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, 1997
HARRIS & HARRIS GROUP, INC.
---------------------------------------------------
(Exact Name of Registrant Specified in Its Charter)
New York 13-3119827
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Rockefeller Plaza, Rockefeller Center, New York, New York 10020
- ------------------------------------------------------------- ----------
(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
----------------------------
(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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
Registrant as of March 13, 1998 was $21,434,648 based on the last sale price
as quoted by Nasdaq National Market on such date (only officers and directors
are considered affiliates for this calculation).
As of March 13, 1998, the registrant had 10,692,971 shares of common
stock, par value $.01 per share, outstanding.
TABLE OF CONTENTS
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . 6
PART II
Item 5. Market for Company'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 7a. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . 17
Item 9. Disagreements on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . 37
PART III
Item 10. Directors and Executive Officers of
the Company. . . . . . . . . . . . . . . 38
Item 11. Executive Compensation. . . . . . . . . . . 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . 46
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . 47
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K. . . . . . . . . 48
Signatures . . . . . . . . . . . . . . . . . . . . . 50
Exhibit Index. . . . . . . . . . . . . . . . . . . . 52
PART I
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 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. 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 Company was incorporated under the laws of the State of New York in
August 1981. Prior to September 30, 1992, the Company had a class of
securities registered, and filed under the reporting requirements, of the
Securities Exchange Act of 1934 (the "1934 Act") as an operating company. On
that date 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 BDC subject to the provisions of Sections 55 through 65 of the
1940 Act. 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.
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification of the Company, beginning in 1998, as a
RIC under Sub-Chapter M of the Code. As a RIC, the Company
annually must distribute at least 90 percent of its investment company
taxable income and may either distribute or retain its taxable net capital
gains from investments. (However, any net capital gains not distributed could
be subject to a corporate level income tax.) There can be no assurance that
the Company will qualify as a RIC or that if it does qualify that it will
continue to qualify. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments."
Venture Capital Investments
The Company has invested 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
1
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 in the past and will continue in the future to seek investments
which offer the potential for significantly higher returns but which involve
a significantly greater degree of risk than other investments.
The Company may control an investee 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 investee 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 investee
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 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.
In addition to the information disclosed above, please see "Item 8.
Financial Statements and Supplementary Data."
Intellectual Property
The Company believes there is a role for organizations like itself 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.
2
The Company invests principally in securities issued by companies
involved in: 1) research and development of a technology and/or obtaining
licensing rights to intellectual property or patents; 2) outright
acquisition of intellectual property or patents; and 3) 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 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.
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 1934 Act, 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 Company generally is required by the 1940 Act to make significant
managerial assistance available with respect to investee companies that the
Company treats as qualifying assets for purposes of the 70 percent test (see
"Regulation"). "Making available significant managerial assistance" as
defined in the 1940 Act with respect to a business development company such
as the Company 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 Company believes that providing managerial assistance
to its investees is critical to its business development activities.
The nature, timing and amount of managerial assistance provided by the
Company vary depending upon the particular requirements of each investee
company.
3
The Company 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
Company 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 Company also seeks capital for its investees from other
potential investors and occasionally subordinates its own investment to those
of other investors. The Company may introduce 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 Company also assists with joint ventures,
acquisitions and mergers.
In connection with its managerial assistance, the Company 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 Company's role will become progressively
less active. However, when the Company owns or acquires a substantial
proportion of a more mature investee company's equity, the Company may remain
active in and may initiate planning of major transactions by the investee.
The Company typically seeks 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) to 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 added the provisions
of the 1940 Act applicable to BDCs, which are a special type of closed-end
investment company. 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 provisions applicable to BDCs, and is
qualified in its entirety by the reference to the full text of the 1940 Act
and the rules issued 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." In general, in order to qualify as a BDC, a company must (i) be
a domestic company; (ii) have registered a class of its securities pursuant
to Section 12 of the 1934 Act; (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) make available significant
managerial assistance to such portfolio companies; (v) have a majority of
"disinterested" directors (as defined in the 1940 Act) and (vi) 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 equity
securities on which "margin" credit can be extended; or (ii) is controlled
by a BDC (control under the 1940 Act is presumed to exist where a BDC owns
25 percent of the outstanding voting 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 requires that at least 70 percent 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 the Company acquired their securities; (ii) securities of
bankrupt or insolvent companies that were eligible at the time of the
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 from whom, securities can be purchased in order for
the securities to be considered qualifying assets.
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 percent
after the issuance of the debt or the preferred stock (i.e., such senior
securities may not be in excess of its net assets).
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
interest 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 percent or more of the Company's
Common Stock present at the meeting, if the holders of more than 50 percent
of the outstanding Common Stock are present or represented by proxy or (ii)
more than 50 percent of the Company's outstanding Common Stock, whichever is
less.
Certain transactions involving certain closely related persons of the
Company, including its directors, officers and employees may require the
prior approval of the SEC. However, the 1940 Act ordinarily does not
restrict transactions between the Company and investee companies.
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification of the Company, beginning in 1998, as a
RIC under Sub-Chapter M of the Code. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Recent
Developments."
Employees
The Company currently employs five full-time employees and one part-
time employee.
Item 2. Properties
The Company maintains its offices at One Rockefeller Plaza, Suite 1430,
New York, New York 10020, where it leases approximately 4,700 square feet of
office space pursuant to a lease agreement expiring in 2003. A portion of
this space was sublet in 1997 to an early-stage company in which the Company
had an equity interest. See Note 7 to the Financial Statements and Schedules
contained in "Item 8. Financial Statements and Supplementary Data."
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of its shareholders
during the fourth quarter of the 1997 fiscal year.
6
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters
Stock Transfer Agent
The Bank of New York, 101 Barclay Street, Suite 12W, 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 under
the 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. The quarterly stock prices quoted represent interdealer
quotations and do not include markups, markdowns, or commissions.
<TABLE>
<S> <C> <C>
1997 Quarter Ending Low High
March 31 $3.3750 $5.1250
June 30 $3.5000 $4.8125
September 30 $2.5000 $3.7500
December 31 $2.5000 $4.0000
1996 Quarter Ending Low High
March 31 $5.6250 $7.8750
June 30 $5.5000 $7.3750
September 30 $4.0000 $5.8750
December 31 $3.6250 $4.8750
</TABLE>
The Company has not paid dividends since 1991. On September 25, 1997,
the Company's Board of Directors approved a proposal to seek qualification
of the Company beginning in 1998 as a RIC under Sub-Chapter M of the Code.
There can be no assurance that the Company will qualify as a RIC or that, if
it does qualify, it will continue to qualify. To initially qualify as a RIC,
the Company must, among other things, pay a dividend to shareholders equal
to the Company's cumulative realized earnings and profits ("E&P") from its
pre-RIC taxable years. The Company currently estimates that its E&P as of
December 31, 1997 was approximately $7.8 million and it currently intends to
distribute such E&P prior to year-end 1998 if it receives SEC certification.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
Recent Sales of Unregistered Securities
The Company has not sold registered shares for the years ended December
31, 1997 and 1996. See Note 4 to the Financial Statements and Schedules
contained in "Item 8. Financial Statements and Supplementary Data."
7
Shareholders
As of March 13, 1998, there were approximately 160 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.
