SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended Commission File No. 0-11576
December 31, 1995
HARRIS & HARRIS GROUP, INC.
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(Exact name of registrant specified in its charter)
New York 13-3119827
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(State or other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization)
One Rockefeller Plaza, Rockefeller Center, New York, New York 10020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 332-3600
-------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $ .01 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The aggregate market value of the Common Stock held by non-affiliates of
Registrant as of March 15, 1996 was $51,000,204 based on the last sale price
as quoted by NASDAQ on such date (only officers and directors are considered
affiliates for this calculation).
As of March 15, 1995, the registrant has 10,333,902 shares of common
stock, par value $ .01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10K
----------------------------
(1) Annual Report to Shareholders for Parts I and II; and Part IV,
the Year Ended December 31, 1995. Item 14(a) (1) and (2)
(2) Proxy Statement for Annual Meeting of
Shareholders to be held April 11, 1996. Part III
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TABLE OF CONTENTS
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Page
PART 1
Item 1. Business. . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . 7
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters. . . . . . . 7
Item 6. Selected Financial Data . . . . . . . . . . 8
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations. . . . . . . . . . 9
Item 8. Financial Statements and
Supplementary Data . . . . . . . . . . . 9
Item 9. Changes in and Disagreements With
Accountants of Accounting and
Financial Disclosure . . . . . . . . . . 9
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . 9
Item 11. Executive Compensation. . . . . . . . . . . 9
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . 9
Item 13. Certain Relationships and
Related Transactions . . . . . . . . . . 10
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on 8-K . . . . . . . . . . . . . 10
Signatures . . . . . . . . . . . . . . . . . . . . . 11
Exhibit Index. . . . . . . . . . . . . . . . . . . . 14
</TABLE>
Item 1. Business
Harris & Harris Group, Inc. (the "Registrant" or "Company") is a venture
capital investment company, operating as a Business Development Company
("BDC") under the Investment Company Act of 1940 (the "1940 Act"). The
Company's objective is to achieve long-term capital appreciation, rather than
current income, from its investments. The Company has invested, and expects
to continue to invest, a substantial portion of its assets in private,
development stage or start-up companies, and in the development of new
technologies in a broad range of industry segments. These private businesses
tend to be thinly capitalized, unproven, small companies that lack management
depth and have not attained profitability or have no history of operations.
The Company 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. The Company may participate in expansion
financing and leveraged buy-out financing of more mature operating companies
as well as other investments. As a venture capital company, the Company
invests in, and provides managerial assistance to, its private investees
which, in its opinion, have significant potential for growth. There is no
assurance that the Company's investment objective will be achieved.
The Registrant was incorporated under the laws of the State of New York
in August 1981. Prior to September 30, 1992, the Company was registered and
filed under the reporting requirements of the Securities and Exchange Act of
1934 as an operating company. On that date the Company commenced operations
as a closed end, non-diversified investment company under the 1940 Act. On
July 26, 1995, the Company elected to become a business development company
subject to the provision of Sections 55 through 65 of the 1940 Act, as amended
by the Small Business Incentive Act of 1980. As a BDC, the Company operates
as an internally managed investment company whereby its officers and
employees, under the general supervision of its Board of Directors, conduct
its operations.
Venture Capital Investments
The Company has invested, and expects to continue to invest, a
substantial portion of its assets in private, development stage or start-up
companies. The Company may initially 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. In connection with its venture capital investments, the
Company may be involved in recruiting management, formulating operating
strategies, product development, marketing and advertising, assisting in
financial plans, as well as providing management in the initial, start-up
stages and establishing corporate goals. The Company may assist in raising
additional capital for such companies from other potential investors and may
subordinate its own investment to that of other investors. The Company may
also find it necessary or appropriate to provide additional capital of its
own. The Company may introduce such companies to potential joint venture
partners, suppliers and customers. In addition, the Company may assist in
establishing relationships with investment bankers and other professionals.
The Company may also assist with mergers and acquisitions. The Company may
derive income from such companies for the performance of any of the above
services. Because of the speculative nature of these investments and the lack
of any market for such securities, there is significantly greater risk of loss
than is the case with traditional investment securities. The Company expects
that some of its venture capital investments will be a complete loss or will
be unprofitable and that some will appear likely to become successful, but
never realize their potential. The Company has been and will continue to be
risk seeking rather than risk averse in its approach to its venture capital
and other investments.
1
The Company may control a company for which it has provided venture
capital, or it may be represented on the company's board of directors by one
or more of its officers or directors, who may also serve as officers of such a
company. Particularly during the early stages of an investment, the Company
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, the Company expects that its role in the company's operations will
diminish. The Company seeks to assist each company in establishing its own
independent capitalization, management and board of directors. The Company
expects to be able to reduce its active involvement in the management of its
investment in those start-up companies that become successful by a liquidity
event, such as a public offering or sale of a company.
The Company has invested and expects to continue to invest a substantial
portion of its 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.
The Company expects to make speculative investments that have limited
marketability and a greater risk of investment loss than less speculative
issues. The Company does not seek to invest in any particular industries or
categories of investments.
Intellectual Property
The Company believes there is a role for organizations that can assist
in technology transfer. Scientists and institutions that develop and patent
intellectual property increasingly seek the rewards of entrepreneurial
commercialization of their inventions, particularly as governmental,
philanthropic and industrial funding for research has become harder to obtain.
The Company believes that several factors combine to give it a high value-added
role to play in the commercialization of technology: its experience in
organizing and developing successful new companies; its willingness to invest
its own capital at the highest risk, seed stage; its access to high-grade
institutional sources of intellectual property; its experience in mergers,
acquisitions and divestitures; its access to and knowledge of the capital
markets; and its willingness to do as much of the early work as it is
qualified to do.
The Company's form of investment may include: 1) 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 commercialize intellectual property. Income from the Company's
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. At some point during the commercialization of a technology,
the Company's investment may be transformed into ownership of securities of a
development stage or start-up company as discussed above. Investing in
intellectual property is highly risky.
2
Illiquidity of Investments
Many of the Company's investments consist of securities acquired
directly from the issuer in private transactions. They may be subject to
restrictions on resale or otherwise be illiquid. The Company does not
anticipate that there will be any established trading market for such
securities. Additionally, many of the securities that the Company may invest
in will not be eligible for sale to the public without registration under the
Securities Act of 1933, as amended, which could prevent or delay any sale by
the Company of such investments or reduce the amount of proceeds that might
otherwise be realized therefrom. Restricted securities generally sell at a
price lower than similar securities not subject to restrictions on resale.
Further, even if a portfolio company or investee registers its securities and
becomes a reporting company under the Securities and Exchange Act of 1934, the
Company may be considered an insider by virtue of its board representation and
would be restricted in sales of such company's securities.
Managerial Assistance
The Registrant believes that providing managerial assistance to its
investees is critical to its business development activities. "Making
available significant managerial assistance" as defined in the 1940 Act with
respect to a business development company such as the Registrant means (a) any
arrangement whereby a business development company, through its directors,
officers, employees or general partners, offers to provide, and if accepted,
does so provide, significant guidance and counsel concerning the management,
operations, or business objectives and policies of a portfolio company; or (b)
the exercise by a business development company of a controlling influence over
the management or policies of a portfolio company by a business development
company acting individually or as a part of a group acting together which
controls such portfolio company. The Registrant is required by the 1940 Act
to make significant managerial assistance available at least with respect to
investee companies that the Registrant treats as qualifying assets for
purposes of the 70% test (see "Regulation"). The nature, timing, and amount
of managerial assistance provided by the Registrant vary depending upon the
particular requirements of each investee company.
The Registrant may be involved with its investees in recruiting
management, product planning, marketing and advertising and the development of
financial plans, operating strategies and corporate goals. In this
connection, the Registrant may assist clients in developing and utilizing
accounting procedures to efficiently and accurately record transactions in
books of account which will facilitate asset and cost control and the ready
determination of results of operations. The Registrant also seeks capital for
its investees from other potential investors and occasionally subordinates its
own investment to those of other investors. The Registrant introduces its
investees to potential suppliers, customers and joint venture partners and
assists its investees in establishing relationships with commercial and
investment bankers and other professionals, including management consultants,
recruiters, legal counsel and independent accountants. The Registrant also
assists with joint ventures, acquisitions and mergers.
3
In connection with its managerial assistance, the Registrant may be
represented by one or more of its officers or directors on the board of
directors of an investee. As an investment matures and the investee develops
management depth and experience, the Registrant's role will become
progressively less active. However, when the Registrant owns or on a pro
forma basis could acquire a substantial proportion of a more mature investee
company's equity, the Registrant remains active in and will frequently
initiate planning of major transactions by the investee. The Registrant's
goal is to assist each investee company in establishing its own independent
and effective board of directors and management.
Need for Follow-On Investments
Following its initial investment in investees, the Company has made and
anticipates that it will continue to make additional investments in such
investees as "follow-on" investments, in order to increase its investment in
an investee, and may exercise warrants, options or convertible securities that
were acquired in the original financing. Such follow-on investments may be
made for a variety of reasons including: 1) to increase the Company's exposure
to an investee, 2) to acquire securities issued as a result of exercising
convertible securities that were purchased in the original financing, 3) to
preserve the Company's proportionate ownership in a subsequent financing, or
4) in an attempt to preserve or enhance the value of the Company's investment.
There can be no assurance that the Company will make follow-on investments or
have sufficient funds to make such investments; the Company will have the
discretion to make any follow-on investments as it determines, subject to the
availability of capital resources. The failure to make such follow-on
investments may, in certain circumstances, jeopardize the continued viability
of an investee and the Company's initial investment, or may result in a missed
opportunity for the Company to increase its participation in a successful
operation.
Competition
Numerous companies and individuals are engaged in the venture capital
business and such business is intensely competitive. Most of the competitors
have significantly greater experience, resources and managerial capabilities
than the Company and are therefore in a better position than the Company to
obtain access to attractive venture capital investments.
4
Regulation
The Small Business Investment Incentive Act of 1980 modified the
provisions of the 1940 Act that are applicable to a BDC. After filing its
election to be treated as a BDC, a company may not withdraw its election
without first obtaining the approval of holders of a majority of its
outstanding voting securities. The following is a brief description of
the 1940 Act, as modified by the Small Business Investment Incentive Act of
1980, and as qualified in its entirety by the reference to the full text of
the 1940 Act and the rules thereunder by the Securities and Exchange
Commission (the "SEC").
Generally, to be eligible to elect BDC status, a company must primarily
engage in the business of furnishing capital and managerial expertise to
companies which do not have ready access to capital through conventional
financial channels. Such portfolio companies are termed "eligible portfolio
companies." More specifically, in order to qualify as a BDC, a company must
(i) be a domestic company, (ii) have registered a class of its securities or
have filed a registration statement with the SEC pursuant to Section 12 of the
Exchange Act of 1934; (iii) operate for the purpose of investing in the
securities of certain types of portfolio companies, namely, immature or
emerging companies and businesses suffering or just recovering from financial
distress (see following paragraph); (iv) extend significant managerial
assistance to such portfolio companies; (v) have a majority of "disinterested"
directors (as defined in the 1940 Act); and (vi) file (or, under certain
circumstances, intend to file) a proper notice of election with the SEC.
An eligible portfolio company generally is a domestic company that is
not an investment company and that (i) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's over-the-
counter margin list; (ii) is actively controlled by a BDC and has an affiliate
of a BDC on its board of directors; or (iii) meets such other criteria as may
be established by the SEC. Control under the 1940 Act is presumed to exist
where a BDC owns 25% of the outstanding securities of the investee.
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms,
insurance companies, investment banking firms and investment companies.
Moreover, the 1940 Act limits the type of certain assets necessary for its
operations (such as office furniture, equipment and facilities) if, at the
time of acquisition, less than 70% of the value of the Company's assets
consist of qualifying assets. Qualifying assets include: (i) securities of
companies that were eligible portfolio companies at the time such company
acquired their securities; (ii) securities of bankrupt or insolvent companies
that were eligible at the time of such company's initial investment in those
companies: (iii) securities received in exchange for or distributed in or with
respect to any of the foregoing; and (iv) cash items, government securities
and high-quality short-term debt. The 1940 Act also places restrictions on
the nature of the transactions in which, and the persons for whom, securities
can be purchased in order for the securities to be considered qualifying
assets. Such restrictions include limiting purchases to transactions not
involving a public offering and acquiring securities from either the portfolio
company or their officers, directors or affiliates.
5
The Company is permitted by the 1940 Act, under specified conditions, to
issue multiple classes of senior debt and a single class of preferred stock if
its asset coverage, as defined in the 1940 Act, is at least 200% after the
issuance of the debt or the preferred stock (i.e., such senior securities may
not be in excess of 50% of its net assets). If the value of the Company's
assets, as defined, were to increase through the issuance of additional
capital stock or otherwise, the Company would be permitted under the 1940 Act
to issue senior securities.
The Company may sell its securities at a price that is below the
prevailing net asset value per share only after a majority of its
disinterested directors has determined that such sale would be in the best
interests of the Company and its stockholders and upon the approval by the
holders of a majority of its outstanding voting securities, including a
majority of the voting securities held by non-affiliated persons. If the
offering of the securities is underwritten, a majority of the disinterested
directors must determine in good faith that the price of the securities being
sold is not less than a price which closely approximates market value of the
securities, less any distribution discount or commission. As defined by the
1940 Act, the term "majority of the Company's outstanding voting securities"
means the vote of (i) 67% or more of the Company's Common Stock present at the
meeting, if the holders of more than 50% of the outstanding Common Stock are
present or represented by proxy, or (ii) more than 50% of the Company's
outstanding Common Stock, whichever is less.
Most of the transactions involving the Company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the
prior approval of the Commission under the 1940 Act prior to its amendment by
the Small Business Investment Incentive Act are now permissible upon the prior
approval of a majority of the Company's independent directors and a majority
of the directors having no financial interest in the transactions. However,
certain transactions involving certain closely affiliated persons of the
Company, including its directors, officers, and employees, may still require
the prior approval of the Commission. In general, (i) any person who owns,
controls or holds power to vote, more than 5% of the Company's outstanding
Common Stock; (ii) any director, executive officer or general partner of that
person; and (iii) any person who directly or indirectly controls, is
controlled by, or is under common control with, that person, must obtain the
prior approval of a majority of the Company's independent directors and, in
some situations, the prior approval of the Commission, before engaging in
certain transactions involving the Company or any company controlled by the
Company. The 1940 Act generally does not restrict transactions between the
Company and its portfolio companies. While a BDC may change the nature of its
business so as to cease being a BDC (and in connection therewith withdraw its
election to be treated as a BDC) only if authorized to do so by a majority
vote (as defined in the 1940 Act) of its outstanding voting securities,
stockholder approval of changes in other fundamental investment policies of a
BDC is not required (in contrast to the general 1940 Act requirement, which
requires stockholder approval for a change in any fundamental investment
policy). The Company is entitled to change its diversification status without
stockholder approval.
6
Item 2. Properties
The Company maintains its offices at One Rockefeller Plaza, Suite 1430,
New York, New York 10020, where it leases approximately 3,400 square feet of
office space pursuant to a lease agreement expiring in 2003.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
On Friday, October 20, 1995, Registrant held its Annual Meeting of
Shareholders, for the following purposes: 1) to elect directors of the
Company; 2) to consider and act upon a proposal to authorize options to be
automatically granted to non-employee Directors under the 1988 Stock Option
Plan; 3) to ratify, confirm and approve the Board of Directors' selection of
Arthur Andersen LLP as the Company's independent public accountant for its
fiscal year ending December 31, 1995. All of the nominees at the October 20,
1995 annual meeting were elected directors by an affirmative vote of at least
89% of the total shares outstanding. With respect to purpose number two,
described as proposal "to consider and act upon a proposal to authorize
options to be automatically granted to non-employee Directors under the 1988
Stock Option Plan" in the Registrant's 1995 Proxy Statement, the affirmative
votes cast were 8,528,138, the negative votes cast were 514,787 and those
abstaining were 109,405, effecting passage. With respect to purpose number
three, described as proposal "to ratify, confirm and approve the Board of
Directors' selection of Arthur Andersen LLP" as the Company's independent
public accountant for its fiscal year ending December 31, 1995, the
affirmative votes cast were 9,140,065, the negative votes cast were 31,050
and those abstaining were 55,050, effecting passage.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information set forth under the caption "Shareholder Information-
Shareholders and Market Prices" on page 36 of the 1995 Annual Report is herein
incorporated by reference.
7
Item 6. Selected Financial Data
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Financial Position as of December 31:
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1995 1994 1993 1992
Total assets $ 37,524,555 $ 32,044,073 $ 34,534,724 $ 29,377,482
Liabilities $ 962,646 $ 733,271 $ 1,785,427 $ 6,724,139
Net asset value $ 36,561,909 $ 31,310,802 $ 32,749,297 $ 22,653,343
Net asset value
per share $ 3.54 $ 3.43 $ 3.66 $ 2.71
Shares
outstanding 10,333,902 9,136,747 8,944,828 8,350,999
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Operating Data for year ended December 31 unless otherwise noted:
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Three months ended
1995 1994 1993 December 31, 1992
Revenues $ 1,109,517 $ 820,276 $ 453,950 $ 167,668
Net operating
loss (1,099,409) (2,278,882) (1,614,625) (203,295)
Net realized
gain (loss)
on investments 1,371,349 96,856 23,590,570 (128,332)
Net realized
income (loss) 271,940 (2,182,026) 21,975,945 (331,627)
Net increase
(decrease)
in realized
appreciation
on investments 158,219 (886,040) (13,083,344) (1,247,191)
Net increase
(decrease) in
net assets
resulting from
operations 430,159 (3,068,066) 8,892,601 (1,578,818)
Increase (decrease)
in net assets
resulting from
operations
per share $ 0.04 $ (0.34) $ 1.03 $ (0.19)
</TABLE>
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 31 through 35 of the Company's 1995 Annual Report are herein
incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 12 through 30 of the Company's 1995 Annual Report are herein
incorporated by reference. See also Item 14 of the Form 10K - "Exhibits,
Financial Statement Schedules and Reports of Form 8K"
Item 9. Changes in and Disagreements With Accountants of Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" on
page 3 and "Executive Officers" on page 8 in the Company's definitive Proxy
Statement for Annual Meeting of Shareholders to be held April 11, 1996, filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, on or
about March 4, 1996 (the "1996 Proxy Statement") is herein incorporated by
reference.
Item 11. Executive Compensation
The information set forth under the caption "Summary Compensation
Table" on page 11 in the 1996 Proxy Statement is herein incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security ownership of
Directors, Nominees, and Officers and other principal holders of the
Corporations's voting securities" on page 7 in the 1996 Proxy Statement is
herein incorporated by reference.
9
Item 13. Certain Relationships and Related Transactions
There were no relationships or transactions within the meaning of this
item during the year ended December 31, 1995.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1)The following financial statements included on pages 12 through 30
of the Company's 1995 Annual Report are herein incorporated by reference:
(A) Statement of Assets and Liabilities as of December 31, 1995 and 1994
Statement of Operations for the years ended December 31, 1995,
1994 and 1993
Statement of Changes in Net Assets for the years ended December 31,
1995, 1994, and 1993
Statement of Cash Flows for the years ended December 31, 1995,
1994, and 1993
(B) Notes to Financial Statements
(C) Financial Highlights (selected per share data and ratio)
(a)(2)The following financial statement schedules are submitted herewith:
Schedule I - Marketable Securities - Other Investments
The information set forth under the captions "Schedule of Investments"
and "Footnote to Schedule of Investments" on pages 16 through 23 of the 1995
Annual Report are herein incorporated by reference.
Schedules other than those listed above have been omitted because they
are not applicable or the required information is presented in the financial
statements and/or related notes.
(a)(3)Exhibits. The exhibits which are filed with this Form 10-K or
incorporated herein by reference are set forth in the Exhibit Index on page 13.
(b) Reports on Form 8-K. The Registrant did not file any reports of
Form 8-K during the last quarter of 1995.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HARRIS & HARRIS GROUP, INC.
Date: March 28, 1996 By: /s/___________________
Charles E. Harris
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
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Signatures Title Date
/s/___________________ Chairman of the Board of Directors March 28, 1996
Charles E. Harris and Chief Executive Officer
/s/___________________ President, Chief Operating Officer March 28, 1996
Robert B. Schulz and Chief Compliance Officer
/s/___________________ Executive Vice President March 28, 1996
C. Richard Childress and Chief Financial Officer
/s/___________________ Executive Vice President March 28, 1996
David C. Johnson, Jr.
/s/___________________ Vice President, Controller, Treasurer March 28, 1996
Rachel M. Pernia and Principal Accounting Officer
11
/s/___________________ Director March 25, 1996
C. Wayne Bardin
/s/___________________ Director March 25, 1996
G. Morgan Browne
/s/___________________ Director March 22, 1996
Harry E. Ekblom
/s/___________________ Director March 28, 1996
Charles F. Hays
/s/___________________ Director March 26, 1996
Jon J. Masters
/s/___________________ Director March 28, 1996
Glenn E. Mayer
/s/___________________ Director March 24, 1996
William R. Polk
/s/___________________ Director March 21, 1996
James E. Roberts
</TABLE>
12
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under
the Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with
this report.)
Exhibit No. Description
- ----------- -----------
3.1(a) * Restated Certificate of Incorporation of the Registrant, as
amended, incorporated by reference to Exhibit 3 (a) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
3.1(b) * Restated By-laws of the Registrant.
4.1 Specimen certificate of common stock certificate, incorporated
by reference to Exhibit 4 to Company's Registration Statement on
Form N-2 filed October 29, 1992.
8.1 * Harris & Harris Group, Inc. 1988 Stock Option Plan, as amended
and restated.
9.1 * Harris & Harris Group, Inc. Custodian Agreement with JP Morgan
10.1 Employment Agreement by and between the Registrant and Charles
E. Harris dated August 15, 1990, incorporated by reference to
Exhibit 10 (r) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
10.2 Amendment No.1 to the Employment Agreement dated as of August
15, 1990 between the Registrant and Charles E. Harris dated as
of June 30, 1992, incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement in Form N-2 filed on
October 29, 1992.
10.3 Amendment No.2 to the Employment Agreement dated as of August
15, 1990 between the Registrant and Charles E. Harris dated as
of January 6, 1993, incorporated by reference to Exhibit 10.22
to the Company's Registration Statement in Form N-2 filed on
December 3, 1993.
10.4 * Amendment No.3 to the Employment Agreement dated as of August
15, 1990 between the Registrant and Charles E. Harris dated as
of June 30, 1994.
10.5 Severance Compensation Agreement by and between the Registrant
and Charles E. Harris dated August 15, 1990, incorporated by
reference to exhibit 10 (s) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
13
10.6 Employment Agreement by and between the Registrant and C.
Richard Childress dated August 15, 1990, incorporated by
reference to exhibit 10 (t) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.7 Amendment No. 1 to the Employment Agreement dated as of August
15, 1990 between the Registrant and C. Richard Childress dated
as of June 30, 1992 incorporated by reference to Exhibit 10.2
to the Company's Registration Statement in Form N-2 filed on
October 29, 1992.
10.8 Amendment No.2 to the Employment Agreement dated as of August
15, 1990 between the Registrant and C. Richard Childress dated
as of January 6, 1993, incorporated by reference to Exhibit
10.22 to the Company's Registration Statement in Form N-2 filed
on December 3, 1993.
10.9 * Amendment No.3 to the Employment Agreement dated as of August
15, 1990 between the Registrant and C. Richard Childress dated
as of June 30, 1994.
10.10 Severance Compensation Agreement by and between the Registrant
and C. Richard Childress dated August 15, 1990, incorporated by
reference to Exhibit 10 (u) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
10.11 Warrant issued by the Registrant to Charles E. Harris dated
September 23, 1985 as clarified and restated on May 1, 1989,
incorporated by reference to Exhibit 10 (n) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989.
10.12 Warrant issued by the Registrant to C. Richard Childress dated
September 23, 1985 as clarified and restated on May 1, 1989,
incorporated by reference to Exhibit 10 (o) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989.
10.13 * Stock Purchase Agreement, Standstill Agreement and Termination
and Release by and among Harris & Harris Group, Inc. and
American Bankers Life Assurance Company of Florida dated May 18,
1995.
10.14 * Form of Indemnification Agreement which has been established
with all directors and executive officers of the Company.
10.15 * Definitive Proxy Statment for the Annual Meeting of Shareholders
to be held on April 11, 1996
13 * Annual Report to shareholders for year ended December 31, 1995
24 * Consent of Arthur Andersen LLP
14
CERTIFICATE OF INCORPORATION
OF
HARRIS & HARRIS GROUP, INC.
1. The name of the Corporation is Harris & Harris Group, Inc.
2. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Business
Corporation Law. The Corporation is not formed to engage in any act or
activity requiring the consent or approval of any state official, department,
board, agency or other body without such consent or approval first being
obtained.
3. The office of the Corporation is to be located in the County of
New York and State of New York.
1
4. The aggregate number of shares which the Corporation shall have
authority to issue is 27,000,000 shares, consisting of 25,000,000 shares of
Common Stock, par value one cent ($.01) per share, and 2,000,000 shares of
Preferred Stock, par value ten cents ($.10) per share. The designations,
relative rights, preferences and limitations of the shares of each class shall
be as follows: Subject to the provisions hereof, the Board of Directors is
hereby expressly authorized to divide shares of Preferred Stock into one or
more series, to issue the shares of Preferred Stock in such series, and to fix
the number of shares to be included in each series, and the designation,
relative rights, preferences and limitations of all shares of each series.
The authority of the Board of Directors with respect to each series shall
include, without limitation, the determination of any or all of the following
matters:
(a) the number of shares constituting such series and the
designation thereof to distinguish the shares of such series from the
shares of all other series;
(b) the annual dividend rate on the shares of such series and whether
such dividends shall be cumulative and, if cumulative, the date
from which dividends shall accumulate;
(c) the redemption price or prices for shares of such series, if
redeemable, and the terms and conditions of such redemption;
(d) the preference, if any, of shares of such series in the event of
any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation;
(e) the voting rights (including but not limited to, the number of
votes per share), if any, of shares of such series in addition to
voting rights prescribed by law, and the terms, if any, of such voting
rights;
(f) the rights, if any, of shares of such series to be converted into
shares of any other class or series, including Common Stock, and the
terms and conditions of such conversion;
(g) the terms or amount of any sinking fund provided for the purchase
or redemption of such series; and
(h) any other relative rights, preferences and limitations of such
series.
The shares of each series of Preferred Stock may vary from the shares of any
other series of Preferred Stock as to any of such matters.
5. Each share of Common Stock shall be equal in all respects to every
other share of Common Stock.
2
6. No shareholder of the Corporation shall have preemptive or
preferential rights to any shares of any class of stock of the Corporation or
obligations convertible into stock of the Corporation whether now or hereafter
authorized.
