As filed with the Securities and Exchange Commission on April 26, 2002
Securities Act File No. 333-_____
Investment Company Act File No. 811-07074
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
--------------------
[X] Registration Statement under the Securities Act of 1933
[ ] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No.
and/or
[X] Registration Statement under the Investment
Company Act of 1940
(Check Appropriate Box or Boxes)
--------------------
HARRIS & HARRIS GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
--------------------
One Rockefeller Plaza
Rockefeller Center
New York, New York 10020
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (212) 332-3600
Charles E. Harris, Chairman, CEO
One Rockefeller Plaza
Rockefeller Center
New York, NY 10020
(Name and Address of Agent for Service)
--------------------
Copies to:
Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, New York 10036
(212) 735-3000
Approximate date of proposed public offering: As soon as
practicable 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, as amended, other than securities offered in connection with a
dividend reinvestment plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Securities Amount Proposed Proposed Amount of
Being Registered Being Maximum Maximum Registration
Registered Offering Price Aggregate Fee
Per Share(1) Offering Price
----------------------- ---------------------- ------------------ --------------------- -----------------
Common Stock,
$.01 par value 2,954,743 Shares $2.25 $6,648,171.75 $611.63
Total 2,954,743 Shares $2.25 $6,648,171.75 $611.63
----------------------- ---------------------- ------------------ --------------------- -----------------
(1) As calculated pursuant to Rule 457(c) under the Securities Act of
1933, as amended.
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
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CROSS-REFERENCE SHEET
PARTS A AND B OF PROSPECTUS
N-2 Item Number Location in Part A (Caption)
------------------------------------------------ ----------------------------------------
PART A
1. Outside Front Cover....................... Front Cover Page
2. Inside Front and Outside Back
Cover Page................................ Front Cover Page
3. Fee Table and Synopsis.................... Prospectus Summary; Table of Fees and
Expenses
4. Financial Highlights...................... Financial Highlights
5. Plan of Distribution...................... The Offer
6. Selling Shareholders...................... Not Applicable
7. Use of Proceeds........................... Use of Proceeds;
8. General Description of the
Registrant............................... Investment Objectives and Policies; The
Offer; Risk Factors and Special
Considerations
9. Management................................ Management of the Company
10. Capital Stock............................. The Offer; Capitalization; Custodian,
Transfer Agent, Dividend-Disbursing
Agent and Registrar; Dividends and
Distributions; Taxation
11. Defaults and Arrears on Senior
Securities................................ Not Applicable
12. Legal Proceedings......................... Not Applicable
13. Table of Contents of the Statement
of Additional Information................. Not Applicable
PART B*
------------------------------------------------ ------------------------------------------------
14. Cover Page................................ Not Applicable
15. Table of Contents......................... Not Applicable
16. General Information and History........... Cover of Prospectus; General Description
of the Registrant
17. Investment Objective and Policies......... Investment Objectives; Investment
Practices
18. Management of the Company ............... Management of the Company
19. Control Person and Principal
Holders of Securities..................... Control Person and Principal Holders of
Securities
20. Investment Advisory and Other
Services.................................. Recital of Investment Objective;
Management
21. Brokerage, Allocation and Other
Practices................................. Brokerage, Allocation and Other Practices
22. Tax Status................................ Taxation
23. Financial Statements...................... Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
---------------------------
* Pursuant to General Instructions to Form N-2, all information required
by Part B: Statement of Additional Information has been incorporated
into Part A: The Prospectus of the Registration Statement
SUBJECT TO COMPLETION DATED APRIL __, 2002
PROSPECTUS
HARRIS & HARRIS GROUP, INC.
2,954,743 SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF RIGHTS TO SUBSCRIBE FOR SUCH SHARES
---------------------------------
We are issuing transferable rights ("Rights") to our shareholders.
These Rights will allow you to subscribe for new shares of our common
stock. For every Right that you receive, you may buy one new share of our
common stock. You will receive one Right for every three shares of our
common stock that you own on June __, 2002 (the "Record Date"). Fractional
Rights will not be issued. Accordingly, we will round up the Rights issued
to you to the next whole Right. In the case of shares of common stock held
of record by Cede & Co. ("Cede"), as nominee for the Depository Trust
Company ("DTC"), or any other depository or nominee, the number of Rights
issued to Cede or such other depository or nominee will be adjusted to
permit rounding up (to the next whole Right) of the Rights to be received
by beneficial owners for whom it is the holder of record only if Cede or
such other depository or nominee provides to us on or before the close of
business on June [ ], 2002 written representation of the number of Rights
required for such rounding. Also, you can purchase shares not acquired by
other shareholders in this Rights offering (the "Offer"), subject to
limitations discussed in this prospectus.
The Rights are transferable and will be admitted for trading on the
Nasdaq National Market ("NNM") under the symbol "[ ]." Our shares of common
stock are listed, and the shares issued pursuant to this Offer will be
listed, on the NNM under the symbol "TINY". On March 31, 2002 (the most
recent date as of which we have calculated our net asset value), the net
asset value per share of our shares was $_____ and on June __, 2002 (the
last date prior to our shares trading ex-Rights) the last reported sales
price of our shares on the NNM was $_____. The purchase price per share
(the "Subscription Price") will be $2.25 representing a discount of $____(
___%) from such net asset value per share. The Offer will expire at 5:00
p.m. New York time on June , 2002 unless the Offer is extended as described
in this Prospectus (the "Expiration Date").
We are a venture capital investment company, operating as a
Business Development Company ("BDC") under the Investment Company Act of
1940 (the "1940 Act"). Our objective is to achieve long-term capital
appreciation rather than current income from our investments. Recently we
decided to focus our new business activities exclusively on small
technology, including but not limited to nanotechnology, microsystems and
microelectromechanical systems "MEMS" technology. On March 27, 2002, we
changed our NNM symbol to "TINY", and at the 2002 Annual Meeting of
Shareholders, shareholders will be asked to approve changing the name of
the Company to Small-Technology Venture Capital, Inc. Although small
technology is multidisciplinary and theoretically applicable to a wide
variety of fields, small technology in general is new and has significant
science and engineering risk as well as commercialization risk. See "-
General Information of Company." Our address is One Rockefeller Plaza,
Rockefeller Center, New York, New York 10020 and our telephone number is
(212) 332-3600.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. AN INVESTMENT IN THESE SECURITIES SHOULD BE CONSIDERED ONLY BY
PERSONS CAPABLE OF SUSTAINING THE LOSS OF THEIR ENTIRE INVESTMENT.
FOR A DISCUSSION OF CERTAIN RISK FACTORS AND SPECIAL CONSIDERATIONS
WITH RESPECT TO OWNING OUR SHARES, SEE "RISK FACTORS AND SPECIAL
CONSIDERATIONS" COMMENCING ON PAGE __ OF THIS PROSPECTUS.
This Prospectus sets forth certain information about us that you
should know before investing in our common stock. You are advised to read
this Prospectus in its entirety and retain it for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION 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.
---------------------------------
SUBSCRIPTION SALES PROCEEDS
PRICE LOAD TO COMPANY(1)
----------------------- -------------- ----------------------------
Per Share............................ $2.25 None $[ ]
Total................................ $6,648,171.75 None $[ ]
---------------------------------
(1) Before deduction of expenses incurred by the Company, estimated at $[
]. After deducting such expenses, the net proceeds to this company
will be $[ ].
Shareholders who do not exercise their rights should expect that they
will, at the completion of the Offer, own a smaller proportional interest
in the Company than would otherwise be the case. The subscription price per
share may be less than the market price per share at the expiration of the
Offer. In addition, because the subscription price per share may be less
than the net asset value per share at the expiration of the Offer and
because we will incur expenses in connection with the Offer, the Offer is
likely to result in a dilution of net asset value per share for all
shareholders. This dilution will disproportionately affect non-exercising
shareholders. If the subscription price per share is substantially less
than the net asset value per share at the expiration of the Offer, such
dilution is likely to be substantial. The Offer includes an
over-subscription privilege that may also result in substantial dilution of
net asset value per share.
This Prospectus sets forth concisely certain information about the
Company that a prospective investor should know before investing. Investors
are advised to read and retain it for future reference.
------------------------------------------------------------------------------
The Date of the Prospectus is April 26, 2002
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 the Company.
ANNUAL EXPENSES (as a percentage of net assets
attributable to common stock)
Total Annual Administrative and Operating Expenses........ [ ]% (1)
------------------
----------------------------
(1) Amounts are based on estimated amounts for our current fiscal year
after giving effect to anticipated net proceeds of the Offer assuming
that all of the rights are exercised and that we incur the estimated
offering expenses.
EXAMPLE
The following examples illustrate the projected dollar amount of
cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Company. These amounts are
based upon payment by the Company of expenses at levels set forth in the
above table.
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
[$ ] [$ ] [$ ] [$ ]
The foregoing table is to assist you in understanding the various
costs and expenses that an investor in the Company 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 the common stock.
Actual expenses and annual rates of return may be more or less than those
assumed for purposes of the example.
PROSPECTUS SUMMARY
This summary highlights some information that is described more fully
elsewhere in this Prospectus. It may not contain all of the information
that is important to you. To understand the Offer fully, you should read
the entire document carefully, including the risk factors.
PURPOSE OF THE OFFER
Recently we have decided to focus our new business activities
exclusively on small technology, including but not limited to
nanotechnology, microsystems and microelectromechanical systems (MEMS)
technology. We have invested in five companies that we consider to be small
technology companies. In 1994, we invested in our first small technology
company, Nanophase Technologies Corporation ("Nanophase"), a spinoff from
Argonne National Laboratory, which completed an initial public offering in
1997. We sold our interest in Nanophase in 2001 and invested part of the
proceeds of the sale in August 2001, in privately held Nantero, Inc., a
Harvard University spinoff developing advanced semiconductors using
nanotechnology. In February 2002, we invested in NanoPharma Corp., a
Massachusetts General Hospital spinoff founded to develop advanced drug
delivery systems. On March 7, 2002, we invested in NanoOpto Corp., which is
applying proprietary nano-optics and nano-manufacturing technology to
design and make components for optical networking. On March 8, 2002, we
invested in NEO Photonics Corporation, a privately held company that
develops patented technology that enables the manufacture of unique
nanoscale optical compositions for the telecommunications industry.
Our Board of Directors believes that our prior investment and
expertise in the small technology sector are likely to lead to several
attractive investment opportunities in the small technology sector becoming
available to us over the next one to two years. Hence, our Board of
Directors believes that it would be in our best interest to increase our
asset base so that we will be in a better position to take advantage of
such attractive investment opportunities, increase the diversification of
our portfolio and achieve other net benefits, including increasing the
percentage of our assets that is invested in small technology and
increasing our market share in small technology private equity investing.
In addition, our Board of Directors believes that increasing our size
should lower our expenses as a proportion of average net assets to the
extent that certain of our fixed costs do not increase proportionately and
can be spread over a larger asset base, although the Board of Directors
does expect other of our expenses to rise as more new investments are made
and we add personnel. Each deal on which we perform due diligence entails
expenses whether or not it is consummated, and we plan to add personnel to
enable us to enlarge the scope of our activities and our expertise in small
technology. The Board of Directors also believes that a larger number of
outstanding shares and a larger number of beneficial owners of shares could
increase the level of market interest in and visibility of the company and
improve the trading liquidity of our shares on the NNM. There can be no
assurance that either of these benefits will be realized.
By offering the Rights we are seeking to accomplish the Board's
directive while giving you an opportunity to purchase additional shares of
our common stock at a price that is anticipated to be below market and
below net asset value without incurring any commission charge. Because the
Rights are transferable non-participating shareholders may be able to
reduce the possible dilution of their interests as a result of the Rights
offering by selling their Rights.
In determining that the Offer was in our best interests as well as
that of our shareholders, our Board of Directors considered, among other
things, using a variable pricing versus fixed pricing mechanism, the
benefits and drawbacks of conducting a non- transferable versus a
transferable rights offering and the effect on us if the Offer is
undersubscribed.
IMPORTANT TERMS OF THE OFFER
Total number of shares available for primary subscription...................................2,954,743
Number of Rights you will receive for each outstanding
share you own on the Record Date..............................One Right for every three shares*
Number of shares you may purchase with your Rights
at the Subscription Price per share...................................One share for every Right
Subscription Price per share....................................................................$2.25
--------------
* The number of Rights to be issued will be rounded up to the next whole
Right.
OVER-SUBSCRIPTION PRIVILEGE
Shareholders who fully exercise all Rights initially issued to them
are entitled to buy shares of common stock that were not bought by other
Rights holders. If enough shares of common stock are available, all
shareholder requests to buy shares that were not bought by other Rights
holders will be honored in full. If the requests for shares of common stock
exceed the shares available, the available shares of common stock will be
allocated pro rata among those shareholders on the Record Date who
over-subscribe based on the number of Rights originally issued to them. See
"The Offer -- Over-Subscription Privilege."
METHOD FOR EXERCISING RIGHTS
Except as described below, subscription certificates evidencing the
Rights ("Subscription Certificates") will be sent to Record Date
shareholders or their nominees. If you wish to exercise your Rights, you
may do so in the following ways:
(1) Complete and sign the Subscription Certificate. Mail it
in the envelope provided or deliver it, together with
payment in full to the "Subscription Agent" at the
address indicated on the Subscription Certificate. Your
completed and signed Subscription Certificate and payment
must be received by the Expiration Date.
(2) Contact your broker, banker or trust company, which can
arrange, on your behalf, to guarantee delivery of payment
and delivery of a properly completed and executed
Subscription Certificate pursuant to a notice of
guaranteed delivery ("Notice of Guaranteed Delivery") by
the close of business on the third business day after the
Expiration Date. A fee may be charged for this service.
The Notice of Guaranteed Delivery must be received by the
Expiration Date.
Rights holders will have no right to rescind a purchase after the
Subscription Agent has received payment. See "The Offer -- Method of
Exercise of Rights" and "The Offer -- Payment for Shares."
