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 28, 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 July 8, 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 we anticipate that they will be admitted
for trading on the Nasdaq National Market ("NNM") under the symbol "TINYR." We
anticipate that the Rights will begin trading on July 1, 2002. We will mail the
subscription related documents to you on or prior to July 8, 2002. The Offer
will expire at 5:00 p.m. New York time on July 26, 2002 unless the Offer is
extended as described in this Prospectus (the "Expiration Date"). 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 $2.63 and on June 28, 2002 (the last date prior to
our shares trading ex-Rights) the last reported sales price of our shares on the
NNM was $2.88. The purchase price per share (the "Subscription Price") will be
$2.25, representing a discount of $0.38 (14%) from such net asset value per
share.
We are a venture capital investment company, operating as a Business
Development Company ("BDC") under the Investment Company Act of 1940 (the "1940
Act"). Based upon our historical investment practices we would consider
ourselves as a nondiversified BDC. 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 on tiny 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, we will ask our shareholders to
approve our Board of Directors' decision to change our name to Tiny Technology
Venture Capital, Inc. Although tiny technology is multidisciplinary and
theoretically applicable to a wide variety of fields, tiny technology in general
is new and has significant science and engineering risks as well as
commercialization risk. See "Information Regarding the 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 7 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 $2.25
Total . . . . . . . . . . . . . . . . . . . . $6,648,171.75 None $6,648,171.75
------------------
(1) Before deduction of expenses incurred by the Company, estimated at
$176,726. After deducting such expenses, the net proceeds to this company
will be $6,471,445.75.
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. Notwithstanding the over-subscription
privilege, we will not issue more than 2,954,743 shares plus shares for rounded
up Rights.
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 June 28, 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)
Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00%
Interest Payments on Borrowed Funds . . . . . . . . . . . . . . . . . 0.05%
Other Operating Expenses
Profit-sharing accrual(1) . . . . . . . . . . . . . . . . . . . . . 0.41%
Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . 3.80%
Administration and operations . . . . . . . . . . . . . . . . . . . 1.55%
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . 1.38%
Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.56%
Directors' fees and expenses. . . . . . . . . . . . . . . . . . . . 0.44%
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.09%
Custodian fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 0.05%
----
Total Annual Administrative and Operating Expenses. . . . . . . . . . 8.33%(2)
====
--------------
(1) The Company has an Employee Profit-Sharing Plan (the "Plan") that provides
for profit sharing equal to twenty percent of the net realized income of
the Company as reflected on the Consolidated Statement of Operations of the
Company for such year, less the nonqualifying gain, if any.
Under the Plan, net realized income of the Company 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 carryovers 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 of March 31, 2002, twenty percent of the potentially realizable net
income, less the nonqualifying gain, is approximately $306,000. The expense
associated with this liability for 2002 is approximately $125,000 or .41%
of net assets. This expense is subject to change over the remainder of
2002, and therefore, by year end, may be substantially larger than the
amount stated above.
(2) 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
------ ------- ------- --------
$83 $261 $458 $1,042
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.
2
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 on tiny
technology, including but not limited to nanotechnology, microsystems and
microelectromechanical systems (MEMS) technology. We have invested in eight
companies that we consider to be tiny-technology companies. In 1994, we invested
in our first tiny-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. On February 12, 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 NeoPhotonics
Corporation, a privately held company that develops patented technology that
enables the manufacture of unique nanoscale optical compositions for the
telecommunications industry. On May 3, we invested in Nanotechnologies, Inc., a
privately held company utilizing a proprietary technology for the production of
nanoscale materials. On June 14, 2002, we invested in Optiva, Inc., a privately
held company that is developing and commercializing a new class of nanomaterials
for advanced optical applications initially for the flat panel display industry.
On June 24, 2002, we invested in Continuum Photonics, Inc., a privately held
company that is developing a family of unique and value-added optical networking
subsystems that will enhance the flexibility and reliability of optical networks
by offering equipment manufacturers capabilities heretofore unavailable.
Our Board of Directors believes that our prior investments and expertise in
the tiny-technology sector are likely to lead to several attractive investment
opportunities in the tiny-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 tiny technology by
making more and larger investments in tiny technology and increasing our market
share in tiny-technology private equity investing. There can be no assurances
that we will realize any of these benefits or goals.
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 tiny 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 any 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.