7. The Secretary of State is designated as the agent of the
Corporation upon whom process against it may be served. The post office
address to which the Secretary of State shall mail a copy of any process
against the Corporation served upon him is:
One Rockefeller Plaza
Suite 1430
New York, New York 10020
Attention: The Chairman of the Board of Directors
8. Each person who at any time is or was a director or officer of the
Corporation shall be indemnified by the Corporation to the fullest extent
permitted by the New York Business Corporation Law as it may be amended or
interpreted from time to time, including the advancing of expenses, subject to
any limitations imposed by the Investment Company Act of 1940 and the Rules
and Regulations promulgated thereunder. Furthermore, to the fullest extent
permitted by New York law, as it may be amended or interpreted from time to
time, subject to the limitations imposed by the Investment Company Act of 1940
and the Rules and Regulations promulgated thereunder, no director or officer
of the Corporation shall be personally liable to the Corporation or its
stockholders for any act or failure to act in any capacity for which such
person would be entitled to indemnification hereunder. No amendment of the
Certificate of Incorporation of the Corporation or repeal of any of its
provisions shall limit or eliminate any of the benefits provided to any person
who at any time is or was a director or officer of the Corporation under this
Article in respect of any act or omission that occurred prior to such
amendment or repeal.
3
IN WITNESS WHEREOF, we have made and signed this certificate this 27th day of
December, A.D. 1995 and we affirm the statements contained therein as true
under penalties of perjury.
/s/____________________________________
Robert B. Schulz, President
/s/____________________________________
Susan Neissa-Carey, Corporate Secretary
4
BY-LAWS
OF
HARRIS & HARRIS GROUP, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office of the
corporation shall be located in the City, County and State of New York.
SECTION 2. OTHER OFFICES. The corporation may have other offices
and places of business, within or without the State of New York, as shall be
determined by the directors.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the shareholders may
be held at such place or places, within or without the State of New York, as
shall be fixed by the directors and stated in the notice of the meeting.
SECTION 2. ANNUAL MEETING. The annual meeting of shareholders
for the election of directors and the transaction of such other business as
may properly come before the meeting shall be held on the date selected by the
Board of Directors in each calendar year.
SECTION 3. NOTICE OF ANNUAL MEETING. Notice of the annual meeting
shall be given to each shareholder entitled to vote, at least ten days prior
to the meeting.
SECTION 4. SPECIAL MEETINGS. Special meetings of the shareholders
for any purpose or purposes may be called by the President or Secretary.
1
SECTION 5. NOTICE OF SPECIAL MEETING. Notice of a special meeting,
stating the time, place and purpose or purposes thereof, shall be given
to each shareholder entitled to vote, at least ten days prior to the meeting.
The notice shall also set forth at whose direction it is being issued.
SECTION 6. QUORUM. At any meeting of the shareholders, the
holders of a majority of the shares of stock then entitled to vote, shall
constitute a quorum for all purposes, except as otherwise provided by law or
the Certificate of Incorporation.
SECTION 7. VOTING. At each meeting of the shareholders, every
holder of stock then entitled to vote may vote in person or by proxy, and,
except as may be otherwise provided by the Certificate of Incorporation, shall
have one vote for each share of stock registered in his name.
SECTION 8. ADJOURNED MEETINGS. Any meeting of shareholders may
be adjourned to a designated time and place by a vote of a majority in interest
of the shareholders present in person or by proxy and entitled to vote,
even though less than a quorum is so present. No notice of such an adjourned
meeting need be given, other than by announcement at the meeting, and any
business may be transacted which might have been transacted at the meeting as
originally called.
SECTION 9. ACTION BY WRITTEN CONSENT OF SHAREHOLDERS. Whenever
by any provision of statute or of the Certificate of Incorporation or of these
By-Laws, the vote of shareholders at a meeting thereof is required or permitted
to be taken in connection with any corporate action, the meeting and vote
of shareholders may be dispensed with, if all the shareholders who would have
been entitled to vote upon the action if such meeting were held, shall consent
in writing to such corporate action being taken.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER. The number of directors of the corporation
shall be determined from time to time by resolutions of the directors, who
shall hold office for the term of one year and until their successors are duly
elected and qualify. The number of directors may be less than three when all
of the shares are owned by less than three shareholders, but in such event
the number of directors may not be less than the number of shareholders.
Directors need not be shareholders.
SECTION 2. POWERS. The Board of Directors may adopt such rules
and regulations for the conduct of its meetings, the exercise of its powers
and the management of the affairs of the corporation as it may deem proper,
not inconsistent with the laws of the State of New York, the Certificate of
Incorporation or these By-Laws.
2
In addition to the powers and authorities by these By-Laws expressly
conferred upon them, the Board of Directors may exercise all such powers of
the corporation and do such lawful acts and things except as are by statute,
the Certificate of Incorporation or these By-Laws directed or required to be
exercised or done by the shareholders.
SECTION 3. MEETING, QUORUM, ACTION WITHOUT MEETING. Meetings of
the Board of Directors may be held at any place, either within or outside the
State of New York, provided a quorum be in attendance. Except as may be
otherwise provided by the Certificate of Incorporation or by the Business
Corporation Law, a majority of the directors in office shall constitute a
quorum at any meeting of the Board of Directors and the vote of a majority of
a quorum of directors shall constitute the act of the Board of Directors.
The Board of Directors may hold an annual meeting, without notice,
immediately after the annual meeting of shareholders. Regular meetings of the
Board of Directors may be established by a resolution adopted by the Board of
Directors. The Chairman of the Board of Directors may call, and at the request
of any two directors must call, a special meeting of the Board of Directors,
three days notice of which shall be given by overnight United States Mail or
by Federal Express or any other private overnight courier service, or two
days notice of which shall be given personally or by telephone, telecopier
or telefax (or similar communications equipment), telegram or cable, to each
director.
Any one or more members of the Board of Directors or any Committee
thereof may participate in a meeting of such Board of Directors or Committee
by means of a conference telephone call or similar communications equipment
allowing all persons participating in the meeting to hear each other at the
same time, if before the meeting the Chairman of the Board of Directors or the
Chairman of such Committee, as the case may be, determines that an emergency
or other extraordinary circumstances exist, making telephone participation in
the meeting by one or more directors appropriate. The determination by the
Chairman of the Board of Directors or the Chairman of a Committee thereof, as
the case may be, that an emergency or other extraordinary circumstances exist,
making telephone participation in the meeting by one or more directors
appropriate, shall be final and conclusive. Where authorized by the Chairman
of the Board of Directors or the Chairman of a Committee thereof, as described
above in this paragraph, participation by means of a conference telephone call
or similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time shall constitute presence in
person at the meeting.
3
Any action required or permitted to be taken by the Board of
Directors or any Committee thereof may be taken without a meeting if all
members of the Board of Directors or the Committee consent in writing to the
adoption of a resolution authorizing the action. The resolution and the
written consents thereto by the members of the Board of Directors or Committee
shall be filed with the minutes of the meetings of the Board of Directors or
Committee.
SECTION 4. VACANCIES, REMOVAL. Except as otherwise provided in
the Certificate of Incorporation or in the following paragraph, vacancies
occurring in the membership of the Board of Directors, from whatever cause
arising (including vacancies occurring by reason of the removal of directors
without cause and newly created directorships resulting from any increase in
the authorized number of directors), may be filled by a majority vote of the
remaining directors, though less than a quorum, or such vacancies may be
filled by the shareholders.
Except where the Certificate of Incorporation contains provisions
authorizing cumulative voting or the election of one or more directors by
class or their election by holders of bonds, or requires all action by
shareholders to be by a greater vote, any one or more [of] the directors may be
removed, (a) either for or without cause, at any time, by vote of the
shareholders holding a majority of the outstanding stock of the corporation
entitled to vote, present in person or by proxy, at any special meeting of the
shareholders or by written consent of all of the shareholders entitled to
vote, or (b) for cause, by action of the Board of Directors at any regular or
special meeting of the Board of Directors. A vacancy or vacancies occurring
from such removal may be filled at the special meeting of shareholders or at a
regular or special meeting of the Board of Directors.
SECTION 5. COMMITTEES. The Board of Directors, by resolution
adopted by a majority of the entire Board of Directors, may designate from its
members an Executive Committee or other committee or committees, each
consisting of three or more members, with such powers and authority (to the
extent permitted by law) as may be provided in said resolution.
4
ARTICLE IV
OFFICERS
SECTION 1. EXECUTIVE OFFICERS. The executive officers of the
corporation shall be a Chairman of the Board, a President, a Treasurer and a
Secretary, all of whom shall be elected annually by the Board of Directors,
who shall hold office at the pleasure of the Board of Directors. No one
person may serve simultaneously as both President and Secretary of the
corporation, but any two or more other offices may be held simultaneously by
the same person. All vacancies occurring among any of the officers shall be
filled by the Board of Directors.
SECTION 2. OTHER OFFICERS. The Board of Directors may appoint
such other officers and agents with such powers and duties as it shall deem
necessary.
SECTION 3. THE CHAIRMAN OF THE BOARD. The Chairman of the Board
of Directors shall be the chief executive officer of the corporation and,
while the Board of Directors is not in session, shall have general management
and control of the business and affairs of the corporation. He shall also
preside at all meetings of the Board of Directors and shall have and perform
such other duties as from time to time may be assigned to him by the Board of
Directors.
SECTION 4. THE PRESIDENT. The President, who may but need not be
a director, shall, in the absence of a Chairman of the Board, preside at all
meetings of the shareholders and directors. He shall have and perform such
other duties as from time to time may be assigned to him by the Board of
Directors or the Chairman of the Board.
SECTION 5. THE VICE-PRESIDENT. The Vice-President, if one be
elected, or if there be more than one, the senior Vice-President as determined
by the Board of Directors, in the absence or disability of the President,
shall exercise the powers and perform the duties of the President and each
Vice-President shall exercise such other powers and perform such other duties
as from time to time may be assigned to him by the Board of Directors, the
Chairman of the Board, or the President.
5
SECTION 6. THE TREASURER. The Treasurer shall have custody of
all funds, securities and evidences of indebtedness of the corporation; he
shall receive and give receipts and acquittances for moneys paid in on account
of the corporation, and shall pay out of the funds on hand all bills, payrolls,
and other just debts of the corporation, of whatever nature, upon maturity;
he shall enter regularly in books to be kept by him for that purpose, full
and accurate accounts of all moneys received and paid out by him on account
of the corporation, and he shall perform all other duties incident to the
office of Treasurer and as may be prescribed by the Board of Directors.
SECTION 7. THE SECRETARY. The Secretary shall keep the minutes
of all meetings of the Board of Directors and of the shareholders; he shall
attend to the giving and serving of all notices to shareholders and directors
or other notice required by law or by these By-Laws; he shall affix the seal
of the corporation to deeds, contracts and other instruments in writing
requiring a seal, when duly signed or when so ordered by the Board of Direc-
tors; he shall have charge of the certificate books and stock books and such
other books and papers as the Board of Directors may direct, and he shall
perform all other duties incident to the office of Secretary.
SECTION 8. SALARIES. The salaries and other compensation of all
officers and employees shall be fixed by the Board of Directors, or by any
committee designated from among the directors (in accordance with Article III,
Section 5, of these By-Laws) to handle such compensation matters, and the fact
that any officer is a director shall not preclude him from receiving a salary
and other compensation as an officer, or from voting upon the resolution
providing the same.
ARTICLE V
CAPITAL STOCK
SECTION 1. FORM AND EXECUTION OF CERTIFICATES. Certificates of
stock shall be in such form as required by the Business Corporation Law of New
York and as shall be adopted by the Board of Directors. They shall be numbered
and registered in the order issued; shall be signed by the Chairman or a
Vice-Chairman of the Board of Directors (if any) or by the President or Vice-
President and by the Secretary or an Assistant Secretary or the Treasurer or
an Assistant Treasurer and may be sealed with the corporate seal or a facsimile
thereof. When such a certificate is countersigned by a transfer agent or
registered by a registrar, the signatures of any such officers may be
facsimile.
6
SECTION 2. TRANSFER. Transfer of shares shall be made only upon
the books of the corporation by the registered holder in person or by attorney,
duly authorized, and upon surrender of the certificate or certificates
for such shares properly assigned for transfer.
SECTION 3. LOST OR DESTROYED CERTIFICATES. The holder of any
certificate representing shares of stock of the corporation may notify the
corporation of any loss, theft or destruction thereof, and the Board of
Directors may thereupon, in its discretion, cause a new certificate for the
same number of shares, to be issued to such holder upon satisfactory proof of
such loss, theft or destruction, and the deposit of indemnity by way of bond or
otherwise, in such form and amount and with such surety or sureties as the
Board of Directors may require, to indemnify the corporation against any loss
or liability by reason of the issuance of such new certificates.
SECTION 4. RECORD DATE. In lieu of closing the books of the
corporation, the Board of Directors may fix, in advance, a date, not exceeding
fifty days, nor less than ten days, as the record date for the determination
of shareholders entitled to receive notice of, or to vote, at any meeting of
shareholders, or to consent to any proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment of any divi-
dends, or allotment of any rights, or for the purpose of any other action.
ARTICLE VI
MISCELLANEOUS
SECTION 1. DIVIDENDS. The Board of Directors may declare dividends
from time to time upon the capital stock of the corporation from the surplus
or net profits available therefor.
SECTION 2. SEAL. The Board of Directors shall provide a suitable
corporate seal and shall be used as authorized by the By-Laws.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation
shall be determined by the Board of Directors.
SECTION 4. CHECKS, NOTES, ETC. Checks, notes, drafts, bills of
exchange and orders for the payment of money shall be signed or endorsed in
such manner as shall be determined by the Board of Directors.
7
The funds of the corporation shall be deposited in such bank or
trust company, and checks drawn against such funds shall be signed in such
manner as may be determined from time to time by the Board of Directors.
SECTION 5. NOTICE AND WAIVER OF NOTICE. Any notice required to
be given under these By-Laws may be waived by the person entitled thereto, in
writing, by telecopier or telefax (or similar communications equipment),
telegram, cable or radiogram, and the presence of any person at a meeting
shall constitute waiver of notice thereof as to such person.
8
ARTICLE VII
AMENDMENTS
SECTION 1. BY SHAREHOLDERS. These By-Laws may be amended at any
shareholders' meeting by vote of the shareholders holding a majority (unless
the Certificate of Incorporation requires a larger vote) of the outstanding
stock having voting power, present either in person or by proxy, provided
notice of the amendment is included in the notice or waiver of notice of such
meeting.
SECTION 2. BY DIRECTORS. The Board of Directors may also amend
these By-Laws at any regular or special meeting of the Board by a majority
(unless the Certificate of Incorporation requires a larger vote) vote of the
entire Board, but any By-Laws so made by the Board of Directors may be altered
or repealed by the shareholders.
BY-LAWS
OF
HARRIS & HARRIS GROUP, INC.
I certify that the following By-Laws, consisting of nine pages, each of
which I have initialed for identification, are the By-Laws:
(1) Adopted, as contemplated by Section 601(a) of the New York
Business Corporation Law, as amended, for and on behalf of the shareholders of
Harris & Harris Group, Inc. (the "corporation"), by a written action signed by
the corporation's sole incorporator and dated as of December 1, 1981;
(2) Approved and adopted by the corporation's Board of Directors
by a unanimous written consent in lieu of an organizational meeting dated as
of December 1, 1981; and
(3) As amended by the corporation's Board of Directors (a) at
its March 23, 1984, special meeting; (b) by a unanimous written consent of
directors dated as of April 13, 1984; (c) at its April 30, 1984, special
meeting; (d) at its July 9, 1984, meeting; (e) at its October 19, 1984,
meeting; (f) at its July 11, 1985, meeting; (g) at its November 17, 1988,
meeting; (h) at its April 25, 1989, meeting; (i) by a unanimous written
consent of directors dated June 9, 1992; and (j) by a unanimous written consent
of directors dated October 19, 1992.
/s/____________________________
Jay Middleton Tannon, Secretary
Dated: July 14, 1992
HARRIS & HARRIS GROUP, INC.
1988 STOCK OPTION PLAN
as Amended and Restated
1. PURPOSE
The 1988 Long Term Incentive Compensation Plan (the "1988 Plan") was
adopted by the Board of Directors on November 17, 1988 and approved by the
stockholders of Harris & Harris Group, Inc. (the "Corporation") on August 3,
1989. To enhance the effectiveness of the 1988 Plan, on April 20, 1994, the
Board of Directors amended and restated the 1988 Plan, and renamed it the 1988
Stock Option Plan, as Amended and Restated (the "Plan"). Such amendments were
approved by the stockholders of the Corporation on June 30, 1994. The Board
of Directors subsequently amended and restated the Plan on September 6, 1995,
as set forth herein, to permit issuance of shares to non-employee directors on
September 6, 1995, subject to stockholder approval and receipt of an exemptive
order from the Securities and Exchange Commission, and such amendments shall
become effective on the date that both have occurred (the "Amendment Effective
Date").
The purpose of the Plan is to advance the interests of the Corporation,
by providing a means to attract, retain, reward and motivate employees and
certain directors of the Corporation and its subsidiaries, and to encourage
stock ownership in the Corporation by such employees and directors by
providing them with a means to acquire a proprietary interest in the
Corporation. The Plan provides for awards of either Incentive Stock Options
as provided in section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") or Nonqualified Stock Options, or a combination thereof, to
selected employees and directors.
2. DEFINITIONS
For purposes of the Plan, the following terms shall have the
meanings below unless the context clearly indicates otherwise:
2.1 "Award" shall mean an Incentive Stock Option or a Nonqualified Stock
Option.
2.2 "Award Agreement" shall mean an agreement between a Participant and the
Corporation covering the specific terms and conditions of an Award.
2.3 "Board of Directors" shall mean the Board of Directors of the
Corporation.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
2.5 "Committee" shall mean the committee appointed by the Board of
Directors to administer the Plan pursuant to Section 4.
2.6 "Corporation" shall mean Harris & Harris Group, Inc.
2.7 "Disability" shall mean permanent disability within the meaning of
section 22(e)(3) of the Code.
2.8 "Employee" shall mean an employee of the Corporation or any of its
Subsidiaries.
2.9 "Effective Date" shall have the meaning specified in Section 10.
2.10 "Fair Market Value" shall have the meaning specified in Section
6.2(b).
2.11 "Incentive Stock Option" shall mean an option to purchase Stock
granted under Section 6.2 of the Plan, which is designated as an
Incentive Stock Option and is intended to meet the requirements of
section 422 of the Code.
2.12 "Nonqualified Stock Option" shall mean an option to purchase Stock
granted under Section 6.2 of the Plan that is not intended to be an
Incentive Stock Option.
2.13 "Option" shall mean an Incentive Stock Option or a Nonqualified Stock
Option.
2.14 "Option Period" shall mean the period from the date of the grant of
an Option to the date when the Option expires as stated in the terms of
the Award Agreement.
2.15 "Optionee" shall mean an Employee or an Outside Director, as the case
may be, who has been granted an Option under the Plan.
2.16 "Outside Director" shall mean a member of the Board of Directors who
is not an employee of the Corporation or any of its Subsidiaries.
2.17 "Outside Director Option" shall mean a Nonqualified Stock Option
granted to an Outside Director under Section 6.2 of the Plan.
2.18 "Participant" shall mean an Employee or an Outside Director, as the
case may be, who has been granted an Award under the Plan.
2.19 "Plan" shall mean this Harris & Harris Group, Inc. 1988 Stock Option
Plan, as Amended and Restated.
2.20 "Restricted Period" shall mean the period of time from the date of
grant of an Option to the date when the restrictions placed on the
Option lapse.
2.21 "Retirement" shall mean termination of employment with the Corporation
or any of its Subsidiaries after attaining age 55 (or earlier with the
consent of the Board).
2.22 "Stock" shall mean the Corporation's common stock of a par value of
$.01 per share.
2.23 "Subsidiary" shall mean any corporations (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation if,
at the time of granting an Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
2.24 "Termination of Employment" shall be deemed to have occurred at the
close of business on the last day on which an Employee is carried as an
active employee on the records of the Corporation or any of its
Subsidiaries. The Committee shall determine whether an authorized leave
of absence, or other absence on military or government service,
constitutes severance of the employment relationship between the
Corporation or a Subsidiary and the Employee.
3. STOCK SUBJECT TO THE PLAN
3.1 Authorized Stock. Subject to adjustment as provided in this Section,
the aggregate number of shares of Stock subject to an Award under the
Plan shall not exceed 20% of the shares of Stock outstanding on the date
of grant; provided, however, that if warrants, options, and rights of
the Corporation have been issued and are outstanding to persons other
than the Corporation's directors, officers, and employees at the time
of grant, then the aggregate number of shares of Stock subject to an
Award shall not exceed 15% of the shares of Stock outstanding on the
date of grant unless and until such warrants, rights and options issued
to such other persons have been exercised or have expired. Stock
delivered under the Plan may consist, in whole or in part, of authorized
and unissued shares or treasury shares. Upon approval by the Board of
Directors and subject to any applicable regulations and restrictions,
the Corporation may from time to time acquire shares of Stock in the
open market upon such terms as it deems appropriate for reserve in its
treasury in connection with exercises hereunder.
3.2 Effect of Expirations. In the event that any Award granted under the
Plan expires, is canceled or terminates without exercise, the shares of
Stock no longer subject to such Award shall be available to be rewarded
under the Plan.
3.3 Adjustments in Authorized Shares. In the event of any merger,
reorganization, consolidation, capitalization, separation, liquidation,
stock dividend, stock split, share combination, or other change in the
corporate structure of the Corporation affecting the number of shares of
Stock or the kind of shares or securities, an appropriate and
proportionate adjustment shall be made in the number and kind of shares
that may be delivered under the Plan, and in the number and kind of or
price of shares subject to outstanding Awards; provided that the number
of shares subject to any Award shall always be a whole number. Any
adjustment of an Incentive Stock Option under this Section shall be made
in such a manner so as not to constitute a "modification" within the
meaning of section 424(h)(3) of the Code.
3.4 Limitation on Grants. Grants of Options in any one calendar year to
any individual shall be limited to Options to purchase no more than
300,000 shares of Stock.
3.5 Limitation on Outside Director Grants. The number of shares of Stock
subject to an Outside Director Option granted to an Outside Director
under the Plan shall be equal to 20,000. The aggregate number of shares
of Stock that may be granted to Outside Directors under the Plan shall
not exceed 200,000, excluding any shares or options outstanding on
August 31, 1995.
4. ADMINISTRATION
4.1 The Committee. The Plan shall be administered by the Committee
consisting of not fewer than two Outside Directors who shall be
appointed from time to time by and shall serve at the discretion of the
Board of Directors, shall be "disinterested persons" within the meaning
of Rule 16b-3 ("Rule 16b-3") promulgated pursuant to the provisions of
the Securities Exchange Act of 1934 (the "Exchange Act"), and shall also
be "outside directors" within the meaning of section 162(m) of the
Code. Any Award shall also be approved pursuant to section 57(o) of
the Investment Company Act.
4.2 Authority of the Committee. Subject to the provisions of the Plan,
the Committee shall have sole power (i) to construe and interpret the
Plan; (ii) to establish, amend or waive rules and regulations for its
administration; (iii) to determine and accelerate the exercisability of
any Award (other than an Outside Director Option) or the termination of
any Restricted Period under an Award (other than an Outside Director
Option); (iv) to correct inconsistencies in the Plan or in any Award
Agreement or any other instrument relating to an Award; and (v)
subject to the provisions of Section 7, to amend the terms and
conditions of any outstanding Option, to the extent such terms and
conditions are within the discretion of the Committee as provided in
the Plan. The Committee, however, shall have no discretionary authority
with respect to Outside Director Options. Notwithstanding the
foregoing, no action of the Committee may, without the consent of the
person or persons entitled to exercise any outstanding Option or to
receive payment of any other outstanding Award, adversely affect the
rights of such person or persons.
4.3 Selection of Participants/Automatic Grants. The Committee shall have
the authority to grant Awards under the Plan from time to time to such
Employees (including officers of the Corporation and any of its
Subsidiaries who are Employees) as the Committee shall determine. In
addition, certain Outside Directors shall automatically receive
Outside Director Options pursuant to Section 6.2 of the Plan.
4.4 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders
or resolutions of the Board of Directors shall be final, conclusive and
binding on all persons, including the Corporation, Participants and
Participants' estates and beneficiaries.
4.5 Delegation of Certain Responsibilities. The Committee may, in its
sole discretion, delegate to one or more of its members or to one or
more agents the administration of the Plan under this Section 4 as it
may deem advisable. All authority delegated by the Committee under
this Section 4.5 shall be exercised in accordance with the provisions
of the Plan and any guidelines for the exercise of such authority that
may from time to time be established by the Committee.
4.6 Procedures of the Committee. All determinations of the Committee
shall be made by not less than a majority of its members present at a
meeting (in person or otherwise) at which a quorum is present, or by
unanimous written consent. A majority of the entire Committee shall
constitute a quorum for the transaction of business. To the fullest
extent permitted by law, no member of the Committee shall be liable,
and the Corporation shall indemnify each Committee member for any act
or omission with respect to his services on the Committee. Service on
the Committee shall constitute service as a director of the
Corporation so that members of the Committee shall be entitled to
indemnification and reimbursement for services as members of the
Committee to the same extent as for services as directors of the
Corporation.
5. ELIGIBILITY
Employees of the Corporation and its Subsidiaries who are expected to
contribute to the growth and profitability of the Corporation and its
Subsidiaries, and Outside Directors who have not previously received options
to purchase shares of Stock, are eligible to receive Awards.
6. AWARDS UNDER THE PLAN
6.1 General. Any Award granted under the Plan may be made either alone or
in conjunction with any other Award that may be granted under the Plan.
6.2 Incentive Stock Options/Nonqualified Stock Options/Outside Director
Options.
(a) Grants -- All Options granted under the Plan shall be evidenced by
an Award Agreement in such form as the Committee may from time to time
approve. All Options shall be subject to the terms and conditions
described in the remainder of this Section 6.2 and Options other than
Outside Director Options shall contain such additional terms and
conditions, which need not be the same in each case, not inconsistent
with the provisions of the Plan, as the Committee shall deem desirable.
More than one Award may be granted to the same Employee. With respect
to all Options other than Outside Director Options, the Committee shall
determine vesting periods or other Restricted Periods as it shall
deem desirable, including Restricted Periods that lapse upon the
achievement of performance goals relating to the Corporation.
(b) Outside Director Options -- Notwithstanding any other provision of
the Plan to the contrary, effective as of the Amendment Effective Date,
each Outside Director who has not previously received an option to
purchase shares of Stock, shall automatically receive an Outside
Director Option to purchase 20,000 shares of Stock. Thereafter, each
Outside Director, upon becoming an Outside Director, shall automatically
receive an Outside Director Option to purchase 20,000 shares of Stock;
provided, however, that Outside Directors who have previously received
options to purchase shares of Stock shall not receive Outside Director
Options. Outside Director Options shall vest in cumulative installments
of 20% per year, commencing as of the date of grant.