SALE OF RIGHTS
The Rights are transferable until the Expiration Date. The Rights
will be listed for trading on the NNM. Although no assurance can be given
that a market for the Rights will develop, trading in the Rights on the NNM
will begin three Business Days prior to the Record Date and may be
conducted until the close of trading on the last NNM trading day prior to
the Expiration Date. The value of the Rights, if any, will be reflected by
the market price. Rights may be sold by individual holders or may be
submitted to the Subscription Agent for sale. Any Rights submitted to the
Subscription Agent for sale must be received by the Subscription Agent on
or before June __, 2002, one business day prior to the Expiration Date, due
to normal settlement procedures. Trading of the Rights on the NNM will be
conducted on a when-issued basis until and including the date on which the
Subscription Certificates are mailed to Record Date shareholders and
thereafter will be conducted on a regular-way basis until and including the
last NNM trading day prior to the Expiration Date. The shares will begin
trading ex-Rights two Business Days prior to the Record Date. If the
Subscription Agent receives Rights for sale in a timely manner, it will use
its best efforts to sell the Rights on the NNM. Any commissions will be
paid by the selling Rights holders. Neither the Company nor the
Subscription Agent will be responsible if Rights cannot be sold and neither
has guaranteed any minimum sales price for the Rights. For purposes of this
Prospectus, a "Business Day" shall mean any day on which trading is
conducted on the NNM.
The following table sets forth for the quarters indicated the high
and low closing prices on the NNM per share of the common stock and the net
asset value and the premium or discount from net asset value at which the
common stock was trading, expressed as a percentage of net asset value, at
each of the high and low closing prices provided.
NET ASSET VALUE PREMIUM OR DISCOUNT
MARKET PRICE (1) (end of period) AS % OF NAV
------------------------- --------------- -------------------------
QUARTER ENDED HIGH LOW HIGH LOW
2000 Quarter Ending
March 31 32.50 9.25 5.08 539.76 82.09
June 30 17.125 5.25 3.88 341.37 35.31
September 30 10.1875 5.75 4.64 119.56 23.71
December 31 6.4375 2.4375 3.51 83.40 (30.56)
2001 Quarter Ending
March 31 4.25 2.063 3.09 37.54 (33.24)
June 30 3.29 2.01 3.29 0.00 (38.91)
September 30 2.86 1.60 2.92 (2.05) (45.21)
December 31 2.33 1.55 2.75 (15.27) (43.64)
2002 Quarter Ending
March 31 5.50 1.80 [ ] [ ] [ ]
(1) As reported on the NNM
USE OF PROCEEDS
We estimate the gross proceeds of the Offer to be approximately $[ ].
This figure is based on the Subscription Price per share of $2.25 and
assumes all shares offered are sold and that the expenses related to the
Offer are approximately $[ ].
We may invest either directly or through a wholly-owned
subsidiary, which would be formed as a Small Business Investment
Corporation ("SBIC"). We expect to invest such proceeds in accordance with
our investment objectives and policies within twelve months after receipt
of such proceeds, depending on the available investment opportunities for
the types of investment, such as investments in small technology, in which
we principally invest. A SBIC can obtain, at relatively low cost, goverment
loans. However, a SBIC is required to share a portion of its profits with
the government as well. We have not yet decided whether or not to apply for
a SBIC license. There can be no assurance that, if we do apply for a SBIC
license, our application will be accepted. We may continue to make
follow-on investments in non-small technology companies now in our
portfolio with part of the cash and equivalents now held by the Company.
IMPORTANT DATES TO REMEMBER
Please note that the dates in the table below may change if the
Offer is extended.
EVENT DATE
Record Date...........................................................June [ ], 2002
Subscription Period..........................June [ ], 2002 through July [ ], 2002**
Expiration of the Offer*..............................................July [ ], 2002**
Payment for Guarantees of Delivery Due*...............................July [ ], 2002**
Confirmation to Participants........................................August [ ], 2002**
------------------------------------
* A shareholder exercising Rights must deliver by July [ ], 2002
either (a) a Subscription Certificate and payment for shares or
(b) a Notice of Guaranteed Delivery.
** Unless the Offer is extended.
INFORMATION AGENT
Please direct all questions or inquiries relating to the Offer to
our information agent:
____________________
____________________
____________________
Toll Free: ( )
You may also contact your brokers or nominees for information with
respect to the Offer.
INFORMATION REGARDING THE COMPANY
We are a venture capital investment company, operating as a
Business Development Corporation under the 1940 Act. Our objective is to
achieve long-term capital appreciation, rather than current income, from
our investments. We have invested a substantial portion of our assets in
privately held development stage or start-up companies and in the
development of new technologies in a broad range of industry segments.
Recently we decided to focus our new business activities exclusively on
small technology, including but not limited to nanotechnology, microsystems
and microelectromechanical systems (MEMS) technology. Although small
technology is multidisciplinary and theoretically applicable to a wide
variety of fields, small technology in general is new and has significant
science and engineering risk as well as commercialization risk. We may also
invest, to the extent permitted under the 1940 Act, in publicly traded
securities, including high risk securities as well as investment grade
securities. We may participate in expansion financing and leveraged buyout
financing of more mature operating companies as well as other investments.
As a venture capital company, we invest in and provide managerial
assistance to our private portfolio companies which, in our opinion, have
significant potential for growth.
Our mission is straightforward and simple; a) to create wealth for
our shareholders by making the best venture capital investments that we can
make in small technology; and, b) as a natural byproduct of that work, to
give our shareholders an increasingly pure play on a reasonably diversified
portfolio of small technology venture capital investments. There is no
assurance that our investment objective will be achieved.
The Company was incorporated under the laws of the State of New
York in August 1981. Prior to September 30, 1992, we had a class of
securities registered and filed under the reporting requirements of the
Securities Exchange Act of 1934 (the "1934 Act") as an operating company.
On that date we commenced operations as a closed-end, non-diversified
investment company under the 1940 Act. On July 26, 1995, we elected to
become a BDC subject to the provisions of Sections 55 through 65 of the
1940 Act. As a BDC, we operate as an internally managed investment company
whereby our officers and employees, under the general supervision of our
Board of Directors, conduct our operations.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The following summarizes some of the matters that you should
carefully consider before investing in the Company through the Offer.
If you do not exercise your Rights, you will be diluted as a result of the
Rights offering. In addition, whether or not you exercise your Rights, the
per share net asset value of your shares likely will be diluted (reduced)
immediately as a result of the Offer.
If you do not exercise all of your Rights, you will own a smaller
proportional interest in the Company when the Offer is over. In addition,
whether or not you exercise your Rights, the per share net asset value of
your shares (after payment of estimated offering expenses) likely will be
diluted (reduced) immediately as a result of the Offer because:
- the shares offered may be sold at less than their current net asset
value
- you will indirectly bear the expenses of the Offer
- the number of shares outstanding after the Offer will have
increased proportionately more than the increase in the size of
our net assets
We cannot state precisely the amount of any dilution because it is
not known at this time what the net asset value per share will be on the
Expiration Date or what proportion of the Rights will be exercised. The
dilution may be substantial and will increase if the net asset value
increases as shown by the following examples, assuming a $2.25 Subscription
Price:
Scenario 1:(1)
NAV....................................................................$
Subscription Price.....................................................$
Reduction in NAV($)(2).................................................$( )
Reduction in NAV(%)....................................................( )%
Scenario 2:(1)
NAV....................................................................$
Subscription Price.....................................................$
Reduction in NAV($)(2).................................................$( )
Reduction in NAV(%)....................................................( )%
------------------------------------
(1) Both examples assume full primary and over-subscription privilege
exercise. Actual amounts may vary due to rounding.
(2) Assumes $[ ] in estimated offering expenses.
If you do not wish to exercise your Rights, you should consider
selling them as set forth in this Prospectus. Any cash you receive from
selling your Rights should serve as partial compensation for any possible
dilution of your interest. We cannot give assurance, however, that a market
for the Rights will develop or that the Rights will have any marketable
value.
Our shares might trade at a discount from net asset value or at premiums
that are unsustainable over the long term.
Shares of business development corporations may, as frequently
occurs with closed- end investment companies, trade at a market price that
is less than the value of the net assets attributable to those shares. The
possibility that our shares will trade at a discount 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 BDC 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.
There is no right to redeem shares of our common stock.
You will be free to dispose of your shares on the NNM or other
markets on which the shares may trade. You do not have the right to redeem
your shares of common stock.
Leveraging by us could result in making our total return to common
shareholders more volatile.
Leverage entails two primary risks. The first risk is that the use
of leverage magnifies the impact on the common shareholders of changes in
net asset value. For example, a fund 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 leverage will exceed the
return on the securities acquired with the proceeds of leverage, thereby
diminishing rather than enhancing the return to common shareholders. If we
were to utilize leverage, these two risks would generally make our total
return to common shareholders more volatile. In addition, we might be
required to sell investments in order to meet dividend or interest payments
on the debt or preferred stock when it may be disadvantageous to do so.
As provided in the 1940 Act and subject to certain exceptions, we
can issue debt or preferred stock so long as our total assets immediately
after such issuance, less certain ordinary course liabilities, exceed 200%
of the amount of the debt outstanding and exceed 200% of the sum of the
amount of the preferred stock and debt outstanding. Such debt or preferred
stock may be convertible in accordance with SEC guidelines which may permit
the registrant to obtain leverage at attractive rates. A leveraged capital
structure creates certain special risks and potential benefits not
associated with unleveraged funds having similar investment objectives and
policies. Any investment income or gains from the capital represented by
preferred shares or debt which is in excess of the dividends payable
thereon will cause the total return of the common shares to be higher than
would otherwise be the case. Conversely, if the investment performance of
the capital represented by preferred shares or debt fails to cover the
dividends payable thereon, the total return of the common shares would be
less or, in the case of negative returns, would result in higher negative
returns to a greater extent than would otherwise be the case. 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 the common shares
means that dividends on the common shares from earnings may be reduced or
eliminated. Although an inability to pay dividends on the common shares
could conceivably result in the Company ceasing to qualify as a regulated
investment company under the Code, which would be materially adverse to the
holders of the common shares, such inability can be avoided through the use
of mandatory redemption requirements designed to ensure that the Company
maintains the necessary asset coverage.
The class voting rights of preferred shares could make it more
difficult for the Company to take certain actions that may, in the future,
be proposed by the Board and/or the holders of common stock, such as a
merger, exchange of securities, liquidation or alteration of the rights of
a class of the Company's securities if such actions would be adverse to the
preferred shares.
Preferred shares will be issued only if our Board of Directors
determines in light of all relevant circumstances known to the Board that
to do so would be in our best interest and in the best interest of our
common shareholders. The circumstances that the Board will consider before
issuing preferred shares include not only the dividend rate on the
preferred shares in comparison to our historical performance but also such
matters as the terms on which we can call the preferred shares and our
ability to meet the asset coverage tests and other requirements imposed by
the rating agencies for such preferred shares.
The issuance of preferred shares convertible into shares of common
stock might also reduce the net income and net asset value per share of the
common shares upon conversion. Such income dilution would occur if we
could, from the investments made with the proceeds of the preferred shares,
earn an amount per common share issuable upon conversion greater than the
dividend required to be paid on the amount of preferred stock convertible
into one share of common stock. Such net asset value dilution would occur
if preferred shares were converted at a time when the net asset value per
common share was greater than the conversion price.
Investing in small, private companies involves a high degree of risk and is
highly speculative.
There are significant risks inherent in our venture capital
business. We have invested a substantial portion of our assets in privately
held development stage or start-up companies. These privately held
businesses tend to be thinly capitalized, unproven, small companies with
risky technologies that lack management depth and have not attained
profitability or have no history of operations. Because of the speculative
nature and the lack of a public market for these investments, there is
significantly greater risk of loss than is the case with traditional
investment securities. We expect that some of our venture capital
investments will be a complete loss or will be unprofitable and that some
will appear to be likely to become successful but never realize their
potential. We have been risk seeking rather than risk averse in our
approach to venture capital and other investments. Neither our investments
nor an investment in us are intended to constitute a balanced investment
program. Small technology companies in particular are unproven, with
significant science and technology risks as well as commercialization
risks. We have in the past relied, and continue to rely to a large extent,
upon proceeds from sales of investments rather than investment income to
defray a significant portion of our operating expenses. Such sales are
unpredictable and may not occur.
We are dependant 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 management members. We utilize outside consultants to
assist us in due diligence, including our two newest Directors, Dr. Kelly
S. Kirkpatrick and Lori D. Pressman. Our future success depends to a
significant extent on the continued service and coordination of our senior
management team, and particularly the Chairman and Chief Executive Officer.
The departure of any of the executive officers or key employees 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.
Loss of pass-through tax treatment would substantially reduce net assets
and income available for dividends.
We currently qualify as a Regulated Investment Company ("RIC")
under the Internal Revenue Code of 1986, as amended (the "Code") for
pass-through tax treatment, because we meet certain diversification and
distribution requirements under the Code. We would cease to qualify for
pass-through tax treatment if we were unable to comply with these
requirements. Also, we could be subject to a four percent excise tax (and,
in certain cases, corporate level income tax) if we failed to make certain
gain or income distributions. The lack of pass-through tax treatment could
have a material adverse effect on the total return, if any, obtainable from
an investment in the Company. If we fail to qualify as a RIC, we would
become subject to Federal income tax as if we were an ordinary C
Corporation, which tax would result in a corresponding reduction in our net
assets and the amount of income available for distribution to our
stockholders. See "Taxation" for a more complete discussion of these and
other U.S. federal income tax considerations.
Loss of status as a RIC would reduce our net asset value by forcing us to
establish currently unestablished reserves for taxes.
As a RIC, we do not have to pay federal income taxes on our income
that is distributed to our shareholders. Accordingly, we do not establish
reserves for taxes on our unrealized capital gains. If we failed to qualify
for RIC status, we would have to establish such 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
were to retain such net realized capital gains, we would have to establish
appropriate reserves for taxes upon making such a decision. See "Taxation."
Investing in our stock is highly speculative and the investor could lose
some or all of the amount invested.
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 shares of 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 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, small technology, material sciences and other
high technology industries, will also affect our common stock price.
Unfavorable economic conditions could result in financial losses for us as
well as impair our ability to engage in liquidity events.
Most of the companies in which we have made or will make
investments are susceptible to economic slowdowns or recessions. An
economic slowdown, capital markets conditions or credit squeeze may affect
the ability of a company to raise additional capital from venture capital
or other private equity sources or to engage in a liquidity event such as
an initial public offering or merger. These conditions could lead to
financial losses in our portfolio. Unfavorable economic conditions also
could increase our cost of capital.
On September 11, 2001, the World Trade Center in New York City and
the Pentagon near Washington, DC were targets of terrorist attacks. As a
result of these events and other general economic conditions, it was
especially difficult for small companies to sell new products and services
or to raise new capital, and the United States equity markets experienced
declines. For the quarter ended September 30, 2001, the Nasdaq Composite
Index declined 31%.