Item 6. Selected Financial Data
The following tables should be read in conjunction with the Financial
Statements and Schedules included in Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
BALANCE SHEET DATA
Financial Position as of December 31:
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Total assets $ 39,273,784 $ 38,555,290 $ 37,524,555 $ 32,044,073 $ 34,534,724
Liabilities $ 5,618,850 $ 2,622,687 $ 962,646 $ 733,271 $ 1,785,427
Net asset
value $ 33,654,934 $ 35,932,603 $ 36,561,909 $ 31,310,802 $ 32,749,297
Net asset
value per
share $ 3.15 $ 3.44 $ 3.54 $ 3.43 $ 3.66
Shares
outstanding 10,692,971 10,442,682 10,333,902 9,136,747 8,944,828
Operating Data for year ended December 31:
1997 1996 1995 1994 1993
Investment
income $ 614,046 $ 1,013,417 $ 1,109,517 $ 820,276 $ 453,950
Net operating
loss (1,498,141) (1,291,065) (1,099,409) (2,278,882) (1,614,625)
Net realized
(loss) gain
on
investments (2,079,677) (2,465,175) 1,371,349 96,856 23,590,570
Net realized
(loss) income(3,577,818) (3,756,240) 271,940 (2,182,026) 21,975,945
Net increase
(decrease)
in unrealized
appreciation
on investments 969,243 2,967,248 158,219 (886,040) (13,083,344)
Net (decrease)
increase in
net assets
resulting from
operations (2,608,575) (788,992) 430,159 (3,068,066) 8,892,601
(Decrease) increase
in net assets
resulting from
operations per
outstanding
share $ (0.24) $ (0.08) $ 0.04 $ (0.34) $ 1.03
</TABLE>
8
Item 7. 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 (decrease) increase
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 tax benefit. The second element is "Net
realized (loss) gain on investments," which is the difference between the
proceeds received from dispositions of portfolio securities and their stated
cost, net of applicable income tax provisions (benefits). These two elements
are combined in the Company's financial statements and reported as "Net
realized (loss) income." 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 (loss) gain on investments" and "Net increase (decrease) in
unrealized appreciation on investments" are directly related. When a
security is sold to realize a (loss) gain, net unrealized appreciation
(increases) decreases and net realized gain (decreases) increases.
Financial Condition
The Company's total assets and net assets were, respectively, $39,273,784
and $33,654,934 at December 31, 1997, versus $38,555,290 and $35,932,603 at
December 31, 1996. Net asset value per share was $3.15 at December 31, 1997,
versus $3.44 at December 31, 1996. The Company's shares outstanding as of
December 31, 1997 were 10,692,971, versus 10,442,682 at December 31, 1996.
The Company's financial condition is dependent on the success of its
investments. The Company has invested 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 or have no history of operations. At December 31, 1997, approximately
34 percent of the Company's $39.3 million in total assets consisted of
investments at fair value in private businesses, of which net unrealized
appreciation was approximately $2.5 million before taxes. At December 31,
1996, approximately 49 percent of the Company's $38.6 million in total assets
consisted of investments at fair value in private businesses, of which net
unrealized appreciation was approximately $5.0 million.
9
A summary of the Company's investment portfolio is as follows:
<TABLE>
<S> <C> <C>
December 31, 1997 December 31, 1996
Investments, at cost $30,500,498 $28,981,093
Unrealized appreciation 8,158,732 6,667,589
----------- -----------
Investments, at fair value $38,659,230 $35,648,682
=========== ===========
</TABLE>
The accumulated unrealized appreciation on investments net of deferred taxes
is $5,340,834 at December 31, 1997, versus $4,371,591 at December 31, 1996.
Following an initial investment in a private company, the Company may
make additional investments in such investee in order to: (1) increase its
ownership percentage; (2) to exercise warrants or options that were acquired
in a prior financing; (3) to preserve the Company's proportionate ownership
in a subsequent financing; or (4) 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 Company's investment or could 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 investments made by the
Company in its private placement portfolio during the year ended December 31,
1997:
<TABLE>
<S> <C>
New Investments: Amount
MedLogic Global Corporation $ 128,990
-----------
Sub-total $ 128,990
Follow-on Investments:
BioSupplyNet, Inc. $ 200,000
Highline Offshore Advisors, LLP 500,000
MultiTarget, Inc. 97,387
NBX Corporation 1,190,002
-----------
Sub-total $ 1,987,389
Loans:
BioSupplyNet, Inc. $ 50,000
Gel Sciences, Inc. 316,000
Harber Brothers Productions, Inc. 250,000
NeuroMetrix, Inc.* 1,100,000
nFX Corporation 220,000
Purespeech, Inc. 243,980
-----------
Sub-total $ 2,179,980
10
Exercise of Warrants Held:
NeuroMetrix, Inc. $ 200,000
Princeton Video Image, Inc. 15,075
------------
Sub-total $ 215,075
------------
Total $ 4,511,434
============
<FN>
*On February 27, 1998, the Company converted its $1,100,000 NeuroMetrix,
Inc. Convertible Note into 229,620 shares of Series C-2 Preferred Stock, as
part of a $4 million financing completed by NeuroMetrix, Inc.
</FN>
</TABLE>
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 securities, including U.S. Government
Obligations. The amount of interest income earned varies based upon the
average balance of the Company's fixed-income portfolio and the average
yield on this portfolio.
The Company had interest income of $490,807 in 1997, $803,819 in 1996 and
$999,869 in 1995. The decrease is a result of a decline in the balance of the
Company's fixed-income portfolio to pay operating expenses and to purchase
non-income producing private portfolio investments. The Company also received
consulting and administrative fees which totaled $29,870 in 1997, $68,185 in
1996 and $88,209 in 1995.
Operating expenses were $3,045,290 in 1997, $2,985,316 in 1996 and
$2,806,141 in 1995. The increase from 1996 to 1997 is primarily due to: the
accrual of $423,808 for the Company's profit-sharing plan which has not been
paid out; restructuring expenses of $100,000 incurred by the Company as a
result of researching the conversion to RIC status; both offset by a decrease
in overall expenses as a result of the Company's effort to cut expenses.
The increase from 1995 to 1996 is primarily owed to additional consulting
fees incurred in 1996 related to prospective private portfolio investments.
Most of the Company's operating expenses are related to employee and director
compensation, office and rent expenses and consulting and professional fees
(primarily legal and accounting fees).
Net operating losses before taxes were $2,431,244 in 1997, $1,971,899 in
1996 and $1,696,624 in 1995.
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. 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.
11
Realized Gains and Losses on Sales of Portfolio Securities:
During the three years ended December 31, 1997, 1996 and 1995, the Company
sold various investments, realizing a net loss of $3,199,502, $3,792,576 and
a net gain of $2,109,768, respectively.
During 1997, the Company realized losses on the sale of its investments in
nFX Corporation in the amount of $2,631,720, Harber Brothers Productions,
Inc. of $1,205,000, Gel Sciences, Inc. of $633,028, Dynecology, Inc. of
$99,900 and Micracor Corporation of $66,444. These losses were offset by
gains in the sale of Highline Capital Partners of $750,000 and various
publicly traded securities of $686,590.
During 1996, the Company realized a loss on the sale of its equity
interest in Sonex International Corporation of $2,579,000. However, because
the investment had been written off in 1994, the loss did not affect earnings
in 1996. Also during 1996, the Company sold and realized a loss on the sale
of its equity interest in Micracor Corporation of $999,993 and net losses on
sales of various publicly held securities of $213,583.
During 1995, the Company sold various publicly traded securities,
realizing a net pre-tax capital gain of $2,109,768.
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments before taxes increased by
$1,491,143 during the year ended December 31, 1997, from $6,667,589 to
$8,158,732, owing primarily to increased valuations on NBX Corporation,
Nanophase Technologies Corporation and PHZ Capital Partners, L.P. These
gains were offset primarily by decreased valuations in PureSpeech, Inc. and
Princeton Video Image, Inc.
Net unrealized appreciation on investments before taxes increased by
$4,564,996 during the year ended December 31, 1996, from $2,102,593 to
$6,667,589, owing primarily to increased valuations for Gel Sciences, Inc.,
Nanophase Technologies Corporation, PHZ Capital Partners, L.P., Princeton
Video Image, Inc. and Biofield Corporation; offset primarily by a decreased
valuation of nFX Corporation.