3
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. We anticipate that
the Rights will be listed for trading on the NNM. Although no assurance can be
given that a market for the Rights will develop, we anticipate that trading in
the Rights on the NNM will begin on the Business Days immediately following 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 by 5:00
p.m., New York time, on or before July 23, 2002, three business days prior to
the Expiration Date, due to normal settlement procedures. Trading of the Rights
on the NNM will be conducted until and including the last NNM trading day prior
to the Expiration Date. The shares will begin trading ex-Rights on the Business
Days immediately following 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.
4
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 23.92
December 31. . . . . . . . . 6.4375 2.4375 3.51 83.40 (30.54)
2001 Quarter Ending
March 31 . . . . . . . . . . 3.94 2.063 3.09 27.44 (32.23)
June 30. . . . . . . . . . . 3.12 2.03 3.29 (5.17) (38.27)
September 30 . . . . . . . . 2.82 1.65 2.92 (3.43) (43.49)
December 31. . . . . . . . . 2.27 1.66 2.75 (17.46) (39.64)
2002 Quarter Ending
March 31 . . . . . . . . . . 5.00 1.92 2.63 90.11 (27.0)
------------------
(1) As reported on the NNM
USE OF PROCEEDS
We estimate the gross proceeds of the Offer to be approximately $6,648,172.
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 $176,726.
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.
We may invest either directly or through a wholly-owned subsidiary, which would
be formed as a Small Business Investment Corporation ("SBIC"). A SBIC can
obtain, at relatively low cost, government 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.
Under normal circumstances, we will invest at least 80% of our assets (net
assets and any amounts borrowed for investment purposes) in tiny-technology
company investments. For this purpose, tiny-technology companies are companies
whose capitalization is less than $500 million at the time of our investment and
whose business focus is on new technologies. Although we intend to invest
entirely in companies involved significantly in tiny technologies, we may also
make follow-on investments in existing portfolio companies involved in other
technologies. This policy is not a fundamental policy and accordingly may be
changed without shareholder approval, although we will give shareholders at
least 60 days prior notice of any change. We may continue to make follow-on
investments in non-tiny-technology companies now in our portfolio, subject to
the foregoing discussion, with part of the cash and equivalents now held by the
Company.
5
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 28, 2002
Subscription Period . . . . . . . . . . . . . . . . . . . . July 8, 2002 through July 26, 2002**
Expiration of the Offer*. . . . . . . . . . . . . . . . . . July 26, 2002**
Payment for Guarantees of Delivery Due* . . . . . . . . . . July 31, 2002**
Confirmation to Participants. . . . . . . . . . . . . . . . August 5, 2002**
------------------
* A shareholder exercising Rights must deliver by July 26, 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:
Innisfree M&A Incorporated
501 Madison Avenue
New York, NY 10022
Telephone: Banks and brokers call collect to
(212) 750-5833, all others call toll free to
(888) 750-5834
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 Company 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 on tiny technology, including but not limited to nanotechnology,
microsystems and microelectromechanical systems (MEMS) technology. Although tiny
technology is multidisciplinary and theoretically applicable to a wide variety
of fields, tiny technology in general is new and has significant science and
engineering risks 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
tiny technology; and, b) as a natural byproduct of that work, to give our
shareholders an increasingly pure play on a reasonably diversified portfolio of
tiny-technology venture capital investments. There is no assurance that either
our investment objective or our mission 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.
6
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.63
------
Subscription Price. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.25
------
Reduction in NAV($)(2). . . . . . . . . . . . . . . . . . . . . . . . $(0.11)
------
Reduction in NAV(%) . . . . . . . . . . . . . . . . . . . . . . . . . (4.18)%
------
Scenario 2:(1)
NAV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.80
------
Subscription Price. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.25
------
Reduction in NAV($)(2). . . . . . . . . . . . . . . . . . . . . . . . $(0.15)
------
Reduction in NAV(%) . . . . . . . . . . . . . . . . . . . . . . . . . (5.36)%
------
---------------
(1) Both examples assume full primary and over-subscription privilege exercise.
Actual amounts may vary due to rounding.
(2) Assumes $174,726 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 Companies 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
7
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.
OUR STATUS AS A NON-DIVERSIFIED COMPANY COULD SUBJECT US TO GREATER VOLATILITY
THAN COMPANIES WITH MORE BROADLY DIVERSIFIED INVESTMENTS.
As a result of investing a greater portion of our assets in the securities
of a smaller number of issuers, we may be more vulnerable to events affecting a
single issuer and therefore subject to greater volatility than a company whose
investments are more broadly diversified. Accordingly, an investment in the
Company may, under some circumstances, present greater risk to you than an
investment in a diversified company.
