W. Jamison 2003 137,182 0 0 12,000
Vice President 2002 35,936 0 0 1,050
________________
(1) For 2002, these amounts represent the actual amounts earned as a result
of realized gains during the year ended December 31, 2002 under the
Harris & Harris Group Employee Profit-Sharing Plan and paid out in 2003.
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. For 2003, Mr. Harris's "All Other Compensation" consists of:
$14,000 401(k) Plan employer contribution; $298,306 for his 2003 SERP
contribution; and $5,990 in life insurance premiums for the benefit of
his beneficiaries. With respect to 2002 and 2003, an additional $73,739
was accrued for Mr. Harris's SERP account in 2002, but was not paid until
2003.
(4) Mr. Harris has an employment agreement with us.
(5) Ms. Harris also earned $2,000 in 2003 for her participation at board
meetings as secretary, but was not paid until 2004.
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.
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 Compensation
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%
($10,503); Mel P. Melsheimer, 4.233% ($3,224); Helene B. Shavin, 1.524%
($1,161); and Jacqueline M. Matthews, 0.453% ($345), which together equal 20%
($15,233). 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). Currently under the 2002
Plan, the distribution amounts for non-grandfathered investments for each
officer and employee currently are as follows: Charles E. Harris, 7.790%; Mel
P. Melsheimer, 3.733%; Douglas W. Jamison, 3.5%; Daniel V. Leff, 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 and Daniel V.
Leff are each 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. During 2003, we made no accrual for profit sharing.
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 tock. 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 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.
Pending further clarification from the SEC, as a consequence of the
foregoing classifications and eligibility criteria, we will not treat as an
eligible portfolio company pursuant to the first alternative criterion
described above (that is, no class of securities outstanding against which a
broker may extend margin credit) any company that, at the time of our
investment, has outstanding any debt securities or equity securities against
which the margin rules adopted by the Federal Reserve Board authorize a broker
to extend credit.
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
December 31, 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 13,798,845
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.
PLAN OF DISTRIBUTION
We may sell our Common Stock through underwriters or dealers,
directly to one or more purchasers through agents or through a combination of
any such methods of sale. Any underwriter or agent involved in the offer and
sale of our Common Stock will be named in the applicable Prospectus
Supplement.
The distribution of our Common Stock may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, at prevailing market prices at the time of sale, at prices related to
such prevailing market prices, or at negotiated prices, provided, however,
that the offering price per share less any underwriting commissions or
discounts must equal or exceed the net asset value per share of our common
stock.
In connection with the sale of our Common Stock, underwriters or
agents may receive compensation from us in the form of discounts, concessions
or commissions. Underwriters may sell our Common Stock to or through dealers,
and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents
that participate in the distribution of our Common Stock may be deemed to be
underwriters under the Securities Act of 1933, and any discounts and
commissions they receive from us and any profit realized by them on the resale
of our Common Stock may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933. Any such underwriter or agent will be
identified and any such compensation received from us will be described in the
applicable Prospectus Supplement. The maximum commission or discount to be
received by any NASD member or independent broker-dealer will not exceed 8%.
We will not pay any compensation to any underwriter or agent in the form of
warrants, options, consulting or structuring fees or similar arrangements.
Any Common Stock sold pursuant to a Prospectus Supplement will be
listed on the Nasdaq National Market.
Under agreements into which we may enter, underwriters, dealers and
agents who participate in the distribution of our Common Stock may be entitled
to indemnification by us against certain liabilities, including liabilities
under the Securities Act of 1933. Underwriters, dealers and agents may engage
in transactions with us, or perform services for us, in the ordinary course of
business.
If so indicated in the applicable Prospectus Supplement, we will
authorize underwriters or other persons acting as our agents to solicit offers
by certain institutions to purchase our Common Stock from us pursuant to
contracts providing for payment and delivery on a future date. Institutions
with which such contacts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by us. The obligations of any purchaser under any such contract will
be subject to the condition that the purchase of the Common Stock shall not at
the time of delivery be prohibited under the laws of the jurisdiction to which
such purchaser is subject. The underwriters and such other agents will not
have any responsibility in respect of the validity or performance of such
contracts. Such contracts will be subject only to those conditions set forth
in the Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
In connection with an offering of our common stock in December 2003,
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 for a period of 180 days, 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.
In order to comply with the securities laws of certain states, if
applicable, our Common Stock offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers.
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.