(c) Option Price -- The purchase price per share of Stock covered by
Options other than Outside Director Options shall be determined by the
Committee but shall not be less than 100% of the Fair Market Value of
such Stock on the date the Option is granted. The purchase price per
share of Stock covered by Outside Director Options shall be equal to
100% of the Fair Market Value of such stock on the date the Outside
Director Option is granted. The "Fair Market Value" shall be the
closing market price of the Stock as reported on the NASDAQ Stock
Market, or on any stock exchange on which the Corporation's shares may
then be listed, on the date of grant, or, if no trades were reported
on that date, the closing price on the most recent trading day
immediately preceding the date of the grant.
An Incentive Stock Option granted to an Optionee who, at the time the
Option is granted, owns (within the meaning of section 424(d) of the
Code) stock possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation or any Subsidiary,
shall have an exercise price that is at least 110% of the fair market
value of the Stock subject to the Option.
(d) Option Period -- The Option Period for all Options other than
Outside Director Options shall be determined by the Committee, but no
Option shall be exercisable later than ten years from the date of grant.
The Option Period for Outside Director Options shall be ten years from
the date of grant. Notwithstanding the foregoing, in the case of an
Optionee owning (within the meaning of section 424(d) of the Code), at
the time an Incentive Stock Option is granted, stock possessing more
than 10% of the total combined voting power of all classes of stock of
the Corporation or any Subsidiary, such Incentive Stock Option shall
not be exercisable later than five years from the date of grant. No
Option may be exercised at any time unless such Option is valid and
outstanding as provided in this Section 6.2.
(e) Limitation on Amount of Incentive Stock Options -- The aggregate
Fair Market Value (determined as of the time the Option is granted) of
the Stock with respect to which incentive stock options are exercisable
for the first time by a Participant during any calendar year under this
and all other stock option plans of the Corporation or any Subsidiary,
shall not exceed $100,000. Options or portions of Options exercisable
as a result of acceleration under Section 8.10 in excess of the $100,000
limit described herein shall be treated as Non-qualified Stock Options
for tax purposes.
(f) Nontransferability of Options -- No Option shall be transferable
by the Optionee otherwise than by will or by the laws of descent and
distribution, and such Option shall be exercisable, during the
Optionee's lifetime, only by the Optionee.
(g) Exercisability -- An Option may be exercised, so long as it is
valid and outstanding, from time to time in part or as a whole, subject
to any limitations with respect to the number of shares for which the
Option may be exercised at a particular time and to such other
conditions (e.g., conditions relating to the achievement of certain
performance goals) as the Committee in its discretion may specify upon
granting the Option (other than with respect to Outside Director
Options) or as otherwise provided in this Section 6.2.
(h) Method of Exercise -- To exercise an Option, the Participant or
the other person(s) entitled to exercise the Option shall give written
notice of exercise to the Corporation, specifying the number of full
shares to be purchased. Such notice shall be accompanied by payment in
full (either in cash or in form of Stock owned by Optionee described
below) for the Stock being purchased plus, in the case of Nonqualified
Stock Options, any required withholding tax as provided in Section 9.
With respect to all Options, payment in full or in part may be made in
the form of Stock owned by the Optionee (based on the Fair Market Value
of the Stock on the date the Option is exercised) evidenced by
negotiable Stock certificates registered either in the sole name of the
Optionee or the names of the Optionee and spouse, or by any combination
of cash or shares. No shares of Stock shall be issued unless the
Optionee has fully complied with the provisions of this Section 6.2(h).
(i) Termination of Employee's Employment -- After an Employee's
Termination of Employment, an Option may be exercised, subject to
adjustment as provided in Section 3.3 or 8.10, only with respect to
the number of shares of Stock that the Employee could have acquired by
an exercise of the Option immediately prior to the Termination of
Employment. Except to the extent otherwise provided by the Committee
or as described below, an Employee's right to exercise any Option shall
terminate 90 days after Termination of Employment. Notwithstanding the
foregoing, in no event shall such exercise occur after the expiration
date of the Option as specified in the applicable Award Agreement.
(i) At the expiration of three months (for Incentive Stock
Options) or three years (for Nonqualified Stock Options) after the
Employee's Retirement; provided, however, that if an Incentive
Stock Option is not exercised after three months, it will be treated
as a Nonqualified Stock Option for purposes of the Plan when it is
exercised; or
(ii) At the expiration of one year in the event of Disability of
the Employee (the determination of the Committee on any question
involving Disability shall be conclusive and binding); or
(iii) At the expiration of six months after the Employee's death
if the Employee's Termination of Employment occurs by reason of
death. Any Option exercised under this subparagraph (iii) may be
exercised in full by the legal representative of the estate of the
Employee or by the person or persons who acquire the right to
exercise such Option by bequest or inheritance.
(j) Cessation of Service as an Outside Director -- After an Outside
Director ceases to serve as an Outside Director, an Outside Director
Option may be exercised, subject to adjustment as provided in Section
3.3 or 8.10, only with respect to the number of shares of Stock that the
Outside Director could have acquired by an exercise of the Option
immediately prior to cessation of service as an Outside Director.
Except as described below, an Outside Director's right to exercise any
Option shall terminate 90 days after cessation of service as an Outside
Director. Notwithstanding the foregoing, in no event shall such
exercise occur after the expiration date of the Option as specified
in the applicable Award Agreement.
(i) At the expiration of three years after the Outside Director's
retirement from the Board; or
(ii) At the expiration of one year in the event of Disability of
the Outside Director; or
(iii) At the expiration of six months after the Outside Director's
death if the Outside Director's cessation of service as an Outside
Director occurs by reason of death. Any Option exercised under this
subparagraph (iii) may be exercised in full by the legal
representative of the estate of the Outside Director or by the
person or persons who acquire the right to exercise such Option by
bequest or inheritance.
(k) Not a Stockholder -- The person or persons entitled to exercise,
or who have exercised, an Option shall not be entitled to any rights as
a stockholder of the Corporation with respect to any shares subject to
the Option until such person or persons shall have become the holder of
record of such shares.
7. AMENDMENTS AND TERMINATION
7.1 Amendments and Termination. The Board may at any time and from time
to time alter, amend, suspend, or terminate the Plan in whole or in
part; providedthat, no amendment that requires stockholder approval in
order for the Plan to continue to comply with Rule 16b-3 or section
162(m) of the Code shall be effective unless the same shall be approved
by the requisite vote of the stockholders of the Corporation. The
provisions of the Plan relating to Outside Director Options shall not be
amended more than once in any six-month period other than to comport
with changes in the Code or the Employee Retirement Income Security Act
of 1974, as amended, or the rules or regulations thereunder.
Notwithstanding the foregoing, no amendment shall affect adversely any
of the rights of any Participant without such Participant's consent,
under any Award theretofore granted under the Plan. The power to grant
Awards under the Plan will automatically terminate ten years after the
Effective Date. If the Plan is terminated, any unexercised Option shall
continue to be exercisable in accordance with its terms and the terms of
the Plan in effect immediately prior to such termination.
7.2 Conditions on Awards. In granting an Award other than an Outside
Director Option, the Committee may establish any conditions that it
determines are consistent with the purposes and provisions of the Plan,
including, without limitation, a condition that the granting of an
Award is subject to the surrender for cancellation of any or all
outstanding Awards held by the Participant.
7.3 Selective Amendments. Any amendment or alteration of the Plan may be
limited to, or may exclude from its effect, particular classes of
Participants.
8. GENERAL PROVISIONS
8.1 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive compensation, and the Plan is not intended
to constitute a plan subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
8.2 Transfers, Leaves of Absence and Other Changes in Employment Status.
For purposes of the Plan (i) a transfer of an Employee from the
Corporation to a Subsidiary, or vice versa, or from one Subsidiary to
another; or (ii) a leave of absence, duly authorized in writing by
the Corporation, for military service or sickness, or for any other
purpose approved by the Corporation or a subsidiary if the period of
such leave does not exceed 90 days; or (iii) any leave of absence in
excess of 90 days approved by the Corporation, shall not be deemed a
Termination of Employment. The Committee, in its sole discretion
subject to the terms of the Award Agreement, shall determine the
disposition of all Awards made under the Plan in all cases involving
any substantial change in employment status other than as specified
herein.
8.3 Distribution of Stock--Securities Restrictions. The Committee may
require Participants receiving Stock pursuant to any Award under the
Plan to represent to and agree with the Corporation in writing that
the Participant is acquiring the shares for investment without a view
to distribution thereof. No shares shall be issued or transferred
pursuant to an Award unless such issuance or transfer complies with all
relevant provisions of law, including but not limited to, (i) the
limitations, if any, imposed in the state of issuance or transfer, (ii)
the restrictions, if any, imposed by the Securities Act of 1933, as
amended, the Exchange Act, and the rules and regulations promulgated
thereunder, and (iii) requirements of any stock exchange upon which the
Corporation's shares may then be listed. The certificates for such
shares may include any legend that the Committee deems appropriate to
reflect any restrictions on transfer.
8.4 Governing Law. The Plan and all determinations made and actions taken
pursuant thereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
8.5 Stop Transfer Orders. All certificates for shares of Stock delivered
under the Plan pursuant to any Award shall be subject to such stop
transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the
Stock is then listed, and any applicable Federal, state or foreign
securities law, and the Committee may cause a legend or legends to be
put on any such certificates to make appropriate reference to such
restrictions.
8.6 Other Compensation Plans. Nothing contained in the Plan shall prevent
the Board of Directors from adopting other compensation arrangements,
subject to stockholder approval if such approval is required.
8.7 Subsidiary Plans. The Committee may approve or adopt incentive
compensation plans of Subsidiaries under the Plan as required to meet
the provisions of the tax laws or any other applicable laws, rules or
regulations in the jurisdictions in which any Subsidiary operates.
Any shares of Stock issued under any such Subsidiary plans shall be
deemed to have been issued under the Plan.
8.8 Interpretation. The Plan is designed and intended to comply with Rule
16b-3 promulgated under the Exchange Act and, to the extent applicable,
with section 162(m) of the Code, and all provisions hereof shall be
construed in a manner to so comply.
8.9 No Right to Employment/Continuation as Director. Neither the action
of the Corporation in establishing the Plan, nor any action taken by it
or by the Board of Directors or the Committee under the Plan or any
Award Agreement, nor any provision of the Plan, shall be construed as
giving to any person the right (a) to be retained in the employ of the
Corporation or any Subsidiary or (b) to continue to serve as director
of the Corporation.
8.10 Change of Control/Tender Offers.
(a) For the purposes of this Section, a "change of control" shall be
deemed to have taken place on the tenth day after:
(i) Any individual, firm, corporation or other entity, or any
group (as defined in Section 13(d)(3) of the Securities Exchange Act
of 1934 becomes, directly or indirectly, the beneficial owner (as
defined in the General Rules and Regulations of the Securities and
Exchange Commission with respect to Sections 13(d) and 13(g) of the
Exchange Act) of more than 30% of the then outstanding shares of the
Corporation's capital stock entitled to vote generally in the
election of directors of the Corporation; or
(ii) The commencement of, or the first public announcement of the
intention of any individual, firm, corporation or other entity or of
any group (as defined in Section 13(d)(3) of the Exchange Act) to
commence a tender or exchange offer subject to Section 14(d)(1) of
the Act for any class of the Corporation's capital stock; or
(iii) The stockholders of the Corporation approve a definitive
agreement for (A) the merger or other business combination of the
Corporation with or into another corporation pursuant to which the
stockholders of the Corporation do not own, immediately after the
transactions, more than 50% of the voting power of the corporation
that survives and is a publicly owned corporation and not a
subsidiary of another corporation, or (B) the sale, exchange or
other disposition of all or substantially all of the assets of the
Corporation; provided, however, that a "change of control" shall not
be deemed to have taken place if beneficial ownership is acquired
by, or a tender or exchange offer is commenced or announced by,
the Corporation or any of its Subsidiaries, any profit sharing,
employee ownership or other employee benefit plan of the Corporation
or any Subsidiary or any trustee of or fiduciary with respect to any
such plan when acting in such capacity, or any group comprised solely
of such entities.
(b) In the event of a "change of control" as defined in Section 8.10(a),
then, unless the provisions of this Section 8.10 are suspended or
terminated by an affirmative vote of a majority of the Board of
Directors before the occurrence of such a change of control, all
outstanding Options shall become exercisable in full whether or not
otherwise exercisable at such time, and shall remain exercisable in full
thereafter until they expire pursuant to their respective terms (to the
extent so provided in the applicable Award Agreement).
8.11 Award Period. No Award granted under the Plan shall be exercisable
or payable more than 10 years from the date of grant.
9. WITHHOLDING
Where a Participant or other person is entitled to receive shares of
Stock pursuant to the exercise of an Option or is otherwise entitled to
receive shares of Stock or cash pursuant to an Award hereunder, the
Corporation shall have the right to require the Participant or such other
person to pay to the Corporation the amount of any taxes that the Corporation
may be required to withhold before delivery to such Participant or other
person of cash or a certificate or certificates representing such shares.
Upon the disposition of shares of Stock acquired pursuant to the exercise of
an Incentive Stock Option, the Corporation shall have the right to require the
payment of the amount of any taxes that are required by law to be withheld
with respect to such disposition.
Unless otherwise prohibited by the Committee or by applicable law, a
Participant may satisfy any such withholding tax obligation by any of the
following methods, or by a combination of such methods: (i) tendering a cash
payment; (ii) authorizing the Corporation to withhold from the shares of Stock
otherwise payable to such Participant one or more of such shares having an
aggregate Fair Market Value, determined as of the date the withholding tax
obligation arises, less than or equal to the amount of the total withholding
tax obligation; or (iii) delivering to the Corporation previously acquired
shares of Stock (none of which may be subject to any claim, lien, security
interest, community property right or other right of spouses or present or
former family members, pledge, option, voting agreement or other restriction
or encumbrance of any nature whatsoever) having an aggregate Fair Market
Value, determined as of the date the withholding tax obligation arises, less
than or equal to the amount of the total withholding tax obligation. A
Participant's election to pay his or her withholding tax obligation (in whole
or in part) by the method described in (ii) above is irrevocable once it is
made, may be disapproved by the Committee and, if made by any director,
officer or other person who is subject to Section 16(b) of the Exchange Act,
must be made (x) only during the period beginning on the third business day
following the date of release of the Corporation's quarterly or annual summary
statement of sales and earnings and ending on the twelfth business day
following the date of such release or (y) not less than six months prior to
the date such Participant's withholding tax obligation arises.
10. EFFECTIVE DATE OF PLAN
The 1988 Plan became effective upon the approval thereof by the
Corporation's stockholders on August 3, 1989 (the "Effective Date"). On April
20, 1994, the Board of Directors amended, restated and renamed the 1988 Plan,
which action was approved by stockholders on June 30, 1994. On September 6,
1995, the Board of Directors amended the Plan, subject to stockholder approval
and receipt of an exemptive order from the Securities and Exchange Commission.
In the absence of such approval of stockholders of the amendments to the Plan
or receipt of an exemptive order from the Securities and Exchange Commission
authorizing the automatic award of Outside Director Options, any Awards
granted under the Plan pursuant to the amendments shall be null and void.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
Corporate Safekeeping Account Agreement
Account Name: Harris & Harris Group, Inc. Account #: 88659
Gentlemen:
By virtue of the authority contained in the resolutions set forth in the
Certificate following this Agreement, we hereby request you to open a custody
account in the name of the Corporation and to hold in it, upon the following
terms and subject to additional instructions, all funds, securities and other
property received by you for our account.
1. Until you receive contrary written instructions from us, you are authorized
and directed to:
a. dispose of cash income and principal received by you with respect to this
account as follows:
___ credit all income and principal to our checking account; or
___ credit all income and principal to our income and principal custody ledger
accounts respectively; balances to be subject only to our written
instructions; or
_x_ credit all income and principal to our principal custody ledger account,
balances to be subject only to our written instructions; and
b. dispose of fractional interests in stock received by you as a result of
stock dividends as follows:
___ buy the additional fractional interest needed to obtain a full share; or
_x_ sell any fractional interest received
2. You are authorized to:
a. surrender for payment maturing obligations and those called for redemption;
b. exchange securities when the exchange is purely ministerial;
c. accept and open all mail directed to us in your care; and
d. sign for us and in our name any declarations, affidavits or certificates of
ownership required for the collection of income or principal on our behalf.
3. We understand and agree that securities in registered form are to be
registered in nominee name and that:
a. We will indemnify and hold harmless both you and the nominee from all
liability as the holder of record and will have the same responsibility as if
the securities were registered in our name;
b. you will forward stockholders' reports to us only if we specifically
request you to do so;
c. in compliance with the Securities and Exchange Commission's Rule 14b-2;
___ you are authorized to release to issuing companies our name, address and
share positions (We understand that the issuing companies may provide this
information to others); or
_x_ you are not authorized to release to issuing companies our name, address
and share positions
d. you are authorized to vote proxies on shares held for our account in
accordance with the following instructions (it being understood that we may
change these instructions by notifying you prior to the date of meeting of
shareholders):
___ forward all proxies and proxy material to us, except proxies relating
solely, on an uncontested basis, to the election of directors, appointment of
auditors and other ordinary business (in which case we authorize you to vote
as recommended by management); or
___ forward all proxy materials to us and send the issuer of the shares an
abstention or quorum vote only; or
_x_ do not vote on our behalf, but forward all proxies and proxy materials to
us.
4. We understand and agree that you will carry out all instructions regarding
securities transactions which you receive on our behalf in accordance with
generally accepted market practice and that:
a. when you are instructed to receive securities against payment, we will have
funds on deposit with you or may have made funds available to you in advance
for such purpose;
b. you are not under any duty to provide us with investment advice or to
supervise our investments; and
c. you may, at your sole discretion, accept orders from us for the purchase or
sale of securities and either execute such orders yourselves or by means of a
broker or other financial organization of your choice including organizations
affiliated with you, subject to the fees and commissions in effect from time
to time. You shall not be responsible for any act or omission, or for the
solvency of any broker or agent selected by you to effect any transaction for
our account including organizations affiliated with you. When instructed to
buy securities for which you or an affiliate of yours acts as a dealer, you
may buy or sell such securities from or to yourselves as principal, or such
affiliate. We are on notice and agree that when you execute an order from me
through a broker or other financial organization including affiliated
organizations, you may receive a portion of the brokerage commission or other
remuneration payable on such execution. The amounts of any such payments to
you shall be as agreed from time to time by you and the broker or other
financial organization and they shall not appear on any confirmations or other
statements, but will be available to us upon our request.
d. you are authorized to accept and act on all instructions received from any
of your affiliates to either receive or deliver securities against payment
into or from our account and to charge our account any transaction, service or
other fee on behalf or such affiliate. In carrying out any such transaction,
it is understood that we will not send you separate settlement instructions.
We agree to assume all risks which may result from any action taken by you in
reliance in good faith on such instructions.
e. you are authorized, until further notice, to receive from and/or deliver to
the following broker(s) or their successor(s): Salomon Brothers Inc., Morgan
Stanley & Co., Josephthal, Lyon & Ross Inc., Goldman Sachs & Co., Ladenburg,
Thalmann & Co., Inc., Robinson-Humphrey & Company any securities they may
present to you or request to be delivered by you, against payment for our
account.
In carrying out any such transactions, it is understood that no confirmation
will be mailed to you. The broker, however, will furnish you with
instructions through the Depository Trust Company under I.D. #27656 of their
purchase or sale. You are to act upon such instructions as may be received by
you from time to time from the broker. The broker will be held responsible
for the accuracy of the figures and any other details of the transaction
instructions.
Advices of all transactions effected under this authorization are to be sent
to us in the usual manner.
These instructions may be considered in full force and effect until revoked.
5. We authorize you to deposit any securities held in our account in a book
entry account maintained either at the Federal Reserve Bank of New York or in
domestic or foreign depositories, clearing agencies or other book entry
systems including but not limited to The Depository Trust Company and
Euroclear. Such securities may be held in the name of a nominee maintained by
you or by any such depository and may be commingled with securities owned by
you or others.
6. You are authorized and directed to follow and rely upon all instructions
given by us or an attorney-in-fact acting under written authority filed with
you including, without limitation, instructions given by letter, telephone,
facsimile transmissions, telegram, teletype, cablegram or electronic media if
you believe them to be genuine. We agree to assume all risks which may result
from any action taken by you in reliance in good faith on such instructions.
You shall be protected in executing such instructions from an attorney-in-fact
prior to receipt by you of notice of the revocation of the written authority
of the attorney-in-fact.
7. You are not responsible for any failure or delay either in collecting any
monies which may have accrued in connection with any foreign securities or in
notifying us of any rights exercisable by us in connection with or of any
proceedings affecting such securities. Unless otherwise instructed, all such
monies, including income and the proceeds of sales and redemptions, received
in a foreign currency will be converted into US Dollars at the prevailing rate
of exchange in New York as determined by you for credit in accordance with
paragraph 1(a) hereof.
8. We agree to pay you as compensation for your services a fee computed at
rates determined by you from time to time and communicated to us in advance
and you are authorized and directed to charge to our account the amount due
you. You are further authorized and directed to charge to our account all
taxes and expenses incidental to the transfer of securities on our behalf. We
understand that any dividends automatically credited on the dividend date to
our account which are not subsequently received by you from the corporations
paying such dividends will be reimbursed to you from our account. We agree
that it is our duty to reconcile statements and advices sent to us and that
all such statements and advices will be considered final thirty days from the
date of dispatch.
9. We hereby pledge to you as security for the payment of any present or
future obligation or liability of any kind which we may have to you, all
monies, credits, negotiable instruments, bonds, stocks, commercial paper,
securities, mortgages, claims, demands, rights, interests and property of
every kind which (i) may now or hereafter be in transit to you or any of your
affiliates and which belong to us or (ii) are held by you or any of your
affiliates for our account or subject to our order (all of which are
hereinafter referred to as the "Collateral") and we hereby grant you a lien,
right of set-off and security interest in the Collateral.
10. Duplicate statements should be sent to the following parties:
Name:___________________________________________________________________
Address:________________________________________________________________
________________________________________________________________________
Name:___________________________________________________________________
Address:________________________________________________________________
________________________________________________________________________
11. Special Instructions: ___________________________________________________
_________________________________________________________________________
12. This agreement shall be governed by and construed in accordance with the
law of the State of New York. It may be terminated by written notice at any
time at the option of either party.
Very truly yours,
/s/________________________
Charles E. Harris
Authorized Signature/Title: Chairman & CEO
Date: May 24, 1994
Tax Identification Number Address of Record
13-3119827 14 West 49th Street, Suite 1430
New York, NY 10020
Accepted:
Morgan Guaranty Trust Company of New York
By: /s/____________________
Name/Title: Frank Andreula
AMENDMENT NO. 3
TO THE EMPLOYMENT AGREEMENT
DATED AUGUST 15, 1990 BETWEEN
HARRIS & HARRIS GROUP, INC.
AND CHARLES E. HARRIS
This is Amendment No. 3, dated as of June 30, 1994, to the Employment
Agreement dated as of August 15, 1990 between Harris & Harris Group, Inc. (the
"Company"), a New York corporation and Charles E. Harris (the "Executive").
WHEREAS, the Company and the Executive are parties to an Employment
Agreement dated as of August 15, 1990 (the "Agreement") and as amended by
Amendment No. 1 dated as of June 30, 1992 and Amendment No. 2, dated as of
January 3, 1993.
WHEREAS, the Company and the Executive desire to amend the Agreement as
set forth below, in accordance with the recommendations and approval of the
Compensation Committee of the Board of Directors of the Company and the mutual
considerations received by the Company and the Executive as outlined below:
NOW, THEREFORE, the Agreement is hereby amended and the Executive and
the Company agree as follows:
1) Section 3 (a) of the Agreement shall be amended to read as follows:
3. Terms and Duties.
(a) Period of Employment. The period of the Executive's employment
under this Agreement (the "Period of Employment") shall commence August 15,
1990 and shall terminate December 31, 1999 or until it ceases or is terminated
sooner as provided in paragraph 6 (a) (disability), 7 (death), or 8 (c)
(termination of employment).
2) Section 4 (a) of the Agreement shall be amended to read as follows:
(a) Base Salary. The Company shall pay the Executive a fixed salary
(the "Base Salary") at an annual rate adjusted as provided below. The Base
Salary, as adjusted, shall be payable in accordance with the customary payroll
practices of the Company, but not less frequently than monthly. On January 1,
1995, and on each January 1 thereafter during the Period of Employment, the
Base Salary shall be increased in accordance with the following formula (the
"Formula"), to the extent that the Formula would produce an increase:
Base Salary = Computed Annual Salary plus Incremental Annual Compensation
Computed Annual Salary = Computed Annual Salary as of December 31 immediately
preceding the January 1 with respect to which the increased Computed Annual
Salary is being computed, provided that for the January 1, 1995 determination,
the December 31 Computed Annual Salary shall mean $313,907, multiplied by the
product of (A divided by B), where:
A is the Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average
for All Items (standard reference base period 1982-1984 = 100) (the "CPI"), as
published during the September immediately preceding the January 1 with
respect to which the increased Computed Annual Salary is being computed; and
B is the CPI as published during the September next immediately preceding the
January 1 (thus one year earlier than A above) with respect to which the
increased Computed Annual Salary is being computed.
Incremental Annual Compensation = (Computed Annual Salary computed as of
January 1 multiplied by thirty percent (30%)) divided by (1 minus the sum of C
plus D), where:
C is the maximum marginal federal tax rate for married individuals filing
joint returns for the year of the calculation of the Incremental Annual
Compensation.
D is the maximum marginal state and city (if applicable where Executive
resides) tax rate for married individuals filing joint returns for the year of
the calculation of the Incremental Annual Compensation.
The effect of the above formula for Incremental Annual Compensation is gross
up the thirty percent of the Computed Annual Salary for federal, state and
city taxes.
Base Salary for the period August 1, 1994 to December 31, 1994 shall be
defined as $514,958.88.
As referred hereafter in the Agreement as the "CPI Factor" shall be defined as
follows:
CPI Factor = E divided by F, where:
E is the CPI as published during the September immediately preceding the
January 1 with respect to which an increase in Computed Annual Salary is being
computed; and
F is the CPI as published during September, 1989.
If during the Period of Employment the United States Bureau of Labor
Statistics (the "Bureau") (ceases publication of the CPI, the Formula and CPI
Factor shall thereafter by applied using the consumer price index published by
the Bureau (or any successor agency of the federal government) that is most
nearly equivalent to the CPI.
3) Section 10, Retirement Benefits, of the Agreement is hereby amend to read
in its entirety as follows:
As of August 1, 1994 the Company shall pay a one time retirement benefit
of $167,543.16 to the Executive.
The Executive and his spouse and dependents shall be entitled to medical
and health insurance if at the time of retirement he has ten years of service
with the Company and has attained 50 years of age or has fifteen years of
service with the Company and has attained 45 years of age. The coverage shall
be secondary to any government provided or subsequent employer provided health
insurance plans. The Executive and the Company shall be parties to a contract
delineating in detail the medical and health insurance benefit described
above.
Except as amended hereby, all terms of the Agreement shall remain in
full force and effect after the effective date of this Amendment No. 3. After
such effectiveness all references in the Agreement to "this Agreement" shall
refer to the Agreement as amended hereby. All capitalized words not
specifically defined in this Amendment No. 3 shall have the meaning prescribed
in the Agreement.