Our business of making private equity investments and positioning
them for liquidity events also may be adversely affected by current and
future market and economic conditions. Significant changes in the public
equity markets could have an effect on the valuations of private companies
and on the potential for liquidity events involving such companies. This
could adversely affect the amount and timing of gains that may be realized
on our investments.
Investing in our common stock may be inappropriate for the investor's risk
tolerance.
Our investments, in accordance with our investment objective and
principal strategies, result in a far above average amount of risk and
volatility and may well result in loss of principal. Our investments in
portfolio companies are highly speculative and aggressive and, therefore,
an investment in our shares would not be suitable for investors for whom
such risk is inappropriate.
The market for venture capital investments, including small technology
investments, is highly competitive. In addition to finding attractive
investment opportunities, in some cases, our status as a regulated business
development corporation may hinder our ability to participate in investment
opportunities or to protect the value of existing investments, because of
"pay to play" provisions in which preferred protections such as dilution
protection may be forfeited or preferred stock may be converted to common
stock by failure to invest in subsequent rounds of financing.
We face substantial competition in our investing activities from
private venture capital funds, investment affiliates of large industrial,
technology, service and financial companies, small business investment
companies, wealthy individuals and foreign investors. As a result the
sources of funding are many but attractive investment opportunities are too
few. Hence, we face substantial competition in sourcing good investment
opportunities on terms of investment that are commercially attractive.
Further, as a regulated business development company, we are required to
disclose quarterly the name and business description of portfolio companies
and value of any portfolio securities. Most of our competitors are not
subject to such disclosure requirements. Our obligation to disclose such
information could hinder our ability to invest in certain portfolio
companies. Additionally, other regulations, current and future, may make us
less attractive as a potential investor to a given portfolio company than a
private venture capital fund not subject to the same regulations.
We operate in a regulated environment.
We are subject to substantive SEC regulations as a BDC. Securities
and tax laws and regulations governing our activities may change in ways
adverse to our and our shareholders' interests and interpretations of such
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. Business practices may change in ways
that cause the regulations that govern our activities to be more adverse to
our and our shareholders' interests.
We invest in securities that are illiquid and may not be able to dispose of
such securities when it is advantageous to do so.
Most of our investments are or will be equity securities acquired
directly from small companies. Our portfolio of equity securities is and
will usually be 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 such
securities at times when it may be advantageous for us to liquidate such
investments.
We invest in private companies that may complete initial public offerings.
These types of companies can be highly volatile and have uncertain
liquidity.
When companies in which we have invested as private entities
complete initial public offerings, they are by definition unseasoned
issues. Typically, they have relatively small capitalizations. Thus, they
can be expected to be highly volatile and of uncertain liquidity. If they
are perceived as suffering from adverse news or developments and/or the
capital markets are in a negative phase, not only their market prices, but
also their liquidity can be expected to be affected negatively.
Historically, we have also invested in unseasoned publicly traded companies
with similar characteristics and thus with similar exposure to potential
negative volatility and illiquidity. The decimalization of the stock
markets, particularly Nasdaq, may decrease liquidity of stocks in general
and smaller capitalization issues in particular. In addition, the
imposition of decimalization on the stock exchanges, particularly Nasdaq,
may reduce liquidity and increase volatility and riskiness of small, thinly
traded public companies because it may create a disincentive for dealers to
market and make markets in smaller issues.
The inability of our portfolio companies to market successfully their
products would have a negative impact on our investment returns.
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.
Because there is generally no established market in which to value our
investments, our Investment and Valuation Committee's determination of
their values may differ materially from the values that a ready market or
third party would attribute to these investments.
There is typically no public market of equity securities of the
small privately held companies in which we invest. As a result, the
valuation of most of the equity securities in our portfolio is the good
faith estimate of our Board of Directors. In the absence of a readily
ascertainable market value, the estimated value of our portfolio of equity
securities may differ significantly from the values that would be placed on
the portfolio if a ready market for the equity securities existed.
Quarterly results may fluctuate and are not indicative of future quarterly
performance.
Our quarterly operating results could 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 encounter competition in our markets and general
economic 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.
Because we must distribute income, we will continue to need additional
capital to fund our investments and operating expenses.
We will continue to need capital to fund investments and to pay
for operating expenses. Unless we elect to pay a federal income tax and
retain the after-tax income, we must distribute at least 90 percent of its
investment company taxable income to its stockholders to maintain its RIC
status. As a result, such earnings will not be available to fund
investments. If we fail to generate net realized long-term capital gains or
to obtain funds from outside sources, it could have a material adverse
effect on our financial condition and results as well as our ability to
make follow-on and new investments. We do not normally establish reserves
for taxes on unrealized capital gains. In addition, as a BDC, we are
generally required to maintain a ratio of at least 200 percent of total
assets to total borrowings, which may restrict our ability to borrow in
certain circumstances.
FINANCIAL HIGHLIGHTS
The financial statements for the year ended December 31, 2001,
which have been incorporated into this Prospectus by reference described
below, have been so incorporated in reliance upon the report of Arthur
Andersen LLP given on the authority of said firm as experts in accounting
and auditing.
INCORPORATION BY REFERENCE
Our Annual Report for the fiscal year ended December 31, 2001
(File No. 0-11576, filed March 12, 2002) Form 10-K, which either
accompanies this Prospectus or has previously been provided to the person
to whom this Prospectus is being sent, is incorporated herein by reference
with respect to all information other than the information set forth in the
Letter to Shareholders included therein. We will furnish, without charge, a
copy of the Annual Report upon request by writing or calling the address or
telephone number listed below.
THE OFFER AND PLAN OF DISTRIBUTION
TERMS OF THE OFFER
We are issuing to shareholders on the Record Date ("Record Date
Shareholders") Rights to subscribe for the shares of our common stock. Each
Record Date Shareholder is being issued one transferable Right for every
three shares of common stock owned on the Record Date. The Rights entitle
the holder to acquire at the Subscription Price one share of common stock
for each Right held. Fractional Rights will not be issued. Accordingly, the
number of Rights issued to a shareholder on the Record Date will be rounded
up to the next whole Right. In the case of shares of common stock held of
record by Cede, as nominee for DTC, or any other depository or nominee, the
number of Rights issued to Cede or such other depository or nominee will be
adjusted to permit rounding up (to the next whole Right) of the Rights to
be received by beneficial owners for whom it is the holder of record only
if Cede or such other depository or nominee provides to us on or before the
close of business on June [ ], 2002 written representation of the number of
Rights required for such rounding. Rights may be exercised at any time
during the Subscription Period. See "Expiration of the Offer." The Right to
acquire one additional Share for each Right held during the Subscription
Period at the Subscription Price is hereinafter referred to as the "Primary
Subscription."
In addition, a Record Date Shareholder who fully exercises all
initially issued Rights is entitled to subscribe for shares that were not
otherwise subscribed for by others on Primary Subscription (the
"Over-Subscription Privilege"). For purposes of determining the maximum
number of shares a Record Date Shareholder may acquire pursuant to the
Offer, broker-dealers whose shares are held of record by Cede, as nominee
for DTC, or by any other depository or nominee, will be deemed to be the
holders of the Rights that are issued to Cede or such other depository or
nominee on their behalf. Shares acquired pursuant to the Over-Subscription
Privilege are subject to allotment, which is more fully discussed below
under "Over-Subscription Privilege."
Rights will be evidenced by Subscription Certificates. The number
of Rights issued to each holder will be stated on the Subscription
Certificates delivered to the holder. The method by which Rights may be
exercised and shares paid for is set forth below in "Method of Exercise of
Rights" and "Payment for Shares." A Rights holder will have no right to
rescind a purchase after the Subscription Agent has received payment. See
"Payment for Shares" below. Shares issued pursuant to an exercise of Rights
will be listed on the NNM.
The Rights are transferable until the Expiration Date and will be
admitted for trading on the NNM. Assuming a market exists for the Rights,
the Rights may be purchased and sold through usual brokerage channels and
sold through the Subscription Agent. Although we cannot give any assurance
that a market for the Rights will develop, trading in the Rights on the NNM
will begin three Business Days before the Record Date and may be conducted
until the close of trading on the last Exchange trading day prior to the
Expiration Date. Trading of the Rights on the NNM will be conducted on a
when-issued basis until and including the date on which the Subscription
Certificates are mailed to Record Date Shareholders and thereafter will be
conducted on a regular way basis until and including the last NNM trading
day prior to the Expiration Date. The method by which Rights may be
transferred is set forth below in "Method of Transferring Rights." The
Common Stock will begin trading ex-Rights two Business Days prior to the
Record Date. For purposes of this Prospectus, a "Business Day" shall mean
any day on which trading is conducted on the NNM.
Nominees who hold shares of our common stock for the account of
others, such as banks, brokers, trustees or depositories for securities,
should notify the respective beneficial owners of such shares as soon as
possible to ascertain such beneficial owners' intentions and to obtain
instructions with respect to the Rights. If the beneficial owner so
instructs, the nominee should complete the Subscription Certificate and
submit it to the Subscription Agent with proper payment. In addition,
beneficial owners of our common stock or Rights held through such a nominee
should contact the nominee and request the nominee to effect transactions
in accordance with the beneficial owner's instructions.
OVER-SUBSCRIPTION PRIVILEGE
If all of the Rights initially issued are not exercised, any
shares for which subscriptions have not been received will be offered, by
means of the Over-Subscription Privilege, to Record Date Shareholders who
have exercised all the Rights initially issued to them and who wish to
acquire more than the number of shares for which the Rights issued to them
are exercisable. Record Date Shareholders who exercise all the Rights
initially issued to them will have the opportunity to indicate on the
Subscription Certificate how many shares they are willing to acquire
pursuant to the Over-Subscription Privilege. If sufficient shares remain
after the Primary Subscriptions have been exercised, all over-subscriptions
will be honored in full. If sufficient shares are not available to honor
all over-subscriptions, the available shares will be allocated among those
who over-subscribe based on the number of Rights originally issued to them.
The percentage of remaining shares each over- subscribing shareholder may
acquire will be rounded down to result in delivery of whole shares. The
allocation process may involve a series of allocations in order to assure
that the total number of shares available for over-subscriptions is
distributed on a pro rata basis.
The method by which shares will be distributed and allocated
pursuant to the Over- Subscription Privilege is as follows. Shares will be
available for purchase pursuant to the Over-Subscription Privilege only to
the extent that the maximum number of shares is not subscribed for through
the exercise of the Primary Subscription by the Expiration Date. If the
shares so available ("Excess Shares") are not sufficient to satisfy all
subscriptions pursuant to the Over-Subscription Privilege, the Excess
Shares will be allocated pro rata (subject to the elimination of fractional
shares) among those holders of Rights exercising the Over-Subscription
Privilege, not to the number of shares requested pursuant to the Over-
Subscription Privilege, but to the number of shares held on the Record
Date; provided, however, that if this pro rata allocation results in any
holder being allocated a greater number of Excess Shares than the holder
subscribed for pursuant to the exercise of such holder's Over-Subscription
Privilege, then such holder will be allocated only such number of Excess
Shares as such holder subscribed for and the remaining Excess Shares will
be allocated among all other holders exercising Over-Subscription
Privileges. The formula to be used in allocating the Excess Shares is as
follows:
Holder's Record Date Position x Excess Shares Remaining
------------------------------
Total Record Date Position of
All Over-Subscribers
We will not offer or sell any shares which are not subscribed for
under the Primary Subscription or the Over-Subscription Privilege.
THE SUBSCRIPTION PRICE
The Subscription Price for the Shares to be issued pursuant to the
Rights will be $2.25 per share representing a discount of $[ ] ([ ]%) to
our last reported net asset value of $[ ].
We announced the Offer on June [ ], 2002. The net asset value per
share of our common stock at the close of business on March 31, 2002 (the
most recent data as of which we calculated our net asset value) was $[ ].
The last reported sale price of a share of our common stock on the NNM on
June [ ], 2002 (the last date prior to the shares trading ex- Rights) was
$[ ], representing a [ ]% premium in relation to the net asset value per
share of common stock at the close of business on such date.
SALES BY SUBSCRIPTION AGENT
Holders of Rights who do not wish to exercise any or all of their
Rights may instruct the Subscription Agent to sell any unexercised Rights.
The Subscription Certificates representing the Rights to be sold by the
Subscription Agent must be received on or before June __, 2002. Upon the
timely receipt of appropriate instructions to sell Rights, the Subscription
Agent will use its best efforts to complete the sale and will remit the
proceeds of sale, net of commissions, to the holders. If the Rights can be
sold, sales of the Rights for any particular holder will be deemed to have
been effected at the weighted average price received by the Subscription
Agent for all holders on the day such Rights are sold. The selling Rights
holder will pay all brokerage commissions incurred by the Subscription
Agent. These sales may be effected by the Subscription Agent through [ ], a
registered broker-dealer affiliated with the Subscription Agent, at a
commission or markup of up to $[ ] per Right, provided that, if the
Subscription Agent is able to negotiate a lower brokerage commission or
markup with an independent broker-dealer, the Subscription Agent will
execute these sales through that other broker-dealer. [ ] may also act on
behalf of its clients to purchase or sell Rights in the open market and be
compensated therefor. The Subscription Agent will automatically attempt to
sell any unexercised Rights that remain unclaimed as a result of
Subscription Certificates being returned by the postal authorities as
undeliverable as of the fourth Business Day prior to the Expiration Date.
These sales will be made net of commissions on behalf of the non-claiming
shareholders. Proceeds from those sales will be held by The Bank of New
York, in its capacity as the Company's transfer agent, for the account of
the non-claiming shareholder until the proceeds are either claimed or
escheat. There can be no assurance that the Subscription Agent will be able
to complete the sale of any of these Rights and neither we nor the
Subscription Agent have guaranteed any minimum sales price for the Rights.
All of these Rights will be sold at the market price, if any, on the NNM or
through an unaffiliated market maker if no market exists on the NNM.
METHOD OF TRANSFERRING RIGHTS
The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer
in accordance with the accompanying instructions. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights)
may be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register
the portion of the Rights evidenced thereby in the name of the transferee
(and to issue a new Subscription Certificate to the transferee evidencing
the transferred Rights). In this event, a new Subscription Certificate
evidencing the balance of the Rights will be issued to the Rights holder
or, if the Rights holder so instructs, to an additional transferee.