EXPERTS
Our audited financial statements as of December 31, 2003 and for each
of the two years in the period then ended have been incorporated by reference
from our 2003 Annual Report on Form 10-K in reliance on the report of
PricewaterhouseCoopers LLP, independent registered public accounting firm,
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 registered public accounting
firm to audit our December 31, 2003 financial statements.
The financial statements, as of and for the year ended December 31,
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.
We will furnish, without charge, a copy of such financial statements
upon request by writing to 111 West 57th Street, Suite 1100, New York, New
York 10019, Attention: Investor Relations, or calling 212-582-0900.
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 year ended December 31, 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 year ended December 31, 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.
7,000,000 Shares
Common Stock
The date of the Prospectus is , 2004
__________________
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.
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 10-K
-------------------------
Consolidated Statements of Assets and Liabilities for years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Operations for the years ended December
31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the
years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in the Net Assets for the years
ended December 31, 2003, 2002 and 2001 Consolidated Schedule of
Investments as of December 31, 2003, 2002 and 2001
Footnote to Consolidated Schedule of Investments
Notes to Consolidated Financial Statements
Financial Highlights for the years ended December 31,
2003, 2002 and 2001
(b) Quarterly Reports on Form 10-Q
-----------------------------
Consolidated Statements of Operations for the quarters ended March
31, 2004, and 2003
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004, and 2003
Consolidated Statements of Changes in Net Assets for the quarters
ended March 31, 2004, and 2003
Consolidated Schedule of Investments as of March 31, 2004
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.(1)
(b) Restated By-laws of the Company.(1)
(c) Not applicable.
(d) Form of Specimen certificate of common stock certificate.(2)
(e) Not applicable.
(f) Not applicable.
(g) Not applicable.
(h) Not applicable.
(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.(1)
(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.(1)
(j) Harris & Harris Group, Inc. Custodian Agreement with JP
Morgan.(1)
(k) Not applicable.
(l) Opinion letter of Skadden, Arps, Slate, Meagher & Flom,
LLP.(2)
(m) Not applicable.
(n) Consent of the Registered Public Accounting Firm.(3)
(o) Not applicable
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics under 17j-1 under the 1940 Act is hereby
incorporated by reference to Exhibit (r) of our registration
statement on Form N-2 filed on December 19, 2003.
(s) Powers of Attorney.(1)
(1) Previously filed with Pre-Effective Amendment 1 to the Registration
Statement on March 22, 2004.
(2) Previously filed with Pre-Effective Amendment 2 to the Registration
Statement on April 13, 2004.
(3) Filed herewith.
Item 25. Marketing Arrangements
--------------------------------
The information contained under the heading "Plan of Distribution" on
page 59 of the Prospectus is incorporated herein by reference, and any
information concerning any underwriters will be contained in the accompanying
Prospectus Supplement, if any.
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. $ 8,011
Nasdaq listing fee $ 70,000
Printing (other than stock certificates) $ 50,000
Accounting fees and expenses $ 20,000
Legal fees and expenses $300,000
Miscellaneous $167,130
Total $615,141
Item 27. Persons Controlled by or Under Common Control with Company
--------------------------------------------------------------------
Percentage of voting
Organized securities owned
At December 31, 2003 under laws of by the Registrant
-------------------- ------------- --------------------
Harris & Harris Enterprises, Inc. Delaware 100%
Item 28. Number of Holders of Securities (as of May 12, 2004)
--------------------------------------------------------------
Title of class Number of record holders
-------------- ------------------------
Common stock, $.01 par value 130
The Company was advised by its transfer agent that there were 130
holders of record of the common stock that held the common stock for an
estimated 13,175 beneficial owners.
Item 29. Indemnification
-------------------------
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. Not applicable.
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;
(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; and
(d) that for the purposes of determining any liability
under the Securities Act of 1933, each filing of
the Company's annual report or quarterly reports
pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is
incorporated by reference in the registration
statement 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.
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(e) and
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 Registered Public Accounting Firm.
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 3rd day of June, 2004.
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 June 3, 2004
-------------------------------------- Chief Executive Officer
Charles E. Harris (Principal Executive Officer)
/s/ Mel P. Melsheimer President, Chief Operating Officer June 3, 2004
-------------------------------------- and Chief Financial Officer
Mel P. Melsheime (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
--------------------------------------
Mark Parsells
* Director
--------------------------------------
Lori D. Pressman
* Director
--------------------------------------
Charles E. Ramsey
* Director
--------------------------------------
James E. Roberts
*By: /s/ Charles E. Harris
-----------------------------
Attorney-in-fact