This Amendment No. 3: a) amends the Agreement dated as of August 15,
1990 as set forth herein, b) shall be amended or waived in whole or in part
only by a written instrument, signed by both parties hereto, c) in case any
provision of this Amendment No. 3 dated as of June 30, 1994 shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be effected or impaired thereby, and
d) shall be governed in all respects, including validity, interpretation and
effect by the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 3 to be
executed by its duly authorized officers and the Executive has signed and
delivered this Amendment No. 3, all as of June 30, 1994, but as actually on
the date set forth below.
HARRIS & HARRIS GROUP, INC.
BY: /s/____________________
C. Richard Childress
TITLE: Executive Vice President
DATE: 7/20/94
/s/________________________
Charles E. Harris
DATE: 7/21/94
AMENDMENT NO. 3
TO THE EMPLOYMENT AGREEMENT
DATED AUGUST 15, 1990 BETWEEN
HARRIS & HARRIS GROUP, INC.
AND C. RICHARD CHILDRESS
This is Amendment No. 3, dated as of June 30, 1994, to the Employment
Agreement dated as of August 15, 1990 between Harris & Harris Group, Inc. (the
"Company"), a New York corporation and C. Richard Childress (the "Executive").
WHEREAS, the Company and the Executive are parties to an Employment
Agreement dated as of August 15, 1990 (the "Agreement") and as amended by
Amendment No. 1 dated as of June 30, 1992 and Amendment No. 2, dated as of
January 3, 1993.
WHEREAS, the Company and the Executive desire to amend the Agreement as
set forth below, in accordance with the recommendations and approval of the
Compensation Committee of the Board of Directors of the Company and the mutual
considerations received by the Company and the Executive as outlined below:
NOW, THEREFORE, the Agreement is hereby amended and the Executive and
the Company agree as follows:
1) Section 3 (a) of the Agreement shall be amended to read as follows:
3. Terms and Duties.
(a) Period of Employment. The period of the Executive's employment
under this Agreement (the "Period of Employment") shall commence August 15,
1990 and shall terminate December 31, 1999 or until it ceases or is terminated
sooner as provided in paragraph 6 (a) (disability), 7 (death), or 8 (c)
(termination of employment).
2) Section 4 (a) of the Agreement shall be amended to read as follows:
(a) Base Salary. The Company shall pay the Executive a fixed salary
(the "Base Salary") at an annual rate adjusted as provided below. The Base
Salary, as adjusted, shall be payable in accordance with the customary payroll
practices of the Company, but not less frequently than monthly. On January 1,
1995, and on each January 1 thereafter during the Period of Employment, the
Base Salary shall be increased in accordance with the following formula (the
"Formula"), to the extent that the Formula would produce an increase:
Base Salary = Computed Annual Salary plus Incremental Annual Compensation
Computed Annual Salary = Computed Annual Salary as of December 31 immediately
preceding the January 1 with respect to which the increased Computed Annual
Salary is being computed, provided that for the January 1, 1995 determination,
the December 31 Computed Annual Salary shall mean $155,047, multiplied by the
product of (A divided by B), where:
A is the Consumer Price Index, All Urban Consumers (CPI-U), U.S. City Average
for All Items (standard reference base period 1982-1984 = 100) (the "CPI"), as
published during the September immediately preceding the January 1 with
respect to which the increased Computed Annual Salary is being computed; and
B is the CPI as published during the September next immediately preceding the
January 1 (thus one year earlier than A above) with respect to which the
increased Computed Annual Salary is being computed.
Incremental Annual Compensation = (Computed Annual Salary computed as of
January 1 multiplied by thirty percent (30%)) divided by (1 minus the sum of C
plus D), where:
C is the maximum marginal federal tax rate for married individuals filing
joint returns for the year of the calculation of the Incremental Annual
Compensation.
D is the maximum marginal state and city (if applicable where Executive
resides) tax rate for married individuals filing joint returns for the year of
the calculation of the Incremental Annual Compensation.
The effect of the above formula for Incremental Annual Compensation is gross
up the thirty percent of the Computed Annual Salary for federal, state and
city taxes.
Base Salary for the period August 1, 1994 to December 31, 1994 shall be
defined as $242,809.45.
As referred hereafter in the Agreement as the "CPI Factor" shall be defined as
follows:
CPI Factor = E divided by F, where:
E is the CPI as published during the September immediately preceding the
January 1 with respect to which an increase in Computed Annual Salary is being
computed; and
F is the CPI as published during September, 1989.
If during the Period of Employment the United States Bureau of Labor
Statistics (the "Bureau") (ceases publication of the CPI, the Formula and CPI
Factor shall thereafter by applied using the consumer price index published by
the Bureau (or any successor agency of the federal government) that is most
nearly equivalent to the CPI.
3) Section 10, Retirement Benefits, of the Agreement is hereby amend to read
in its entirety as follows:
As of August 1, 1994 the Company shall pay a one time retirement benefit
of $73,135.35 to the Executive.
The Executive and his spouse and dependents shall be entitled to medical
and health insurance if at the time of retirement he has ten years of service
with the Company and has attained 50 years of age or has fifteen years of
service with the Company and has attained 45 years of age. The coverage shall
be secondary to any government provided or subsequent employer provided health
insurance plans. The Executive and the Company shall be parties to a contract
delineating in detail the medical and health insurance benefit described
above.
Except as amended hereby, all terms of the Agreement shall remain in
full force and effect after the effective date of this Amendment No. 3. After
such effectiveness all references in the Agreement to "this Agreement" shall
refer to the Agreement as amended hereby. All capitalized words not
specifically defined in this Amendment No. 3 shall have the meaning prescribed
in the Agreement.
This Amendment No. 3: a) amends the Agreement dated as of August 15,
1990 as set forth herein, b) shall be amended or waived in whole or in part
only by a written instrument, signed by both parties hereto, c) in case any
provision of this Amendment No. 3 dated as of June 30, 1994 shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be effected or impaired thereby, and
d) shall be governed in all respects, including validity, interpretation and
effect by the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 3 to be
executed by its duly authorized officers and the Executive has signed and
delivered this Amendment No. 3, all as of June 30, 1994, but as actually on
the date set forth below.
HARRIS & HARRIS GROUP, INC.
BY: /s/______________________
Charles E. Harris
TITLE: Chairman
DATE: 7/21/94
/s/__________________________
C. Richard Childress
DATE: 7/20/94
STOCK PURCHASE AGREEMENT
by and among
HARRIS & HARRIS GROUP, INC.
and
AMERICAN BANKERS LIFE ASSURANCE
COMPANY OF FLORIDA
and
AMERICAN BANKERS INSURANCE
COMPANY OF FLORIDA
Dated as of May 18, 1995
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Section
1. Sale and Purchase of the Shares . . . . . . . . . . . . . 2
1.1 Authorization of the Shares. . . . . . . . . . . . . 2
1.2 Sale and Purchase of the Shares. . . . . . . . . . . 2
2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Closing. . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Deliveries at the Closing. . . . . . . . . . . . . . 2
3. Representations and Warranties of the Company . . . . . . 2
3.1 Organization, Standing, etc. . . . . . . . . . . . . 2
3.2 SEC Reports and Financial Statements . . . . . . . . 2
3.3 Authorization of the Shares. . . . . . . . . . . . . 3
3.4 Valid and Binding Obligation . . . . . . . . . . . . 3
3.5 No Material Adverse Change . . . . . . . . . . . . . 3
3.6 Litigation, etc. . . . . . . . . . . . . . . . . . . 4
3.7 Compliance with Other Instruments, etc.. . . . . . . 4
3.8 Governmental Consent . . . . . . . . . . . . . . . . 4
3.9 Offer of Shares. . . . . . . . . . . . . . . . . . . 4
4. Representations of ABLAC. . . . . . . . . . . . . . . . . 5
4.1 Purchase for Investment. . . . . . . . . . . . . . . 5
4.2 Source of Funds. . . . . . . . . . . . . . . . . . . 5
5. Registration under Securities Act, etc. . . . . . . . . . 7
5.1 Registration on Request. . . . . . . . . . . . . . . 7
(a) Request . . . . . . . . . . . . . . . . . . . . 7
(b) Registration Statement Form . . . . . . . . . . 7
(c) Expenses. . . . . . . . . . . . . . . . . . . . 8
(d) Effective Registration Statement. . . . . . . . 8
(e) Priority in Requested Registrations . . . . . . 8
(f) Deferral. . . . . . . . . . . . . . . . . . . . 9
(g) Limitations on Registration Obligations . . . . 9
5.2 Incidental Registration. . . . . . . . . . . . . . . 10
(a) Right to Include Registrable Securities . . . . 10
5.3 Indemnification.. . . . . . . . . . . . . . . . . . . . . 10
(a) Indemnification by the Company. . . . . . . . . 10
(b) Indemnification by the Sellers. . . . . . . . . 11
(c) Notices of Claims, etc. . . . . . . . . . . . . 12
6. Definitions . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Certain Defined Terms. . . . . . . . . . . . . . . . 13
6.2 Other Provisions Regarding Definitions . . . . . . . 16
7. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 16
7.1 Survival of Representations and Warranties; Sever-
ability. . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Amendment and Waiver . . . . . . . . . . . . . . . . 16
7.3 Notices, etc.. . . . . . . . . . . . . . . . . . . . 16
7.4 Successors and Assigns . . . . . . . . . . . . . . . 17
7.5 Descriptive Headings . . . . . . . . . . . . . . . . 17
7.6 Fees and Expenses. . . . . . . . . . . . . . . . . . 17
7.7 Stamp or Other Tax . . . . . . . . . . . . . . . . . 17
7.8 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . 17
7.9 Counterparts . . . . . . . . . . . . . . . . . . . . 17
7.10 Entire Agreement. . . . . . . . . . . . . . . . 17
</TABLE>
STOCK PURCHASE AGREEMENT
dated as of May 18, 1995
by and between
HARRIS & HARRIS GROUP, INC.
and
AMERICAN BANKERS LIFE ASSURANCE COMPANY
OF FLORIDA
and
AMERICAN BANKERS INSURANCE COMPANY
OF FLORIDA
STOCK PURCHASE AGREEMENT (the "Agreement"), dated
as of May 18, 1995, by and among HARRIS & HARRIS GROUP,
INC., a New York corporation (the "Company"), and AMERICAN
BANKERS LIFE ASSURANCE COMPANY OF FLORIDA ("ABLACOF") and
AMERICAN BANKERS INSURANCE COMPANY OF FLORIDA ("ABIC";
ABLACOF AND ABIC being referred to individually or collec-
tively as the context requires as "ABLAC").
The Company and ABLACOF are parties to a Note and
Warrant Purchase Agreement, dated as of August 17, 1994 (the
"Purchase Agreement"). Pursuant to a Termination and Re-
lease Agreement of even date herewith, the Company and
ABLACOF have agreed to terminate the Purchase Agreement.
The Company and ABLAC wish to provide for the purchase of
1,075,269 shares (the "Shares") of common stock, par value
$.01 per share, of the Company (the "Common Stock"), by
ABLAC for a purchase price of $5,000,000.85 (the "Purchase
Price"). Certain capitalized terms used in this Agreement
are defined in Section 6 hereof.
Concurrently with the execution and delivery of
this Agreement, the Company and ABLAC are entering into a
Standstill Agreement whereby ABLAC is agreeing to certain
restrictions with respect to the acquisition, disposition
and voting of Voting Stock (the "Standstill Agreement").
1
The Company and ABLAC hereby agree as follows:
1. Sale and Purchase of the Shares.
1.1 Authorization of the Shares. Prior to the
date hereof, the Company has authorized the issuance and
sale of the Shares.
1.2 Sale and Purchase of the Shares. Subject to
the terms and conditions of this Agreement, and in reliance
upon the representations and warranties contained herein, at
the Closing (as hereinafter defined), the Company is issu-
ing, selling and delivering to ABLAC, and ABLAC is purchas-
ing from the Company, the Shares, for the Purchase Price.
2. Closing
2.1 Closing. The Closing of the transaction
provided for in Section 1.2 hereof (the "Closing") is taking
place at the offices of Skadden, Arps, Slate, Meagher &
Flom, 919 Third Avenue, New York, New York 10022, at 10:00
a.m., New York City time, on the date hereof. The date of
the Closing is referred to herein as the "Closing Date."
2.2 Deliveries at the Closing. At the Closing,
the Company is delivering to ABLAC a certificate or certifi-
cates for the Shares, registered in the name of ABLAC
against payment by ABLAC to the Company of Five Million
Dollars ($5,000,000) by wire transfer of immediately avail-
able funds.
3. Representations and Warranties of the Compa-
ny. The Company represents and warrants that:
3.1 Organization, Standing, etc. The Company is
a corporation duly organized, validly existing and in good
standing under the laws of the State of New York and has all
requisite corporate power and authority to own and operate
its properties, to carry on its business as now conducted,
to enter into this Agreement, to issue and sell the Shares
and to carry out the terms of this Agreement.
2
3.2 SEC Reports and Financial Statements. The
Company has heretofore made available to ABLAC complete and
correct copies of all forms, reports and documents required
to be filed by it since January 1, 1993 under the Securities
Act or the Exchange Act (as such documents have been amended
since the time of their filing, collectively, the "Company
SEC Documents"). The Company SEC Documents, including with-
out limitation, any financial statements or schedules in-
cluded therein, at the time filed, (a) did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the cir-
cumstances under which they were made, not misleading and
(b) complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as
the case may be. The consolidated financial statements of
the Company included in the Company SEC Documents, at the
time filed, complied as to form in all material respects
with applicable accounting requirements and with the pub-
lished rules and regulations of the SEC with respect there-
to, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may
be indicated in the notes thereto or, in the case of unau-
dited statements included in the Company SEC Documents, as
permitted by Form 10-Q of the SEC) and fairly present (sub-
ject, in the case of the unaudited statements, to normal,
recurring audit adjustments) in all material respects the
consolidated financial position of the Company and its
consolidated Subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for
the periods then ended.
3.3 Authorization of the Shares. The execution,
delivery and performance by the Company of this Agreement
and the issuance and sale of the Shares hereunder have been
duly authorized by all requisite corporate action on the
part of the Company and will not conflict with, or result in
a breach of the terms, conditions or provisions of the
Certificate of Incorporation or By-laws.
3.4 Valid and Binding Obligation. This Agreement
has been duly executed and delivered by the Company and is
the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms
except as limited by bankruptcy and other laws affecting
creditors' rights generally and by general principles of
equity.
3.5 No Material Adverse Change. Except as previ-
ously disclosed to ABLAC in writing or in the Company SEC
Documents, since December 31, 1994, there has not been any
material adverse change in the assets, business or financial
condition of the Company and its Subsidiaries taken as a
whole (a "Material Adverse Change").
3
3.6 Litigation, etc. There is no action, pro-
ceeding or investigation pending or, to the knowledge of the
Company, threatened which questions the validity or legality
of, or seeks damages in connection with, this Agreement or
the transaction contemplated hereby, or any action taken or
to be taken pursuant to this Agreement or the transaction
contemplated hereby or which is reasonably likely to result
in a Material Adverse Change.
3.7 Compliance with Other Instruments, etc. Nei-
ther the Company nor any of its Subsidiaries is in violation
of any term of the Certificate of Incorporation or the By-Laws.
Neither the Company nor any of its Subsidiaries is in
violation of any term of any agreement or instrument to
which it is a party or by which it is bound or any term of
any applicable law, ordinance, rule or regulation of any
governmental authority or any term of any applicable order,
judgment or decree of any court, arbitrator or governmental
authority, which violation is reasonably likely to result in
a Material Adverse Change. The execution, delivery and per-
formance by the Company of this Agreement will not result in
any such violation of, or be in conflict with or constitute
a default under, any such term or result in the creation of
(or impose any obligation on the Company or any of its
Subsidiaries to create) any lien upon any of the properties
or assets of the Company or any of its Subsidiaries pursuant
to any such term, except for any such conflict or default
which is not reasonably likely to result in a Material
Adverse Change.
3.8 Governmental Consent. Except as required by
the Exchange Act and by the rules and regulations of the
NASD, no consent, approval or authorization of, or declara-
tion or filing with, any governmental authority on the part
of the Company or any of its Subsidiaries which has not been
obtained or made is required for the valid execution and
delivery by the Company of this Agreement or the valid
offer, issuance, sale and delivery by the Company of the
Shares pursuant to this Agreement.
3.9 Offer of Shares. Neither the Company nor
anyone acting on its behalf has taken or will take any
action which would subject the issuance and sale of the
Shares to the registration and prospectus delivery provi-
sions of the Securities Act.
4
4. Representations of ABLAC. ABLAC represents
and warrants that:
4.1 Purchase for Investment. ABLAC is purchasing
the Shares for ABLAC's own account (and expressly not for
the account of any pension or trust fund) for investment and
not with a view to the distribution thereof or with any
present intention of distributing or selling the Shares
acquired hereby. ABLAC understands that the Shares have not
been registered under the Securities Act and may be resold
(which resale is not now contemplated) only if registered
pursuant to the provisions of such Act or if an exemption
from registration is available, and that the Company is not
required to register the Shares except to the extent provid-
ed herein.
4.2 Source of Funds. One or more of the fol-
lowing statements is individually or collectively, as the
case may be, an accurate representation as to the source of
all the funds to be used by ABLAC to pay the Purchase Price:
(a) if ABLAC is an insurance company, no part of
such funds constitute assets allocated to a separate
account (within the meaning of ERISA and the regula-
tions thereunder) maintained by ABLAC in which an em-
ployee benefit plan (or its related trust) has any
interest; or
(b) if ABLAC is an insurance company, to the ex-
tent that any part of such funds constitutes assets
allocated to any separate account maintained by ABLAC,
(i) such separate account is a "pooled separate ac-
count" within the meaning of Prohibited Transaction
Class Exemption ("PTE") 90-1, in which case ABLAC have
disclosed to the Company in writing the names of each
employee benefit plan whose assets in such separate
account exceed 10% of the total assets or are expected
to exceed 10% of the total assets of such account as of
the date of such purchase (and for the purposes of this
Section 4.2, all employee benefit plans maintained by
the same employer or employee organization are deemed
to be a single plan), and every relevant requirement of
PTE 90-1 specifically applicable to ABLAC which is re-
quired to be satisfied as of the date of such purchase
will be satisfied in all material respects as of such
date of purchase or (ii) such separate account contains
only the assets of a specific employee benefit plan,
complete and accurate information as to the identity of
which ABLAC have delivered to the Company in writing;
or
5
(c) if ABLAC is a "qualified professional asset
manager" or "QPAM" (within the meaning of Part V of
Prohibited Transaction Class Exemption 84-14 (the "QPAM
Exemption")) of such funds which constitute assets of
an "investment fund" (within the meaning of Part V of
the QPAM Exemption) managed by ABLAC, every relevant
requirement of the QPAM Exemption specifically applica-
ble to ABLAC which is required to be satisfied as of
the date of such purchase will be satisfied in all
material respects as of the date of such purchase and
ABLAC have disclosed to the Company in writing ABLAC's
name as such QPAM and the names of all employee benefit
plans whose assets are included in such investment
fund;
(d) if ABLAC is an investment company, ABLAC is
registered under the 1940 Act;
(e) if ABLAC is other than an insurance company
or an investment company, all or a portion of such
funds consists of funds which do not constitute assets
of any employee benefit plan and the remaining portion,
if any, of such funds consists of funds which may be
deemed to constitute assets of one or more specific
employee benefit plans, complete and accurate informa-
tion as to the identity of each of which ABLAC deliv-
ered to the Company in writing; or
(f) if ABLAC's funds constitute assets of an "in-
vestment fund" (within the meaning of the QPAM Exemp-
tion referred to in subparagraph (c) above), such
assets of such "investment fund" are managed by a QPAM
(as defined in subparagraph (c) above), such QPAM has
investment discretion with respect to the transaction
for purposes of applying the QPAM exemption, and every
relevant requirement of the QPAM Exemption specifically
applicable to such QPAM which is required to be satis-
fied as of the date of such purchase will be satisfied
in all material respects as of the date of such pur-
chase.
As used in this Section 4.2, the term "employee
benefit plan" shall mean any employee benefit plan subject
to section 406 of ERISA and any employee benefit plan or
individual retirement account subject to section 4975 of the
Internal Revenue Code of 1986, as amended from time to time,
and the term "separate account" shall have the meaning
assigned to it in section 3 of ERISA.
6
5. Registration under Securities Act, etc.
5.1 Registration on Request.
(a) Request. Upon the written request of the
Initiating Holders, requesting that the Company effect
the registration under the Securities Act of all or
part of such Initiating Holders' Registrable Securities
and specifying the intended method of disposition
thereof, the Company will, subject to the terms hereof,
promptly give written notice of such requested regis-
tration to all registered holders of Registrable Secu-
rities, and thereupon the Company will use its reason-
able best efforts to effect the registration under the
Securities Act of
(i) the Registrable Securities which the
Company has been so requested to register by such
Initiating Holders for disposition in accordance
with the intended method of disposition stated in
such request, and
(ii) all other Registrable Securities the
holders of which shall have made a written request
to the Company for registration thereof within 30
days after the giving of such written notice by
the Company (which request shall specify the in-
tended method of disposition of such Registrable
Securities),
all to the extent requisite to permit the disposition (in
accordance with the intended methods thereof as aforesaid)
of the Common Stock, so to be registered. The Company shall
have the right to select the managing underwriter in any
registration pursuant to this Section 5.1, subject to the
approval of the Initiating Holders (not to be unreasonably
withheld).
(b) Registration Statement Form. Registrations
under this Section 5.1 shall be on such appropriate
registration form of the Commission (i) as shall be
selected by the Company and (ii) as shall permit the
disposition of such Registrable Securities in accor-
dance with the intended method or methods of disposi-
tion specified in the request(s) for registration made
pursuant to Section 5.1(a).
7
(c) Expenses. The Company will pay all Registra-
tion Expenses in connection with the registration
requested pursuant to this Section 5.1.
(d) Effective Registration Statement. A regis-
tration requested pursuant to this Section 5.1 shall
not be deemed to have been effected (i) unless a regis-
tration statement with respect thereto has become
effective, provided that a registration which does not
become effective after the Company has filed a regis-
tration statement with respect thereto solely by reason
of the refusal to proceed of the Initiating Holders
shall be deemed to have been effected by the Company at
the request of such Initiating Holders unless the
Initiating Holders shall have agreed in writing to pay
all Registration Expenses in connection with such
registration, (ii) if, after it has become effective,
such registration becomes subject to any stop order,
injunction or other order or requirement of the Commis-
sion or other governmental agency or court for any
reason, or (iii) the conditions to closing specified in
the purchase agreement or underwriting agreement en-
tered into in connection with such registration are not
satisfied, other than by reason of some act or omission
by such Initiating Holders.
(e) Priority in Requested Registrations. If a
requested registration pursuant to this Section 5.1
involves an underwritten offering, and the managing
underwriter shall advise the Company in writing (with a
copy to each holder of Registrable Securities request-
ing registration) that, in its opinion, the number of
securities requested to be included in such registra-
tion (including securities of the Company which are not
Registrable Securities) exceeds the number which can be
sold in such offering within a price range acceptable
to the holders of a majority of the Registrable Securi-
ties requested to be included in such registration, the
Company will include in such registration, to the
extent of the number which the Company is so advised
can be sold in such offering, (i) first, Registrable
Securities requested to be included in such registra-
tion, pro rata among the holders thereof requesting
such registration on the basis of the number of such
securities requested to be included by such holders,
(ii) second, securities the Company proposes to sell
and (iii) other securities of the Company requested to
be included in such registration by the holders there-
of.
8
(f) Deferral. Notwithstanding the foregoing, (i)
in the event that the Company intends to commence a
public offering of securities to which Section 5.2
hereof will apply, it shall so notify the holders of
Registrable Securities in writing and such holders
shall be deemed to have waived their right to request
registration under this Section 5.1 for a period of 120
days following such notice and (ii) the Company may
delay the filing of a registration statement for a
period not exceeding one hundred and eighty (180) days
following the Company's receipt of the written request
of the Initiating Holders pursuant to Section 5.1(a)
hereof at any time when (A) the Company is in posses-
sion of material non-public information the disclosure
of which, in the exercise of the Company's reasonable
good faith judgment, the Company believes would be
adverse to the best interests of the Company or (B)
such registration would adversely affect (including,
without limitation, through the premature disclosure
thereof) a proposed financing, reorganization, recapi-
talization, merger, consolidation or similar transac-
tion.
(g) Limitations on Registration Obligations.
Notwithstanding the foregoing provisions of this Sec-
tion 5.1, the Company shall not be obligated to (i)
file more than two registration statements pursuant to
Section 5.1(a) hereof; or (ii) file and use its reason-
able best efforts to cause to become effective (A) a
registration statement pursuant to this Section 5.1 (1)
within 180 days immediately following the effective
date of any registration statement pertaining to an
underwritten offering of the Company's securities or
(2) if a special or interim audit of the financial
statements of the Company or any of its affiliates
would be necessary in order for the financial state-
ments required to be included in such registration
statement to meet the requirements of Regulation S-X or
similar rules promulgated by the Commission, (B) more
than one registration statement in any twelve-month
period or (C) any such registration statement where the
proposed aggregate offering price of the Registrable
Securities to be sold thereunder is less than $3 mil-
lion; or (iii) keep effective any registration state-
ment filed pursuant to this Section 5.1 for a period of
more than ninety (90) days.
9
5.2 Incidental Registration.
(a) Right to Include Registrable Securities. If
the Company shall at any time after the date hereof
propose to register any shares of its Common Stock
under the Securities Act (other than a registration in
connection with an offering of shares to employees of
the Company pursuant to a stock plan, or in connection
with the issuance of securities or assets of or relat-
ing to a merger with another corporation), the Company
shall notify the holders of any Registrable Securities
as promptly as possible of such proposed registration,
following which notice such holder shall have thirty
(30) days after the receipt of such notice to request
inclusion in such registration of any Registrable
Securities. The Company shall, if so requested, in-
clude such Registrable Securities in such registration
unless the proposed managing underwriter of the securi-
ties covered by the registration advises the Company
that the inclusion of such shares would, in the opinion
of such underwriter, raise a substantial question as to
whether the proposed offering by the Company could be
successfully consummated on terms reasonably acceptable
to the Company. The Company shall pay all Registration
Expenses relating to a registration pursuant to this
Section 5.2.