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.
8
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. Tiny-technology
companies in particular are unproven, with significant science and technology
risks as well as commercialization risk. 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 lawyers and outside consultants, including our
two newest Directors, Dr. Kelly S. Kirkpatrick and Lori D. Pressman, to assist
us in conducting due diligence when evaluating potential investments. Our future
success to a significant extent depends on the continued service and
coordination of our senior management team, and particularly depends on 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."
9
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 because we are a small capitalization company
ourselves, our stock price is especially likely to be affected by these market
conditions. General economic conditions, and general conditions in the Internet
and information technology, life sciences, nanotechnology, tiny-technology,
material sciences and other high technology industries, will also affect our
common stock price. During the first quarter of 2002, we decided to make all of
our new private equity investments (other than follow-on investments in existing
portfolio investments) in tiny technology, including nanotechnology,
microsystems and microelectromechanical systems (MEMS). Tiny-technology
investments are new and especially risky, involving science and technology risks
as well as commercialization risk.
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 and such could adversely affect the
amount and timing of gains, if any, 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 TINY-TECHNOLOGY
INVESTMENTS, IS HIGHLY COMPETITIVE. IN ADDITION TO THE DIFFICULTY OF FINDING
ATTRACTIVE INVESTMENT OPPORTUNITIES, IN SOME CASES, OUR STATUS AS A REGULATED
BUSINESS DEVELOPMENT COMPANY MAY HINDER OUR ABILITY TO PARTICIPATE IN INVESTMENT
OPPORTUNITIES OR TO PROTECT THE VALUE OF EXISTING INVESTMENTS, 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 many
competitors, including but not limited to private venture capital funds,
investment affiliates of large industrial, technology, service and financial
companies, small business investment companies, wealthy individuals and foreign
investors. 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
10
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. Also, compliance with certain regulations
applicable to our business may prevent us from making follow-on investments that
would be in our, as well as our shareholders', best interests.
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. Also, as business and financial practices continue to evolve,
they may render the regulations under which we operate less appropriate and more
burdensome than they were when originally imposed.
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 PRIVATELY HELD COMPANIES THAT MAY COMPLETE INITIAL PUBLIC
OFFERINGS. THESE TYPES OF COMPANIES AND INITIAL PUBLIC OFFERINGS 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, and we are
subject to lock-up provisions for specified periods of time. 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 have decreased liquidity of stocks in general
and smaller capitalization issues in particular. In addition, the imposition of
decimalization on the stock exchanges, particularly Nasdaq, may have reduced
liquidity and increased volatility and riskiness of small, thinly traded public
companies because it may have created 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 subject to 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. We adjust quarterly the valuation of
our portfolio to reflect the Investment and Valuation Committee's estimate of
the current fair value of each investment in our portfolio. Any
11
changes in estimated fair value are recorded in our consolidated statements of
operations as a change in the "Net (decrease) increase in unrealized
appreciation on investments."
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 and our portfolio companies encounter competition in our markets and general
economic and market 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 our investment
company taxable income to our stockholders to maintain our RIC status. As a
result, if we make such distributions, 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 would 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.
DURING SOME PERIODS, THERE ARE FEW OPPORTUNITIES TO TAKE EARLY STAGE COMPANIES
PUBLIC OR SELL THEM TO ESTABLISHED COMPANIES.
During some periods, there may be few opportunities to gain liquidity or
realize a gain on an otherwise successful investment, as the market for initial
public offerings may be moribund, particularly for early stage, high technology
companies. During such periods or other periods, it may also be difficult to
sell such companies to established companies. The lack of exit strategies during
such periods also tends to have an adverse effect on the ability of private
equity companies to raise capital privately.
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) on Form 10-K and our quarterly report for the
fiscal quarter ended March 31, 2002 (File No. 811-07074, filed May 15, 2002 on
Form 10-Q), are 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, as well
as our latest Form 10-Q, upon request by writing or calling the address or
telephone number listed herein.
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
12
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 July
8, 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 we anticipate
that the Rights 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 on the Business Days immediately following the
Record Date and may be conducted until the close of trading on the last NNM
trading day prior to the Expiration Date. Trading of the Rights on the NNM will
be conducted 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 on the Business Days immediately following the Record Date.
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.
13
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 $0.38 (14%) to our last
reported net asset value of $2.63.