Net unrealized appreciation on investments before taxes increased by
$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., Questech Corporation, Alliance Pharmaceutical Corporation and Magellan
Health Services, Inc.; offset primarily by a decreased valuation of Sonex
International Corporation.
12
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at December 31, 1997 of $21,693,067 (net
of $4,000,000 drawn from the J.P. Morgan line of credit), versus $19,296,591
at December 31, 1996 and $23,833,891 at December 31, 1995. Included in
marketable securities are the Company's holdings in Nanophase Technologies
Corporation of $6,854,660 and Princeton Video Image, Inc. of $1,064,895.
Both holdings are subject to lock-up agreements and are valued at December 31,
1997 at discounts from market value: a 26 percent discount in the case of
Nanophase Technologies Corporation and a 24 percent discount in the case of
Princeton Video Image, Inc.
As of December 31, 1997, the Company had a $4,000,000 line of credit in
place with J.P. Morgan, of which the Company had borrowed $4,000,000.
Management believes that its cash, receivables and marketable securities
provide the Company with sufficient liquidity for its operations.
Recent Developments
The Company is currently a corporation taxable under Sub-Chapter C of the
Code (a "C Corporation"). On September 25, 1997, the Company's Board of
Directors approved a proposal to seek qualification of the Company (as of
January 1, 1998) as a RIC under Sub-Chapter M of the Code. In order to
qualify as a RIC, the Company must, in general, (1) annually derive at least
90 percent of its gross income from dividends, interest and gains from the
sale of securities; (2) quarterly meet certain investment diversification
requirements; and (3) annually distribute at least 90 percent of its
investment company taxable income as a dividend. In addition to the
requirement that the Company must annually distribute at least 90 percent of
its investment company taxable income, the Company may either distribute
or retain its taxable net capital gains from investments, but any net capital
gains not distributed could be subject to corporate level tax. Further, the
Company could be subject to a 4 percent excise tax (and in some cases,
corporate level income tax) if it fails to distribute 98 percent of its
annual taxable income.
Because of the specialized nature of its investment portfolio, the Company
can satisfy the diversification requirements under Sub-Chapter M of the Code
only if it receives a certification from the SEC that it is "principally
engaged in the furnishing of capital to other corporations which are
principally engaged in the development or exploitation of inventions,
technological improvements, new processes, or products not previously
generally available." In January 1998, the Company requested such a
certification. While the Company believes that it is likely the SEC will
grant the certification, there is no guarantee that the SEC in fact will
take that action. Even if the certification is issued, there can be no
assurance that the Company will qualify as a RIC or that, if it does qualify,
it will continue to qualify. In particular, continued qualification as a
RIC requires the Company to satisfy certain portfolio diversification
requirements in future years. The Company's ability to satisfy those
requirements may not be controllable by the Company.
The Company incurred ordinary and capital losses during its C Corporation
taxable years that remain available for use and may be carried forward to its
1998 and subsequent taxable years. Ordinarily, a corporation that elects to
13
qualify as a RIC may not use its loss caryforwards from C Corporation
taxable years to offset RIC investment company taxable income or net capital
gains. In addition, a corporation that elects to qualify as a RIC continues
to be taxable as a C Corporation on any gains realized within 10 years of its
qualification as a RIC from sales of assets that were held by the corporation
on the effective date of the election ("C Corporation Assets") to the extent
of any gain built into the assets on such date ("Built-In Gain"). The
Company has filed a private ruling request with the Internal Revenue Service
("IRS") asking the IRS to rule that the Company can carry forward its C
Corporation losses to offset any Built-In Gains resulting from sales of its
C Corporation Assets, thereby enabling the Company to retain some or all of
the proceeds from such sales without disqualifying itself as a RIC or
incurring corporate level income tax. In addition, because a RIC is not
permitted to have, as of the close of any RIC taxable year, E&P accumulated
during any C Corporation taxable year, the Company has also requested a
ruling that its sale of C Corporation Assets with Built-In Gains during RIC
taxable years will not generate C Corporation E&P. Although there is no
guarantee that the IRS will rule favorably on the Company's request for
rulings, the management of the Company believes that favorable rulings are
likely.
The Company estimates that cumulative E&P as of December 31, 1997 were
approximately $7.8 million. It intends to distribute such E&P prior to
December 31, 1998 if it receives the SEC certification described above.
As of December 31, 1997, the Company has sufficient current assets to make
such distribution without jeopardizing its ability to pay its expenses as
they may become due.
If necessary for liquidity purposes, in lieu of distributing its taxable
net capital gains, the Company may retain such net capital gains and elect
to be deemed to have made a distribution of the gains, or part thereof, to
the shareholders under the "designated undistributed capital gain" rules of
section 852(b)(3) of the Code. In such a case, the Company would have to pay
a 35 percent corporate level income tax on such "designated undistributed
capital gain," but it would not have to distribute the excess of the retained
"designated undistributed capital gain" over the amount of tax thereon in
order to maintain its RIC status.
Tax Consequences of Net Capital Gains
The following simplified examples illustrate the tax treatment under
Sub-Chapter M of the Code for the Company and its shareholders with regard to
three possible alternatives, assuming a net long-term capital gain of $1.00
per share, consisting entirely of sales of non-real property assets held for
more than 18 months.
Under Alternative A: 100 percent of net capital gain declared as a
dividend and distributed to shareholders
1. No taxation at the Company level.
2. Shareholders receive a $1.00 per share dividend and pay a maximum
tax of 20 percent* or $.20 per share, retaining $.80 per share.
14
Under Alternative B: 100 percent of net capital gain retained by the
Company and designated as "undistributed capital gain" dividend
1. The Company pays a corporate level income tax of 35 percent on
the undistributed gain or $.35 per share and retains 65 percent of the gain
or $.65 per share.
2. Shareholders increase their cost basis in their stock by $.65 per
share. They pay a 20 percent* capital gains tax on 100 percent of the
undistributed gain of $1.00 per share or $.20 per share in tax. Offsetting
this tax, shareholders receive a tax credit equal to 35 percent of the
undistributed gain or $.35 per share.
Under Alternative C: 100 percent of net capital gain retained by the
Company, with no designated undistributed capital gain dividend
1. The Company pays a corporate level income tax of 35 percent on
the retained gain or $.35 per share plus an excise tax of 4 percent of $.98
per share, or about $.04 per share.
2. There is no tax consequence at the shareholder level.
*Assumes all capital gains qualify for long-term rates of 20 percent.
Risks
There are significant risks inherent in the Company's venture capital
business. The Company has invested 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 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 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.
Risks Relating to the Year 2000 Issue
The Company believes that the "Year 2000" problem is not material to the
Company. Many computer software systems in use today cannot recognize the
Year 2000 and may revert to 1900 or some other date because of the way in
which dates were encoded and calculated. The Company could be adversely
affected if its computer system or those of its service providers do not
properly process and calculate date-related information and data on and
after January 1, 2000. The Company has been actively working on necessary
changes to its computer systems to prepare for the Year 2000 and intends to
obtain reasonable assurances from its service providers that they are taking
comparable steps with respect to their computer systems. However, the steps
the Company is taking and intends to take does not guarantee complete
success or eliminate the possibility that interaction with outside computer
systems may have an adverse impact on the Company.