Holders wishing to transfer all or a portion of their Rights (but
not fractional Rights) should allow at least three Business Days prior to
the Expiration Date for (i) the transfer instructions to be received and
processed by the Subscription Agent, (ii) a new Subscription Certificate to
be issued and transmitted to the transferee or transferees with respect to
transferred Rights, and to the transferor with respect to retained rights,
if any, and (iii) the Rights evidenced by the new Subscription Certificates
to be exercised or sold by the recipients thereof. Neither the Company nor
the Subscription Agent shall have any liability to a transferee or
transferor of Rights if Subscription Certificates are not received in time
for exercise or sale prior to the Expiration Date.
Except for the fees charged by the Subscription Agent for
facilitating subscriptions (which will be paid by us as described below),
all commissions, fees and other expenses (including brokerage commissions
and transfer taxes) incurred in connection with the purchase, sale or
exercise of Rights will be for the account of the transferor of the Rights,
and none of these commissions, fees or expenses will be paid by us or by
the Subscription Agent.
We anticipate that the Rights will be eligible for transfer
through, and that the exercise of the Primary Subscription and
Over-Subscription may be effected through, the facilities of DTC (Rights
exercised through DTC are referred to as "DTC Exercised Rights").
EXPIRATION OF THE OFFER
The Offer will expire on the Expiration Date unless we extend the
Expiration Date. Rights will expire on the Expiration Date and thereafter
may not be exercised.
SUBSCRIPTION AGENT
The Subscription Agent is [ ], Att: [ ]. The
Subscription Agent will receive from us an amount estimated to be $[ ]
comprised of the fee for its services and the reimbursement for certain
expenses related to the Offer. INQUIRIES BY ALL HOLDERS OF RIGHTS SHOULD BE
DIRECTED TO [ (TELEPHONE (800)
OR ( ) )]; HOLDERS MAY ALSO CONSULT THEIR BROKERS OR
NOMINEES.
METHOD OF EXERCISE OF RIGHTS
Rights may be exercised by filling in and signing the reverse side
of the Subscription Certificate and mailing it in the envelope provided, or
otherwise delivering the completed and signed Subscription Certificate to
the Subscription Agent, together with payment for the Shares as described
below under "Payment for Shares." Rights may also be exercised through a
Rights holder's broker, who may charge the Rights holder a servicing fee in
connection with such exercise.
Completed Subscription Certificates must be received by the
Subscription Agent prior to 5:00 p.m., New York time, on the Expiration
Date (unless payment is effected by means of a notice of guaranteed
delivery as described below under "Payment for Shares"). The Subscription
Certificate and payment should be delivered to [ ] at the following
address:
If By Mail: [ ]
[ ]
[ ]
[ ]
If By Hand: [ ]
[ ]
[ ]
[ ]
If By Overnight Courier: [ ]
[ ]
[ ]
[ ]
PAYMENT FOR SHARES
Holders of Rights who acquire shares on Primary Subscription or
pursuant to the Over-Subscription Privilege may choose between the
following methods of payment:
(1) A subscription will be accepted by the Subscription Agent if,
prior to 5:00 p.m., New York time, on the Expiration Date, the
Subscription Agent has received a notice of guaranteed delivery by
telegram or otherwise from a bank, a trust company, or a NNM
member, guaranteeing delivery of (i) payment of the full
Subscription Price for the shares subscribed for on Primary
Subscription and any additional shares subscribed for pursuant to
the Over-Subscription Privilege and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not
honor a notice of guaranteed delivery if a properly completed and
executed Subscription Certificate and full payment is not received
by the Subscription Agent by the close of business on the third
Business Day after the Expiration Date. The notice of guaranteed
delivery may be delivered to the Subscription Agent in the same
manner as Subscription Certificates at the addresses set forth
above, or may be transmitted to the Subscription Agent by
facsimile transmission (telecopy number [ ];
telephone number to confirm receipt [ ].
(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of a check for the
shares subscribed for on Primary Subscription and additional
shares subscribed for pursuant to the Over-Subscription Privilege
to the Subscription Agent based on the Subscription Price of $2.25
per share. To be accepted, the payment, together with the executed
Subscription Certificate, must be received by the Subscription
Agent at the addresses noted above prior to 5:00 p.m., New York
time, on the Expiration Date. The Subscription Agent will deposit
all stock purchase checks received by it prior to the final due
date into a segregated interest-bearing account pending proration
and distribution of shares. The Subscription Agent will not accept
cash as a means of payment for shares. EXCEPT AS OTHERWISE SET
FORTH BELOW, A PAYMENT PURSUANT TO THIS METHOD MUST BE IN UNITED
STATES DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN
THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO THE HARRIS &
HARRIS GROUP, INC., AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION
CERTIFICATE TO BE ACCEPTED. If the aggregate Subscription Price
paid by a Record Date Shareholder is insufficient to purchase the
number of shares of Common Stock that the holder indicates are
being subscribed for, or if a Record Date Shareholder does not
specify the number of shares of Common Stock to be purchased, then
the Record Date Shareholder will be deemed to have exercised
first, the Primary Subscription Rights (if not already fully
exercised) and second, the Over-Subscription Privilege to the full
extent of the payment tendered. If the aggregate Subscription
Price paid by a Record Date Shareholder is greater than the shares
he has indicated an intention to subscribe, then the Record Date
Shareholder will be deemed to have exercised first, the Primary
Subscription Rights (if not already fully subscribed) and second,
the Over- Subscription Privilege to the full extent of the excess
payment tendered.
Within ten Business Days following the Expiration Date (the
"Confirmation Date"), a confirmation will be sent by the Subscription Agent
to each holder of Rights (or, if our shares are held by Cede or any other
depository or nominee, to Cede or such other depository or nominee),
showing (i) the number of shares acquired pursuant to the Primary
Subscription, (ii) the number of shares, if any, acquired pursuant to the
Over-Subscription Privilege, (iii) the per share and total purchase price
for the shares and (iv) any excess to be refunded by the Company to such
holder as a result of payment for shares pursuant to the Over-Subscription
Privilege which the holder is not acquiring. Any payment required from a
holder of Rights must be received by the Subscription Agent on the
Expiration Date, or if the Rights holder has elected to make payment by
means of a notice of guaranteed delivery, on the third Business Day after
the Expiration Date. Any excess payment to be refunded by the Company to a
holder of Rights, or to be paid to a holder of Rights as a result of sales
of Rights on his behalf by the Subscription Agent or exercises by Record
Date Shareholders of their Over-Subscription Privileges, and all interest
accrued on the holder's excess payment will be mailed by the Subscription
Agent to the holder within fifteen Business Days after the Expiration Date.
Interest on the excess payment will accrue through the date that is one
Business Day prior to the mail date of the reimbursement check. All
payments by a holder of Rights must be in United States dollars by money
order or check drawn on a bank located in the continental United States of
America and payable to Harris & Harris Group, Inc.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the shares purchased are subject to collection
of checks and actual payment pursuant to any notice of guaranteed delivery.
A Rights holder will have no right to rescind a purchase after the
Subscription Agent has received payment either by means of a notice of
guaranteed delivery or a check.
If a holder of Rights who acquires shares pursuant to the Primary
Subscription or the Over-Subscription Privilege does not make payment of
any amounts due, we reserve the right to take any or all of the following
actions: (i) find other purchasers for such subscribed-for and unpaid-for
shares; (ii) apply any payment actually received by it toward the purchase
of the greatest whole number of shares which could be acquired by such
holder upon exercise of the Primary Subscription or the Over-Subscription
Privilege; (iii) sell all or a portion of the shares purchased by the
holder, in the open market, and apply the proceeds to the amounts owed; and
(iv) exercise any and all other rights or remedies to which it may be
entitled, including, without limitation, the right to set off against
payments actually received by it with respect to such subscribed shares and
to enforce the relevant guaranty of payment.
Holders who hold shares of common stock for the account of others,
such as brokers, trustees or depositaries for securities, should notify the
respective beneficial owners of the shares as soon as possible to ascertain
the beneficial owners' intentions and to obtain instructions with respect
to the Rights. If the beneficial owner so instructs, the record holder of
the Rights should complete Subscription Certificates and submit them to the
Subscription Agent with the proper payment. In addition, beneficial owners
of common stock or Rights held through such a holder should contact the
holder and request the holder to effect transactions in accordance with the
beneficial owner's instructions.
The instructions accompanying the Subscription Certificates should
be read carefully and followed in detail. DO NOT SEND SUBSCRIPTION
CERTIFICATES TO THE COMPANY.
The method of delivery of Subscription Certificates and payment of
the Subscription Price to the Subscription Agent will be at the election
and risk of the Rights holders, but if sent by mail it is recommended that
the Subscription Certificates and payments be sent by registered mail,
properly insured, with return receipt requested, and that a sufficient
number of days be allowed to ensure delivery to the Subscription Agent and
clearance of payment prior to 5:00 p.m., New York City time, on the
Expiration Date. Because uncertified personal checks may take at least five
business days to clear, you are strongly urged to pay, or arrange for
payment, by means of a certified or cashier's check or money order.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by us and our
determination will be final and binding. In our sole discretion we may
waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured
within such time as we determine in our sole discretion. Neither we nor the
Subscription Agent will be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
DELIVERY OF STOCK CERTIFICATES
Certificates representing shares purchased pursuant to the Primary
Subscription will be delivered to subscribers as soon as practicable after
the corresponding Rights have been validly exercised and full payment for
the shares has been received and cleared. Certificates representing shares
purchased pursuant to the Over-Subscription Privilege will be delivered to
subscribers as soon as practicable after the Expiration Date and after all
allocations have been effected.
FEDERAL INCOME TAX CONSEQUENCES TO SHAREHOLDERS
For United States federal income tax purposes, neither the receipt
nor the exercise of the Rights will result in taxable income to you.
Moreover, you will not realize a loss if you do not exercise the Rights.
The holding period of a Right received by you includes the holding period
of the Common Shares with regard to which the Right is issued. The holding
period for a share acquired upon exercise of a Right begins with the date
of exercise.
If a Right is sold, a gain or loss will be realized by the
shareholder in an amount equal to the difference between the basis of the
Right sold (as described below) and the amount realized on its disposition.
The basis for determining gain or loss upon the sale of a share acquired
upon the exercise of a Right will be equal to the sum of (i) the
subscription price per share, (ii) any servicing fee charged to you by your
broker, bank or trust company, and (iii) the basis, if any, in the Rights
that you exercised (as described below).
A gain or loss recognized upon a sale of a share acquired upon the
exercise of a Right will be a capital gain or loss assuming the share is
held as a capital asset at the time of sale. This gain or loss will be a
long-term capital gain or loss if the share has been held at the time of
sale for more than one year.
As noted above, your basis in shares issued under the Offer
includes your basis in the Rights underlying those shares. If the aggregate
fair market value of the Rights at the time they are distributed is less
than 15% of the aggregate fair market value of the Company's Common Stock
at such time, the basis of the Rights issued to you will be zero unless you
elect to allocate your basis of previously owned shares to the Rights
issued to you in the Offer. This allocation is based upon the relative fair
market value of such shares and the Rights as of the date of distribution
of the Rights. Thus, if you make such an election and the Rights are later
exercised, the basis in the shares you originally owned will be reduced by
an amount equal to the basis allocated to the Rights. This election must be
made in a statement attached to your federal income tax return for the year
in which the Rights are distributed. If the Rights expire without exercise,
you will not be permitted to allocate a portion of your basis in the shares
to the unexercised Rights and, therefore, you will realize no loss.
The foregoing is a general summary of the material United States
federal income tax consequences of the receipt, exercise and sale of
Rights. The discussion is based upon applicable provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), U.S. Treasury regulations
thereunder and other authorities currently in effect, and does not cover
state, local or foreign taxes. The Code and Treasury regulations thereunder
are subject to change by legislative or administrative action, possibly
with retroactive effect. You should consult your tax advisors regarding
specific questions as to federal, state, local or foreign taxes. You should
also review the discussion of certain tax considerations affecting yourself
and the Company set forth under "Taxation."
EMPLOYEE PLAN CONSIDERATIONS
Shareholders that are employee benefit plans subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
including corporate savings and 401(k) plans, Keogh Plans of self-employed
individuals and Individual Retirement Accounts ("IRA") (each a "Benefit
Plan" and collectively, "Benefit Plans"), should be aware that additional
contributions of cash in order to exercise Rights may be treated as Benefit
Plan contributions and, when taken together with contributions previously
made, may subject a Benefit Plan to excise taxes for excess or
nondeductible contributions. In the case of Benefit Plans qualified under
Section 401(a) of the Code, additional cash contributions could cause the
maximum contribution limitations of Section 415 of the Code or other
qualification rules to be violated. Benefit Plans contemplating making
additional cash contributions to exercise Rights should consult with their
counsel prior to making such contributions.
Benefit Plans and other tax exempt entities, including
governmental plans, should also be aware that if they borrow in order to
finance their exercise of Rights, they may become subject to the tax on
unrelated business taxable income ("UBTI") under Section 511 of the Code.
If any portion of an IRA is used as security for a loan, the portion so
used is also treated as distributed to the IRA depositor.
ERISA contains prudence and diversification requirements and ERISA
and the Code contain prohibited transaction rules that may impact the
exercise of Rights. Among the prohibited transaction exemptions issued by
the Department of Labor that may exempt a Benefit Plan's exercise of Rights
are Prohibited Transaction Exemption 84-24 (governing purchases of shares
in investment companies) and Prohibited Transaction Exemption 75-1
(covering sales of securities).
Due to the complexity of these rules and the penalties for
noncompliance, Benefit Plans should consult with their counsel regarding
the consequences of their exercise of Rights under ERISA and the Code.
USE OF PROCEEDS
The gross proceeds of the Offer, assuming all shares offered
hereby are sold, are estimated to be approximately $6,648,171.75, before
deducting expenses payable by us estimated at approximately $[ ]. We
anticipate that investment of the proceeds will be invested as promptly as
investment opportunities are identified, in particular in small
technologies such as nanotechnology, microsystems and
microelectromechanical systems (MEMS). We anticipate investing, either
directly or through a SBIC, the proceeds within the next twelve months.
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES
We invest in privately held development stage or start-up
businesses. These businesses tend to be undercapitalized, unproven small
companies based on risky technologies that lack management depth and have
not attained profitability or have no history of operations. In connection
with our investments in these types of companies, we provide managerial
assistance to our private investees which, in our opinion, have significant
potential for growth. In addition, we may own 100 percent of the securities
of such a start-up investment for a period of time and may control such
company for a substantial period.