5.3 Indemnification.
(a) Indemnification by the Company. In the event
of any registration of any securities of the Company
under the Securities Act in accordance with this Sec-
tion 5, the Company will, and hereby does, indemnify
and hold harmless each holder of Registrable Securities
included in such registration, each underwriter of the
securities so registered and each person who controls
any such underwriter within the meaning of Section 15
of the Securities Act, against any and all losses,
claims, damages or liabilities to which they or any of
them may become subject under the Securities Act or any
other statute or common law of the United States or any
jurisdiction therein, including any amount paid in
settlement of any litigation, commenced or threatened,
if such settlement is effected with the written consent
of the Company, and to reimburse them for any legal or
other expenses incurred by them in connection with
investigating any claims and defending any actions
insofar as any such losses, claims, damages, liabil-
ities or actions arise out of or are based upon (i) any
10
untrue statement or alleged untrue statement of a
material fact contained in the registration statement
relating to the sale of such Registrable Securities, or
any post-effective amendment thereof, or the omission
or alleged omission to state therein a material fact
necessary to make the statements therein, in light of
the circumstances under which they were made, not
misleading, or (ii) any untrue statement or alleged
untrue statement of a material fact contained in any
preliminary prospectus, if used prior to the effective
date of such registration statement, or contained in
the prospectus (as amended or supplemented if the
Company shall have filed with the Commission any amend-
ment thereof or supplement thereto) if used within the
period during which the Company is required to keep the
registration statement to which such prospectus relates
current, or the omission or alleged omission to state
therein (if so used) a material fact necessary in order
to make the statements therein, in light of the circum-
stances under which they were made, not misleading;
provided, however, that the indemnification agreement
contained in this Section 5.3(a) shall not (x) apply to
any such losses, claims, damages, expenses, liabilities
or actions arising out of, or based upon, any such
untrue statement or alleged untrue statement, or any
such omission or alleged omission, if such statement or
omission was made in reliance upon and in conformity
with information furnished in writing to the Company by
such holder or such underwriter for use in connection
with preparation of the registration statement or any
such amendment thereof of supplement thereto; or (y)
inure to the benefit of any underwriter (or to the
benefit of any person controlling such underwriter)
from whom the person asserting any such losses, claims,
damages, expenses, liabilities or actions purchased the
securities which are the subject thereof if such under-
writer failed to send or give a copy of the prospectus
to such person at or prior to the written confirmation
of the sale of such securities to such person.
(b) Indemnification by the Sellers. The Company
may require, as a condition to including any Registra-
ble Securities in any registration statement filed
pursuant to this Section 5, that the Company shall have
received an undertaking satisfactory to it from the
prospective seller of such Registrable Securities, to
indemnify and hold harmless (in the same manner and to
the same extent as set forth in subdivision (a) of this
Section 5.3) the Company, each director of the Company,
11
each officer of the Company and each other person, if
any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or al-
leged statement in or omission or alleged omission from
such registration statement, any preliminary prospec-
tus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if
such statement or alleged statement or omission or
alleged omission was made in reliance upon and in
conformity with written information furnished to the
Company by such seller for use in the preparation of
such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or
supplement. Any such indemnity shall remain in full
force and effect, regardless of any investigation made
by or on behalf of the Company or any such director,
officer or controlling person and shall survive the
transfer of Registrable Securities by any seller.
(c) Notices of Claims, etc. Promptly after re-
ceipt by an indemnified party of notice of the com-
mencement of any action or proceeding involving a claim
referred to in the preceding subdivisions of this
Section 5.3, such indemnified party will, if a claim in
respect thereof may be made against an indemnifying
party, give written notice to the latter of the com-
mencement of such action, provided that the failure of
any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of its obliga-
tions under the preceding subdivisions of this Section
5.3, except to the extent that the indemnifying party
is prejudiced by such failure to give notice. In case
any such action is brought against an indemnified party
in respect of such claim, the indemnifying party shall
be entitled to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indem-
nified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with
the defense thereof; provided that if in the reasonable
good faith judgment of the indemnified party a conflict
of interest exists between such indemnified party and
the indemnifying party, the indemnifying party shall be
entitled to be represented by one counsel of its own
choosing (the reasonable fees and disbursements of
which shall be payable by the indemnifying party) and
to participate in the defense of such action. No
12
indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or
enter into any settlement of any such action which does
not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such
claim or litigation. No indemnified party shall con-
sent to entry of any judgment or enter into any settle-
ment of any such action the defense of which has been
assumed by an indemnifying party without the consent of
such indemnifying party.
6. Definitions.
6.1 Certain Defined Terms. As used herein the
following terms have the following respective meanings:
Affiliate: any Person directly or indirectly
controlling or controlled by or under common control with
the Company or any Subsidiary, including (without limita-
tion) any Person beneficially owning or holding 10% or more
of any class of voting securities of the Company or any
Subsidiary or any other corporation of which the Company or
any Subsidiary owns or holds 10% or more of any class of
voting securities, provided that, for purposes of this
definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"),
as used with respect to any Person, shall mean the posses-
sion, directly or indirectly, or the power to direct or
cause the direction of the management and policies of such
Person, whether through the ownership of voting securities
or by contract or otherwise.
Business Day: any day excluding Saturday, Sunday
and any other day on which banks are required or authorized
to close in New York City.
By-Laws: By-Laws of the Company, as in effect at
the time.
Certificate of Incorporation: Certificate of
Incorporation of the Company, as in effect at the time.
Closing: as defined in Section 2.1 hereof.
Closing Date: as defined in Section 2.1 hereof.
Common Stock: as defined in the introduction to
this Agreement.
13
Company: as defined in the introduction to this
Agreement.
Company SEC Documents: as defined in Section 3.2
hereof.
ERISA: the Employee Retirement Income Security
Act of 1974, as amended from time to time.
Exchange Act: the Securities Exchange Act of
1934, or any successor federal statute, and the rules and
regulations of the SEC thereunder, all as the same shall be
in effect at the time.
GAAP: generally accepted accounting principles as
from time to time in effect in the United States as set
forth in the opinions and pronouncements of the American
Institute of Certified Public Accountants and the statements
and pronouncements of the Financial Accounting Standards
Board or in such opinions, statements and pronouncements as
may be issued by any successor to either such entity.
Initiating Holders: any holder or holders of
Registrable Securities holding at least 51% of the Registra-
ble Securities (by number of shares at the time issued and
outstanding), and initiating a request pursuant to Section 5
hereof for the registration of all or part of such holder's
or holders' Registrable Securities.
Material Adverse Change: as defined in Section 3.5
hereof.
NASD: the National Association of Securities
Dealers, Inc.
1940 Act: The Investment Company Act of 1940 or
any successor Federal statute, and the rules and regulations
of the SEC thereunder, all as the same shall be in effect at
the time.
Person: a corporation, an association, a partner-
ship, an organization, a business, an individual, a govern-
ment or political subdivision thereof or a governmental
agency.
Purchase Price: as defined in the introduction to
this Agreement.
14
Registrable Securities: (a) the Shares and (b)
any Common Stock issued or issuable with respect to the
Shares by way of stock dividend or stock split or in connec-
tion with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise. As to
any particular Registrable Securities, once issued, such
securities shall cease to be Registrable Securities when (w)
a registration statement with respect to the sale of such
securities shall have become effective under the Securities
Act and such securities shall have been disposed of in
accordance with such registration statement, (x) they shall
have been distributed to the public pursuant to Rule 144 (or
any successor provision) under the Securities Act, (y) they
shall have been otherwise transferred, new certificates for
them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent disposi-
tion of them shall not require registration or qualification
of them under the Securities Act or any similar state law
then in force, or (z) they shall have ceased to be outstand-
ing.
Registration Expenses: all expenses incident to
the Company's performance of or compliance with Section 5
hereof, including, without limitation, all registration,
filing and NASD fees, all fees and expenses of complying
with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery
expenses, the fees and disbursements of counsel for the
Company and of its independent public accountants, including
the expenses of any special audits or "cold comfort" letters
required by or incident to such performance and compliance,
but excluding underwriting discounts and commissions and
transfer taxes, if any, and excluding the fees and disburse-
ments of counsel and accountants retained by the holder or
holders of any Registrable Securities being registered.
SEC: the United States Securities and Exchange
Commission.
Securities Act: the Securities Act of 1933, or
any successor federal statute, and the rules and regulations
of the SEC thereunder, all as the same shall be in effect at
the time.
Subsidiary: any corporation, association or other
business entity a majority (by number of votes) of the
Voting Stock of which is at the time owned by the Company or
by one or more Subsidiaries or by the Company and one or
more Subsidiaries.
15
Voting Stock: stock of any class or classes (or
equivalent interests), if the holders of the stock of such
class or classes (or equivalent interests) are ordinarily,
in the absence of contingencies, entitled to vote for the
election of the directors (or persons performing similar
functions) of such business entity, even though the right so
to vote has been suspended by the happening of such a con-
tingency.
6.2 Other Provisions Regarding Definitions: (a)
Unless otherwise defined therein, all terms defined in this
Agreement shall have the defined meanings when used in any
certificate, report or other document made or delivered
pursuant to this Agreement.
(b) The words "hereof," "herein," and "hereun-
der," and words of similar import when used in this Agree-
ment shall refer to this Agreement as a whole and not to any
particular provision of this Agreement.
7. Miscellaneous.
7.1 Survival of Representations and Warranties;
Severability. All representations and warranties contained
in this Agreement shall survive the execution and delivery
of this Agreement, and the Closing. Any provision of this
Agreement that is prohibited or unenforceable in any juris-
diction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting
the validity or enforceability of such provisions in any
other jurisdiction.
7.2 Amendment and Waiver. Any term of this
Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospective-
ly) only with the written consent of the Company and ABLAC.
Any amendment or waiver effected in accordance with this
Section 7.2 shall be binding upon ABLAC and the Company.
7.3 Notices, etc. Except as otherwise provided
in this Agreement, notices and other communications under
this Agreement shall be in writing and shall be delivered,
or mailed by registered or certified mail, return receipt
requested, by a nationally recognized overnight courier,
postage prepaid, or by telecopy addressed: (i) if to ABLAC,
at such address or telecopy number as ABLAC shall have fur-
nished to the Company in writing from time to time for such
purpose, or (ii) if to the Company, at such address or
telecopy number as the Company shall have furnished to ABLAC
in writing from time to time for such purpose, to the atten-
tion of its President.
16
7.4 Successors and Assigns. This Agreement shall
be binding upon and inure to the benefit of and be enforce-
able by the respective successors and permitted assigns of
the parties hereto, whether so expressed or not.
7.5 Descriptive Headings. The headings in this
Agreement are for purposes of reference only and shall not
limit or otherwise affect the meaning hereof.
7.6 Fees and Expenses. Whether or not the Clos-
ing occurs and except as otherwise expressly set forth here-
in, each party shall pay its own expenses incurred by it in
connection with the transactions contemplated by this Agree-
ment, including without limitation, the reasonable fees and
expenses of its counsel.
7.7 Stamp or Other Tax. Should any stamp, excise
tax or similar administration or governmental charge become
payable in respect of this Agreement or any modification
hereof or thereof, the Company shall pay the same (including
interest and penalties, if any) and shall hold ABLAC harm-
less with respect thereto.
7.8 GOVERNING LAW. THIS AGREEMENT SHALL BE CON-
STRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF
THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
7.9 Counterparts. This Agreement may be executed
in two counterparts, each of which shall be deemed an origi-
nal, but which together shall constitute one and the same
instrument, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such
counterpart.
7.10 Entire Agreement. This Agreement constitutes
the entire agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There
are no restrictions, promises, representations, warranties,
covenants or undertakings, other than those expressly set
forth or referred to herein. This Agreement supersedes all
prior agreements and understandings between the parties
including, without limitation, the Purchase Agreement, with
respect to such subject matter.
17
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed, all on the day and year
first above written
HARRIS & HARRIS GROUP, INC.
By: /s/_____________________
Name: Robert B. Schulz
Title: President
AMERICAN BANKERS LIFE
ASSURANCE COMPANY OF
FLORIDA
By: /s/____________________
Name: Floyd Denison
Title: Senior Vice President
AMERICAN BANKERS INSURANCE
COMPANY OF FLORIDA
By: /s/___________________
Name: Floyd Denison
Title: Senior Vice President
STANDSTILL AGREEMENT
STANDSTILL AGREEMENT dated as of May 18, 1995 by and
among American Bankers Life Assurance Company of Florida and
American Bankers Insurance Company of Florida (together the
"Investor") and Harris & Harris Group, Inc. (the "Company").
The Investor and the Company are entering into a Stock
Purchase Agreement of even date herewith (the "Stock
Purchase Agreement"), whereby, upon the terms set forth
therein, the Investor is purchasing from the Company, and the
Company is issuing and selling to the Investor, 1,075,269
shares (the "Shares") of the Company's Common Stock, $.01
par value per share (the "Common Stock"), constituting
approximately 10.4% of the shares of common stock
outstanding after giving effect to such issuance.
As a condition to entering into the Stock Purchase
Agreement, the Company has required that the Investor, and
as an inducement to the Company to enter into the Stock
Purchase Agreement the Investor has agreed to, enter into
this Agreement.
In consideration of the foregoing, and the agreements
contained herein, the parties hereto agree as follows:
A. Restriction on Acquisitions of Voting Securities.
The Investor will not, and will cause the other members of
the Investor Group (as defined herein) not to, in any
manner, acquire, agree to acquire, make any proposal to
acquire, directly or indirectly, any Voting Securities (as
defined herein) if, after any such acquisition, the Investor
Group would beneficially own Voting Securities possessing
aggregate voting power in excess of 10.5% of the total
voting power of all then outstanding Voting Securities. For
purposes of this Agreement, (i) "Investor Group" means the
Investor, its subsidiaries and affiliates, their respective
officers and directors and any person acting on behalf of
the Investor, any of such subsidiaries or affiliates or
their respective officers and directors and (ii) "Voting
Securities" means the Shares, any other shares of Common
Stock and any other issued and outstanding securities of the
Company generally entitled to vote in the election of
directors.
1
B. Restrictions on Certain Other Actions. The
Investor will not, and will cause the other members of the
Investor Group not to:
(1) propose to enter into, or
announce or disclose any intention to propose to enter into,
directly or indirectly, any merger or business combination
involving the Company or any of its subsidiaries or to pur-
chase, directly or indirectly, a material portion of the
assets of the Company or any of its subsidiaries;
(2) make, or in any way
participate, directly or indirectly, in any "solicitation"
of "proxies" (as such terms are defined or used in
Regulation 14A of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) to vote, or seek to advise or
influence any person or entity with respect to the voting
of, any Voting Securities, or become a "participant" in any
"election contest" (as such terms are used or defined in
Regulation 14A of the Exchange Act) relating to the election
of directors of the Company; provided, however, that neither
the Investor nor any other member of the Investor Group
shall be deemed to have engaged in a "solicitation" or to
have become a "participant" by reason of voting its Voting
Securities in any such election in accordance with the
provisions of this Agreement;
(3) form, join or in any way
participate in a "group" (within the meaning of Section
13(d)(3) of the Exchange Act) or otherwise act in concert
with any person or entity, (i) for the purpose of
circumventing the provisions of this Agreement or, (ii)
other than other members of the Investor Group (to the
extent permitted by this Agreement), for the purpose of
acquiring, holding, voting or disposing of any Voting
Securities;
(4) request the Company (or
its directors, officers, employees or agents), directly or
indirectly, to amend or waive Section 1 hereto or any of
paragraphs (i) through (iv) of this Section 2, or take any
action which might require the Company or any member of the
Investor Group to make a public announcement regarding the
possibility of (A) a business combination or merger
involving the Company or any of its subsidiaries, on the one
hand, and any member of the Investor Group, on the other
hand, or (B) the sale to any member of the Investor Group of
a material portion of the assets of the Company or any of
its subsidiaries.
2
(5) deposit any Voting Securities
in a voting trust, or subject any Voting Securities to a voting
or similar agreement; or
(6) sell, transfer, pledge or
otherwise dispose of or encumber any Voting Securities
except:
(A) sales or transfers of
Voting Securities to another member of the Investor
Group, provided such member has agreed in writing to be
bound by all of the provisions of this Agreement
applicable to such member's transferor;
(B) sales of Voting
Securities pursuant to a firm commitment, underwritten
distribution to the public, registered pursuant to
Section 5 of the Stock Purchase Agreement or otherwise
under the Securities Act of 1933, as amended (the
"Securities Act"), in which the Investor and the other
members of the Investor Group use their best efforts to
effect as wide a distribution of such Voting Securities
as reasonably practicable and to prevent any person or
entity, affiliated persons or entities or other group
from purchasing through such offering Voting Securities
having in the aggregate more than 4.9% of the aggregate
voting power of all then outstanding Voting Securities;
(C) sales of Voting
Securities in privately negotiated transactions, in which
the Investor and the other members of the Investor Group
use their best efforts to prevent any person or entity,
affiliated persons or entities or other group from pur-
chasing through such transactions Voting Securities
having in the aggregate more than 4.9% of the aggregate
voting power of all then outstanding Voting Securities;
provided that the Investor gives written notice to the
Company at least thirty (30) days prior to the date of
any such sale specifying the amount of Voting Securities
which the Investor and the other members of the Investor
Group intend to sell and that, if during such thirty (30)
day period the Company gives written notice to the
Investor of the pendency of any underwritten offering by
the Company of Voting Securities, neither the Investor
nor any other member of the Investor Group will effect
any sales pursuant to such privately negotiated transac-
tions until sixty (60) days after the consummation of
such offering;
3
(D) sales of Voting
Securities pursuant to Rule 144 of the General Rules and
Regulations under the Securities Act; provided that (1)
no such sale shall be effected to the extent the member
of the Investor Group seeking to effect such sale knows
or has reason to believe that the purchaser of Voting
Securities in such sale would, after such purchase,
beneficially own Voting Securities having in the
aggregate more than 4.9% of the aggregate voting power of
all then outstanding Voting Securities and (2) the Inves-
tor shall give written notice to the Company at least ten
(10) days prior to the date of any such sale specifying
the amount of Voting Securities which the Investor and
the other members of the Investor Group intend to sell
and that, if during such ten (10) day period the Company
gives written notice to the Investor of the pendency of
any underwritten offering by the Company of Voting
Securities, neither the Investor nor any other member of
the Investor Group will effect any such sale until sixty
(60) days after the consummation of such offering; or
(E) sales of Voting
Securities to the Company or in a tender or exchange
offer by a third party.
C. Voting. In any election of directors of the Company,
the Investor and each other member of the Investor Group will vote,
or execute written consents with respect to, their Voting Securities,
in accordance with the recommendation of the Company's Board of
Directors.
D. Termination. This Agreement shall terminate
automatically without any further action by any party on May 18,
2002. Upon such termination, this Agreement shall be void
and of no further force of effect, except that such termina-
tion shall not relieve a party from liability for breach of
this Agreement prior to such termination.
4
E. Amendment and Waiver. Any term of this Agreement
may be amended and the observance of any term of this Agreement
may be waived (either generally or in a particular instance and
either retroactively or prospectively but without limitation of
Section 2(iv)) only with the prior written consent of the Company
and the Investor.
F. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the
respective successors and permitted assigns of the parties hereto;
provided that the rights, obligations, covenants and agreements of
the Investor hereunder may not be assigned or delegated, as applicable,
except as provided in Section 2(vi)(A).
G. Notices. All notices, requests and other communications
to any party hereunder shall be in writing and shall be given (and
shall be deemed to have been given upon receipt) if delivered in
person or sent by facsimile, telegram, telex, by registered or
certified mail (postage prepaid, return receipt requested) or by
reputable overnight courier to the respective parties at the
following addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this
Section 7):
if to the Investor, to:
American Bankers Insurance Group
11222 Quail Roost Drive
Miami, Florida 33157
Attention: Mr. Floyd Denison
Facsimile: (305) 252-7068
if to the Company, to:
Harris & Harris Group, Inc.
One Rockefeller Plaza
14 West 49th Street
New York, New York 10020
Attention: Chief Executive Officer
Facsimile: (212) 332-3601
5
with a copy to:
Skadden, Arps, Slate, Meagher & Flom
One Beacon Street
Boston, MA 02108
Attention: Kent A. Coit, Esq.
Facsimile: (617) 573-4822
H. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES
SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
I. Counterparts. This Agreement may be executed in
two counterparts, each of which shall be deemed an original, but
which together shall constitute one and the same instrument, and
it shall not be necessary in making proof of this Agreement to
produce or account for more than one such counterpart.
6
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
AMERICAN BANKERS LIFE ASSURANCE
COMPANY OF FLORIDA
By: /s/________________________
Name: Floyd Denison
Title: Senior Vice President
AMERICAN BANKERS INSURANCE
COMPANY OF FLORIDA
By: /s/________________________
Name: Floyd Denison
Title: Senior Vice President
HARRIS & HARRIS GROUP, INC.
By: /s/________________________
Name: Robert B. Schulz
Title: President
7
TERMINATION AND RELEASE AGREEMENT
HARRIS & HARRIS GROUP, INC., a New York corpo-
ration (the "Company"), and AMERICAN BANKERS LIFE ASSURANCE
COMPANY OF FLORIDA ("ABLAC") are the parties to a Note and
Warrant Purchase Agreement, dated as of August 17, 1994 (the
"Purchase Agreement").
The Company and ABLAC hereby agree that effective
as of the date hereof (i) the Purchase Agreement is terminated
and shall be null and void and of no further force or
effect and (ii) each of the Company and ABLAC shall have no,
and hereby forever irrevocably releases the other from any,
liability or obligation under or with respect to the Purchase
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed as of this 18th day of
May, 1995.
HARRIS & HARRIS GROUP, INC.
/s/________________________
Name: Robert B. Schulz
Title: President and COO
AMERICAN BANKERS LIFE
ASSURANCE COMPANY OF
FLORIDA
/s/________________________
Name: Floyd Denison
Title: Senior Vice President
INDEMNIFICATION AGREEMENT
This is an Indemnification Agreement dated as of December
15, 1992 between HARRIS & HARRIS GROUP, INC., a New York
corporation (the "Company"), and (the "Indemnitee").
1. Recitals. The Indemnitee is an officer/director
of the Company. Article 8 of the Company's Certificate of
Incorporation, as currently amended, obligates the Company to
indemnify its directors and officers to the fullest extent
permitted by the New York Business Corporation Law, as amended
(the "NYBCL"), subject to the limitations imposed by the
Investment Company Act of 1940 and the Rules and Regulations
adopted thereunder. In accordance with the NYBCL and in
consideration of the Indemnitee's continuing services to the
Company, the Company and the Indemnitee desire to enter into this
Agreement.
2. Indemnitee's Services. The Indemnitee shall diligently
administer the Company's affairs in the position or positions
described in paragraph 1. Subject to any obligation imposed by
contract or by operation of law, (a) the Indemnitee may at any
time and for any reason resign from such position or positions,
and (b) the Company may at any time and for any reason (or no
reason) terminate the Indemnitee's employment in such position or
positions.
3. Indemnification. The Company shall indemnify the
Indemnitee and hold the Indemnitee harmless against any loss or
liability related to or arising from the Indemnitee's service as
a director, officer, employee, or agent of the Company, or of any
subsidiary or affiliate of the Company (a "Subsidiary") or in any
capacity whether as a director, officer, employee, agent or in
any other capacity, for any other corporation, investee,
partnership, joint venture, trust, employee benefit plan or other
enterprise on behalf of the Company or its subsidiaries
("Entity"), upon the following terms and conditions:
(a) The Company shall, to the fullest extent permitted
by the NYBCL as now in effect--and to such greater or, with
respect to acts or omissions occurring thereafter, to such lesser
extent as the NYBCL (or of any successor codification of the New
York corporation laws) may hereafter from time to time permit --
hold the Indemnitee harmless from and indemnify the Indemnitee
against (1) all judgments rendered, fines levied, and other
assessments (including amounts paid in settlement of any claims,
if approved by the Company), plus (2) all reasonable costs and
expenses (including, without limitation, attorneys fees,
retainers, court costs, transcript costs, experts' fees, witness
fees, travel expenses, duplicating costs, printing and binding
costs, telephone charges, postage, and delivery service fees),
incurred in connection with the defense of any threatened,
pending, or completed action or proceeding, whether civil,
criminal, administrative, or investigative (an "Action"), related
to or arising from (1) any actual or alleged act or omission of
the Indemnitee at any time as a director, officer, employee, or
agent of the Company or of any Subsidiary or Entity, or (2) the
Indemnitee's past, present, or future status as a director,
officer, employee, or agent of the Company or of any Subsidiary
or Entity.
1
(b) Subject to a determination by a majority of the
disinterested directors or a committee thereof who are not a
party to such Action or by independent legal counsel in a written
opinion that the Indemnitee is likely to have satisfied the
standard for indemnification under the NYBCL and the Investment
Company Act of 1940, upon presentation from time to time of such
invoices, statements for services rendered, or other similar
documentation as the Company may reasonably request, the Company
shall advance to or reimburse the Indemnitee for all reasonable
costs and expenses incurred of the types specified in paragraph
3(a) in the defense of any threatened, pending, or completed
Action, as and when such costs are incurred.
(c) The Company shall indemnify the Indemnitee under
paragraph 3(a) only as authorized in a specific case upon a
determination that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable
standard of conduct set forth in the NYBCL or in any other
applicable provision of New York law. Such determination shall
be made, as the Indemnitee chooses, either (1) by a majority vote
of a quorum of the Company's disinterested directors who are not
parties to such Action, or (2) by independent legal counsel in a
written opinion. The Company shall pay the fees and expenses of
any independent legal counsel chosen by the Company to make the
determination contemplated by this paragraph 3(c).
(d) The indemnification provided by this Agreement
shall apply only to (1) actual or alleged acts or omissions that
occur during the Indemnitee's service as a director, officer,
employee, or agent of the Company or of any Subsidiary or Entity,
and (2) actual or threatened Actions in which the Indemnitee is
joined or named as a party, but which relate to or arise from
alleged acts or omissions that occurred before the Indemnitee's
service as a director, officer, employee, or agent of the Company
or of any Subsidiary or Entity, or which relate to acts or
omissions alleged against any former directors, officers,
employees, or agents of the Company or of any Subsidiary or
Entity.
(e) Nothing in this Agreement shall be deemed or
construed to create any liability of the Company (1) to former
directors, officers, employees, or agents or their predecessors
other than Indemnitee, or to any other person not a party to this
Agreement, or (2) exceeding the liability that the Company may
lawfully incur in accordance with applicable New York law.
2
4. Conduct of Litigation.
(a) If any Action is made, brought, or threatened
against the Indemnitee for which the Indemnitee may be
indemnified under this Agreement, the Indemnitee shall, to the
extent not inconsistent with any private insurance coverage
obtained by the Company:
(l) Permit the Company to conduct the
Indemnitee's defense of the Action at the Company's expense and
with the use of counsel selected by the Company; or
(2) Retain counsel acceptable to the Indemnitee
and the Company to defend or counsel the Indemnitee with respect
to the Action, and permit the Company to monitor and direct the
Indemnitee's defense.
(b) The Company shall at all times have the option to
undertake the Indemnitee's defense of any Action for which the
Indemnitee may be indemnified under this Agreement. If the
Company elects to conduct the Indemnitee's defense, the
Indemnitee shall cooperate fully with the Company in the defense
of the Action. If the Company elects to conduct the Indemnitee's
defense after the Indemnitee proceeds under paragraph 4(a)(2),
the Company shall advance or reimburse the Indemnitee for the
reasonable costs, including attorneys' fees, incurred by the
Indemnitee in enabling the Company to undertake the Indemnitee's
defense.