15
Forward-Looking Statements
The information contained herein contains certain forward-looking
statements. These statements include the plans and objectives of management
for future operations and financial objectives, portfolio growth and
availability of funds. These forward-looking statements are subject to the
inherent uncertainties in predicting future results and conditions. Certain
factors that could cause actual results and conditions to differ materially
from those projected in these forward-looking statements are set forth
herein. Other factors that could cause actual results to differ materially
include the uncertainties of economic, competitive and market conditions,
and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying the forward-
looking statements included herein are reasonable, any of the assumptions
could be inaccurate and therefore, there can be no assurance that the
forward-looking statements included or incorporated by reference herein will
prove to be accurate. Therefore, the inclusion of such information should
not be regarded as a representation by the Company or any other person that
the objectives and plans of the Company will be achieved.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
16
Item 8. Financial Statements and Supplementary Data
HARRIS & HARRIS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
The following reports and financial schedules of Harris & Harris Group,
Inc. are filed herewith and included in response to Item 8.
Documents Page
Report of Independent Public Accountants. . . . . . . . . . 18
Financial Statements
Statements of Assets and Liabilities
as of December 31, 1997 and 1996 . . . . . . . . . . . 19
Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 . . . . . 20
Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995. . . . . . 21
Statements of Changes in Net Assets for the
years ended December 31, 1997, 1996 and 1995. . . . . . 22
Schedule of Investments as of December 31, 1997 . . . . . . 23-25
Footnote to Schedule of Investments . . . . . . . . . . . . 26-29
Notes to Financial Statements . . . . . . . . . . . . . . . 30-35
Selected Per Share Data and Ratios for the
years ended December 31, 1997, 1996, 1995 and 1994
and 1993. . . . . . . . . . . . . . . . . . . . . . . . 36
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.
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Harris & Harris Group, Inc.:
We have audited the accompanying statements of assets and liabilities of
Harris & Harris Group, Inc. (a New York corporation) as of December 31, 1997
and 1996, including the schedule of investments, as of December 31, 1997,
and the related statements of operations, cash flows and changes in net
assets for the three years ended December 31, 1997, and the selected per
share data and ratios for each of the five years ended December 31, 1997.
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, 1997 and 1996,
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.
As explained in Note 2, the financial statements include securities
valued at $13,222,857 (39.3 percent of net assets), whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. 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.
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, 1997 and
1996, the results of its operations, its cash flows and the changes in its
net assets for the three years ended December 31, 1997, and the selected per
share data and ratios for each of the five years ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
New York, New York
February 10, 1998
18
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
<S> <C> <C>
December 31, 1997 December 31, 1996
Investments, at value (See accompanying
schedule of investments and notes). . $ 38,659,230 $ 35,648,682
Cash and cash equivalents. . . . . . . . 145,588 155,440
Interest receivable. . . . . . . . . . . 111,106 198,342
Taxes receivable (Note 6). . . . . . . . 0 2,119,492
Prepaid expenses . . . . . . . . . . . . 85,126 81,501
Other assets . . . . . . . . . . . . . . 272,734 351,833
--------------- ---------------
Total assets . . . . . . . . . . . . . . $ 39,273,784 $ 38,555,290
=============== ===============
LIABILITIES & NET ASSETS
Accounts payable and accrued
liabilities . . . . . . . . . . . . . $ 899,491 $ 374,326
Deferred rent. . . . . . . . . . . . . . 51,662 60,914
Deferred income tax liability (Note 6) . 667,697 2,187,447
Note Payable (Note 7). . . . . . . . . . 4,000,000 0
--------------- ---------------
Total liabilities. . . . . . . . . . . . 5,618,850 2,622,687
Commitments and contingencies (Note 7) --------------- ---------------
Net assets . . . . . . . . . . . . . . . $ 33,654,934 $ 35,932,603
=============== ===============
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; 10,692,971 issued
and outstanding at 12/31/97 and
10,442,682 issued and outstanding at
12/31/96. . . . . . . . . . . . . . . 106,930 104,427
Additional paid in capital . . . . . . . 16,178,979 15,850,576
Accumulated net realized income. . . . . 12,028,191 15,606,009
Accumulated unrealized appreciation of
investments, net of deferred tax
liability of $2,817,898 at 12/31/97
and $2,295,998 at 12/31/96. . . . . . 5,340,834 4,371,591
-------------- ---------------
Net assets . . . . . . . . . . . . . . . $ 33,654,934 $ 35,932,603
============== ===============
Shares outstanding . . . . . . . . . . . 10,692,971 10,442,682
-------------- ---------------
Net asset value per outstanding share. . $ 3.15 $ 3.44
============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
19
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
Investment income:
Interest from:
Fixed-income
securities $ 490,807 $ 803,819 $ 999,869
Affiliated companies 40,000 40,779 11,222
Dividend income--
unaffiliated companies. 0 8,024 8,436
Consulting and
administrative fees . . 29,870 68,185 88,209
Other income. . . . . . . 53,369 92,610 1,781
----------- ------------ -----------
Total investment income 614,046 1,013,417 1,109,517
Expenses:
Salaries and benefits . . 1,931,065 1,524,826 1,560,132
Administration and
operations . . . . . . . 392,114 474,537 440,605
Professional fees . . . . 327,038 675,241 461,526
Depreciation and amortization 48,968 57,426 161,876
Rent. . . . . . . . . . . 130,092 160,601 124,713
Directors' fees and expenses 100,496 80,702 40,836
Custodian fees. . . . . . 15,517 11,983 16,453
Restructuring charges
(Note 6) . . . . . . . . 100,000 0 0
----------- ----------- -----------
Total expenses. . . . 3,045,290 2,985,316 2,806,141
----------- ----------- -----------
Operating loss before
income taxes . . . . . . (2,431,244) (1,971,899) (1,696,624)
Income tax benefit
(Note 6) . . . . . . . . 933,103 680,834 597,215
----------- ----------- -----------
Net operating loss . . . . (1,498,141) (1,291,065) (1,099,409)
Net realized (loss) gain
on investments:
Realized (loss) gain on
sale of investments . . (3,199,502) (3,792,576) 2,109,768
------------ ------------ -----------
Total realized
(loss) gain . . . . . (3,199,502) (3,792,576) 2,109,768
Income tax benefit
(provision) (Note 6). . 1,119,825 1,327,401 (738,419)
------------ ------------ -----------
Net realized (loss) gain
on investments. . . . . (2,079,677) (2,465,175) 1,371,349
Net realized (loss) income (3,577,818) (3,756,240) 271,940
Net increase (decrease) in
unrealized appreciation on
investments:
Increase as a result of
investment sales. . . . 93,999 2,525,548 337,577
Decrease as a result of
investment sales. . . . (2,892,408) 0 (562,765)
Increase on investments
held. . . . . . . . . . 7,297,164 4,112,413 1,002,347
Decrease on investments
held. . . . . . . . . . (3,007,612) (2,072,965) (533,745)
------------ ------------ ----------
Change in unrealized
appreciation on
investments . . . . . 1,491,143 4,564,996 243,414
Income tax provision
(Note 6). . . . . . . . (521,900) (1,597,748) (85,195)
------------ ------------ ----------
Net increase in unrealized
appreciation on
investments. . . . . . 969,243 2,967,248 158,219
============ ============ ==========
Net (decrease) increase in
net assets from operations:
Total. . . . . . . . . . .$(2,608,575) $ (788,992) $ 430,159
============ ============ =========
Per outstanding share. . .$ (0.24) $ (0.08) $ 0.04
============ ============ =========
The accompanying notes are an integral part of these financial statements
</TABLE>
20
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
Cash flows provided by (used in) operating activities:
Net (decrease) increase in
net assets resulting from
operations. . . . . . . . $(2,608,575) $ (788,992) $ 430,159
Adjustments to reconcile
(decrease) increase in
net assets from operations
to net cash (used in)
provided by operating
activities:
Net realized and
unrealized loss (gain)
on investments. . . . . 1,708,359 (772,420) (2,353,182)
Deferred income taxes. . (1,442,094) 1,636,817 241,479
Depreciation and
amortization. . . . . . 48,968 57,426 161,876
Other. . . . . . . . . . 0 (10,144) 40,859
Changes in assets and liabilities:
Receivable from brokers. 0 205,789 3,835,602
Prepaid expenses . . . . (3,625) 5,475 (21,756)
Interest receivable. . . 87,236 102,376 (227,392)
Taxes receivable . . . . 2,119,492 (1,679,377) 1,184,567
Other assets . . . . . . 40,296 (103,981) (9,372)
Accounts payable and accrued
liabilities . . . . . . 473,363 22,197 (43,241)
Deferred rent. . . . . . (9,252) 10,279 10,281
Collection on note
receivable. . . . . . . 0 0 54,664
Purchase of fixed assets (10,169) (35,777) (16,409)
----------- ------------ ----------
Net cash provided by (used
in) operating activities 403,999 (1,350,332) 3,288,135
Cash (used in) provided by investing activities:
Net (purchase) sale of
short-term investments and
marketable securities . (155,667) 6,035,532 (3,324,957)
Investment in private
placements and loans. . (4,511,434) (4,981,614) (4,236,352)
------------ ------------ ------------
Net cash (used in) provided
by investing activities (4,667,101) 1,053,918 (7,561,309)
Cash flows provided by financing activities:
Purchase of treasury stock 0 0 (646,430)
Proceeds from exercise of
stock options . . . . . 253,250 87,500 62,500
Proceeds from private
placement of stock
(Note 4). . . . . . . . 0 0 5,000,001
Proceeds from note payable
(Note 7). . . . . . . . 4,000,000 0 0
------------ ----------- -----------
Net cash provided by
financing activities. . 4,253,250 87,500 4,416,071
Net (decrease) increase in
cash and cash equivalents:
Cash and cash equivalents
at beginning of the year 155,440 364,354 221,457
Cash and cash equivalents
at end of the year. . . 145,588 155,440 364,354
----------- ----------- -----------
Net (decrease) increase
in cash and cash
equivalents . . . . . . $ (9,852) $ (208,914) $ 142,897
=========== =========== ===========
Supplemental disclosures of
cash flow information:
Income taxes paid. . . . $ 5,909 $ 57,234 $ 8,323
The accompanying notes are an integral part of these financial statements.