The following are brief descriptions of each portfolio company in
which we are invested. With the exception of PHZ Capital Partners, L.P.
("PHZ") and Alpha Simplex Group, LLC, ("Alpha"), which have been profitable
and have made cash distributions to their partners, including us, for
several years, each of the following portfolio companies is in their
developmental stage or is a start-up business. Except for PHZ, Alpha and
Exponential Business Development Company, all of the companies may require
additional funding which 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 currently difficult to
obtain. Each company, including PHZ and Alpha, is dependant upon a single
or small number of customers and/or key operating personnel. All of the
following companies rely heavily upon the technology associated with their
respective business. Therefore, each company places great importance on any
relevant patents, trademarks, licenses, algorithms, trade secrets,
franchises or concessions held by them. Lastly, each company is
particularly vulnerable to general economic and capital markets conditions
and to changes in government regulation, interest rates or technology.
Alpha Simplex Group, LLC, ("Alpha") located at One Cambridge
Center, 9th Floor, Cambridge, MA, 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, Inc. Professor at the MIT Sloan School. Charles E.
Harris has agreed to serve as an advisor to the company. As of
December 31, 2001, we held 50,000 units (representing 0.5% of the
total units outstanding) of Alpha, at no cost, subject to vesting
at the rate of 2,500 units per quarter. As of December 31, 2001,
27,500 units were fully vested at a valuation of $784. The
Managing Member of the company is Dr. Andrew W. Lo.
Experion Systems, Inc. ("Experion"), located at 300 Concord Road,
Billerica, MA, 01821, develops and sells an e-business software
package known as Guided Selling Systems (GSS) for credit unions to
sell mortgages to their members. Experion is a non-controlled
affiliated company of Harris & Harris Group, Inc. As of December
31, 2001, we held 187,500 shares of Series A Convertible Preferred
Stock (representing 24.29% of the total shares of Series A
Convertible Preferred Stock outstanding) and 10,000 shares of
Series B Convertible Preferred Stock (representing 5.20% of the
total shares of Series B Convertible Preferred Stock outstanding)
of Experion. On January 29, 2002, we purchased an additional
12,500 shares of Series B Convertible Preferred Stock (together,
with the original 187,500 shares, representing a total of 10% of
the total shares of Series B Convertible Preferred Stock
outstanding) of Experion. As of the date above, the total amount
of shares of Experion held by us were valued at $1,200,000.
Charles E. Harris serves as a director of the company. Ross Blair
is the chief executive officer of the company, and Dr. Glen Utban,
the [ ] Professor at the MIT Sloan School, is the chairman of the
company.
Exponential Business Development Company ("EBDC"), located at 216
Walton Street, Syracuse, NY, 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 December 31, 2001, we held one Limited
Partnership Unit (representing 0.87% of the total Limited
Partnership Units outstanding) of EBDC. As of the date above, the
Limited Partnership Unit of EBDC held by us was valued at $25,000.
The administrative partner of the company is Dirk E. Sonneborn.
Informio, Inc. ("Informio"), located at 430 Bedford Street,
Lexington, MA, 02420, is a wireless web infrastructure service
firm. Informio technology permits web audio content to be
identified, qualified, organized and formatted for access and
navigation from a wireless or wireline telephone. This permits web
content to be presented to the user in voice and audio format
rather than forcing the user to read the web content. As of
December 31, 2001, we held 229,364 shares of Series A Convertible
Preferred Stock (representing 1.18% of the total Series A
Convertible Preferred Stock outstanding) of Informio. As of the
date above, the Series A Convertible Preferred Stock of Informio
held by us was valued at $151,380. Informio plans to liquidate.
The chief executive officer of the company is Alex Laats.
Kriton Medical, Inc. ("Kriton"), located at 3351 Executive Way,
Miramar, FL, 33025, is a privately held company engaged in
research and development of implantable rotary blood pumps for
patients who suffer from congestive heart failure. As of December
31, 2001, we held 476,191 shares of Series B Convertible Preferred
Stock (representing 7.90% of the total Series B Convertible
Preferred Stock outstanding) of Kriton. As of the date above, the
Series B Convertible Preferred Stock of Kriton held by us was
valued at $1,000,001. The chief executive officer of the company
is Dr. Robert B. Fine.
Nantero, Inc. ("Nantero"), a privately held company spun off from
Harvard University, located at 25-D Olympia Avenue, Woburn, MA,
01801, intends to be a fabless semiconductor company, focusing on
the development of non-volatile random access memory (NRAM) based
on carbon nanotubes. As of December 31, 2001, we held 345,000
shares of Series A Preferred Stock (representing 8.16% of the
total Series A Preferred Stock outstanding) of Nantero. As of the
date above, the Series A Preferred Stock of Nantero held by us was
valued at $489,999. The chief executive officer of the company is
Greg Schmergel.
NeuroMetrix, Inc. ("NeuroMetrix"), a privately held company spun
off from MIT, located at 62 Fourth Avenue, Waltham, MA, 02451,
develops and sells medical diagnostic products based on patented
intellectual property related to developing inexpensive, portable
instruments which 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 first product tests for and monitors carpel tunnel
syndrome. The company's recently announced second product tests
lower back pain. NeuroMetrix is a non-controlled affiliated
company of Harris & Harris Group, Inc. As of December 31, 2001, we
held 875,000 shares of Series A Convertible Preferred Stock
(representing 100% of the total Series A Convertible Preferred
Stock outstanding), 625,000 shares of Series B Convertible
Preferred Stock (representing 100% of the total Series B
Convertible Preferred Stock outstanding), 1,148,100 shares of
Series C-2 Convertible Preferred Stock (representing 28.72% of the
total Series C Convertible Preferred Stock outstanding) and
266,665 shares of Series E Convertible Preferred Stock
(representing 6.0% of the total Series E Convertible Preferred
Stock outstanding) of NeuroMetrix. As of the date above, the total
amount of shares of NeuroMetrix held by us were valued at
$6,708,225. Charles E. Harris serves as a director of the company.
The chief executive officer of the company is Dr. Shai N. Gozani.
PHZ Capital Partners L.P. ("PHZ"), located at 321 Commonwealth
Road, Wayland, MA, 01778, is a non-registered investment advisor
which manages third-party assets through private limited
partnerships investing primarily in global financial futures,
long/short equities and interbank FX. Charles E. Harris serves as
a director for each of PHZ Global Fund Ltd., PHZ Long/Short Equity
Fund (Cayman) Ltd. and PHZ Long/Short Trading Ltd. PHZ is a
non-controlled affiliated company of Harris & Harris Group, Inc.
As of December 31, 2001, we held the Sole Limited Partnership
interest (representing 100% of the Limited Partnership interests
outstanding) of Harris Partners I, L.P., which owns a Limited
Partnership interest (representing 20% of the Limited Partnership
interests outstanding) in PHZ. As of the date above, the Limited
Partnership interest of Harris Partners I, L.P. held by us was
valued at $2,382,132, and the Limited Partnership Interest of PHZ
held by Harris & Harris Enterprises, Inc. was valued at $538,870.
The Managing Partner of the company is Dr. James M. Hutchinson.
Questech Corporation ("Questech"), located at 92 Park Street,
Rutland, VT, 05701, manufactures and sells custom tile lines and
trim products, with revenue generated primarily from stock
products. Questech is a non-controlled affiliated company of
Harris & Harris Group, Inc. As of December 31, 2001, we held
646,954 shares of Common Stock (representing 8.54% of the total
Common Stock outstanding) of Questech, as well as warrants to
purchase 1,965 shares of Common Stock of the company at $5.00 per
share and 1,250 shares of Common Stock of the company at $1.50 per
share. As of the date above, the Common Stock of Questech held by
us was valued at $724,588. Mel P. Melsheimer serves as a director
of the company. The chief executive officer of the company is
Barry J. Culkin.
Schwoo, Inc. ("Schwoo"), located at 2100 Wharton Street, Suite
500, Pittsburgh, PA, 15203, was developing a software-based
Automated Security Management System to monitor for, detect and
respond to security attacks or misuse in real time, learning from
its experience and predicting new attacks. Schwoo was a non-
controlled affiliated company of Harris & Harris Group, Inc. HHGP
had advanced convertible bridge loans in the amount of $360,250 to
the company. The bridge financing could have been converted at our
option into Series B Convertible Preferred Stock of Schwoo or, if
outstanding upon consummation of a VC led round of financing, into
Series C Convertible Preferred Stock of Schwoo. As of December 31,
2001, we held 2,306,194 shares of Series B Convertible Preferred
Stock (representing 46.19% of the total Series B Convertible
Preferred Stock outstanding) of Schwoo, as well as total Bridge
Loans, Demand Loans, accrued interest and warrants convertible
into 2,003,118 shares of Series B Convertible Preferred Stock at
$0.3853 per share. As of the date above, the convertible bridge
loans and the Series B Convertible Preferred Stock of Schwoo held
by us was valued at $0. Schwoo, which filed for Chapter 7
bankruptcy in February of 2002, is being liquidated. The chief
executive officer of the company was Dana F. Emmott.
RECENT DEVELOPMENTS
In the first quarter of 2002, we have invested in the following
companies:
NanoOpto Corporation (NanoOpto), a privately held company spun off
from Princeton University, located at 1600 Cottontail Lane,
Somerset, NJ, 08873, plans to be the first company to develop and
manufacture innovative, high performance, integrated optical
communications sub-components in a chip. NanoOpto plans to apply
revolutionary technologies to overcome roadblocks in market demand
for optical networking by delivering increased network and
architecture flexibility, and lower overall costs based on
patented technology. As of March 31, 2002, we held 267,857 shares
of Series A-1 Convertible Preferred Stock (representing 7.81% of
the total Series A-1 Convertible Preferred Stock outstanding) of
NanoOpto. As of the date above, the Series A-1 Convertible
Preferred Stock of NanoOpto held by us was valued at $625,000. The
chief executive officer of the company is Barry J. Weinbaum.
Nanopharma Corp. ("Nanopharma"), located at 191 Commonwealth
Avenue, Boston, MA, 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 will also pursue an aggressive
out-licensing program for its platform technologies. As of March
31, 2002, 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,
the Series A Convertible Preferred Stock of Nanopharma held by us
was valued at $700,000. Charles E. Harris is a director of the
company. The chief executive officer of the company is Michael
Tarnow.
NEO Photonics Corporation ("NEO"), located at 49040 Milmont Drive,
Fremont, CA, 94538, develops and manufactures planar optical
devices and components for leading optical component manufacturers
using its patented nanomaterials desposition technology. The
company is developing functional component arrays to offer
integrated optical "systems on a chip" to leading component
vendors. As of March 31, 2002, we held 1,478,197 shares of Series
D Convertible Preferred Stock (representing 4.27% of the total
Series D Convertible Preferred Stock outstanding) of NEO. As of
the date above, the total amount of shares of NEO held by us was
valued at $1,000,000. The chief executive officer of the company
is Timothy S. Jenks.
BUSINESS
GENERAL
We are a venture capital investment company, operating as a
Business Development Company under the 1940 Act. Our investment objective
is long-term growth through capital appreciation rather than current income
from our investments. We have invested a substantial portion of our assets
in privately held start-up companies and in the development of new
technologies in a broad range of industry segments. These privately held
businesses generally tend to be thinly capitalized, unproven small
companies based on risky technologies that lack management depth and have
as yet, not attained profitability. Recently we decided to focus our new
business activities exclusively on small technology, including but not
limited to nanotechnology, microsystems and microelectromechanical systems
(MEMS) technology. As a venture capital company, we invest in and provide
managerial assistance to our portfolio companies which, in our opinion,
have significant potential for growth. We are managed by our Board of
Directors and officers and have no investment advisor.
Neither our investments, nor an investment in us, are intended to
constitute a balanced investment program. We expect to be risk seeking
rather than risk averse in our investment approach. To such end, we reserve
the fullest possible freedom of action, subject to our certificate of
incorporation, applicable law and regulations, and policy statements
contained herein. There can be no assurance that our investment objective
will be achieved.
We expect to invest a substantial or major portion of our assets
in securities that do not pay interest or dividends and that are subject to
legal or contractual restrictions on resale that may adversely affect the
liquidity and marketability of such securities.
We expect to make speculative investments with limited
marketability and a greater risk of investment loss than less speculative
issues. Although we recently decided to focus our new investments in small
technology, such technology is enabling technology applicable to a wide
range of fields and businesses, and we do not seek to invest in any
particular industries or categories of investments. Our securities
investments may consist of private, public or governmental issuers of any
type. Subject to RIC diversification requirements, we may commit all of our
assets to only a few investments.
Achievement of our investment objectives is basically dependent
upon the judgment of our management. Charles E. Harris, Chairman and Chief
Executive Officer of the Company, and a "control" person as defined in the
1940 Act, is primarily responsible, and Mel P. Melsheimer, President and
Chief Operating Officer, is secondarily responsible, for making or
supervising all investment decisions of the Company under the direction of
the Company's Board of Directors. There can be no assurance that a suitable
replacement could be found for Mr. Harris in the event of his death,
resignation, retirement or inability to act on behalf of the Company.
Subject to continuing to meet the tests for being a BDC, there are
no limitations on the types of securities or other assets 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.
o Venture capital investments, whether in corporate, partnership or
other form, including development stage or start-up entities.
o Intellectual property or patents or research and development in
technology or product development that may lead to patents or
other marketable technology.
o Debt obligations of all types having varying terms with respect to
security or credit support, subordination, purchase price,
interest payments and maturity.
o Foreign securities.
o Miscellaneous investments.
The following is a brief description of the types of assets which
we may invest in, the investment strategies we may utilize and the
attendant risks associated with our investments and strategies:
EQUITY, EQUITY-RELATED SECURITIES AND DEBT WITH EQUITY FEATURES
We may invest in equity, equity-related securities and debt with
equity features ("Equity Securities"). Equity Securities include common
stock, preferred stock, debt instruments convertible into common or
preferred stock, limited partnership interests, other beneficial ownership
interests, and warrants, options or other rights to acquire any of the
foregoing.
Investments may be made in companies with operating histories that
are unprofitable or marginally profitable, that have negative net worth or
that are involved in bankruptcy or reorganization proceedings. Such
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 the
Company invests in these securities, it incurs the risk that the option
feature will expire worthless, thereby either eliminating or diminishing
the value of the Company's 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 such registration, and therefore the
opportunities for sale are more limited than in the case of marketable
securities, although such investments may be purchased at more advantageous
prices and may offer attractive investment opportunities. Even if we
complete 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 its investments more
marketable, a considerable amount of time may elapse between a decision to
sell or register such securities for sale and the time when we are able to
sell such securities, hence 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.