The documents relating to the Offer were mailed to you on July 8, 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 $2.63. The last reported sale price of a share of our common stock on the
NNM on June 28, 2002 (the last date prior to the shares trading ex-Rights) was
$2.88, representing a 9.5% premium in relation to the net asset value per share
of our common stock at the close of business on March 31, 2002.
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 July 23, 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 $0.05 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. 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.
14
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 The Bank of New York. The Subscription Agent will
receive from us an amount estimated to be $25,000 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 THE INFORMATION AGENT
(TELEPHONE (888) 750-5834); 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 The Bank of New York at the following address:
If By Mail: The Bank of New York
Tender & Exchange Department
P.O. Box 11248
Church Street Station
New York, NY 10286-1248
15
If By Hand: The Bank of New York
Tender & Exchange Department
3rd Floor
One Wall Street
New York, NY 10286
If By Overnight Courier: The Bank of New York
Tender & Exchange Department
5th Floor
385 Rifle Camp Road
West Paterson, NJ 07424
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 ((973) 247-4077; telephone number to confirm
receipt (973) 247-4075).
(2) Alternatively, a holder of Rights can send the Subscription
Certificate together with payment in the form of (i) a certified check
or money order, or (ii) a wire transfer in same day funds, 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 WIRE
TRANSFER (IN SAME DAY FUNDS), MONEY ORDER OR CERTIFIED CHECK DRAWN ON
A BANK LOCATED IN THE CONTINENTAL UNITED STATES, MUST BE PAYABLE TO
THE BANK OF NEW YORK, 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,
16
(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 wire transfer (in same day funds),
money order or certified check drawn on a bank located in the continental United
States of America and payable to The Bank of New York.
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 by either of the two methods outlined
above.
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 setoff 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 WIRE TRANSFER (IN SAME DAY FUNDS), 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 we 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.
17
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
18
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
We estimate the gross proceeds of the Offer to be approximately $6,648,172.
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 $176,726.
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.
We may invest either directly or through a wholly-owned subsidiary, which would
be formed as a Small Business Investment Corporation ("SBIC"). A SBIC can
obtain, at relatively low cost, government 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.
Under normal circumstances, we will invest at least 80% of our assets (net
assets and any amounts borrowed for investment purposes) in tiny-technology
company investments. For this purpose, tiny-technology companies are companies
whose capitalization is less than $500 million at the time of our investment and
whose business focus is on new technologies. Although we intend to invest
entirely in companies involved significantly in tiny technologies, we may also
make follow-on investments in existing portfolio companies involved in other
technologies. This policy is not a fundamental policy and accordingly may be
changed without shareholder approval, although we will give shareholders at
least 60 days prior notice of any change. We may continue to make follow-on
investments in non-tiny-technology companies now in our portfolio, subject to
the foregoing discussion, with part of the cash and equivalents now held by the
Company.
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 startup 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"), which
has been profitable and has made cash distributions to its partners, including
us, for several years, and Alpha Simplex Group, LLC ("Alpha"), which made a cash
distribution to its partners, including us, this year, each of the following
portfolio companies is in its developmental stage or is a start-up business.
Except for PHZ, Alpha and Exponential Business Development Company ("EBDC"), 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 or, in the case of EBDC, with the companies in which it
invests. Therefore, each company places great importance on its relevant
patents, trademarks, licenses, algorithms, trade
19
secrets, franchises or concessions. 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 Professor at the MIT Sloan
School. Charles E. Harris has agreed to serve as an advisor to the company.
As of March 31, 2002, 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 March 31, 2002, 27,500 units were fully
vested at a valuation of $4,763. 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
and other financial products to their members. Experion is a non-controlled
affiliated company of Harris & Harris Group, Inc. As of March 31, 2002, 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 22,500 shares of Series B Convertible Preferred Stock
(representing 8.04% of the total shares of Series B Convertible Preferred
Stock outstanding) of Experion. As of the above date, the total amount of
shares of Experion held by us was valued at $600,000. Charles E. Harris
serves as a director of the company. Ross Blair is the chief executive
officer of the company, and Dr. Glen Urban, the David Austin Professor of
Marketing at the MIT Sloan School, is the chairman of the company.
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 March 31, 2002,
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, was 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 March
31, 2002, 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 March 31, 2002, 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.
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
20
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 also plans to pursue an 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.
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
March 31, 2002, we held 345,070 shares of Series A Preferred Stock
(representing 8.17% of the total Series A Preferred Stock outstanding) of
Nantero. As of the date above, 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.