</TABLE>
21
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
Changes in net assets from operations:
Net operating loss. . . $(1,498,141) $(1,291,065) $(1,099,409)
Net realized (loss)
gain on investments. . (2,079,677) (2,465,175) 1,371,349
Net (decrease) increase
in unrealized appreciation
on investments as a
result of sales. . . . (1,818,966) 1,641,606 (146,372)
Net increase in unrealized
appreciation on investments
held . . . . . . . . . 2,788,209 1,325,642 304,591
------------ ------------ ------------
Net (decrease) increase in
net assets resulting from
operations . . . . . . (2,608,575) (788,992) 430,159
Changes in net assets from
capital stock transactions:
Purchase of stock . . . 0 0 (646,430)
Restricted stock award
(Note 3) . . . . . . . 0 0 110,283
Proceeds from exercise of
stock options and warrants 253,250 87,500 62,500
Proceeds from private placement
of common stock (Note 4) 0 0 5,000,001
Tax benefit of restricted
stock award and common
stock transactions . . 77,656 72,186 294,594
----------- ------------ -----------
Net increase in net assets
resulting from capital
stock transactions . . 330,906 159,686 4,820,948
Net (decrease) increase
in net assets. . . . . . (2,277,669) (629,306) 5,251,107
Net assets:
Beginning of the year . 35,932,603 36,561,909 31,310,802
----------- ----------- -----------
End of the year . . . . $33,654,934 $35,932,603 $36,561,909
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
22
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Investments in Unaffiliated Companies (12)(13)(14) --
11.4% of total investments
Publicly Traded Portfolio (Common stock unless noted otherwise) --
8.9% of total investments
Oil and Gas Related
CORDEX Petroleums Inc. (1)
Argentine and Chilean oil
and gas exploration
Class A Common Stock . . . . . . (C) 4,052,080 $156,423
Biotechnology and Healthcare Related
Fuisz Technologies, Ltd. (1)(4). . (C) 125,000 1,062,500
Guilford Pharmaceuticals (1)(4). . (C) 10,000 201,563
Keravision, Inc. (1)(4). . . . . . (C) 60,000 384,375
Energy Research Corporation (1)(4)
-- Fuel Cell Energy. . . . . . . . (C) 35,000 556,719
Princeton Video Image, Inc. (1)(2)(7)
-- Real time sports and
entertainment advertising -- 1.5% of
fully diluted equity . . . . . . . (C) 150,200 1,064,895
----------
Total Publicly Traded Portfolio (cost: $3,018,422) . . . . . . . . $3,426,475
Private Placement Portfolio (Illiquid) -- 2.5% of total investments
Exponential Business Development
Company (1)(2)(5) -- Venture capital
partnership focused on early stage
companies
Limited partnership interest . . (A) -- $ 25,000
MedLogic Global Corporation (1)(2) --
Medical cyanoacrylate adhesive --
1.08% of fully diluted equity
Series B Convertible
Preferred Stock. . . . . . . . (A) 60,319
Common Stock . . . . . . . . . (A) 25,798
Warrants @ $5.00 expiring
earlier of Initial Public
Offering registration and
12/31/98. . . . . . . . . . . (A) 115,869 943,296
----------
Total Private Placement Portfolio (cost: $1,058,775) . . . . . . . $ 968,296
Total Investments in Unaffiliated
Companies (cost: $4,077,197) . . . . . . . . . . . . . . . . . . $4,394,771
The accompanying notes are an integral part of this schedule.
</TABLE>
23
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Investments in Non-Controlled Affiliates (12)(14) --
42.8% of total investments
Publicly Traded Portfolio -- 17.7% of total investments
Nanophase Technologies Corporation
(1)(2)(6)(8) -- Manufactures
and markets inorganic crystals of
nanometric dimensions -- 5.1%
of fully diluted equity
Common Stock . . . . . . . . . . (C) 730,916 $6,854,660
----------
Total Publicly Traded Portfolio (cost: $1,626,204) . . . . . . . . $6,854,660
Private Placement Portfolio (Illiquid) -- 25.1% of total investments
Genomica Corporation (1)(2)(5)(6)(9)
-- Develops software that enables
the study of complex genetic
diseases -- 11.0% of fully
diluted equity
Common Stock . . . . . . . . . . (A) 199,800
Series A Voting Convertible
Preferred Stock. . . . . . . . (A) 1,660,200 $1,000,304
NBX Corporation (1)(2)(6)(10) --
Exploits innovative distributed
computing technology for use in
small business telephone systems
-- 15.1% of fully diluted equity
Series A Convertible Preferred Stock (B) 500,000
Series C Convertible Preferred Stock (B) 240,793
Series D Convertible Preferred Stock (B) 59,965 4,540,298
PHZ Capital Partners Limited Partnership (2)
-- Organizes and manages investment
partnerships -- 20.0% of fully diluted
equity
Limited partnership interest . . . . (D) -- 1,405,622
One year 8% note due 9/22/98 . . . . (A) $ 500,000 500,000
PureSpeech, Inc. (1)(2)(6) -- Develops
and markets innovative speech
recognition technology -- 8.8% of
fully diluted equity
Series A Convertible Preferred Stock (D) 190,476 1
Convertible Promissory Note . . . . (D) $ 243,980 1
Questech Corporation (1)(2)(6) --
Manufactures and markets proprietary
decorative tiles and signs -- 15.2% of
fully diluted equity
Common Stock. . . . . . . . . . . . (D) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01 (A) 166,667 167
----------
Total Private Placement Portfolio (cost: $7,154,287) . . . . . . . $ 9,709,561
Total Investments in Non-Controlled Affiliates (cost: $8,780,491). $16,564,221
The accompanying notes are an integral part of this schedule.