These businesses tend to be undercapitalized, unproven small companies that
lack management depth and have not attained profitability or have no
history of operations. Small technology companies have science and
engineering risk in addition to commercialization risk. Because of the
speculative nature of these investments by us and the lack of any market
for the securities purchased by us, there is significantly greater risk of
loss than is the case with traditional investment securities. We expect
that some of our venture capital investments will be a complete loss or
will be unprofitable and that some will appear to be likely to become
successful but never realize that potential.
We may own 100 percent of the securities of a start-up investment
for a period of time and may control such 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 be
involved in recruiting management, formulating operating strategies,
product development, marketing and advertising, assistance in financial
plans, as well as providing management in the initial start-up stages and
establishing corporate goals. We may assist in raising additional capital
for such 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 such
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 such companies for the
performance of any of the above services.
We may control or be represented on the board of directors of a
company for which we have provided venture capital by one or more of our
officers or directors, who may also serve as officers of such a company. We
indemnify our officers and directors for serving on the boards of directors
or as officers of investee companies, which exposes us to additional risks.
Particularly during the early stages of an investment, we may in effect be
conducting the operations of the company. As a venture company emerges from
the developmental stage with greater management depth and experience, we
expect that our role in the company's operations will diminish. Our goal is
to assist each company in establishing its own independent capitalization,
management and board of directors. We expect to be able to reduce our
interest in those start-up companies which become successful.
Following an initial investment in portfolio companies, we may
make additional investments in such portfolio companies as "follow-on"
investments, in order to: (1) increase or maintain in whole or in part our
ownership percentage; (2) exercise warrants, options or convertible
securities that were acquired in the original or subsequent financing; (3)
preserve our proportionate ownership in a subsequent financing; or (4)
attempt to preserve or enhance the value of our investment. Recently, "pay
to play" provisions have become common in venture capital transactions;
such provisions require proportionate investment in subsequent rounds of
financing in order to preserve certain preferred rights such as
anti-dilution protection or to prevent preferred shares from being
converted to common shares.
There can be no assurance that we will make follow-on investments
or have sufficient funds to make such investments; we have the discretion
to make any follow-on investments as we determine, subject to the
availability of capital resources. The failure to make such follow-on
investments may, in certain 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 certain 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 BDC or regulated investment company ("RIC")
requirements.
INTELLECTUAL PROPERTY
We believe there is a role for organizations that can assist in
technology transfer. Scientists and institutions that develop and patent
intellectual property perceive the need for and rewards of entrepreneurial
commercialization of their inventions. We believe that our experience in
organizing and developing new companies; our willingness to invest our own
capital at the highest-risk seeding stage; our access to high-grade
institutional sources of intellectual property and our development; our
knowledge of the capital markets; our experience with business incubators;
and our willingness, on a selective basis, to do as much of the early work
as we are qualified to do combine to give us a value-added role to play in
the commercialization of technology.
Our form of investment may be: l) funding of research and
development in the development of a technology; 2) obtaining licensing
rights to intellectual property or patents; 3) outright acquisition of
intellectual property or patents; and 4) formation and funding of companies
or joint ventures to further commercialize intellectual property. Income
from our investments in intellectual property or its development may take
the form of participation in licensing or royalty income, fee income, or
some other form of remuneration. Investment in developmental intellectual
property rights involves a high degree of risk that can result in loss of
our entire investment as well as additional risks including uncertainties
as to the valuation of an investment and potential difficulty in
liquidating an investment. Further, investments in intellectual property
generally require investor patience as investment return may be realized
only after or over a long period. At some point during the
commercialization of a technology, our investment may be transformed into
ownership of securities of a development stage or start-up company as
discussed under "Venture Capital Investments" above. Investment in
intellectual property is highly risky.
DEBT OBLIGATIONS
We may hold debt securities for income and as a reserve pending
more speculative investments. Debt obligations may include 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 such 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 that are involved in bankruptcy or reorganization proceedings; or
that are start-up or development stage entities. In addition, we may
participate in the acquisition or divestiture of companies or divisions of
companies through issuance or receipt of debt obligations.
It is likely that our investments in debt obligations will be of
varying quality, including non-rated, highly speculative debt investments
with limited marketability. Investments in lower-rated and non-rated
securities, commonly referred to as "junk bonds," are subject to special
risks, including a greater risk of loss of principal and non-payment of
interest. Generally, lower-rated securities offer a higher return potential
than higher-rated securities but involve greater volatility of price and
greater risk of loss of income and principal, including the possibility of
default or bankruptcy of the issuers of such securities. Lower-rated
securities and comparable non-rated securities will likely have large
uncertainties or major risk exposure to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation. The occurrence of adverse conditions and uncertainties to
issuers of lower-rated securities would likely reduce the value of lower-
rated securities held by us, with a commensurate effect on the value of our
shares.
The markets in which lower-rated securities or comparable
non-rated securities are traded generally are more limited than those in
which higher-rated securities are traded. The existence of limited markets
for these securities may restrict our ability to obtain accurate market
quotations for the purposes of valuing lower-rated or non-rated securities
and calculating net asset value or to sell securities at their fair value.
The public market for lower-rated securities and comparable non-rated
securities is relatively new and has not fully weathered a major economic
recession. Any such economic downturn could adversely affect the ability of
issuers' lower-rated securities to repay principal and pay interest
thereon. The market values of certain 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 due to default by such 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 it is
required to seek recovery upon a default in the payment of principal or
interest on its 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 such securities are protected
against early call. Similarly, when interest rates increase, the market
value of a debt portfolio already invested at lower yields can be expected
to decline. Deterioration in credit quality also generally causes a decline
in market value of the security, while an improvement in credit quality
generally leads to increased value.
FOREIGN SECURITIES
We may make investments in securities of issuers whose principal
operations are conducted outside the United States, and whose earnings and
securities are stated in foreign currency.
Compared to otherwise comparable investments in securities of U.S.
issuers, currency exchange risk of securities of foreign issuers is a
significant variable. The value of such 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 its investments in
foreign securities through the use of futures, options and forward currency
purchases or sales.
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; and may issue, publicly or
privately, bonds, debentures or notes, in series or otherwise, with such
interest rates and other terms and provisions, including conversion rights,
on a secured or unsecured basis, for any purpose of the Company, up to the
maximum amounts and percentages permitted for closed-end investment
companies under Section 18 of the 1940 Act, or any successor statute or
law, as the same may be amended from time to time, or as amplified or
modified by rules adopted thereunder. 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 five percent
of its assets), if giving effect to such borrowing or issuance, the value
of our total assets would be less than 200 percent of the total liabilities
of the Company (other than liabilities not constituting senior securities).
We may pledge assets to secure any such borrowings.
A primary purpose of our borrowing power is for leverage, to
increase our ability to acquire investments. 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 the Company were not
leveraged. Any such 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 such borrowing, the Company's total income will be greater
than if borrowings were not used. Conversely, if the income from such
assets is not sufficient to cover the borrowing costs, the Company's 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 certain of its investments when it
may be disadvantageous to do so. Borrowings by the Company 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. Any such sales
might be at disadvantageous times or prices.
ISSUANCE OF PREFERRED STOCK
Our Board of Directors is authorized by the Articles of
Incorporation of the Company to issue up to 2,000,000 shares of preferred
stock having a par value of $.10 per share. The Board of Directors is
authorized to divide up such preferred stock in 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 such 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 such issuance the value of our total assets, less
all liabilities and indebtedness other than senior securities, would be
less than 200 percent of the aggregate amount of senior securities
representing indebtedness plus the aggregate involuntary liquidation value
of the preferred stock of the Company (other than up to five percent
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.
REPURCHASE OF SHARES
Our shareholders do not have the right to compel us to redeem
their shares of the Company. We may, however, purchase outstanding shares
of its 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 such 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. There can be no assurance that the
Board of Directors will decide to undertake any purchases of the Company's
common stock.
Purchases of our common shares by us 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 such requirement. To achieve such
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 [ ], we have repurchased a total of [ ] of our shares at a total cost
of [ ]. Because of our recent decision to invest in small technology, our
Board of Directors does not currently intend to authorize the purchase of
additional shares of our stock.
PORTFOLIO COMPANY TURNOVER
Changes with respect to portfolio companies will be made as
management considers necessary in seeking to achieve the 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, changes in particular portfolio holdings may be made
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.
General portfolio changes may also be made to increase our cash to position
the Company in a defensive posture. Portfolio changes will be made without
regard to the length of time an investment has been held, or whether a sale
results in profit or loss, or a purchase results in the reacquisition of an
investment which we may have only recently sold.
If management's evaluation of particular investments or general
conditions changes frequently, portfolio changes may be expected to occur
rapidly and with great frequency. The portfolio turnover rate may vary
greatly from year to year as well as during a year and may also be affected
by cash requirements.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
Set forth below are the names, positions held with the Company and
principal occupations during the past five years of our directors and
certain of our executive officers. There are no family relationships
between any of persons listed. We have no advisory board. Our business
address and that of our officers and directors is One Rockefeller Plaza,
New York, New York 10020.
Position(s) Held With the
Company, Principal Occupation
Names and Address During the Past 5 Years (i)
----------------- -----------------------------
Dr. C. Wayne Bardin............. Director of the Company (since December
1994); President of Thyreos Corp., a
privately held, start-up pharmaceutical
company. From 1978 through 1996, Dr.
Bardin 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. Dr. Bardin also serves as a
consultant to several pharmaceutical
companies. He has directed basic and
clinical research leading to over 500
publications and patents. He has
negotiated 15 licensing and
manufacturing agreements. He has
directed clinical R&D under 18
investigational new drug applications
filed with the U.S. FDA. Dr. Bardin has
been appointed to the editorial boards
of 15 journals. He has also served on
national and international committees
and boards for National Institute of
Health, World Health Organization, The
Ford Foundation, and numerous
scientific societies.
Dr. Phillip A. Bauman........... Director of the Company (since February
1998). Dr. Bauman is an orthopedic
surgeon who is in practice in New York
City and has held an academic
appointment at Columbia University
since 1998. He has been a principal and
Vice President of Orthopedic Associates
of New York since 1994. Dr. Bauman was
elected a fellow of the American
Academy of Orthopedic Surgeons in 1991,
is affiliated with the New York Academy
of Medicine and is on the advisory
board of a medical research foundation.
G. Morgan Browne................ Director of the Company (since June
1992); Mr. Browne has been the Chief
Financial Officer since January 1, 2001
and from 1985- 2000 was the
Administrative Director of the Cold
Spring Harbor Laboratory, a private
not- for-profit institution that
conducts research and education
programs in the fields of molecular
biology and genetics. 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. Mr.
Browne is a director of OSI
Pharmaceuticals, Inc. (a publically
held company principally engaged in
drug discovery based on gene
transcription), a founding director of
the New York Biotechnology Association
and a founding director of the Long
Island Research Institute.
Harry E. Ekblom................. Director of the Company (since 1984); Mr.
Ekblom is an investor. He is a former
Chairman and CEO of European American
Bank and a former Vice Chairman of A.T.
Hudson & Co. Inc.
Dugald A. Fletcher.............. Director of the Company (since 1996);
President of Fletcher & Company, Inc.,
a management consulting firm, for the
past five years. He was Chairman of
Binnings Building Products Company,
Inc. until the end of 1997 and is a
Trustee of the Gabelli Growth Fund and
a Director of the Gabelli Convertible
Securities Fund. His previous business
appointments include: advisor to
Gabelli/Rosenthal LP, a leveraged
buyout fund; Chairman of Keller
Industries (building and consumer
products); Director of and investor in
Mid-Atlantic Coca-Cola Bottling
Company; Senior Vice President of
Booz-Allen & Hamilton and 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.
Charles E. Harris* ............. Director of the Company and its
Chairman of the Board (since April
1984); Chief Compliance Officer from
February 1997 to February 2001; and
Chief Executive Officer of the Company
since July 1984. He has served as a
director, trustee, control person,
chairman and/or chief executive officer
of various publicly and privately held
corporations and not-for-profit
institutions. Prior to 1984, he was
Chairman of Wood, Struthers and
Winthrop Management Corp., the
investment advisory subsidiary of
Donaldson, Lufkin & Jenrette. He was a
member of the Advisory Panel for the
Congressional Office of Technology
Assessment. He is a member of the New
York Society of Security Analysts.
Among his eleemosynary activities, he
is currently a Trustee of, and a member
of the President's Council of the Cold
Spring Harbor Laboratory; a Trustee of
the Nidus Center, a life sciences
business incubator in St. Louis,
Missouri; a life-sustaining fellow of
the Massachusetts Institute of
Technology and a shareholder of its
Entrepreneurship Center.
Dr. Kelly S. Kirkpatrick* ...... Director of the Company (since 2002).
Ms. Kirkpatrick is a consulting
materials scientist. From 2000 to 2002,
she served in the Office of the
Executive Vice Provost of Columbia
University as Director, Columbia
Nanotechnology Initiative and 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, where her
responsibilities for the National
Nanotechnology Initiative included
managing representatives from six
federal agencies in strategies research
and development plan, implementation
plan and a $495 million budget,
organizing the Presidential review
panel and co-writing the panel report.
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.
Glenn E. Mayer ................. Director of the Company (since 1981).
In May 2001, Mr. Mayer joined Jesup &
Lamont Securities Co. as a Senior Vice
President. From December 1991 until May
2001, Mr. Mayer was a Senior Vice
President of Reich & Company, a
division of Fahnestock & Company, Inc.,
a member firm of the New York Stock
Exchange. For 15 years prior to that,
he was employed by Jesup & Lamont
Securities Co. and its successor firms,
in the Corporate Finance department.
Mel P. Melsheimer............... President, Chief Operating Officer and
Chief Financial Officer of the Company
since February 1997, Chief Compliance
Officer since February 2001 and
Treasurer since July 2001. Previously,
Harris & Harris Group utilized Mr.
Melsheimer as a nearly full-time
consultant or officer of a portfolio
company since March 1994. Mr.
Melsheimer has had extensive
entrepreneurial experience as well as
senior operational and financial
management responsibilities with
publicly and privately owned companies.