NeoPhotonics Corporation ("Neo"), located at 49040 Milmont Drive, Fremont,
CA, 94538, is developing planar optical devices and components to
manufacture and offer to leading optical component manufacturers using its
patented nanomaterials deposition technology. The company is developing
functional component arrays to offer integrated optical "systems on a chip"
to 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.
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 March 31, 2002, 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 was 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 utilizing
proprietary algorithms to manage 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 March 31, 2002, 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 $2,009,495, and the
Limited Partnership Interest of PHZ held by Harris & Harris Enterprises,
Inc. as General Partner of Harris Partners I was valued at $883,003. 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, based on
its proprietary technology, with revenue generated primarily from stock
products. Questech is a non-controlled affiliated company of Harris &
Harris Group, Inc. As of March 31, 2002, 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
21
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 March 31, 2002, 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.
SUBSEQUENT EVENTS
Continuum Photonics, Inc. ("Continuum"), located at 45 Manning Road,
Billerica, MA 01821, is developing a family of unique and value-added
optical networking subsystems that will enhance the flexibility and
reliability of optical networks by offering equipment manufacturers
capabilities heretofore unavailable. Continuum is an unaffiliated company
of Harris & Harris Group, Inc. As of June 24, 2002, we held 2,000,000
shares of the Series B Convertible Preferred Stock (representing 7.1% of
the total Series B Preferred Stock outstanding) of Continuum. As of the
date above, the Series B Preferred Stock of Continuum held by us was valued
at $1,000,000. The chief executive officer of the company is Jeffrey D.
Farmer.
Nanotechnologies, Inc. ("Nanotechnologies"), located at 1908 Kramer Lane,
Building B, Suite L, Austin, TX 78758, is developing for production a wide
variety of high-performance nanoscale materials for industry.
Nanotechnologies is a non-controlled affiliated company of Harris & Harris
Group, Inc. As of May 3, 2002, we held 1,538,837 shares of Series B
Convertible Preferred Stock (representing 11.77% of the total Series B
Preferred Stock outstanding) of Nanotechnologies. As of the date above, the
Series B Convertible Preferred Stock of Nanotechnologies held by us was
valued at $750,000. The chief executive officer of the company is Gary
Pankonien.
Optiva, Inc. ("Optiva"), located at 377 Oyster Point Boulevard, Suite 13,
South San Francisco, CA, 94080, is developing and commercializing a new
class of nanomaterials for advanced optical applications initially for the
flat panel display industry. Optiva is an unaffiliated company of Harris &
Harris Group, Inc. As of June 14, 2002, we held 454,545 shares of the
Series C Preferred Stock (representing 5.51% of the total Series C
Preferred Stock outstanding) of Optiva. As of the date above, the Series C
Preferred Stock of Optiva held by us was valued at $500,000. The chief
executive officer of the company is Andrew D. Wahl.
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 on tiny 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.
22
Under normal circumstances, we will invest at least 80% of our assets (net
assets and any amounts borrowed for investment purposes) in tiny-technology
company investments. For this purpose, tiny-technology companies are companies
whose capitalization is less than $500 million at the time of our investment and
whose business focus is on new technologies. Although we intend to invest
entirely in companies involved significantly in tiny technologies, we may also
make follow-on investments in existing portfolio companies involved in other
technologies. This policy is not a fundamental policy and accordingly may be
changed without shareholder approval, although we will give shareholders at
least 60 days prior notice of any change.
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 tiny 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.
23
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 our 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. Tiny-technology companies have science and engineering risks 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
24
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; 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
25
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 our
investments in foreign securities through the use of futures, options and
forward currency purchases or sales.
26
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 our 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 our common stock
from time to time subject to approval of our Board of Directors and compliance
with applicable corporate and securities laws. The Board of Directors may
authorize 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.
27
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 1998, we have repurchased a total of 1,828,740 of our shares at
a total cost of $3,405,531, or $1.86 per share. Because of our recent decision
to invest in tiny 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 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 AND CERTAIN EXECUTIVE OFFICERS
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.
NAMES AND ADDRESS POSITION(S) HELD WITH THE COMPANY, PRINCIPAL OCCUPATION 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.
28
NAMES AND ADDRESS POSITION(S) HELD WITH THE COMPANY, PRINCIPAL OCCUPATION DURING THE PAST 5 YEARS (I)
----------------- -----------------------------------------------------------------------------------
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 publicly 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 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.
29
NAMES AND ADDRESS POSITION(S) HELD WITH THE COMPANY, PRINCIPAL OCCUPATION DURING THE PAST 5 YEARS (I)
----------------- -----------------------------------------------------------------------------------
Dr. Kelly S. Kirkpatrick*. . . Director of the Company (since 2002). Dr. 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.