</TABLE>
24
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
<S> <C> <C> <C>
Method of Shares/
Valuation (3) Principal Value
Private Placement Portfolio in Controlled
Affiliates (12)(14) (Illiquid) -- 6.6% of total investments
BioSupplyNet, Inc. (1)(2)(6)(11) --
Expands commercially the print
and World Wide Web product
directories developed by Cold
Spring Harbor Laboratory Press --
42.7% fully diluted equity
Series A Convertible
Preferred Stock. . . . . . . . (A) 775,000 $ 775,000
Convertible Note (Note 7). . . . (A) $ 50,000 50,000
MultiTarget, Inc. (1)(2)(6) --
Developing intellectual property
related to localized treatment
of cancer -- 37.5% of fully
diluted equity
Series A Convertible
Preferred Stock. . . . . . . . (A) 375,000 210,000
NeuroMetrix, Inc. (1)(2)(6) --
Developing devices for: 1) diabetics
to monitor their blood glucose and
2) detection of carpal tunnel syndrome
-- 30.0% of fully diluted equity
Series A Convertible
Preferred Stock. . . . . . . . (A) 175,000
Series B Convertible
Preferred Stock. . . . . . . . (A) 125,000 410,000
Convertible Note (Note 8). . . . (A) $ 1,100,000 1,100,000
----------
Total Private Placement Portfolio
in Controlled Affiliates (cost: $2,545,000) . . . . . . . . . . . $ 2,545,000
U.S. Government Obligations -- 39.2% of total investments
U.S. Treasury Note dated 03/01/93
due date 02/28/98 -- 5.125% rate (H) $ 5,000,000 $ 4,996,100
U.S. Treasury Bill dated 01/09/97
due date 01/08/98 -- 5.2% yield. (K) $ 975,000 966,383
U.S. Treasury Bill dated 07/17/97
due date 01/15/98 -- 5.2% yield. (K) $ 425,000 421,229
U.S. Treasury Bill dated 08/14/97
due date 02/12/98 -- 5.0% yield. (K) $ 1,125,000 1,115,294
U.S. Treasury Bill dated 08/28/97
due date 02/26/98 -- 5.2% yield. (K) $ 7,720,000 7,656,232
----------
Total Investments in U.S. Government Obligations
(cost: $15,097,810) . . . . . . . . . . . . . . . . . . . . . . . $15,155,238
-----------
Total Investments -- 100% (cost: $30,500,498). . . . . . . . . . . $38,659,230
===========
The accompanying notes are an integral part of this schedule.
</TABLE>
25
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
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 1997. Accordingly, the amounts shown
on the schedule represent the gross additions in 1997.
(5) No changes in valuation occurred in these investments during the year
ended December 31, 1997.
(6) These investments are 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.
(7) Formerly named Princeton Electronic Billboard, Inc. As of December 31,
1997, the market price per share of Princeton Video Image, Inc.
("PVII") was $9.375. As of March 13, 1998, the market price was
$6.53125 and the Company valued its holding at $769,262. The Company
is subject to a lock-up agreement on the stock which expires December
16, 1998.
(8) As of December 31, 1997, the market price per share of Nanophase
Technologies Corporation ("NANX") was $12.6875. As of March 13, 1998,
the market price per share was $6.00, and the Company valued its
holding at $3,373,178. The Company is subject to a lock-up agreement
on the stock which expires on May 26, 1998.
(9) Genomica Corporation was cofounded by the Company, Cold Spring Harbor
Laboratory and Falcon Technology Partners, LP. Mr. G. Morgan Browne
serves on the Board of Directors of the Company and is Administrative
Director of Cold Spring Harbor Laboratory.
(10) Formerly named PowerVoice Technologies, Inc.
(11) BioSupplyNet, Inc. was cofounded by the Company, Cold Spring Harbor
Laboratory and other investors. Mr. G. Morgan Browne serves on the
Board of Directors and is Administrative Director of Cold Spring
Harbor Laboratory.
(12) Investments in unaffiliated companies consist of investments where
Harris & Harris Group, Inc. (the "Company") owns less than 5 percent
of the investee company. Investments in non-controlled affiliated
companies consist of investments where the Company owns more than 5
percent but less than 25 percent of the investee company. Investments
in controlled affiliated companies consist of investments where the
Company owns more than 25 percent of the investee company.
(13) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $4,184,874. The gross unrealized
appreciation based on tax cost for these securities is $644,217.
The gross unrealized depreciation on the cost for these securities
is $434,320.
(14) 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 schedule.
26
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.
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.
27
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 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.
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.
28
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.
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.
29
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 September 30, 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.
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification in 1998 as a Regulated Investment Company
("RIC") under Sub-Chapter M of the Internal Revenue Code. As a RIC, the
Company must, among other things, distribute at least 90 percent of its
taxable net income and may either distribute or retain its taxable net
realized capital gains on investments. There can be no assurance that the
Company will qualify as a RIC or that if it does qualify, it will continue
to qualify. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments.")
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
Cash and Cash Equivalents. Cash and cash equivalents include money
market instruments with maturities of less than three months.
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 bases.
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, 1995 and December 31, 1996 financial statements to conform to the
December 31, 1997 presentation.
30
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 31,1997 and 1996, and the reported amounts of
revenues and expenses for the three years ended December 31, 1997. Actual
results could differ from these estimates.
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.
The Company's 1988 Plan was cancelled as of December 31, 1997, canceling
all outstanding stock options and eliminating all potential stock option
grants. As of January 1, 1998, the Company adopted the Harris & Harris
Group, Inc. Employee Profit-Sharing Plan ("Plan") that provides for profit-
sharing equal to 20 percent of net after-tax income, with the exception of
unrealized gains as of September 30, 1997, on which gains the Company will
not pay employee profit-sharing. For the three months ended December 31,
1997, the Company had accrued $423,808 under the Plan.
Under the 1988 Plan, the number of shares of common stock of the Company
reserved for issuance was 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.
The 1988 Plan provided 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 had 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 have been
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 provided that payment by the optionee upon exercise of an
option may have been made using cash or Company stock held by the optionee.
The Company accounted for the 1988 Plan under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for
the 1988 Plan been determined consistent with the fair value method required
by FASB Statement No. 123 ("FASB No. 123"), the Company's net realized (loss)
income and net asset value per share would have been reduced to the following
pro-forma amounts:
31
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Net Realized (Loss) Income:
As Reported $(3,577,818) $ (3,756,240) $ 271,940
Pro Forma $(3,921,583) $ (4,197,096) $ (88,752)
Net Asset Value per share:
As Reported $3.15 $3.44 $3.54
Pro Forma $3.12 $3.40 $3.51
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Stock volatility 0.60 0.60 0.59
Risk-free interest rate 6.3% 6.8% 6.5%
Option term in years 7 7 7
Stock dividend yield - - - - - -
</TABLE>
Because the FASB No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost and related impact on net realized (loss) income and net
asset value per share may not be representative of that value to be expected
in future years.
32
A summary of the status of the Company's 1988 Plan at December 31, 1997
and 1996 and changes during the years then ended is presented in the table
and narrative below:
<TABLE>
December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C>
Shares Weighted Shares Weighted
Average Average
Exercise Price Exercise Price
Outstanding at
beginning of year 1,080,000 $4.584 1,050,000 $4.445
Granted 300,000 $3.875 160,000 $5.008
Exercised 158,000 $1.603 50,000 $1.750
Forfeited 397,000 $5.267 80,000 $5.375
Expired - - - - - - - -
Canceled 825,000 $4.569 - - - -
Outstanding at end
of year 0 0 1,080,000 $4.584
Exercisable at end
of year 0 0 390,000 $3.334
Weighted average
fair value of
options granted $2.50 - - $3.222 - -
</TABLE>
During 1997, the Chairman of the Company exercised a warrant to purchase
237,605 shares of common stock at a price of $2.0641.