From November 1992 to February 1994, he
served as Executive Vice President,
Chief Operating Officer and Secretary
of Dairy Holdings, Inc. From June 1991
to August 1992, he served as President
and Chief Executive Officer of
Land-O-Sun Dairies as well as Executive
Vice President of Finevest Foods, Inc.
From March 1989 to May 1991, he served
as Vice President, Chief Financial
Officer and Treasurer of Finevest
Foods, Inc. From January 1984 to
February 1989, he served as Chairman,
Chief Executive Officer and Founder of
PHX Pacific, Inc. and from August 1987
to February 1989 President, Chief
Executive Officer and Founder of MPM
Capital Corp. From January 1981 to
December 1983, he served as Executive
Vice President and Chief Operating
Officer of AZL Resources. From November
1975 to December 1980, he served as
Executive Vice President and Chief
Financial Officer of AZL Resources.
From January 1968 to November 1975, he
served in a financial capacity before
becoming Vice President and Chief
Financial Officer of Pepsi- Cola
Company, PepsiCo, Inc., in 1972.
Lori D. Pressman* .............. Director of the Company (since 2002);
Ms. Pressman\, a self-employed business
consultant, provides advisory services
to start- ups and venture capital
companies. Among other projects for
Harris & Harris Group, she has served
as a consultant to the Company in its
due diligence work on Nantero, Inc.,
Nanopharma Corp. and NEO Photonics
Corporation. From September 1989 to
July 2000, she was employed by the
Massachusetts Institute of Technology
in the Technology Licensing Office,
serving as Technology Licensing Officer
from 1989 to 1995 and Assistant
Director from 1996 to 2000. From
September 1984 to September 1989, she
was Senior Development Engineer at
Lasertron, Inc. From November 1983 to
September 1984, she was employed by the
American Lung Association. From 1980 to
1982, she was a Member of Solid State
Materials Research Laboratory at Bell
Laboratories. She is Chair of the
Survey Statistics and Metrics Committee
of the Association of University
Technology Managers for which she
edited a recent report on Academic
Technology Transfer of 190 U.S. and
Canadian Institutions.
James E. Roberts................ Director of the Company (since 1995).
Since October 1999, Mr. Roberts has
been Chairman and Chief Executive
Officer of the Insurance Corporation of
New York, Dakota Speciality Insurance
Company, and ReCor Insurance Company
Inc., all of which are members of
Trenwick Group, Ltd. Since March 2000,
Mr. Roberts has been Chairman and Chief
Executive Officer of Chartwell
Insurance Company, also a member of
Trenwick Group, Ltd. From October 1999
to March 2000, he served as Vice
Chairman of Chartwell Reinsurance
Company. From May 1995 to March 2000,
Mr. Roberts was Vice Chairman of
Trenwick America Reinsurance
Corporation.
* Charles E. Harris, Kelly S. Kirkpatrick and Lori D. Pressman is each an
"interested person" of the Company, as defined in the Investment Company
Act of 1940, as a beneficial owner of more than five percent of the
Company's stock, as a control person of the Company and as an officer of
the Company.
Our Board of Directors has five committees. The Executive
Committee, which manages the affairs of the Company between regularly
scheduled meetings of the Board of Directors, consists of Charles E.
Harris* (Chairman), Dr. C. Wayne Bardin, James E. Roberts, and Glenn E.
Mayer. The Audit Committee consists of Harry E. Ekblom (Chairman), Glenn E.
Mayer and Dr. Phillip A. Bauman, and manages our relationship with our
independent auditors. The Compensation Committee consists of James E.
Roberts (Chairman), Harry E. Ekblom and Dugald A. Fletcher. Its function is
to review and implement compensation of our officers, directors and
employees. The Nomination Committee consists of G. Morgan Browne
(Chairman), Dr. Phillip A. Bauman, Harry E. Ekblom, Dr. Kelly S.
Kirkpatrick and Lori D. Pressman. Its purpose is to select and nominate
directors for our Board of Directors and officers to fill vacancies in
corporate offices. The Nomination Committee does consider nominations from
shareholders. The Investment and Valuation Committee, established in
August, 1992, consists of Dugald A. Fletcher (Chairman), G. Morgan Browne,
James E. Roberts and Dr. C. Wayne Bardin. Its purpose is to review and
approve the valuation of Company assets, from time to time, as prescribed
by the 1940 Act, pursuant to guidelines established by our Board of
Directors.
Mr. Harris and Mr. Melsheimer are primarily responsible for the
day-to-day management of our portfolio, and have served in this capacity
since 1983 and 1997, respectively.
We do not consider that any person other than Charles E. Harris
"controls" the Company within the meaning of this item.
Set forth below is certain information as of March 12, 2002 with
respect to the beneficial ownership of our common stock by (i) each person
who is known by the us to be the beneficial owner of more than five percent
of the outstanding shares of the common stock, (ii) each of our directors
and (iii) all of our directors and executive officers as a group. Except as
otherwise indicated, to the Corporation's knowledge, all shares are
beneficially owned and investment and voting power is held by the persons
named as owners. At this time, we are unaware of any shareholder owning
five percent or more of the outstanding shares of common stock other than
the ones noted below.
Name and Address of Number of Shares of Percent of
Beneficial Owner Common Stock Owned Beneficial Class (1)
------------------- ------------------- --------------------
Charles E. and 791,919 (2) 8.93%
Susan T. Harris
One Rockefeller Plaza
Suite 1430
New York, NY 10020
Dr. C. Wayne Bardin 15,711 (3) *
Dr. Phillip A. Bauman 16,686 (4) *
G. Morgan Browne 25,629 *
Harry E. Ekblom 13,542 *
Dugald A. Fletcher 7,335 *
Dr. Kelly S. Kirkpatrick - *
Glenn E. Mayer 83,000 (5) *
Mel P. Melsheimer 35,000 (6) *
Lori D. Pressman - *
James E. Roberts 9,235 *
Helene Shavin - *
All Directors and Executive Officers 998,057 11.26%
as a Group (10 persons)
(l) Shares of common stock subject to options and warrants currently
exercisable or exercisable within sixty days are deemed
outstanding for computing the percentage of class of the person or
group holding such options or warrants but are not deemed
outstanding for computing the percentage of class of any other
person.
(2) Includes 783,419 shares for which Mrs. Harris has sole power to
vote and dispose of; 8,500 shares for which Mr. Harris has sole
power to vote and dispose of.
(3) Includes 2,840 shares owned by Bardin LLC for the Bardin LLC
Profit-Sharing Keogh.
(4) Includes 5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's
wife; 100 shares owned by Adelaide Polk-Bauman, daughter; 100
shares owned by Milbry Polk- Bauman, daughter; 100 shares owned by
Mary Polk-Bauman, daughter. Ms. Milbry C. Polk is the custodian
for the accounts of the three children.
(5) Includes 2,000 shares owned by Mrs. Mayer.
(6) 10,000 shares are held jointly by Mel P. Melsheimer and his wife.
REMUNERATION OF DIRECTORS AND OTHERS
The following table sets forth the compensation paid by us for the
fiscal year ended December 31, 2001 to certain of our Directors.
Pension Or
Retirement
Benefits Estimated
Accrued Annual Total
As Part Of Benefits Compensation
Aggregate Company's Upon Paid To
Name of Director Compensation Expenses Retirement Directors
---------------------------- ---------------- ------------------ ---------------- ------------------
Dr. C. Wayne Bardin $13,000 - - $13,000
Dr. Phillip A. Bauman $11,000 - - $11,000
G. Morgan Browne $14,172 (1) - - $14,172
Harry E. Ekblom $12,875 (2) - - $12,875
Dugald A. Fletcher $14,000 - - $14,000
Dr. Kelly S. Kirkpatrick (3) - - - -
Glenn E. Mayer $11,000 - - $11,000
Lori D. Pressman (4) - - - -
James E. Roberts $14,000 - - $14,000
(1) Includes $172 paid to Mr. Browne to reimburse him for travel expenses
to attend Board meetings.
(2) Includes $1,875 paid to Mr. Ekblom to reimburse him for travel
expenses to attend Board meetings.
(3) Ms. Kirkpatrick, who became a director in 2002, will perform
consulting work for us, and in connection with such services will
receive compensation from us.
(4) Ms. Pressman, who became a director in 2002, has performed
consulting services for us in the past, and in connection with
such work has received compensation from us. We expect her to
continue to perform consulting work for us.
Effective June 18, 1998, directors who were not officers of the
Company 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 2001 was $90,047.
In 1998, the Board of Directors approved that effective January 1,
1998, 50 percent of all Director fees be used to purchase Company common
stock from us. However, effective on March 1, 1999, the Directors began
purchasing our common stock in the open market, rather than from the
Company. During 2000 and 2001, the Directors bought a total of 15,818 and
7,944 shares in the open market, respectively.
The following table sets forth a summary for each of the last
three years of the cash and non-cash compensation awarded to, earned by, or
paid to our Chief Executive Officer and our other executive officers for
the year ended December 31, 2001.
Annual Compensation
Name and Year Salary Bonus Other Annual All Other
Principal Position ($) ($)(1) Compensation Compensation
($)(2) ($)(3)
Charles E. Harris 2001 215,510 0 48,453 232,000
Chairman, CEO (4) 2000 208,315 1,600,287 43,267 224,805
1999 202,980 785,031 40,674 63,422
Mel P. Melsheimer 2001 243,869 0 - 10,500
President, COO, CFO, 2000 235,727 491,227 - 10,500
Treasurer & Chief 1999 229,690 240,974 - 10,500
Compliance Officer
Helene B. Shavin 2001 13,333 - - 1,867
Controller
Susan T. Harris 2001 12,376 - - 1,578
Secretary
(1) For 1999 and 2000, these amounts represent the actual amounts
earned for the years ended December 31, 1999 and December 31, 2000
and paid out in 2000 and 2001, respectively.
(2) Other than Mr. Harris, amounts of "Other Annual Compensation"
earned by the named executive officers for the periods presented
did not meet the threshold reporting requirements.
(3) Except for Mr. Harris, amounts reported represent the Company's
contributions on behalf of the named executive to the Harris &
Harris Group, Inc. 401(k) Plan. Mr. Harris's 2001 "All Other
Compensation" consists of: $10,500 401(k) Plan employer
contribution; $215,510 for his 2001 SERP contribution; and $5,990
in life insurance premiums for the benefit of his beneficiaries.
(4) Mr. Harris has an employment agreement with the Company.
INCENTIVE COMPENSATION PLAN
As of January 1, 2000, we implemented the Harris & Harris Group,
Inc. Employee Profit-Sharing Plan (the "Plan") that provides for profit
sharing by its officers and employees equal to 20 percent of the our net
realized income as reflected on our consolidated statements of operations
for such year, less the nonqualifying gain, 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 the Company), but is calculated without regard to
dividends paid or distributions made to shareholders, payments under the
Plan, unrealized gains and losses, and loss carry-overs from other years
("Qualifying Income"). The portion of net after-tax realized gains
attributable to asset values as of September 30, 1997 is considered
nonqualifying gain, which reduces Qualifying Income.
As soon as practicable following the year-end audit, the
Compensation Committee ("Committee") will determine whether, and if so how
much, Qualifying Income exists for a plan year, and 90 percent of the
Qualifying Income will be paid out to Plan participants pursuant to the
distribution percentages set forth in the Plan. The remaining 10 percent
will be paid out after we have filed our federal tax return for that year
in which Qualifying Income exists. Currently, the distribution amounts for
each officer and employee are as follows: Charles E. Harris, 13.790
percent; Mel P. Melsheimer, 4.233 percent; Helene B. Shavin, 1.524 percent;
and Jacqueline M. Matthews, 0.453 percent. If a participant leaves the
Company for other than cause, the amount earned will be accrued and may
subsequently be paid to such participant.
Notwithstanding any provisions of the 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 1940 Act be
greater than 20 percent of our "net income after taxes" within the meaning
of Section 57(n)(1)(B) of the 1940 Act. In the event the awards exceed such
amount, the awards will be reduced pro rata.
The Plan may be modified, amended or terminated by the Committee
(subject to the approval of our Board of Directors) at any time with the
stipulation that no such modification, amendment or termination may
adversely affect any participant that has not consented to such
modification, amendment or termination. Nothing in this Plan shall preclude
the Committee from, for any Plan Year subsequent to the current Plan Year,
naming additional Participants in the Plan or changing the Award Percentage
of any Full Participant or New Participant (subject to the overall
percentage limitations contained herein).
During 2001, we reversed a previously accrued profit-sharing
expense of $979,888, reducing the cumulative accrual under the Plan to
$178,282 at December 31, 2001. There was no payout under the Plan for the
2001 year.
On April 26, 2000 the shareholders approved the performance goals
under the Plan in accordance with Section 162(m) of the Internal Revenue
Code of 1986 ("Code"). The Code generally provides that a public company
such as ours may not deduct compensation paid to its chief executive
officer or to any of its four most highly compensated officers to the
extent that the compensation paid to any such officer/employee exceeds $1
million in any tax year, unless the payment is made upon the attainment of
objective performance goals that are approved by our shareholders.
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,
NY, 10154-1002.
Our transfer and dividend-paying agent is The Bank of New York, 28
East 28th Street, New York, NY, 11006.
DIVIDENDS AND DISTRIBUTIONS
As a regulated investment company under the Code, we will not be
subject to U.S. federal income tax on our investment company taxable income
that we distribute to shareholders, provided that at least 90% of our
investment company taxable income for that taxable year is distributed to
its shareholders. We may choose to retain our net capital gains for
investment and pay the associated federal corporate income tax. See
"Taxation." Shareholders exercising Rights will be entitled to receive
dividends on shares issued pursuant to the offering beginning with
dividends declared and payable after the Expiration Date.
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 its
business of investing in such 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 such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Company's total assets and not more than 10% of
the outstanding voting securities of such 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. 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 such issuer, if the basis of such
securities, when added to our basis of any other securities of such 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) its 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
United States federal income tax on net investment income and net capital
gains that we distributes to shareholders. To the extent that we retain our
net capital gains for investment, it will be subject to United States
federal income tax (as discussed below under "Taxation of Shareholders").
We may choose to retain our net capital gains for investment and pay the
associated federal corporate income tax.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax by us. To avoid this tax, we must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its
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) certain undistributed amounts from previous years on
which we paid no United States 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, there can be no assurance that sufficient
amounts of our taxable income and capital gains will 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 it does not meet the foregoing
distribution requirement.