5. Reimbursement of Expenses. As required by the NYBCL,
if the Company makes any payment to the Indemnitee under this
Agreement, and if it is ultimately determined that the Indemnitee
was not entitled to be indemnified by the Company under the NYBCL
or the Investment Company Act of 1940, the Indemnitee shall
promptly repay the Company for all amounts paid to the Indemnitee
under this Agreement which exceed the indemnification to which
the Indemnitee is lawfully entitled.
6. Enforcement of Agreement. If the Indemnitee makes a
claim for indemnification under this Agreement and the Company
refuses to indemnify the Indemnitee, and if the Indemnitee then
prevails in an action or proceeding brought to enforce this
Agreement, the Company shall pay all reasonable costs and
expenses (including attorneys' fees) incurred by the Indemnitee
in connection with the action or proceeding in addition to any
other indemnification required under this Agreement.
3
7. Notice of Claims. If the Indemnitee receives a
complaint, claim, or other notice of any loss, claim, damage, or
liability giving rise to a claim for indemnification under this
Agreement, the Indemnitee shall promptly notify the Company of
the complaint, claim, or other notice. Any failure to notify the
Company, however, shall not relieve the Company from any
liability under this Agreement unless the Company (a) is
materially prejudiced by the failure (such as, for example, where
the failure results in the exclusion or denial of the Company's
otherwise available insurance coverage), and (b) had no actual
knowledge of the complaint, claim, or other notice. In no event
shall the Company be obligated to indemnify the Indemnitee for
any settlement of any Action effected without the Company's prior
consent.
8. Termination.
(a) This Agreement shall terminate (1) upon
termination of the Indemnitee's service as a director, officer,
employee, or agent of the Company or of any Subsidiary or Entity,
or (2) upon the Company's written notice to the Indemnitee that,
in the reasonable opinion of the Company, the Indemnitee has not
complied with paragraph 4 of this Agreement. The Company shall
not issue any such notice merely because it disagrees with a
business judgment or judgments of the Indemnitee.
(b) The termination of this Agreement shall not:
(l) Terminate the Company's liability to the
Indemnitee for (A) Actions against the Indemnitee related to or
arising from acts or omissions occurring or alleged to have
occurred before termination of this Agreement, or (B) Actions
that name or join the Indemnitee as a party, but relate to or
arise from acts or omissions alleged to have occurred before the
Indemnitee's service as a director, officer, employee, or agent,
or acts or omissions alleged against former directors, officers,
employees, or agents.
(2) Render the terms and conditions of this
Agreement inapplicable to any Actions subject to paragraph 8(b)
(1).
9. Subrogation. If the Company makes any payment to the
Indemnitee under this Agreement, the Company shall be subrogated
to the extent of such payment to all of the Indemnitee's rights
of recovery and the Indemnitee shall execute any documents and
take any actions necessary to secure such rights (including
execution of any documents necessary to enable the Company to
bring suit to enforce such rights).
10. Insurance Reimbursements. The Company shall not be
required to make any payment of amounts otherwise indemnifiable
under this Agreement if and to the extent that the Indemnitee has
otherwise actually received such payment under any insurance
policy, contract, agreement, or otherwise.
4
11. Notices. Any notice or other communication required or
permitted under this Agreement shall be deemed given when hand-delivered
or sent by registered United States mail, postage prepaid and
return-receipt requested, to the intended recipient at the address
set forth below or at such other address as the recipient shall
hereafter furnish the sender in writing:
If to the Indemnitee: (name and address)
If to the Company: Harris & Harris Group, Inc.
One Rockefeller Plaza
Rockefeller Center
New York, New York 10020
Attention: The Chairman of the Board
12. Governing Law. The laws of New York and to the extent
inconsistent therewith, the Investment Company Act of 1940, shall
govern the validity, interpretation, and construction of this
Agreement. Nothing in this Agreement shall require any unlawful
action or inaction by any party.
13. Modification. No modification of this Agreement shall
be binding unless executed in writing by the Indemnitee and the
Company.
14. Headings. All "paragraph" references in this Agreement
refer to numbered paragraphs of this Agreement. Paragraph
headings are not part of this Agreement, but are solely for
convenience of reference and shall not affect the meaning or
interpretation of this Agreement or any provision in it.
15. Sole Benefit. Nothing expressed or referred to in this
Agreement is intended or shall be construed to give any person
other than the Company, its successors and assigns, and the
Indemnitee and the Indemnitee's personal representatives, heirs,
or devisees, any legal or equitable right, remedy, or claim under
or with respect to this Agreement or any provisions contained
herein. The assumption of obligations and statements of
responsibilities and all conditions and provisions of this
Agreement are for the sole benefit of the Company, its successors
and assigns, and the Indemnitee and the Indemnitee's personal
representatives, heirs, or devisees.
16. Effect of Prior Agreements. This Agreement contains
the entire understanding between the Company and the Indemnitee
with respect to the subject matter hereof and supersedes any
prior indemnification agreement between the Company or any
predecessor of the Company and the Indemnitee.
5
IN WITNESS WHEREOF, the Indemnitee and the Company have
executed several originals of this Agreement as of December 15,
1992 but actually on the dates set forth below.
THE "INDEMNITEE" HARRIS & HARRIS GROUP, INC.
____________________________ By:____________________________
Name:______________________ Title:__________________________
Date:_______________________ Date:___________________________
6
HARRIS & HARRIS GROUP, INC.
1995 ANNUAL REPORT
<TABLE>
<CAPTION>
FINANCIAL SUMMARY
<S> <C> <C> <C>
December 31, 1995 December 31, 1994 December 31, 1993
Financial Position
Total Assets $ 37,524,555 $ 32,044,073 $ 34,534,724
Deferred Income Tax Liability $ 550,630 $ 309,151 $ 717,806
Other Liabilities $ 412,016 $ 424,120 $ 1,067,621
Net Assets $ 36,561,909 $ 31,310,802 $ 32,749,297
Net Asset Value per
Outstanding Share $ 3.54 $ 3.43 $ 3.66
Shares Outstanding 10,333,902 9,136,747 8,944,828
</TABLE>
<TABLE>
<S>
<C> <C> <C> <C> <C> <C>
% of % of % of
Classes of Assets Value Total Value Total Value Total
Publicly-traded
Equities $ 2,433,543 6.5% $ 1,177,359 3.7% $ 11,653,252 33.7%
Cash and Equivalents 364,354 1.0 221,457 0.7 127,214 0.4
U.S. Government
Obligations 20,161,558 53.7 13,639,018 42.6 14,010,514 40.6
Receivables
Receivable from
Brokers 205,789 0.5 4,041,391 12.6 0 0.0
Notes Receivable 0 0.0 54,664 0.2 71,769 0.2
Other Receivables 668,647 1.8 1,331,229 4.1 75,643 0.2
Private Placements 13,334,188 35.5 11,218,426 35.0 7,878,407 22.8
Other Assets 356,476 1.0 360,529 1.1 717,925 2.1
------------ ------ ------------ ------ ------------ ------
Total Assets $ 37,524,555 100.0% $ 32,044,073 100.0% $ 34,534,724 100.0%
============ ====== ============ ====== ============ ======
</TABLE>
1
BUSINESS STRATEGY
Harris & Harris Group is a publicly-traded, venture capital investment
firm. It is an entrepreneurial company that has earned high returns on its
shareholders' capital by helping other entrepreneurs realize their potential.
Sometimes, Harris & Harris Group finds entrepreneurs to manage the development
of intellectual property or a business idea. Other times, entrepreneurs find
Harris & Harris Group.
Harris & Harris Group is perhaps best known for its co-founding of
high-technology start-ups that have become highly valued, publicly-traded
companies, including Alliance Pharmaceutical and Molten Metal Technology. But
it also has co-founded or been at least a fifty percent owner of early-stage,
low-technology companies that it has helped develop into successful,
publicly-traded entities, including Re Capital Corporation and Ag Services of
America. And it also invests in later stage companies, including
management-led buyouts, and in deals led by other venture capitalists.
Most of Harris & Harris Group's interests in privately-held companies are
intended to be sold eventually -- usually after a period of some years -- once
the entrepreneurial phase of development is over and the investee company can
flourish independently. But two of Harris & Harris Group's start-up
investments, the money management firms Highline Capital Management and PHZ
Capital Partners, may be held for longer periods, in order to share in their
generation of net free cash as they mature.
Sometimes, members of Harris & Harris Group's management team serve as
board members or even operating officers of investee companies. Other times,
Harris & Harris Group merely acts as an active investor, ready to assist the
investee company in ways small or large.
What is common to all of Harris & Harris Group's investments in
privately-held companies is that Harris & Harris Group is a resource,
supplying its own capital, experience and relationships to entrepreneurial
ventures. And Harris & Harris Group is constantly nurturing and drawing on its
relationships with leading research universities, scientific institutions, and
financial, consulting, professional and industrial organizations to bolster its
own resources.
As a result of this value-added approach, Harris & Harris Group's
thirteen-year, historical rate of return on its investments in private
ventures has been extremely high. The Company's goal is to keep its rate of
return on its venture capital investments high by continuing to find good
opportunities and add high value to them.
2
FELLOW SHAREHOLDERS:
During the third quarter, Harris & Harris Group became, in effect, a
publicly-traded venture capital firm: it became a Business Development Company
("BDC"), having obtained an exemptive order from the Securities and Exchange
Commission as authorized by the shareholders at the 1994 Annual Meeting. Harris
& Harris Group has been an investment company since late 1992, prior to which
time it was an operating company. As a BDC, the Company will continue to
invest as it has for the last thirteen years in early-stage and other venture
capital investments, but it will also have greaterflexibility, including the
ability to invest in entities in which other affiliated persons (not including
management or directors) invest, more choices with respect to capital
structure, and the ability to offer stock options as management incentives.
Since starting up Otisville BioTech (now named Alliance Pharmaceutical
Corporation) in 1983, Harris & Harris Group has made venture capital
investments. These high risk investments have included a few losers, but the
Company's overall rates of return on its venture capital investments have been
extraordinarily high. Profits from these investments have been largely
responsible for the Company's growth in net assets from $109,144 at the time
of incorporation in 1981 to $36,561,909 at December 31, 1995. But until the
Company became an investment company in late 1992, its venture
capital returns were commingled with the much lower overall returns of its
operating businesses, in which the Company then had most of its capital
invested.
As a BDC, the Company is in the process of investing a higher percentage
of its capital than heretofore possible in venture capital opportunities. The
Company still must maintain liquidity for working capital, new opportunities
and follow-on investments in existing portfolio companies. But now that the
Company has the flexibility of a BDC, management is studying new ways of
possibly leveraging the Company's relationships, deal flow and performance
record for the benefit of Harris & Harris Group's shareholders.
The Company reported net assets at December 31, 1995 of $36,561,909, as
compared with $31,310,802 at December 31, 1994. Total assets at December 31,
1995 were $37,524,555, as compared with $32,044,073 at December 31, 1994.
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at December 31, 1995 of $23,833,891, versus
$20,465,118 at December 31, 1994 and $25,938,392 at December 31, 1993.
For the year ended December 31, 1995, the Company reported net pre-tax
realized and unrealized appreciation on its investments of $2,109,768 and
$243,414, respectively. The Company's liquidity was boosted $5,000,001 by the
private placement on May 18, 1995 of 1,075,269 unregistered shares of the
Company's common stock at the then-current market price with subsidiaries of
American Bankers Insurance Group, Inc.
3
Harris & Harris Group restructured itself from an operating company that
also made entrepreneurial investments into a full time BDC simply because, over
the years, the Company's return on venture capital investments (defined as any
cash investment in a non-publicly traded security other than an operating
subsidiary of the Company), has been so high. Since the Company's first
venture capital investment in 1983, in the company now named Alliance
Pharmaceutical Corporation (NASDAQ/NMS symbol: ALLP), through December 31,
1995, the Company's annual internal rate of return on its venture capital
investments has been 92.2 percent.
The Company's nine completed venture capital investments (i.e., those in
which the Company has sold its interest), generated an annual internal rate of
return of 93.4 percent. In these completed investments, the Company invested
$9,754,581 and sold its interests for a total of $47,939,584. The Company's
initial investments in these ventures totaled $5,339,523, and its follow-on
investments totaled $4,415,058. From the time of its first investment to
final sale, the average duration of these investments was 3.7 years.
The Company's current portfolio of private investments is comprised of
interests in fourteen companies for which it paid a total of $13,462,816 and
that it values as of December 31, 1995 at a total of $14,813,980. On average,
these investments have been held for only 2.0 years and, so far, their internal
rate of return to the Company has been only 6.7 percent. It would be extremely
difficult (and realistically, shareholders should not expect) for the Company
to bring its internal rate of return on its current portfolio and on new
investments up to the extraordinary levels achieved by its completed
investments. But that is what the Company's management is striving to
do.
As always, we, the employees, management and directors of Harris & Harris
Group, thank the shareholders for their patient support of the Company in a
difficult, long-term business that requires patience. Shareholders and
potential shareholders should read carefully all of the sections of this
annual report, including "Company Business and Investment Objectives," to
understand the nature of the Company's business. The Company does not have a
balanced, diversified portfolio, and many of the Company's investments are
inherently long-term and risky. The Company's common stock is not a suitable
investment for investors who are impatient or are uncomfortable with or unable
to bear such risk, even though the Company's overall historical returns on
such investments have encouraged the Company to become a BDC.
/s/ /s/
Charles E. Harris Robert B. Schulz
Chairman and Chief Executive Officer President and Chief Operating Officer
February 29, 1996
4
SIGNIFICANT EVENTS OF 1995
January 31 Harris & Harris Group announced a $2,062,155 write-down, to
$618,845, of its investment in Sonex International Corporation and
estimated year-end 1994 net asset value of $3.43 per share.
February 1 Company received 108,736 shares of Charter Medical Corporation in
exchange for its interest in Magellan Health Services, as part of
a tax-free merger. The Company had paid $800,000 for its interest
in Magellan in December, 1993. On February 1, 1995, Charter
Medical's stock closed at $15 1/2 on the American Stock Exchange.
February 13 Company announced purchase of a 4.7 percent interest in Harber
Brothers Productions, Inc. for $150,000.
March 23 Company elected Charles F. Hays as a director.
March 28 Company announced purchase of an 11 percent interest in Gel
Sciences, Inc. for $650,000.
May 18 Company announced a $5,000,001 private placement of 1,075,269
unregistered shares of its common stock with American Bankers
Insurance Group. The shares were placed at $4.65 per share, which
was the average closing price of Harris & Harris Group on the
NASDAQ National Market System during the ten previous trading days.
June 1 Company announced purchase of a 24.9 percent interest in Highline
Capital Management, LLC. for $500,000.
June 7 Company elected James E. Roberts as a director.
June 8 Company announced purchase of an additional interest in Harber
Brothers Productions, Inc. for $827,500. Including this
investment, the Company now owns 21.5 percent of Harber Brothers
on a fully-diluted basis.
June 23 Company announced purchase of an additional interest in Intaglio,
Ltd., for $209,836. Including this investment, the Company now
owns 20.4 percent of Intaglio on a fully-diluted basis.
July 26 Effective July 26, 1995, the Board of Directors elected to have
the Company become a Business Development Company ("BDC").
July 28 Company reported net asset value of $3.56 per share as of June
30, 1995.
5
September 22 Company purchased 24.9 percent ownership interest in PHZ Capital
Partners Limited Partnership. PHZ is a non-registered investment
company which manages third-party assets through private limited
partnerships investing primarily in publicly-traded securities in
both domestic and overseas markets.
October 19 Company reported net asset value of $3.52 per share as of
September 30, 1995.
November 8 Company announced purchase of an additional 600,000 shares of
Nanophase Technologies Corporation's Series D Preferred Stock for
$600,000. Including the 562,204 shares of Series D Preferred
Stock previously acquired, the Company's total investment is now
$1,162,204, representing approximately a 10.1 percent
fully-diluted interest in Nanophase.
December 22 Company announced that Mr. Joel Voelz had joined nFX Corporation
as President and CEO.
December 28 Company announced that it had sold its entire interest of
Guilford Pharmaceuticals, Inc., in the open market for $3,040,621.
The Company had acquired these shares in the second half of 1995
for a total of $1,624,195.
After December 31, 1995, but before publication of 1995 Annual Report
February 6 Company reported net asset value of $3.54 per share as of
December 31, 1995.
February 20 Company announced that nFX Corporation had closed a $1 million
equity private placement, in which the Company purchased an
additional $440,000 of nFX Series B Convertible Preferred Stock
and maintained its 37.8 percent fully-diluted ownership interest
in nFX. Prior to this financing, Harris & Harris Group had valued
its holdings in nFX at $3,988,959.
February 27 Company purchased for $400,000, Series A Convertible Preferred
Stock of PureSpeech, Inc., representing a 3.7 percent
fully-diluted equity interest.
6
HARRIS & HARRIS GROUP, INC.
1995 INVESTMENT ACTIVITY
Harber Brothers Productions, Inc.
In February 1995, the Company purchased 150,000 shares of Harber
Brothers Productions, Inc., Series A Voting Convertible Preferred Stock for
$150,000; and in June 1995, the Company purchased 827,500 shares of Harber
Brothers Productions, Inc., Series A Voting Convertible Preferred Stock for
$827,500. The Series A Preferred Stock is convertible into shares of common
stock. The combined purchases represent a 21.5 percent fully-diluted ownership
interest in Harber Brothers Productions.
Harber Brothers is a privately-held, New York City based company that
intends to finance, produce and market media products that combine
entertainment, music, learning and interactivity. Harber Brothers is producing
its first titles, interviewing developers, and establishing distribution
channels. Harber Brothers has received $1,500,000 in total paid-in capital.
Gel Sciences, Inc.
In March 1995, the Company purchased 1,181,819 shares of Series B
Preferred Stock and five-year warrants exercisable into 72,728 shares of
common stock of Gel Sciences, Inc., for $650,000. The Series B Preferred is
convertible into 1,181,819 shares of common stock at $.55 per share.
In December 1995, the Company purchased 41,250 shares of common stock
and 22,275 shares of Series A Non-Convertible Preferred Stock of Gel Sciences
for $26,812. Altogether, the Company owns an 11.8 percent fully-diluted
interest in Gel Sciences.
Gel Sciences is a privately-held company, founded in 1992, that has
developed a significant body of knowledge in responsive gels based on
technology licensed from several institutions including: Massachusetts
Institute of Technology, University of Minnesota, University of Cincinnati, and
University of Washington. Responsive gels expand or contract, in response to
changes in the environment, including changes in: temperature, pressure, pH,
solvent, light, and electric and magnetic fields. Responsive gels perform
useful functions by absorbing and expelling a liquid (chemical or
pharmaceutical) in response to a controlled stimulus. Gel Sciences is
pursuing a strategy of developing OEM relationships to accelerate the
commercialization of its technology with a particular focus in three areas:
separation, control of chemical reactivity, and drug delivery.
Highline Capital Management, LLC.
In June 1995, the Company purchased for $500,000, 24.9 percent of
Highline Capital Management, LLC., a Delaware limited liability company.
Highline is a non-registered investment company organized by Messrs. Jacob W.
Doft and Raji G. Khabbaz to manage third-party assets through private limited
partnerships that invest in publicly-traded securities. Mr. Khabbaz had served
in previous years as an employee and as a director of Harris & Harris Group.
7
PHZ Capital Partners Limited Partnership
In September 1995, the Company purchased, for $720,000, a 24.9 percent
ownership interest in PHZ Capital Partners Limited Partnership, a Delaware
limited partnership. The Company has loaned PHZ $500,000 for one year, which
PHZ is investing to establish its initial audited performance record.
PHZ Capital Partners is a non-registered investment company which will
manage third-party assets through private limited partnerships investing
primarily in publicly-traded securities in both domestic and overseas markets.
PHZ is dedicated to creating and implementing disciplined and model-based
quantitative trading strategies designed to achieve consistently superior
risk-adjusted returns through innovations in financial modeling and trading
technology. PHZ will use a balanced integration of expertise in finance,
leading edge statistics, and advanced computing to find and exploit the complex
relationships existing between financial markets and specific securities.
Harris & Harris Group's investments in Highline and PHZ may be held for
longer periods, as potential net free cash flow generating assets, with a view
towards increasing Harris & Harris Group's cash flow.
8
COMPANY BUSINESS AND INVESTMENT OBJECTIVES
The Company is a venture capital investment company, operating as a
Business Development Company ("BDC") under the Investment Company Act of 1940
(the "1940 Act"), whose objective is to achieve long-term capital appreciation,
rather than current income, from its investments. The Company has invested,
and expects to continue to invest, a substantial portion of its assets in
private, development stage or start-up companies, and in the development of new
technologies in a broad range of industry segments. These private businesses
tend to be thinly capitalized, unproven, small companies that lack management
depth and have not attained profitability or have no history of operations.
The Company 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. The Company may participate in expansion
financing and leveraged buyout financing of more mature operating companies
as well as other investments. The Company does not seek to invest in any
particular industries or categories of investments. As a venture capital
company, the Company invests in, and provides managerial assistance to, its
private investees which, in its opinion, have significant potential for growth.
There is no assurance that the Company's investment objective will be achieved.
As a BDC, the Company operates as an internally managed investment company
whereby its officers and employees, under the general supervision of its Board
of Directors, conduct its operations.
Venture Capital Investments
The Company has invested, and expects to continue to invest, a substantial
portion of its assets in private, development stage or start-up companies. The
Company may initially 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. In connection with its venture capital investments, the Company may be
involved in recruiting management, formulating operating strategies, product
development, marketing and advertising, assisting in financial plans, as well
as providing management in the initial, start-up stages and establishing
corporate goals. The Company may assist in raising additional capital for
such companies from other potential investors and may subordinate its own
investment to that of other investors. The Company may also find it necessary
or appropriate to provide additional capital of its own. The Company may
introduce such companies to potential joint venture partners, suppliers and
customers. In addition, the Company may assist in establishing relationships
with investment bankers and other professionals. The Company may also assist
with mergers and acquisitions. The Company may derive income from such
companies for the performance of any of the above services. Because of the
speculative nature of these investments and the lack of any market for such
securities, there is significantly greater risk of loss than is the case with
traditional investment securities. The Company expects that some of its
venture capital investments will be a complete loss or will be unprofitable and
that some will appear likely to become successful, but never realize their
potential. The Company has been and will continue to be risk seeking rather
than risk averse in its approach to its venture capital and other investments.
9
The Company may control a company for which it has provided venture capital,
or it may be represented on the company's board of directors by one or more of
its officers or directors, who may also serve as officers of such a company.
Particularly during the early stages of an investment, the Company 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, the Company expects that its role in the company's operations will
diminish. The Company seeks to assist each company in establishing its own
independent capitalization, management and board of directors. The Company
expects to be able to reduce its active involvement in the management of its
investment in those start-up companies that become successful by a liquidity
event, such as a public offering or sale of a company.
The Company has invested and expects to continue to invest a substantial
portion of its 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.
The Company expects to make speculative investments that have limited
marketability and a greater risk of investment loss than less speculative
issues.
Intellectual Property
The Company believes there is a role for organizations that can assist in
technology transfer. Scientists and institutions that develop and patent
intellectual property increasingly seek the rewards of entrepreneurial
commercialization of their inventions, particularly as governmental,
philanthropic and industrial funding for research has become harder to obtain.
The Company believes that several factors combine to give it a high value-added
role to play in the commercialization of technology: its experience in
organizing and developing successful new companies; its willingness to invest
its own capital at the highest risk, seed stage; its access to high-grade
institutional sources of intellectual property; its experience in mergers,
acquisitions and divestitures; its access to and knowledge of the capital
markets; and its willingness to do as much of the early work as it is qualified
to do.
The Company's form of investment may include: 1) 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 commercialize intellectual property. Income from the Company's
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. At some point during the commercialization of a technology, the
Company's investment may be transformed into ownership of securities of a
development stage or start-up company as discussed above. Investing in
intellectual property is highly risky.
10
Illiquidity of Investments
Many of the Company's investments consist of securities acquired directly
from the issuer in private transactions. They may be subject to restrictions
on resale or otherwise be illiquid. The Company does not anticipate that there
will be any established trading market for such securities. Additionally,
many of the securities that the Company may invest in will not be eligible for
sale to the public without registration under the Securities Act of 1933, as
amended, which could prevent or delay any sale by the Company of such
investments or reduce the amount of proceeds that might otherwise be realized
therefrom. Restricted securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a
portfolio company or investee registers its securities and becomes a reporting
company under the Securities and Exchange Act of 1934, the Company may be
considered an insider by virtue of its board representation and would be
restricted in sales of such company's securities.
Need for Follow-On Investments
Following its initial investment in investees, the Company has made and
anticipates that it will continue to make additional investments in such
investees as "follow-on" investments, in order to increase its investment in
an investee, and may exercise warrants, options or convertible securities that
were acquired in the original financing. Such follow-on investments may be
made for a variety of reasons including: 1) to increase the Company's exposure
to an investee, 2) to acquire securities issued as a result of exercising
convertible securities that were purchased in the original financing, 3) to
preserve the Company's proportionate ownership in a subsequent financing, or 4)
in an attempt to preserve or enhance the value of the Company's investment.
There can be no assurance that the Company will make follow-on investments or
have sufficient funds to make such investments; the Company will have the
discretion to make any follow-on investments as it determines, subject to the
availability of capital resources. The failure to make such follow-on
investments may, in certain circumstances, jeopardize the continued viability
of an investee and the Company's initial investment, or may result in a missed
opportunity for the Company to increase its participation in a successful
operation.