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 the Company's common stock on the Nasdaq National Market
during the prior ten trading days. As part of the transaction, American
Bankers Insurance Group has been granted certain registration rights and has
executed a standstill agreement.
NOTE 5. EMPLOYEE BENEFITS
The Company has an employment and severance contract with its Chairman,
Charles E. Harris, pursuant to which he is to receive compensation in the
form of salary and other benefits. The term of the contract expires on
December 31, 1999. Base salary is to be increased annually to reflect
inflation and in addition may be increased by such amount as the Compensation
Committee of the Board of Directors of the Company deems appropriate. In
addition, Mr. Harris 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 1997, contributions to the plan that have been
charged to operations totaled approximately $37,000.
33
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. On February 10, 1997, the Company amended this
plan to include employees who "have seven full years of service and have
attained 58 years of age." 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.
As of December 31,1997, the Company had a reserve of $232,415 for the plan.
NOTE 6. INCOME TAXES
As of December 31, 1997, the Company had not elected tax treatment
available to RICs under Sub-Chapter M of the 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 two years and carryforward such losses 15
years.
For the years ended December 31, 1997, 1996 and 1995, the Company's
income tax (benefit) provision was allocated as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Investment operations $ (933,103) $ (680,834) $(597,215)
Realized (loss) gain on investments (1,119,825) (1,327,401) 738,419
Increase (decrease) in unrealized
appreciation on investments 521,900 1,597,748 85,195
------------ ------------ ----------
Total income tax (benefit)
provision $(1,531,028) $ (410,487) $ 226,399
============ ============ ==========
The above tax (benefit) provision consists of the following:
Current -- Federal $ 0 $(2,047,304) $ (38,319)
Deferred -- Federal (1,531,028) 1,636,817 264,718
------------ ------------ ----------
Total income tax (benefit)
provision $(1,531,028) $ (410,487) $ 226,399
============ ============ ==========
</TABLE>
The Company's net deferred tax liability at December 31, 1997 and 1996
consists of the following:
<TABLE>
<S> <C> <C>
1997 1996
Unrealized appreciation on investments $ 2,817,898 $2,295,998
Net operating loss carryforward (1,856,989) 0
Medical retirement benefits (81,345) (72,320)
Other (211,867) (36,231)
------------ ----------
Net deferred income tax liability $ 667,697 $2,187,447
============ ==========
</TABLE>
On September 25, 1997, the Company's Board of Directors approved a
proposal to seek qualification in 1998 as a RIC under Sub-Chapter M of the
Code. As a RIC, the Company annually must distribute at least 90 percent of
its investment company taxable income as a dividend and may either distribute
or retain its taxable net capital gains from investments. There can be no
assurance that the Company will qualify as a RIC or that, if it does qualify,
34
it will continue to qualify. To initially qualify as a RIC, the Company must
pay a dividend to shareholders equal to the Company's cumulative realized
earnings and profits ("E&P"). The Company currently estimates that its E&P
as of December 31, 1997 was approximately $7.8 million and it currently
intends to distribute such E&P prior to year-end 1998. Continued
qualification as a RIC requires the Company to satisfy certain portfolio
diversification requirements in future years. The Company's ability to
satisfy those requirements may not be controllable by the Company. (See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation - Recent Developments.")
The Company incurred $100,000 in additional legal and accounting costs
as part of the effort in seeking RIC qualification.
NOTE 7. COMMITMENTS AND CONTINGENCIES
During 1993, the Company signed a ten-year lease with sublet provisions
for office space. In 1995, this lease was amended to include additional
office space. Rent expense under this lease for the year ended December
31, 1997, was $130,092. Future minimum lease payments in each of the
following years are: 1998 -- $168,768; 1999 -- $176,030; 2000 -- $178,561;
2001 -- $178,561; 2002 -- $178,561; thereafter $101,946.
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, 1997, the Company
would have to fund additional cash and/or property that would have to be
valued at a total of approximately $750,000 by December 1998, in order for
the Senior Professorship to become permanent.
In June 1997, the Company agreed to provide one of its investee
companies with a $450,000 revolving line of credit, of which $50,000 had
been used through December 31, 1997. The purpose of this line of credit,
which will be secured by accounts receivable, is to provide for seasonal
cash flow. To the extent that this line of credit is utilized, the Company
will also receive warrants to purchase common stock.
In December 1997, the Company signed a Demand Promissory Note for a
$4,000,000 line of credit with J.P. Morgan collateralized by the Company's
U.S. Treasury obligations. As of December 31, the Company had borrowed
$4,000,000 against the line of credit. From December 31, 1997 to January
2, 1998, the rate on the line of credit was prime (8.5 percent). From
January 2, 1998 to April 2, 1998, the interest rate on the line of credit was
libor plus 1.5 (7.3125 percent).
NOTE 8. SUBSEQUENT EVENTS
On February 27, 1998, the Company converted its $1,100,000
NeuroMetrix, Inc. Convertible Note into 229,620 shares of Series C-2
Preferred Stock, as part of a $4 million financing of NeuroMetrix, Inc.
35
<TABLE>
<CAPTION>
SELECTED PER SHARE DATA AND RATIOS
Per share operating performance:
<S> <C> <C> <C> <C> <C>
Year Ended Year Ended Year Ended Year Ended Year Ended
December December December December December
31, 1997 31, 1996 31, 1995 31, 1994 31, 1993
---------- ---------- ---------- ---------- ----------
Net asset value,
beginning of
period $ 3.44 $ 3.54 $ 3.43 $ 3.66 $ 2.71
Net operating
loss (0.14) (0.12) (0.11) (0.25) (0.19)
Net realized
(loss) gain (0.19) (0.24) 0.14 0.01 2.75
Net (decrease)
increase in
unrealized
appreciation as
a result of sales (0.17) 0.16 (0.01) (0.11) (1.78)
Net increase
(decrease) in
unrealized
appreciation on
investments held 0.26 0.13 0.03 0.01 0.25
Net (decrease)
increase from capital
stock transactions (0.05) (0.03) 0.06 0.11 (0.08)
----------- ----------- ---------- ---------- ----------
Net asset value,
end of period $ 3.15 $ 3.44 $ 3.54 $ 3.43 $ 3.66
=========== =========== ========== ========== ==========
Market value per
share, end of
period $ 3.50 $ 3.75 $ 7.875 $ 6.375 $ 8.250
Deferred income
tax per share $ 0.06 $ 0.21 $ 0.050 $ 0.030 $ 0.080
Ratio of expenses
to average net assets 9.1% 8.1% 8.3% 13.6% 11.3%
Ratio of net operating
loss to average net
assets 4.5% 3.5% 3.2% 7.1% 6.0%
Investment return based on:
Stock price (6.7)% (52.4)% 23.5% (22.7)% 88.6%
Net asset value (8.4)% (2.8)% 3.2% (6.3)% 35.0%
Portfolio turnover 77.2% 51.3% 51.2% 136.4% 118.1%
Net assets, end of
period $33,654,934 $35,932,603 $36,561,909 $31,310,802 $32,749,297
Number of shares
outstanding 10,692,971 10,442,682 10,333,902 9,136,747 8,944,828
The accompanying notes are an integral part of this schedule.
</TABLE>
36
Item 9. Disagreements on Accounting and Financial Disclosure
None.