30
NAMES AND ADDRESS POSITION(S) HELD WITH THE COMPANY, PRINCIPAL OCCUPATION DURING THE PAST 5 YEARS (I)
----------------- -----------------------------------------------------------------------------------
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 NeoPhotonics 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 is 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. In addition, each of Dr. Kelly S.
Kirkpatrick and Lori D. Pressman may be considered to be an "interested
person" of the Company because of the work each does consulting for the
Company.
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 June 10, 2002 with respect to
the beneficial ownership of our common stock by (i) each person who is known by
us to be the beneficial owner of more than five percent of the
31
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 Company'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 Susan T. Harris . . . . . . . . . . . . . . 791,919(2) 8.93%
One Rockefeller Plaza
Suite 1430
New York, NY 10020
Dr. C. Wayne Bardin. . . . . . . . . . . . . . . . . . . . 15,621(3) --
Dr. Phillip A. Bauman. . . . . . . . . . . . . . . . . . . 16,686(4) --
G. Morgan Browne . . . . . . . . . . . . . . . . . . . . . 25,629 --
Harry E. Ekblom. . . . . . . . . . . . . . . . . . . . . . 14,776 --
Dugald A. Fletcher . . . . . . . . . . . . . . . . . . . . 8,715 --
Dr. Kelly S. Kirkpatrick . . . . . . . . . . . . . . . . . -- --
Glenn E. Mayer . . . . . . . . . . . . . . . . . . . . . . 83,000(5) --
Mel P. Melsheimer. . . . . . . . . . . . . . . . . . . . . 35,000(6) --
Lori D. Pressman . . . . . . . . . . . . . . . . . . . . . -- --
James E. Roberts . . . . . . . . . . . . . . . . . . . . . 10,705 --
Jonathan Rothschild. . . . . . . . . . . . . . . . . . . . 570,243 6.40%
Helene Shavin. . . . . . . . . . . . . . . . . . . . . . . -- --
All Directors and Executive Officers
as a Group (10 persons). . . . . . . . . . . . . . . . . . 1,002,050 11.30%
------------------
(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.
32
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) Dr. Kirkpatrick, who became a director in 2002, is performing 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
$90,047.
In 1998, the Board of Directors approved that effective January 1, 1998,
50 percent of all Director fees be used to purchase Company common stock from
us. However, effective on March 1, 1999, the Directors began purchasing our
common stock in the open market, rather than from the Company. During 2000 and
2001, the Directors bought a total of 15,818 and 7,944 shares in the open
market, respectively.
33
The following table sets forth a summary for each of the last three years
of the cash and non-cash compensation awarded to, earned by, or paid to our
Chief Executive Officer and our other executive officers for the year ended
December 31, 2001.
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY BONUS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(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.
34
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
35
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 but can give no assurances as to
SEC Certification in future years. Pursuant to the SEC Certification, we are
generally entitled to include, in the computation of the 50% value of our assets
(described in (b)(i) above), the value of any securities of an issuer, whether
or not we own more than 10% of the outstanding voting securities of 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)
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 distribute 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
payable 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
36
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. All shares issued
as a result of exercise of the rights will be newly issued shares. Shares of
common stock are not redeemable and have no preemptive, conversion or cumulative
voting rights.
37
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 March 31, 2002 was 119,446 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.
NET ASSET VALUE PREMIUM OR DISCOUT
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 23.92
December 31. . . . . . . . . . . . 6.4375 2.4375 3.51 83.40 (30.54)
2000 Quarter Ending
March 31 . . . . . . . . . . . . . 3.94 2.063 3.09 27.44 (32.23)
June 30 . . . . . . . . . . . . . 3.12 2.03 3.29 (5.17) (38.27)
September 30 . . . . . . . . . . . 2.82 1.65 2.92 (3.43) (43.49)
December 31 . . . . . . . . . . . 2.27 1.66 2.75 (17.46) (39.64)
March 31 . . . . . . . . . . . . . 5.00 1.92 2.63 90.11 (27.0)
---------------
(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
38
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 the material terms of such documents.
39
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.
------------------------
TABLE OF CONTENTS
Page
------
TABLE OF FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
THE OFFER AND PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 12
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
GENERAL DESCRIPTION OF OUR PORTFOLIO COMPANIES . . . . . . . . . . . . . . . . . . . . 19
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FURTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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