11
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
December 31, 1995 December 31, 1994
Investments, at value (See accompanying
schedule ofinvestments and notes). . . $ 35,929,289 $ 26,034,803
Cash. . . . . . . . . . . . . . . . . . . 364,354 221,457
Receivable from brokers . . . . . . . . . 205,789 4,041,391
Interest receivable . . . . . . . . . . . 300,718 73,326
Notes receivable. . . . . . . . . . . . . 0 54,664
Taxes receivable (Note 6) . . . . . . . . 367,929 1,257,903
Prepaid expenses. . . . . . . . . . . . . 86,976 65,220
Other assets. . . . . . . . . . . . . . . 269,500 295,309
------------ ------------
Total assets. . . . . . . . . . . . . . . $ 37,524,555 $ 32,044,073
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES & NET ASSETS
<S> <C> <C>
Accounts payable and accrued
liabilities. . . . . . . . . . . . . . $ 352,129 $ 365,261
Deferred rent . . . . . . . . . . . . . . 59,887 58,859
Deferred income tax liability (Note 6). . 550,630 309,151
------------ ------------
Total liabilities . . . . . . . . . . . . 962,646 733,271
------------ ------------
Commitments and contingencies (Note 7)
Net assets. . . . . . . . . . . . . . . . $ 36,561,909 $ 31,310,802
============ ============
Net assets are comprised of:
Preferred stock, $0.10 par value,
2,000,000 shares authorized;
none issued. . . . . . . . . . . . . . $ 0 $ 0
Common stock, $0.01 par value,
25,000,000 shares authorized;
10,333,902 issued and outstanding
at 12/31/95 and 9,841,099 issued and
9,136,747 outstanding at 12/31/94. . . 103,339 98,411
Additional paid in capital. . . . . . . . 15,691,978 11,543,948
Accumulated net realized income . . . . . 19,362,249 19,090,309
Accumulated unrealized appreciation of
investments, net of deferred tax
liability of $698,250 at 12/31/95
and $613,055 at 12/31/94 . . . . . . . 1,404,343 1,246,124
Treasury stock, at cost (none at
12/31/95; 704,352 at 12/31/94) . . . . 0 (557,707)
Reserve for restricted stock award
(Note 3) . . . . . . . . . . . . . . . 0 (110,283)
------------ ------------
Net assets. . . . . . . . . . . . . . . . $ 36,561,909 $ 31,310,802
============ ============
Shares outstanding. . . . . . . . . . . . 10,333,902 9,136,747
------------ ------------
Net asset value per outstanding share . . $ 3.54 $ 3.43
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Investment income:
Interest from:
Fixed-income securities. . . $ 999,869 $ 719,293 $ 276,059
Unaffiliated companies . . . 0 0 128,398
Affiliated companies . . . . 11,222 11,913 0
Controlled affiliates. . . . 0 0 6,223
Dividend income--
unaffiliated companies . . 8,436 88,067 28,374
Consulting and
administrative fees. . . . 88,209 0 0
Other income. . . . . . . . . 1,781 1,003 14,896
------------ ------------ ------------
Total income . . . . . . . . 1,109,517 820,276 453,950
Expenses:
Salaries and benefits . . . . 1,560,132 2,061,981 1,131,945
Sign-up bonuses . . . . . . . 0 1,000,000 0
------------ ------------ ------------
Total salaries and benefits. 1,560,132 3,061,981 1,131,945
Administration and
operations . . . . . . . . 440,605 424,714 368,241
Professional fees . . . . . . 461,526 421,865 285,772
Depreciation and
amortization . . . . . . . 161,876 271,430 363,752
Rent. . . . . . . . . . . . . 124,713 114,667 123,685
Directors' fees and expenses. 40,836 52,816 78,984
Custodian fees. . . . . . . . 16,453 17,333 0
Other expenses (Note 7) . . . 0 0 700,000
------------ ------------ ------------
Total expenses . . . . . . . 2,806,141 4,364,806 3,052,379
Operating loss before
income taxes . . . . . . . (1,696,624) (3,544,530) (2,598,429)
Income tax benefit (Note 6) . 597,215 1,265,648 983,804
------------ ------------ ------------
Net operating loss . . . . . . (1,099,409) (2,278,882) (1,614,625)
Net realized gain (loss) on investments:
Realized gain (loss) on
sale of investments. . . . 2,109,768 (71,396) 35,873,394
------------ ------------ ------------
Total realized gain (loss) . 2,109,768 (71,396) 35,873,394
Income tax (provision)
benefit (Note 6) . . . . . (738,419) 168,252 (12,282,824)
------------ ------------ ------------
Net realized gain on
investments. . . . . . . . 1,371,349 96,856 23,590,570
------------ ------------ ------------
Net realized income (loss) . . 271,940 (2,182,026) 21,975,945
Net increase (decrease) in unrealized appreciation on investments:
Increase as a result of
investment sales . . . . . 337,577 7,955 0
Decrease as a result of
investment sales . . . . . (562,765) (1,223,026) (22,078,808)
Increase on investments held. 1,002,347 1,028,961 3,054,485
Decrease on investments held. (533,745) (956,624) 0
------------ ------------ ------------
Total unrealized
appreciation
(depreciation) on
investments . . . . . . . 243,414 (1,142,734) (19,024,323)
Income tax (provision)
benefit (Note 6) . . . . . (85,195) 256,694 5,940,979
------------ ------------ ------------
Net increase (decrease) in
unrealized appreciation
on investments . . . . . . 158,219 (886,040) (13,083,344)
------------ ------------ ------------
Net increase (decrease) in net assets from operations:
Total . . . . . . . . . . . . $ 430,159 $ (3,068,066) $ 8,892,601
============ ============ ============
Per outstanding share . . . . $ 0.04 $ (0.34) $ 1.03
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<TABLE>
<CAPITION>
STATEMENT OF CASH FLOWS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Cash flows provided (used) by operating activities:
Net increase (decrease) in net assets
resulting from operations . $ 430,159 $ (3,068,066) $ 8,892,601
Adjustments to reconcile
increase (decrease) in
net assets from operations
to net cash provided (used)
by operating activities:
Net realized and unrealized
(gain) loss on
investments. . . . . . . . (2,353,182) 1,214,130 (16,849,071)
Deferred income taxes . . . . 241,479 (408,655) (5,640,196)
Depreciation and
amortization . . . . . . . 161,876 271,430 363,752
Other . . . . . . . . . . . . 40,859 2,451 3,280
Changes in assets and liabilities:
Receivable from brokers . . . 3,835,602 (4,041,391) 0
Prepaid expenses. . . . . . . (21,756) 183,643 438,578
Interest receivable . . . . . (227,392) (64,949) (5,006)
Taxes receivable. . . . . . . 1,184,567 (1,190,637) (67,266)
Other assets. . . . . . . . . (9,372) 153,071 (120,248)
Accounts payable and accrued
liabilities. . . . . . . . (43,241) 142,570 (66,596)
Payable for securities
purchased. . . . . . . . . 0 (797,380) 720,530
Deferred rent . . . . . . . . 10,281 20,560 47,550
------------ ------------ ------------
Net cash provided (used)
by operating activities. . 3,249,880 (7,583,223) (12,282,092)
Cash (used) provided by investing activity:
Collection on note
receivable . . . . . . . . 54,664 17,105 15,802
Purchase of fixed assets. . . (16,409) (30,188) (258,269)
Net (purchase) sale of
short-term investments . . (6,522,541) 371,496 (10,218,494)
Purchase of investments . . . (8,246,694) (30,411,524) (25,880,690)
Proceeds from sale of
investments. . . . . . . . 7,207,926 36,321,570 47,582,159
------------ ------------ ------------
Net cash (used) provided
by investing activities. . (7,523,054) 6,268,459 11,240,508
Cash flows provided by financing activities:
Purchase of treasury stock. . (646,430) 0 0
Proceeds from exercise of
stock options. . . . . . . 62,500 0 0
Proceeds from private
placement of stock
(Note 4) . . . . . . . . . 5,000,001 0 0
Proceeds from sale of stock . 0 1,409,007 982,789
------------ ------------ ------------
Net cash provided by
financing activities . . . 4,416,071 1,409,007 982,789
------------ ------------ ------------
Net increase (decrease) in cash:
Cash at beginning of period . 221,457 127,214 186,009
Cash at end of period . . . . 364,354 221,457 127,214
------------ ------------ ------------
Net increase (decrease)
in cash. . . . . . . . . . $ 142,897 $ 94,243 $ (58,795)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Changes in net assets from operations:
Net operating loss. . . . . . $ (1,099,409) $ (2,278,882) $ (1,614,625)
Net realized gain on
investments. . . . . . . . 1,371,349 96,856 23,590,570
Net decrease in unrealized
appreciation on
investments as a result
of sales . . . . . . . . . (146,372) (933,059) (15,215,508)
Net increase in unrealized
appreciation on
investments held . . . . . 304,591 47,019 2,132,164
------------ ------------ ------------
Net increase (decrease) in
net assets resulting
from operations. . . . . . 430,159 (3,068,066) 8,892,601
Capital stock transactions:
Purchase of stock . . . . . . (646,430) 0 0
Restricted stock award
(Note 3) . . . . . . . . . 110,283 220,564 220,564
Sales of stock to employees . 0 1,409,007 140,082
Proceeds from exercise of
stock options and
warrants . . . . . . . . . 62,500 0 842,707
Proceeds from private
placement of common stock
(Note 4) . . . . . . . . . 5,000,001 0 0
Tax benefit of restricted
stock award and common
stock transactions . . . . 294,594 0 0
------------ ------------ ------------
Net increase from capital
stock transactions . . . . 4,820,948 1,629,571 1,203,353
------------ ------------ ------------
Net increase (decrease)
in net assets . . . . . . . 5,251,107 (1,438,495) 10,095,954
Net assets:
Beginning of period . . . . . 31,310,802 32,749,297 22,653,343
------------ ------------ ------------
End of period . . . . . . . . $ 36,561,909 $ 31,310,802 $ 32,749,297
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these fincial statements.
15
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
<S> <C> <C> <C>
Method of
Valuation (3) Shares Value
------------- ------ -----
Investments in Unaffiliated Companies (9)(10) -- 10.5% of total investments
Publicly-Traded Portfolio (Common Stock unless noted otherwise)
Oil and Gas Related -- 1.1%
CORDEX Petroleums Inc. (1)(5)
Argentine oil and gas exploration
Class A Common Stock . . . . . . . . . . . . (C) 4,052,080 $ 381,763
Biotechnology and Healthcare Related -- 5.7%
Alliance Pharmaceutical Corporation (1)(4). . (C) 70,000 953,750
Magellan Health Services, Inc. (1)(2)(6). . . (C) 54,368 1,098,030
------------
Total Publicly-Traded Portfolio (cost: $1,140,399) $ 2,433,543
Private Placement Portfolio (Illiquid) -- 3.7%
CORDEX Petroleums Inc. (1)(2)(5)
Argentine oil and gas exploration
Special Warrants. . . . . . . . . . . . . . . (C) 1,667,000 $ 0
Exponential Business Development Company (1)(2)(4)
Venture capital partnership focused on
early stage companies
Limited partnership interest. . . . . . . . . (A) - - 25,000
Princeton Video Image, Inc. (1)(2)(5)(7)(8)
Real time sports and entertainment advertising
3.8% of fully-diluted equity. . . . . . . . . (B) 24,600 615,000
Warrants: 43,800 at $12.50 expiring 5/96;
6,700 at $2.25 expiring 8/97 . . . . . . . (D) 50,500 699,925
------------
Total Private Placement Portfolio (cost: $120,500) $ 1,339,925
------------
Total Investments in
Unaffiliated Companies (cost: $1,260,899). . . $ 3,773,468
------------
</TABLE>
The accompanying notes are an integral part of this schedule.
16
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Private Placement Portfolio in Non-Controlled Affiliates (9) (Illiquid) -- 22.3%
Dynecology Incorporated (1)(2)(5)(7) --
Develops various environmental
intellectual properties -- Option expiring
12/13/98 to purchase at $15 per share
135,000 shares of Common Stock equaling
18.1% of fully-diluted equity . . . . . . . (D) - - $ 60,000
Gel Sciences, Inc. (1)(2)(4)(7) --
Develops engineered response gels for
controlled release systems --
11.8% of fully-diluted equity
Warrants - 72,728 at $.55 expiring 02/01/00 (A) - -
Common Stock. . . . . . . . . . . . . . . . (A) 41,250
Series A Preferred Stock. . . . . . . . . . (A) 22,275
Series B Preferred Stock. . . . . . . . . . (A) 1,181,819 676,812
Harber Brothers Productions, Inc. (1)(2)(4)(7) --
Finances, produces and markets media
products that combine entertainment,
music, learning and interactivity --
21.5% of fully-diluted equity
Series A Voting Convertible Preferred Stock (A) 967,500 967,500
Highline Capital Management, LLC. (1)(2)(4)(7) --
Manages third-party assets --
24.9% of fully-diluted equity . . . . . . . (A) - - 500,000
Intaglio, Ltd. (1)(2) --
Manufactures and markets proprietary
decorative tiles and signs --
20.4% of fully-diluted equity
Common Stock. . . . . . . . . . . . . . . . (B) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01 . . . . (A) 166,667 167
Micracor, Inc. (1)(2)(5)(7) --
Designs and manufactures advanced
solid state photonic systems --
8.9% of fully-diluted equity
Series F Preferred Stock --
444,444 shares and 1,199,999
Warrants at $2.25 expiring 7/20/99. . . . . (A) - - 1,000,000
Nanophase Technologies Corporation (1)(2)(7) --
Manufactures and markets inorganic
crystals of nanometric dimensions
10.1% of fully-diluted equity
Series D Convertible Preferred Stock. . . . (A) 1,162,204 1,162,204
PHZ Capital Partners Limited Partnership (1)(2)(4)(7)
Manages third-party assets --
24.9% of fully-diluted equity . . . . . . . (A) - - 720,000
One year 8% note due 9/22/96. . . . . . . . (A) $ 500,000 500,000
Sonex International Corporation (1)(2) --
Manufactures and markets ultrasonic
toothbrush for home use
17.7% of fully-diluted equity
Series A Non-Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (D) 588,935 146,968
Common Stock. . . . . . . . . . . . . . . . (D) 34,000 8,485
------------
Total Private Placement Portfolio
in Non-Controlled Affiliates (cost: $10,307,519) $ 8,005,304
============
</TABLE>
The accompanying notes are an integral part of this schedule.
17
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
<S> <C> <C> <C>
Method of
Valuation (3) Shares Value
------------- ------ -----
Private Placement Portfolio in Controlled Affiliates (9) (Illiquid) -- 11.1%
nFX Corporation (1)(2)(5)(7) --
Develops neural-network software
37.4% of fully-diluted equity
Series A Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (B) 1,294,288 $ 2,888,980
Series B Non-Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (B) 492,800 1,099,979
------------
Total Private Placement Portfolio
in Controlled Affiliates (cost: $2,096,720) $ 3,988,959
------------
U.S. Government Obligations -- 56.1%
U.S. Treasury Bill dated 7/27/95 due date
01/25/96 -- 4.3% yield . . . . . . . . . . . (A) $ 2,349,377
U.S. Treasury Bill dated 08/17/95 due date
02/15/96 -- 5.4% yield . . . . . . . . . . . (A) 5,623,636
U.S. Treasury Bill dated 09/14/95 due date
03/14/96 -- 5.4% yield . . . . . . . . . . . (A) 973,660
U.S. Treasury Bill dated 10/12/95 due date
04/11/96 -- 5.5% yield . . . . . . . . . . . (A) 1,266,254
U.S. Treasury Bill dated 05/04/95 due date
05/02/96 -- 6.0% yield . . . . . . . . . . . (A) 4,728,071
U.S. Treasury Bill dated 12/21/95 due date
06/20/96 -- 5.2% yield . . . . . . . . . . . (A) 2,048,667
U.S. Treasury Bill dated 06/29/95 due date
06/27/96 -- 5.0% yield . . . . . . . . . . . (A) 3,171,893
------------
Total Investments in U.S. Government Obligations
(cost: $20,161,558). . . . . . . . . . . . . . $ 20,161,558
------------
Total Investments -- 100% (cost: $33,826,696). . $ 35,929,289
============
</TABLE>
The accompanying notes are an integral part of this schedule.
18
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
Notes to Schedule of Investments
(1) Represents a non-income producing security. Equity investments that have
not paid dividends within the last twelve months are considered to be
non-income producing.
(2) Legal restrictions on sale of investment.
(3) See Footnote to Schedule of Investments for a description of the Method of
Valuation A to L.
(4) These investments were made during 1995. Accordingly, the amounts shown
on the schedule represent the gross additions in 1995.
(5) No activity occurred in these investments during the year ended December
31, 1995.
(6) Formerly named National Mentor Holding Corp., Magellan Health Services,
Inc. was later acquired by Charter Medical Corporation, which subsequently
changed its name to Magellan Health Services, Inc.
(7) These investments are in development stage companies. A development stage
company is defined as a company that is devoting substantially all of its
efforts to establishing a new business, and either has not yet commenced
its planned principal operations or has commenced such operations but has
not realized significant revenue from them.
(8) Formerly Princeton Electronic Billboard, Inc.
(9) Investments in unaffiliated companies consist of investments where the
Company owns less than 5% of the investee company. Investments in
non-controlled affiliated companies consist of investments where the
Company owns more than 5% but less than 25% of the investee company.
Investments in controlled affiliated companies consist of investments
where the Company owns more than 25% of the investee company.
(10) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $1,368,576. The gross unrealized appreciation
based on tax cost for these securities is $2,521,205. The gross
unrealized depreciation on the cost for these securities is $116,313.
(11) The percentage ownership of each investee disclosed in the Schedule of
Investments expresses the potential common equity interest in each such
investee. The calculated percentage represents the amount of issuer's
common stock the Company owns or can acquire as a percentage of the
issuer's total outstanding common stock plus common shares reserved for
issued and outstanding warrants, convertible securities and stock options.
The accompanying notes are an integral part of this financial schedule.
19
FOOTNOTE TO SCHEDULE OF INVESTMENTS
ASSET VALUATION POLICY GUIDELINES
The Company's investments can be classified into five broad categories for
valuation purposes:
1) EQUITY-RELATED SECURITIES
2) INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR RESEARCH AND
DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT
3) LONG-TERM FIXED-INCOME SECURITIES
4) SHORT-TERM FIXED-INCOME INVESTMENTS
5) ALL OTHER INVESTMENTS
The Investment Company Act of 1940 (the "1940 Act") requires periodic
valuation of each investment in the Company's portfolio to determine net asset
value. Under the 1940 Act, unrestricted securities with readily available
market quotations are to be valued at the current market value; all other
assets must be valued at "fair value" as determined in good faith by or under
the direction of the Board of Directors.
The Company's Board of Directors is responsible for 1) determining overall
valuation guidelines and 2) ensuring the valuation of investments within the
prescribed guidelines.
The Company's Investment and Valuation Committee, comprised of at least
three or more Board members, is responsible for reviewing and approving the
valuation of the Company's assets within the guidelines established by the
Board of Directors.
Fair value is generally defined as the amount that an investment could be
sold for in an orderly disposition over a reasonable time. Generally, to
increase objectivity in valuing the assets of the Company, external measures of
value, such as public markets or third-party transactions, are utilized
whenever possible. Valuation is not based on long-term work-out value, nor
immediate liquidation value, nor incremental value for potential changes that
may take place in the future.
Valuation assumes that, in the ordinary course of its business, the Company
will eventually sell its investment.
20
The Company's valuation policy with respect to the five broad investment
categories is as follows:
EQUITY-RELATED SECURITIES
Equity-related securities are carried at fair value using one or more of
the following basic methods of valuation:
A. Cost: The cost method is based on the original cost to the Company.
This method is generally used in the early stages of a company's development
until significant positive or negative events occur subsequent to the date of
the original investment that dictate a change to another valuation method. Some
examples of such events are: 1) a major recapitalization; 2) a major
refinancing; 3) a significant third-party transaction; 4) the development of a
meaningful public market for the company's common stock; 5) significant
positive or negative changes in the company's business.
B. Private Market: The private market method uses actual third-party
transactions in the company's securities as a basis for valuation, using
actual, executed, historical transactions in the company's securities by
responsible third parties. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
C. Public Market: The public market method is used when there is an
established public market for the class of the company's securities held by
the Company. The Company discounts market value for securities that are
subject to significant legal, contractual or practical restrictions, including
large blocks in relation to trading volume. Other securities, for which market
quotations are readily available, are carried at market value as of the time of
valuation.
Market value for securities traded on securities exchanges or on the NASDAQ
National Market System is the last reported sales price on the day of
valuation. For other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that day, market value is
the mean of the closing bid price and asked price on that day.
This method is the preferred method of valuation when there is an
established public market for a company's securities, as that market provides
the most objective basis for valuation.
D. Analytical Method: The analytical method is generally used to value an
investment position when there is no established public or private market in
the company's securities or when the factual information available to the
Company dictates that an investment should no longer be valued under either the
cost or private market method. This valuation method is inherently imprecise
and ultimately the result of reconciling the judgments of the Company's
Investment and Valuation Committee members, based on the data available to
them. The resulting valuation, although stated as a precise number, is
necessarily within a range of values that vary depending upon the significance
attributed to the various factors being considered. Some of the factors
considered may include the financial condition and operating results of the
company, the long-term potential of the business of the company, the values of
similar securities issued by companies in similar businesses, the proportion of
the company's securities owned by the Company and the nature of any rights to
require the company to register restricted securities under applicable
securities laws.
21
INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR RESEARCH AND
DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT
Such investments are carried at fair value using the following basic
methods of valuation:
E. Cost: The cost method is based on the original cost to the Company.
Such method is generally used in the early stages of commercializing or
developing intellectual property or patents or research and development in
technology or product development until significant positive or adverse events
occur subsequent to the date of the original investment that dictate a change
to another valuation method.
F. Private Market: The private market method uses actual third-party
investments in intellectual property or patents or research and development in
technology or product development as a basis for valuation, using actual
executed historical transactions by responsible third parties. The private
market method may also use, where applicable, unconditional firm offers by
responsible third parties as a basis for valuation.
G. Analytical Method: The analytical method is used to value an
investment after analysis of the best available outside information where the
factual information available to the Company dictates that an investment should
no longer be valued under either the cost or private market method. This
valuation method is inherently imprecise and ultimately the result of
reconciling the judgments of the Company's Investment and Valuation Committee
members. The resulting valuation, although stated as a precise number, is
necessarily within a range of values that vary depending upon the significance
attributed to the various factors being considered. Some of the factors
considered may include the results of research and development, product
development progress, commercial prospects, term of patent and projected
markets.
LONG-TERM FIXED-INCOME SECURITIES
H. Fixed-Income Securities for which market quotations are readily
available are carried at market value as of the time of valuation using the
most recent bid quotations when available.
Securities for which market quotations are not readily available are
carried at fair value using one or more of the following basic methods of
valuation:
I. Fixed-Income Securities are valued by independent pricing services
that provide market quotations based primarily on quotations from dealers and
brokers, market transactions, and other sources.
J. Other Fixed-Income Securities that are not readily marketable are
valued at fair value by the Investment and Valuation Committee.
22
SHORT-TERM FIXED-INCOME INVESTMENTS
K. Short-Term Fixed-Income Investments are valued at market value at the
time of valuation. Short-term debt with remaining maturity of 60 days or less
is valued at amortized cost.
ALL OTHER INVESTMENTS
L. All Other Investments are reported at fair value as determined in good
faith by the Investment and Valuation Committee.
The reported values of securities for which market quotations are not
readily available and for other assets reflect the Investment and Valuation
Committee's judgment of fair values as of the valuation date using the outlined
basic methods of valuation. They do not necessarily represent an amount of
money that would be realized if the securities had to be sold in an immediate
liquidation. The Company makes many of its portfolio investments with the view
of holding them for a number of years, and the reported value of such
investments may be considered in terms of disposition over a period of time.
Thus valuations as of any particular date are not necessarily indicative of
amounts that may ultimately be realized as a result of future sales or other
dispositions of investments held.
23
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company") is a venture capital investment
company operating as a business development company ("BDC") under the
Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
investment company under the 1940 Act. The Company operates as an internally
managed investment company whereby its officers and employees, under the
general supervision of its Board of Directors, conduct its operations.
The Company elected to become a BDC on July 26, 1995, after receiving the
necessary approvals. From July 31, 1992 until the election of BDC status, the
Company operated as a closed-end, non-diversified, investment company under the
1940 Act. Upon commencement of operations as an investment company, the
Company revalued all of its assets and liabilities at fair value as defined
in the 1940 Act. Prior to such time, the Company was registered and filed
under the reporting requirements of the Securities and Exchange Act of 1934 as
an operating company and, while an operating company, operated directly and
through subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
Portfolio Investment Valuations. Investments are stated at "fair
value" as defined in the 1940 Act and in the applicable regulations of the
Securities and Exchange Commission. All assets are valued at fair value as
determined in good faith by, or under the direction of, the Board of Directors.
See the Asset Valuation Policy Guidelines in the Footnote to Schedule of
Investments.
Securities Transactions. Securities transactions are accounted for on
the date the securities are purchased or sold (trade date); dividend income is
recorded on the ex-dividend date; and interest income is accrued as earned.
Realized gains and losses on investment transactions are determined on the
first-in, first-out basis for financial reporting and tax basis.
Income Taxes. The Company records income taxes using the liability
method in accordance with the provision of Statement of Financial Accounting
Standards No. 109. Accordingly, deferred tax liabilities have been established
to reflect temporary differences between the recognition of income and expenses
for financial reporting and tax purposes, the most significant difference of
which relates to the Company's unrealized appreciation on investments.
Reclassifications. Certain reclassifications have been made to the
December 31, 1993 and December 31, 1994 financial statements to conform to the
December 31, 1995 presentation.
Estimates by Management. The preparation of the financial statements
in conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of December 31,1995 and 1994, and the reported amounts of
revenues and expenses for the three years then ended. Actual results could
differ from these estimates.
24
NOTE 3. STOCK OPTION PLAN AND WARRANTS OUTSTANDING
On August 3, 1989, the shareholders of the Company approved the 1988 Long
Term Incentive Compensation Plan. On June 30, 1994, the shareholders of the
Company approved various amendments to the 1988 Long Term Incentive
Compensation Plan: 1) to conform to the provisions of the Business Development
Company regulations under the 1940 Act, which allow for the issuance of stock
options to qualified participants; 2) to increase the reserved shares under the
amended plan; 3) to call the plan the 1988 Stock Option Plan, as Amended and
Restated (the "1988 Plan"); and 4) to make various other amendments. On
October 20, 1995, the shareholders of the Company approved an amendment to the
1988 Plan authorizing automatic 20,000 share grants of non-qualified stock
options to newly elected non-employee directors of the Company. This amendment
is subject to the receipt of an exemptive order from the Securities and
Exchange Commission which is presently pending.
Under the 1988 Plan, the number of shares of common stock of the Company
reserved for issuance is equal to 20 percent of the outstanding shares of
common stock of the Company at the time of grant. However, so long as
warrants, options, and rights issued to persons other than the Company's
directors, officers, and employees at the time of grant remain outstanding, the
number of reserved shares under the 1988 Plan may not exceed 15 percent of the
outstanding shares of common stock of the Company at the time of grant, subject
to certain adjustments.
At December 31, 1995, there were 2,066,780 shares of common stock reserved
for the issuance of stock option awards under the Amended 1988 Plan, of which
1,393,763 were subject to outstanding options and warrants and 673,017 were
available for future awards.
The 1988 Plan provides for the issuance of incentive stock options and
non-qualified stock options to eligible employees as determined by the
Compensation Committee of the Board (the "Committee"), which is composed of
four non-employee directors. The Committee also has the authority to construe
and interpret the 1988 Plan; to establish rules for the administration of the
1988 Plan; and, subject to certain limitations, to amend the terms and
conditions of any outstanding awards. Options may be exercised for up to 10
years from the date of grant at prices not less than the fair market value of
the Company's common stock at the date of grant. The 1988 Plan provides that
payment by the optionee upon exercise of an option may be made using cash or
Company stock held by the optionee.