In any particular taxable year, we may not qualify as a regulated
investment company. For any such taxable year, all of our taxable income
(including its net capital gains) will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders,
and such 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 C corporation even if we would
otherwise qualify as a regulated investment company.
TAXATION OF SHAREHOLDERS
Distributions paid to you by the Company from its 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 the Company's 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 the Company, are taxable to you as
long-term capital gains, regardless of the length of time you have owned
Company shares. Distributions in excess of the Company's earnings and
profits will first reduce the adjusted tax basis of your shares and, after
such 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 the Company retains any net capital gains, it
may designate such retained amounts as undistributed capital gains in a
notice to its shareholders. If such a designation is made, shareholders
would include in income, as long-term capital gains, their proportionate
share of such undistributed amounts, but would be allowed a credit or
refund, as the case may be, for their proportionate share of the corporate
tax paid by the Company. 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 such shareholder's income as long-term capital
gains and (ii) such shareholder's proportionate share of the corporate tax
paid by the Company.
Dividends and other taxable distributions are taxable to you even
though they are reinvested in additional shares of the Company. If the
Company pays 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 such months, then such dividend will be treated for tax purposes
as being paid by the Company 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
common shares of the Company 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 common shares of the
Company will result in capital gain or loss to you, and will be long-term
capital gain or loss if the shares have been held for more than one year at
the time of sale. Any loss upon the sale or exchange of Company shares held
for six months or less will be treated as long-term capital loss to the
extent of any capital gain dividends received (including amounts credited
as an undistributed capital gain dividend) by you. A loss realized on a
sale or exchange of shares of the Company will be disallowed if other
Company 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 such
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 the Company as capital gain
dividends) that are nonresident aliens or foreign partnerships, trusts or
corporations to the extent that such income is not "effectively connected"
with a U.S. trade or business carried on by such shareholders.
BACKUP WITHHOLDING
The Company is required in certain circumstances to backup
withhold on taxable dividends and certain other payments paid to
non-corporate holders of the Company's shares who do not furnish the
Company with their correct taxpayer identification number and certain
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 the
taxation of the Company and its shareholders. These provisions are subject
to change by legislative or administrative action, and any such change may
be retroactive. The discussion does not purport to deal with all of the
federal income tax consequences applicable to the Company, or which may be
important to particular shareholders in light of their individual
investment circumstances or to certain types of shareholders subject to
special tax rules, such as financial institutions, broker-dealers,
insurance companies, tax-exempt organizations, partnerships or other
passthrough entities, persons holding notes in connection with a hedging,
straddle, conversion or other integrated transaction, persons engaged in a
trade or business in the U.S. or persons who have ceased to be U.S.
citizens or to be taxed as resident aliens. Shareholders are urged to
consult their tax advisers regarding specific questions as to U.S. federal,
foreign, state, local income or other taxes.
CAPITALIZATION
We are authorized to issue twenty-five million shares of common
stock, par value $.01 per share. Our Board of Directors has authorized
issuance of two million 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. 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) capital stock unissued and (iii) capital stock
outstanding for each class of authorized securities of the Company as of
December 31, 2001.
Amount Held by
Company or for
Title of Class Amount Authorized its Own Account Amount Outstanding
Common Stock............................. 25,000,000 1,828,740 8,864,231
-------------------- ------------------- ----------------------
Preferred Stock.......................... 2,000,000 0 0
-------------------- ------------------- ----------------------
The Common Stock is listed and traded on the NNM under the symbol
"TINY." The average weekly trading volume of the common stock on the NNM
for the 12 months ended December 31, 2001 was [114,146] shares. The
following table sets forth for the quarters indicated the high and low
closing prices on the NNM per share of the common stock and the net asset
value and the premium or discount from net asset value at which the common
stock was trading, expressed as a percentage of net asset value, at each of
the high and low closing prices provided.
PREMIUM OR DISCOUNT
MARKET PRICE (1) NET ASSET VALUE AS % OF NAV
--------------------- ----------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW
2000 Quarter Ending
March 31 32.50 9.25 5.08
June 30 17.125 5.25 3.88
September 30 10.1875 5.75 4.64
December 31 6.4375 2.4375 3.51
2001 Quarter Ending
March 31 4.25 2.063 3.09
June 30 3.29 2.01 3.29
September 30 2.86 1.60 2.92
December 31 2.33 1.55 2.75
2002 Quarter Ending
March 31 [ ] [ ]
------------------
(1) As reported on the NNM
LEGAL MATTERS
Certain legal matters will be passed on by Skadden, Arps, Slate, Meagher
& Flom LLP, New York, New York, special counsel to the Company in
connection with the offering of common stock and this rights offering.
EXPERTS
The audited financial statements of the Company as of December 31, 2001
have been included in our 2001 Annual Report in reliance on the report of
Arthur Andersen LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing. Arthur Andersen LLP is
located at 1345 Avenue of the Americas, New York, NY, 10105. Subject to
shareholder approval at the 2002 annual meeting yet to be held,
PricewaterhouseCoopers LLP has been appointed as our independent
accountants in a capacity to audit our December 31, 2002 financial
statements.
FURTHER INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy
statements and other information with the SEC. Such reports, proxy
statements and other information filed by us can be inspected and copied at
public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549; and 500 West Madison Street, Chicago,
Illinois 60661. You can obtain information on the operation of the Public
Reference room by calling the SEC at (800) SEC-0330. The SEC also maintains
a web site that contains reports, proxy statements, and other information.
The address of the SEC's web site is http://www.sec.gov. Copies of such
material may also be obtained from the Public Reference Branch, Office of
Consumer Affairs and Information Services of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Our Common Stock is
listed on the Nasdaq National Market and our reports, proxy statements and
other information concerning us can be inspected and copied at the library
of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a registration statement on Form
N-2 (together with all the exhibits and the appendix thereto, the
"Registration Statement") filed by us with the SEC under the Securities Act
and the 1940 Act. This Prospectus does not contain all of the information
set forth in the Registration Statement. Reference is hereby made to the
Registration Statement and related exhibits for further information with
respect to us and the shares offered hereby. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to
the copy of the applicable document filed with the SEC.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS AS SET
FORTH IN THE PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
---------------------------------
TABLE OF CONTENTS
PAGE
TABLE OF FEES AND EXPENSES.................................................4
PROSPECTUS SUMMARY.........................................................5
FINANCIAL HIGHLIGHTS......................................................18
THE OFFER AND PLAN OF DISTRIBUTION........................................19
USE OF PROCEEDS...........................................................29
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES............................30
BUSINESS..................................................................34
MANAGEMENT OF THE COMPANY.................................................43
DIVIDENDS AND DISTRIBUTIONS...............................................51
TAXATION..................................................................51
CAPITALIZATION............................................................54
LEGAL MATTERS.............................................................55
EXPERTS...................................................................55
FURTHER INFORMATION.......................................................56
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 as described on
page 18 of the Prospectus:
Page
Consolidated Statements of Assets and Liabilities as of
December 31, 2001 and 1999..................................... 31
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999.............................. 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999.............................. 33
Consolidated Statements of Changes in the Net Assets for the
years 34
ended December 31, 2001, 2000, and 1999........................
Consolidated Schedule of Investments as of December 31, 2001............35-39
Footnote to Consolidated Schedule of Investments........................40-42
Notes to Consolidated Financial Statements..............................43-50
Selected Per Share Data and Ratios for the years ended December
31, 2001, 2000, 1999, 1998 and 1997............................ 51
Statements, schedules and historical information other than these
listed above have been omitted since they are either not applicable, or not
required or the required information is shown in the financial statements
or notes thereto.
(2) Exhibits:
(a) Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1(a) to the Company's Form
10-K for the year ended December 31, 1995.
(b) Restated By-laws of the Company, incorporated by reference to
Exhibit 3.1(b) to the Company's Form 10-K for the year ended December 31,
1995 and the Company's Form 10-Q for the quarter ended September 30, 1998.
(c) Not applicable.
(d) Subscription Certificate, Beneficial Owner Listing
certification, Notice of Guaranteed Delivery, and Specimen certificate of
common stock certificate. The Specimen certificate of common stock
certificate is hereby incorporated by reference to Exhibit 4 of the
Company's registration statement in Form N-2 filed on October 29, 1992.
(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, incorporated by
reference to Exhibit 10 (s) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
(5) Deferred Compensation Agreement Between Harris & Harris
Group, Inc. and Charles E. Harris, incorporated by reference as Exhibit 10.19
to the Company's Form 10-K for the year ended December 31, 1999.
(6) Trust Under Harris & Harris Group, Inc. Deferred
Compensation Agreement, incorporated by reference as Exhibit 10.20 to the
Company's Form 10-K for the year ended December 31, 1999.
(7) Form of Indemnification Agreement which has been
established with all directors and executive officers of the Company,
incorporated by reference as Exhibit 10.14 to the Company's Form 10-K for
the year ended December 31, 1995.
(j) Harris & Harris Group, Inc. Custodian Agreement with JP
Morgan, incorporated by reference to Exhibit 9.1 to the Company's Form 10-K for
the year ended December 31, 1995.
(k) (1) Demand Promissory Note, Corporate Certificate-Borrowing,
Statement of Purpose for an Extension of Credit Secured by Margin Stock by and
among Harris & Harris Group, Inc. and J.P. Morgan incorporated by reference as
Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 1997.
(2) Stock Purchase Agreement, Standstill Agreement and
Termination and Release by and among Harris & Harris Group, Inc. and
American Bankers Life Assurance Company of Florida dated May 18, 1995,
incorporated by reference as Exhibit 10.13 to the Company's Form 10-K for
the year ended December 31, 1995.
(3) Note due January 26, 2001; Form of Warrant to Purchase
25,263 Shares of Harris & Harris Group, Inc. common stock, incorporated by
reference as Exhibit 10.21 to the Company's Form 10-K for the year ended
December 31, 1999.
(l) Opinion letter of Skadden, Arps, Slate, Meagher & Flom, LLP.
(m) Not applicable.
(n) (1) Letter to SEC Regarding Arthur Andersen LLP, incorporated
by reference as Exhibit 99.1 to the Company's Form 10-K for the year ended
December 31, 2001.
(2) Arthur Andersen LLP Consent.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Not applicable.
Item 25. Marketing Arrangements
Not Applicable.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration Statement:
Registration fees $611.63
NASDAQ listing fee $[ ]
Printing (other than stock certificates) $[ ]
[Accounting fees and expenses] $[ ]
Legal fees and expenses $[ ]
Information Agent fees and expenses $[ ]
Subscription Agent fees and expenses $[ ]
Miscellaneous $[ ]
-------
Total $[ ]
=======
Item 27. Persons Controlled by or Under Common Control with Company
Percentage of
voting
securities
Organized owned by
At December 31, 2001 under laws of the Registrant
-------------------- ------------- --------------
Harris & Harris Enterprises, Inc. Delaware 100%
Item 28. Number of Holders of Securities (as of [ ])
Title of class Number of record holders
Common stock, $.01 par value [6600]
* The Company was advised by its transfer agent that there were [ ] holders
of record of the common stock which held the common stock for an estimated
[ ] to [ ] beneficial owners.
Item 29. Indemnification
Article 8 ("Article 8") of the Company's Certificate of
Incorporation, as adopted by the Company's Board of Directors in October
1992, and approved by the Company's shareholders in December, 1992,
provides for the indemnification of the Company's 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 Securities and Exchange Commission 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.
The Company maintains directors' and officers' liability
insurance.
Item 30. Business and Other Connections of Investment Adviser
Not applicable. 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
thereunder are maintained at the offices of the Company at One Rockefeller
Plaza, Rockefeller Center, New York, New York 10020. Certain accounts,
books and other documents pertaining to the Company's subsidiaries are
maintained at One Rockefeller Plaza, Rockefeller Center, New York, New York
10020.
Item 32. Management Services
Not Applicable.
Item 33. Undertakings
1. The Company undertakes to suspend the offering of its shares
until it amends its Prospectus if:
(1) subsequent to the effective date of this
Registration Statement, the net asset value per
share declines more than 10% from its net asset
value per share as of the effective date of the
Registration Statement; or
(2) the net asset value increases to an amount greater
than its net proceeds as stated in the Prospectus.
2. The Company undertakes to file a post-effective amendment with
certified financial statements showing the initial capital received before
accepting subscriptions from more than 25 persons, if the Company proposes
to raise its initial capital under Section 14(a)(3) of the Investment
Company Act of 1940.
3. The Company undertakes to supplement the prospectus, after the
expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the subscription agent during the
subscription period, the amount of unsubscribed securities to be purchased
by the subscription agent, and the terms of any subsequent reoffering
thereof. Further, if any public offering by the subscription agent of the
securities registered herein is to be made on terms differing from those
set forth on the cover page of the prospectus included in this Registration
Statement, the Registrant shall undertake to file a post-effective
amendment to set forth the terms of such offering.
4. The Company hereby undertakes:
(a) to file, during any period in which offers or sales are
being made, a post-effective amendment to this
Registration Statement:
(1) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(2) to reflect in the prospectus any facts or events
after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration
Statement; and
(3) to include any material information with respect to
the plan of distribution not previously disclosed
in the Registration Statement or any material
change to such information in the Registration
Statement.
(b) that for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
5. The Company hereby undertakes:
(a) that for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule
497 (h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(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. The Company hereby undertakes to send by first class means
designed to ensure equally prompt delivery, withing two business days of
receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
As required by the Securities Act of 1933, this Registrant's
Registration Statement has been signed on behalf of the Registrant, in the
City of New York, State of New York, on the 26th day of April, 2002.
HARRIS & HARRIS GROUP, INC.
By: /s/
_________________________________
Charles E. Harris
Chairman of the Board
As required by the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
/s/
____________________________ Chairman of the Board of April 26, 2002
Charles E. Harris Directors
/s/
____________________________ Director April 26, 2002
Dr. C. Wayne Bardin
/s/
____________________________ Director April 26, 2002
Dr. Phillip A. Bauman
/s/
____________________________ Director April 26, 2002
G. Morgan Browne
/s/
____________________________ Director April 26, 2002
Harry E. Ekblom
/s/
____________________________ Director April 26, 2002
Dugald A. Fletcher
/s/
____________________________ Director April 26, 2002
Dr. Kelly S. Kirkpatrick
/s/
____________________________ Director April 26, 2002
Glenn E. Mayer
/s/
____________________________ Director April 26, 2002
Lori D. Pressman
/s/
____________________________ Director April 26, 2002
James E. Roberts
EXHIBIT INDEX