25
The following table summarizes changes in outstanding stock options under
the 1988
Plan:
<TABLE>
<S> <C> <C>
Option Exercise
Number of Shares Price Per Share
---------------- ---------------
Outstanding at December 31, 1994 678,102 $1.1875 - $3.750
Issued 742,000 $5.3750 - $5.750
Canceled 0 0
Exercised 370,102 $1.2500 - $2.500
---------
Outstanding at December 31, 1995 1,050,000 $1.1875 - $5.750
=========
</TABLE>
On June 30, 1995, pursuant to the 1988 Plan, the Company issued 136,454
common shares under two restricted stock awards, that vested on such date,
net of shares withheld to fulfill tax obligations.
During 1995, the Chairman of the Company exercised a total of 173,349 stock
options, at an average price of $1.87, by exchanging 64,703 shares of the
Company's stock owned by him.
As of December 31, 1995, there were outstanding warrants to purchase
343,763 shares of common stock at a price of $2.0641 per share expiring in
1999.
NOTE 4. CAPITAL STOCK TRANSACTIONS
On May 18, 1995, the Company completed a $5,000,001 private placement to
subsidiaries of American Bankers Insurance Group of 1,075,269 unregistered
shares of its common stock at $4.65 per share, which was the average closing
price of Harris & Harris Group on the NASDAQ National Market System during the
prior ten trading days. As part of the transaction, American Bankers has been
granted certain registration rights and has executed a standstill agreement.
NOTE 5. EMPLOYEE BENEFITS
As of August 15, 1990, the Company entered into non-competition, employment
and severance contracts with its Chairman, Charles E. Harris, and with its
Executive Vice President, C. Richard Childress, pursuant to which they are to
receive compensation in the form of salaries and other benefits. These
contracts were amended on June 30, 1992, January 3, 1993, and June 30, 1994.
The term of the contracts expires on December 31, 1999.
Base salaries are to be increased annually to reflect inflation and in
addition may be increased by such amounts as the Compensation Committee of
the Board of Directors of the Company deems appropriate.
26
In addition, Messrs. Harris and Childress would be entitled, under certain
circumstances, to receive severance pay under the employment and severance
contracts.
As of January 1, 1989, the Company adopted an employee benefits program
covering substantially all employees of the Company under a 401(k) Plan and
Trust Agreement. During 1995, contributions to the plan that have been charged
to operations totaled $46,283.
On June 30, 1994, the Company adopted a plan to provide medical and health
coverage for retirees, their spouses and dependents who, at the time of their
retirement, have ten years of service with the Company and have attained 50
years of age or have attained 45 years of age and have 15 years of service with
the Company. The coverage is secondary to any government provided or
subsequent employer provided health insurance plans. Based upon actuarial
estimates, the Company provided an original reserve of $176,520 that was
charged to operations for the period ending June 30, 1994. During 1995, the
Company expensed $16,965 and $13,145 for the plan's service cost and interest
expense, respectively. As of December 31, 1995, the Company had a reserve of
$206,630 for the plan.
NOTE 6. INCOME TAXES
The Company has not elected tax treatment available to regulated investment
companies under Subchapter M of the Internal Revenue Code. Accordingly, for
federal and state income tax purposes, the Company is taxed at statutory
corporate rates on its income, which enables the Company to offset any future
net operating losses against prior years' net income. The Company may carry
back operating losses against net income three years and carry forward such
losses fifteen years.
For the years ended December 31, 1995, 1994 and 1993, the Company's income
tax (benefit) provision was allocated as follows:
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
Investment Operations. . . . . . . . .$ (597,215) $ (1,265,648) $ (983,804)
Realized (loss) gain on investments. . 738,419 (168,252) 12,282,824
Increase (decrease) in unrealized
appreciation on investments . . . . 85,195 (256,694) (5,940,979)
----------- ------------ ------------
Total income tax (benefit) provision .$ 226,399 $ (1,690,594) $ 5,358,041
=========== ============ ============
The above tax (benefit) provision consists of the following:
Current -- Federal . . . . . . . . . .$ (38,319) $ (1,281,939) $ 10,998,237
Deferred -- Federal. . . . . . . . . . 264,718 (408,655) (5,640,196)
----------- ------------ ------------
Total income tax (benefit) provision .$ 226,399 $ (1,690,594) $ 5,358,041
=========== ============ ============
</TABLE>
27
The Company's deferred tax liability at December 31, 1995 and 1994 consist
of the following:
<TABLE>
<S> <C> <C>
1995 1994
Unrealized appreciation on investments $ 698,250 $ 613,055
Restricted Stock 0 (192,992)
Medical retirement benefits (72,320) (61,782)
Other (75,300) (49,130)
--------- ---------
Net deferred income tax liability $ 550,630 $ 309,151
========= =========
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
During 1993, the Company signed a ten-year lease with sublet provisions for
office space. Rent expense under this lease for the year ended December 31,
1995, was $124,713. Future minimum lease payments in each of the following
years are: 1996 -- $154,203; 1997 -- $164,484; 1998 -- $168,768; 1999 --
$176,030; 2000 -- $178,560; thereafter $459,067.
The Company has guaranteed a three-year lease obligation of approximately
$21,000 per annum for the office space of one of its investees, Highline
Capital Management LLC.
In December 1993, the Company and MIT announced the establishment by the
Company of the Harris & Harris Group Senior Professorship at MIT. Prior to the
arrangement for the establishment of this Professorship, the Company had made
gifts of stock in start-up companies to MIT. These gifts, together with the
contribution of $700,000 in cash in 1993, which was expensed by the Company in
1993, were used to establish this named chair.
The Company contributed to MIT securities with a cost basis of $3,280,
$20,000 and $20,000 in 1993, 1994, and 1995, respectively. These contributions
will be applied to the MIT Pledge at their market value at the time the shares
become publicly traded or otherwise monetized in a commercial transaction and
are free from restriction as to sale by MIT.
At December 31, 1995, the Company would have to fund additional cash and/or
property that would have to be valued at a total of $756,720 by December, 1998,
in order for the Senior Professorship to become permanent.
28
SELECTED PER SHARE DATA AND RATIOS
<TABLE>
<CAPTION>
Per share operating performance:
<S> <C> <C> <C> <C>
Year Ended Year Ended Year Ended 3 Months Ended
December December December December
31, 1995 31, 1994 31, 1993 31, 1992
---------- ---------- ---------- --------------
Net asset value,
beginning of period $ 3.43 $ 3.66 $ 2.71 $ 2.90
Net operating loss (0.11) (0.25) (0.19) (0.02)
Net realized gain (loss) 0.14 0.01 2.75 (0.02)
Net decrease in
unrealized
appreciation as a
result of sales (0.01) (0.11) (1.78) (0.01)
Net increase (decrease)
in unrealized
appreciation on
investments held 0.03 0.01 0.25 (0.14)
Net increase (decrease)
from capital stock
transactions 0.06 0.11 (0.08) 0
------------ ------------ ------------ ------------
Net asset value,
end of period $ 3.54 $ 3.43 $ 3.66 $ 2.71
============ ============ ============ ============
Market value per share,
end of period $ 7.875 $ 6.375 $ 8.250 $ 4.375
Deferred income tax
per share $ 0.050 $ 0.030 $ 0.080 $ 0.760
Ratio of expenses to
average net assets 8.3% 13.6% 11.3% 2.0%
Ratio of net operating
loss to average
net assets 3.2% 7.1% 6.0% 6.7%
Investment return based on:
Stock price 23.5% (22.7)% 88.6% 49.0%
Net asset value 3.2% (6.3)% 35.0% (6.5)%
Portfolio turnover 51.2% 136.4% 118.1% 8.7%
Net assets,
end of period $ 36,561,909 $ 31,310,802 $ 32,749,297 $ 22,653,343
Number of shares
outstanding 10,333,902 9,136,747 8,944,828 8,350,999
</TABLE>
The accompanying notes are an integral part of this schedule.
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To Harris & Harris Group, Inc.:
We have audited the accompanying statement of assets and liabilities
of Harris & Harris Group, Inc. (a New York corporation) as of December 31, 1995
and 1994, including the schedule of investments as of December 31, 1995, and
the related statements of operations, cash flows and changes in net assets for
the three years ended December 31, 1995, and the selected per share data and
ratios for each of the three years ended December 31, 1995 and the period from
commencement of investment company operations (October 1, 1992) to December 31,
1992. These financial statements and selected per share data and ratios are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and selected per share data
and ratios based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements and
selected per share data and ratios are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995 and 1994, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data
and ratios referred to above present fairly, in all material respects, the
financial position of Harris & Harris Group, Inc. as of December 31, 1995 and
1994, the results of its operations, its cash flows and the changes in its net
assets for the three years ended December 31, 1995, and the selected per share
data and ratios for each of the three years ended December 31, 1995 and the
three month period ended December 31, 1992, in conformity with generally
accepted accounting principles.
As discussed in Note 2, the financial statements include investment
securities valued at $13,334,188 (35.5 percent of total assets), whose values
have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at its estimate of value of such securities and have
inspected the underlying documentation, and in the circumstances, we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
Arthur Andersen LLP
New York, New York
February 6, 1996
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statement of Operations
The Company accounts for its operations under Generally Accepted Accounting
Principles for investment companies. On this basis, the principal measure of
its financial performance is captioned "Net increase (decrease) in net assets
from operations," which is the sum of three elements. The first element is
"Net operating loss," which is the difference between the Company's income from
interest, dividends, and fees and its operating expenses, net of applicable
income taxes (or credit). The second element is "Net realized gain (loss) on
investments," which is the difference between the proceeds received from
dispositions of portfolio securities and their stated cost, net of applicable
income taxes (or credit). These two elements are combined in the Company's
financial statements and reported as "Net realized income (loss)." The third
element, "Net increase (decrease) in unrealized appreciation on investments,"
is the net change in the fair value of the Company's investment portfolio, net
of increase (decrease) in deferred income taxes that would become payable if
the unrealized appreciation were realized through the sale or other disposition
of the investment portfolio.
"Net realized gain (loss) on investments" and "Net increase (decrease) in
unrealized appreciation on investments" are directly related in that when a
security is sold to realize a gain (loss), net unrealized appreciation
decreases (increases) and net realized gain increase (decreases).
Financial Condition
The Company's total assets and net assets were, respectively, $37,524,555
and $36,561,909 at December 31, 1995 versus $32,044,073 and $31,310,802 at
December 31, 1994. Net asset value per share was $3.54 at December 31, 1995,
and $3.43 at December 31, 1994.
The Company's financial condition is dependent on the success of its
investments. The Company has invested and expects to continue to invest a
substantial portion of its assets in private development stage or start-up
companies. These private businesses tend to be thinly capitalized, unproven,
small companies that lack management depth and have not attained profitability
or have no history of operations. At December 31, 1995, 36 percent of the
Company's $37 million in total assets consisted of investments at fair value in
private businesses, of which net unrealized appreciation was $0.8 million. At
December 31, 1994, 35 percent of the Company's $32 million in total assets
consisted of investments at fair value in private businesses, of which net
unrealized appreciation was $2.1 million. The Company's total investment
portfolio also includes cash and marketable securities.
31
A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
December 31, 1995 December 31, 1994
Investments, at cost $ 33,826,696 $ 24,175,624
Unrealized appreciation 2,102,593 1,859,179
------------ ------------
Investments, at fair value $ 35,929,289 $ 26,034,803
============ ============
</TABLE>
Following an initial investment in a private company, the Company may
make additional investments in such investee in order to increase its ownership
percentage, to exercise warrants or options that were acquired in a prior
financing, to preserve the Company's proportionate ownership in a subsequent
financing or in an attempt to preserve or enhance the value of the Company's
investment. Such additional investments are referred to as "follow-on"
investments. There can be no assurance that the Company will make follow-on
investments or have sufficient funds to make additional investments. The
failure to make such follow-on investments could jeopardize the viability of
the investee company and the corresponding value of the Company's investment
in it. Such failure to invest could also result in a missed opportunity for
the Company to participate to a greater extent in an investee's successful
operations. The Company attempts to maintain adequate liquid capital to make
follow-on investments in its private investee portfolio companies. The
Company may elect not to make a follow-on investment either because it does not
want to increase its concentration of risk or because it prefers other
opportunities, even though the follow-on investment opportunity appears
attractive.
The following table is a summary of the cash investment changes in the
Company's private placement portfolio during the year ended December 31, 1995:
<TABLE>
<S> <C>
Amount
Harber Brothers Productions, Inc. (1) $ 967,500
Gel Sciences, Inc. (1)(2) 676,812
Highline Capital Management, LLC. (1) 500,000
Intaglio, Ltd. (2) 209,836
Nanophase Technologies Corporation (2) 662,204
PHZ Capital Partners Limited Partnership (1) 1,220,000
-----------
$ 4,236,352
===========
<FN>
<F1>
(1) New investee company
<F2>
(2) Addition to existing investment in an investee company
</FN>
</TABLE>
32
Results of Operations
Investment Income and Expenses:
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential for capital appreciation and provides little or no
current yield in the form of dividends or interest. The Company does earn
interest income from fixed-income investments. The amount of interest income
varies based upon the average level of cash funds invested during the year and
fluctuations in interest rates. The Company had interest income of $999,869 in
1995, $719,293 in 1994 and $276,059 in 1993. The Company also receives
consulting and administrative fees from certain portfolio companies which
totaled $88,209 in 1995.
Operating expenses were $2,806,141 in 1995, $4,364,806 in 1994 and
$3,052,379 in 1993. Operating expenses in 1994 included sign-up bonuses
totaling $1,000,000 to two executives hired by the Company. Most of the
Company's operating expenses are related to employee and director compensation,
office expenses and legal and accounting fees.
Net operating losses before taxes were $1,696,624, in 1995, $3,544,530 in
1994 and $2,598,429 in 1993. The Company has in the past relied, and
continues to rely to a large extent, upon proceeds from sales of investments,
rather that investment income to defray a significant portion of its operating
expenses. Because such sales cannot be predicted with certainty, the Company
attempts to maintain adequate working capital to provide for fiscal periods
when there are no such sales.
Realized Gains and Losses on Sales of Portfolio Securities:
Net realized gain on investments before taxes was $2,109,768 in 1995,
compared with a loss of $71,396 during 1994 and a gain of $35,873,394 during
1993.
During 1995, the Company sold various publicly-traded securities,
realizing a net pre-tax capital gain of $2,109,768.
During 1994, the Company realized a net capital loss of $71,396 from the
disposition of various portfolio investments.
During 1993, the Company sold its entire interest in the public market in
Molten Metal Technology, Inc., for net sales proceeds of $30,660,754 and
realized a capital gain of $30,631,685. In addition, the Company realized a
$4,908,908 capital gain from the disposition of its interest in Capital Trust
Company, a $841,915 capital gain from the sale of its remaining equity position
in Ag Services of America, Inc., and a $357,590 capital loss from the sale of
other portfolio investments.
33
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments before taxes increased
$243,414 during the year ended December 31, 1995, from $1,859,179 to
$2,102,593, owing primarily to increased valuations for CORDEX Petroleums,
Inc., Intaglio, Ltd., Alliance Pharmaceutical Corporation and Magellan Health
Services, Inc., offset primarily by the decreased valuation of Sonex
International Corporation.
Net unrealized appreciation on investments before taxes decreased
$1,142,734 during the year ended December 31, 1994, from $3,001,913 to
$1,859,179, owing primarily to unrealized losses in Sonex International
Corporation and Dynecology Incorporated, offset by an increase in unrealized
gain in Magellan Health Services, Inc.
Net unrealized appreciation on investments before taxes decreased
$19,024,323 during the year ended December 31, 1993, from $22,026,236 to
$3,001,913, owing primarily to the realization of the appreciation in Molten
Metal Technology, Inc. and Capital Trust Corporation, as a result of the
disposition of the Company's investments in those entities.
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at December 31, 1995 of $23,833,891 versus
$20,465,118 at December 31, 1994 and $25,938,392 at December 31, 1993. The
primary factors contributing to increased liquidity include sales of illiquid
venture capital investments and sales of the Company's common stock. The
primary factors that reduce liquidity include purchasing venture capital
securities and funding the Company's corporate overhead expenses. The
Company's liquidity was increased on May 18, 1995, by a $5,000,001 private
placement of 1,075,269 unregistered shares of the Company's common stock with
subsidiaries of American Bankers Insurance Group, Inc. Management believes
that its cash, receivables and marketable securities provide it with sufficient
liquidity for its operations.
34
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
Business Development Company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. There are significant risks inherent in the
registrant's venture capital business. The Company has invested and will
continue to invest a substantial portion of its assets in private development
stage or start-up companies. These private businesses tend to be thinly
capitalized, unproven, small companies 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. The Company expects that some of its 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.
The Company has been and will continue to be risk seeking rather than risk
averse in its approach to venture capital and other investments. Neither the
Company's investments nor an investment in the Company is intended to
constitute a balanced investment program. The Company does not currently pay,
or intend to pay cash dividends. The Company has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
35
SHAREHOLDER INFORMATION
Stock Transfer Agent
The Bank of New York, 101 Barclay Street, Suite 22W, New York, New York
10286 (Telephone (800) 524-4458, Attention: Ms. Diane Ajjan) serves as transfer
agent for the Company's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
Market Prices
The Company's common stock is traded on the NASDAQ National Market System
under the NASDAQ symbol "HHGP." The following table sets forth the range of
the high and low selling price of the Company's shares during each quarter of
the last two years, as reported by the National Association of Securities
Dealers, Inc.
<TABLE>
<S> <C> <C>
1995 Quarter Ending Low High
March 31 $4.875 $6.375
June 30 $4.375 $5.125
September 30 $4.625 $5.875
December 31 $4.375 $8.125
1994 Quarter Ending Low High
March 31 $7.000 $8.875
June 30 $5.500 $7.875
September 30 $5.125 $7.125
December 31 $5.125 $6.500
</TABLE>
Shareholders
As of February 27, 1996, there were approximately 181 holders of record
of the Company's common stock which, the Company has been informed, hold the
Company's common stock for approximately 2,000 beneficial owners.
Annual Meeting
The Annual Meeting of Shareholders of Harris & Harris Group, Inc., will
be held on Thursday, April 11, 1996, at 2:00 p.m. at the Princeton Club, 15
West 43rd Street, New York, New York.
36
HARRIS & HARRIS GROUP, INC. OFFICERS AND DIRECTORS
OFFICERS
* Charles E. Harris, Chairman and Chief Executive Officer. For additional
information about Mr. Harris, please see the Directors' biographical
information section below.
Robert B. Schulz, age 38, joined the Company, in March 1994, as President
and Chief Operating Officer and has served as Chief Compliance Officer since
November 1994. From 1984, until joining the Company, he was employed by CS
First Boston Corporation, most recently as a Director in the Insurance Group.
Mr. Schulz received his M.B.A. degree from Columbia University in 1983. Prior
to attending Columbia University, he was employed as a research engineer in the
Alternate Energy Group of Chevron Research Company and as a project manager in
Dynecology, Incorporated, a high-technology, family-owned engineering research
firm. He graduated from the Massachusetts Institute of Technology in 1979 with
his B.S. and M.S. degrees in chemical engineering.
C. Richard Childress, age 44, has served as Executive Vice President of
the Company since February 1994 and as Chief Financial Officer since June 1994.
Mr. Childress has served in various executive capacities as a senior officer of
the Company since February 1986. He served as managing general partner of
Consolidating Banks Fund, an investment partnership, from December 1983 to
December 1985, before joining the Company. In addition to such duties, he was
self-employed as a consultant from January 1983 to February 1986. He is a
certified public accountant and began his career with Coopers & Lybrand. He
received his undergraduate degree from Northern Arizona University.
David C. Johnson, Jr., age 39, joined the Company in February 1994, as a
Senior Vice President and has served as Executive Vice President since January
1995. From 1984, until joining the Company, Mr. Johnson served as a Vice
President of Salomon Brothers Inc. He received his M.B.A. from The Darden
School at the University of Virginia in 1984 and his undergraduate degree from
the University of North Carolina at Chapel Hill in 1978.
Rachel M. Pernia, age 36, has served since January 1992 as a Vice
President and Controller of the Company and as Treasurer since November 1994.
From 1988 until Ms. Pernia joined the Company, she was employed as Assistant
Controller for Cellcom Corp. From 1985 through 1988, she was employed as a
senior corporate accountant by Bristol-Myers Squibb Company. She is a graduate
of Rutgers University and is a certified public accountant.
Susan Neissa-Carey, age 23, has served as Secretary of the Company since
July 1995. Ms. Carey joined the Company in January of 1995. She graduated
from Villanova University in 1994.
37
DIRECTORS
Dr. C. Wayne Bardin, age 61, was elected to the Company's Board of
Directors in December 1994. Dr. Bardin's professional appointments have
included: Vice President, The Population Council; 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 450 publications and patents. He has negotiated 15 licensing and
manufacturing agreements. He is currently directing clinical R&D under 18 INDs
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 NIH, WHO, The Ford Foundation, and numerous scientific
societies. Dr. Bardin received a B.A. from Rice University; a M.S. and M.D.
from Baylor University and a Ph.D. from the University of Caen.
G. Morgan Browne, age 60, was elected to the Company's Board of Directors
in June 1992. Since 1985, Mr. Browne has been Administrative Director of the
Cold Spring Harbor Laboratory, a 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 individual consultant or as an associate
of Laurent Oppenheim Associates, Industrial Management Consultants. He is a
director of Oncogene Science, Inc. (principally engaged in drug discovery
based on gene transcription), a director of the New York Biotechnology
Association, and a director and Treasurer of the Long Island Research
Institute. He is a graduate of Yale University and attended New York
University Graduate School of Business.
Harry E. Ekblom, age 67, has been a director of the Company since 1984.
Mr. Ekblom currently serves as Vice Chairman of A.T. Hudson & Co., Inc. and
President of Harry E. Ekblom & Co., Inc., each of which is engaged in the
business of management consulting. He became President of Harry E. Ekblom &
Co., Inc. in 1984 and joined A.T. Hudson in March 1985. Before 1984, he was
employed by European American Bank as the Chairman of its Board of Directors
and Chief Executive Officer. Mr. Ekblom is a director of Pan Energy Corp.
(principally engaged in interstate transmission of natural gas) and The
Commercial Bank of New York. He is a graduate of Columbia College and the
New York University School of Law, a member of the New York Bar, and holds
honorary degrees from Hofstra University and Pace University.
* Charles E. Harris, age 53, has been a director of the Company and
Chairman of its Board of Directors since April 1984. He has served as Chief
Executive Officer of the Company since July 1984. From April 1990 to August
1991, he served as Chairman of publicly-owned Ag Services of America, Inc., in
which the Company then held an equity interest. From its formation in November
1989 until June 1990, he served as Chairman and Chief Executive Officer of
publicly-owned Molten Metal Technology, Inc., which the Company co-founded and
in which the Company then held an equity interest. From July 1986 to January
1989, he served as Chairman of publicly-owned Re Capital Corporation, which the
Company founded and in which the Company then held an equity interest. From
July 1984 to July 1985, he served as a director and was the control person of
publicly-owned Alliance Pharmaceutical, which the Company founded and in which
the Company then held an equity interest. Prior to 1984, he was Chairman of
Wood, Struthers and Winthrop Management Corp., the investment advisory
subsidiary of Donaldson, Lufkin & Jenrette. Mr. Harris was a member of the
Advisory Panel for the Congressional Office of Technology Assessment. He is a
graduate of Princeton University and the Columbia University Graduate School of
Business.
38
Charles F. Hays, age 49, joined the Board as a director in March 1995.
Since 1993, Mr. Hays has been Senior Vice President, Chief Financial and
Administrative Officer of Mid Ocean Reinsurance Company Ltd. His positions
have included: Managing Director & Chief Financial and Administrative Officer
of Marsh & McLennan, Incorporated, from 1984 to 1993; Vice President and
Treasurer of the Guy Carpenter & Company subsidiary of Marsh & McLennan
Companies, from 1979 to 1984; Assistant Vice President of Corporate Development
of Marsh & McLennan Companies, from 1977 to 1979; Assistant Treasurer of Morgan
Guaranty Trust Company, from 1975 to 1977; and Deputy Director of AmerAsian
Group of Companies, from 1971 to 1972. He is a graduate of the University of
Kansas and Stanford University Graduate School of Business.
Jon J. Masters, age 58, was elected to the Company's Board of Directors in
February 1992. Since 1976, he has been a member of the law firm of Christy &
Viener, which he co-founded. Mr. Masters is a graduate of Princeton University
and Harvard Law School.
Glenn E. Mayer, age 70, has been a director of the Company since 1981. In
December 1991, Mr. Mayer joined, as a Senior Vice President, the Investment
Banking division of Reich & Company. Reich & Co. is now a division of
Fahnestock & Company, Inc., a member firm of the New York Stock Exchange.
For fifteen years prior to that, he was employed by Jesup & Lamont Securities
Co. and its successor firms, in the Corporate Finance department. Mr. Mayer is
a graduate of Indiana University.
William R. Polk, age 67, has been a director of the Company since August
1988. For the last seven years, Mr. Polk has been an author and self-employed
consultant. He is the former President of the Adlai Stevenson Institute of
International Affairs, a former member of the Policy Planning Council of the
United States Department of State, and a former Professor of the University of
Chicago and Harvard University. Mr. Polk is a graduate of Harvard University
and Oxford University.
James E. Roberts, age 50, was elected to the Company's Board of Directors
in June 1995. Since May 1995, Mr. Roberts has been Vice Chairman of Trenwick
America Reinsurance Corporation. During the nine years prior to that Mr.
Roberts held the following positions at Re Capital Corporation: President and
Chief Executive Officer, from 1992 to 1995; President and Chief Operating
Officer, 1991 to 1992; Director since 1989 and Senior Vice President, 1986 to
1991; President and Chief Executive Officer of the Company's principal
operating subsidiary, Re Capital Reinsurance Company from 1991 to 1995. Mr.
Roberts has also served as Senior Vice President and Chief Underwriting Officer
of North Star Reinsurance Company, from 1979 to 1986; Vice President of Rollins
Burdick Hunter of New York, Inc., 1977 to 1979; Secretary of American Home
Assurance/National Union Insurance Group of American International Group, Inc.,
1973 to 1977; and commercial casualty underwriter at Continental Insurance
Company, 1972 to 1973. Mr. Roberts is a graduate of Cornell University.
* Charles E. Harris is an "interested person" of the Company, as defined
in the Investment Company Act of 1940, as an owner of more than five percent
of the Company's stock, as a control person and as an officer of the Company.
39
HARRIS & HARRIS GROUP, INC.
Officers
Charles E. Harris
Chairman and Chief Executive Officer
Robert B. Schulz
President, Chief Operating Officer and Chief Compliance Officer
C. Richard Childress
Executive Vice President and Chief Financial Officer
David C. Johnson, Jr.
Executive Vice President
Rachel M. Pernia
Vice President, Treasurer and Controller
Susan Neissa-Carey
Secretary
Executive Offices
One Rockefeller Plaza
Rockefeller Center
New York, New York 10020
TEL (212) 332-3600 / FAX (212) 332-3601
Stock Listing
NASDAQ National Market
Symbol: HHGP
Auditors
Arthur Andersen LLP
General Counsel
Skadden, Arps, Slate, Meagher & Flom
Custodian
J.P. Morgan & Co. Incorporated
Registrar and Transfer Agent
The Bank of New York