37
PART III
Item 10. Directors and Executive Officers of the Company
OFFICERS
* Charles E. Harris, Chairman, Chief Executive Officer and Chief
Compliance Officer. For additional information about Mr. Harris, please see
the Directors' biographical information section below.
Mel P. Melsheimer, age 58, has served as President, Chief Operating
Officer and Chief Financial Officer since February 1997. Previously, Harris
& Harris Group utilized Mr. Melsheimer as a nearly full-time consultant or
officer of an investee company since March 1994. Mr. Melsheimer has had
extensive entrepreneurial experience as well as senior operational and
financial management responsibilities with public and privately owned
companies. From November 1992 to February 1994, he served as Executive
Vice President, Chief Operating Officer and Secretary of Dairy Holdings,
Inc. From June 1991 to August 1992, he served as President and Chief
Executive Officer of Land-O-Sun Dairies as well as Executive Vice President
of Finevest Foods, Inc. From March 1989 to May 1991, he served as Vice
President, Chief Financial Officer and Treasurer of Finevest Foods, Inc.
From January 1984 to February 1989, he served as Chairman, Chief Executive
Officer and Founder of PHX Pacific, Inc. and President and Chief Executive
Officer of MPM Capital Corp. From January 1981 to December 1983, he served
as Executive Vice President and Chief Operating Officer of AZL Resources.
From November 1975 to December 1980, he served as Executive Vice President
and Chief Financial Officer of AZL Resources. From January 1968 to November
1975, he served in a financial capacity before becoming Vice President and
Chief Financial Officer of Pepsi-Cola Company, PepsiCo, Inc. in 1972. He
was graduated from the University of Southern California (MBA) and
Occidental College (B.A., Economics).
Rachel M. Pernia, age 38, has served since January 1992 as a Vice
President and Controller of the Company, as Treasurer since November 1994
and Secretary since September 1996. 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 was graduated from Rutgers University
(B.A., 1981) and is a certified public accountant.
Compliance with Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Corporation's officers and directors, and persons who own more
than ten percent of the Corporation's common stock to file reports
(including a year-end report) of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC") and to furnish the Corporation
with copies of all reports filed.
38
Based solely on a review of the forms furnished to the Corporation, or
written representations from certain reporting persons, the Corporation
believes that except for a late filing of Form 4 by Dr. C. W. Bardin in
connection with a purchase of shares and a late filing of Form 5 by Charles
E. Harris in connection with 13 charitable gifts of Harris & Harris Group,
Inc. shares donated by the Susan T. and Charles E. Harris Foundation, all
persons who were subject to Section 16(a) in 1997 complied with the filing
requirements.
DIRECTORS
Dr. C. Wayne Bardin, age 63, was elected to the Company's Board of
Directors in December 1994. Dr. Bardin is currently President of Thyreos
Corp., a privately held, start up pharmaceutical company. His recent
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 500 publications
and patents. He has negotiated 15 licensing and manufacturing agreements.
He has directed 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
Doctor Honoris Causa from the University of Caen and the University of Paris.
Dr. Phillip A. Bauman, age 42, was elected to the Company's Board of
Directors in February 1998. Dr. Bauman is an orthopedic surgeon who is in
practice in New York City and and holds an academic appointment at Columbia
University since 1988. He is a principal and Vice President of Orthopedic
Associates of New York since 1994. He is also the director of Miller Health
Care Institute associated with St. Luke's/Roosevelt Hospital Center in New
York City since 1995. He holds a bachelor's and master's degree in biology
from Harvard University and a medical degree from Columbia University. Dr.
Bauman was elected a fellow of the American Academy of Orthopedic Surgeons
in 1991 and is affiliated with the New York Academy of Medicine and is on
the advisory board of a medical research foundation. Dr. Bauman is William
R. Polk's son-in-law.
G. Morgan Browne, age 63, 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 private not-for-profit
institution that conducts research and education programs in the fields of
molecular biology and genetics. In prior years, he was active in the
management of numerous scientifically based companies as an individual
consultant or as an associate of Laurent Oppenheim Associates, Industrial
Management Consultants. He is a director of OSI Pharmaceuticals, Inc.
(principally engaged in drug discovery based on gene transcription), a
founding director of the New York Biotechnology Association, and
a founding 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.
39
Harry E. Ekblom, age 69, was elected to the Company's Board of Directors
in 1984. Mr. Ekblom is a partner in Ekblom & Ekblom LLC and President of
Harry E. Ekblom & Co., Inc. He is the former Vice Chairman of A.T. Hudson &
Co. Inc. 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 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.
Dugald A. Fletcher, age 68, was elected to the Company's Board of
Directors in June 1996. Mr. Fletcher has been President of Fletcher &
Company, Inc., a management consulting firm, for the past five years. He was
also Chairman of Binnings Building Products Company, Inc. and is an Advisor
to the Gabelli Growth Fund and a Director of Gabelli Convertible Securities
Fund. Previously, he was an advisor to the Gabelli/Rosenthal LP, a leveraged
buyout fund; Chairman of Keller Industries (building and consumer products);
Director and investor in Mid-Atlantic Coca-Cola Bottling Company; Senior
Vice President of Booz-Allen & Hamilton and President of Booz-Allen
Acquisition Services; Executive Vice President and a Director of Paine
Webber, Inc.; and President of Baker, Weeks and Co.,Inc. He is a graduate
of Harvard College and of Harvard Business School.
* Charles E. Harris, age 55, 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
cofounded 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.
He was a member of the Advisory Panel for the Congressional Office of
Technology Assessment. He is a member of the New York Society of Security
Analysts. Among his eleemosynary activities, he is a Trustee of The
Institute for Genomic Research, a life-sustaining fellow of the Massachusetts
Institute of Technology and a member of the President's Council of Cold
Spring Harbor Laboratory. He was graduated from Princeton University
(A.B., 1964) and the Columbia University Graduate School of Business
(MBA, 1967).
Jon J. Masters, age 60, was elected to the Company's Board of Directors
in February 1992. Since July 1996, Mr. Masters has been Vice Chairman of
Robb Peck McCooey Specialist Corporation. Prior to that, since 1976, he was
a member of the law firm of Christy & Viener, which he cofounded. Mr.
Masters is a graduate of Princeton University and Harvard Law School.
[FN]
* 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.
</FN>
40
Glenn E. Mayer, age 72, 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 15 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 69, has been a director of the Company since August
1988. For the last seven years, Mr. Polk has been a self-employed consultant.
The author of some 15 books and over 100 articles, he has been an advisor to
a number of corporations including Schroder Bank, Citibank, Crocker National
Bank, TWA, Teledyne, Volkswagen, Time Inc. and of the United Nations. 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 History of the University of
Chicago and of Harvard University. Mr. Polk is a graduate of Harvard
University (B.A. with Honors and Ph.D) and of Oxford University (B.A. with
Honors and M.A.) and has received various academic, foundation and
governmental awards. Mr. Polk is the father-in-law of Dr. Phillip A. Bauman.
James E. Roberts, age 52, 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 Corporation, from 1991 to 1995.
Mr. Roberts has also served as Senior Vice President and Chief Underwriting
Officer of North Star Reinsurance Corporation, 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.
41
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth a summary for each of the last three
years of the cash and non-cash compensation awarded to, earned by, or paid
to the Chief Executive Officer of the Company and the other executive
officers of the Company, whose individual remuneration exceeded $100,000 for
the year ended December 31, 1997. The Company's 1988 Stock Option Plan was
canceled on December 31, 1997, canceling all stock options and eliminating
all potential stock option grants.
<TABLE>
Annual Compensation Long-Term
Compensation
Awards
--------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Name Other All
and Principal Annual Other Stock
Position Year Salary Bonus Compensation Compensation Options
- ------------ ----- ------ ----- ------------ ------------ -------
($) ($) ($) (1) ($) (2) (#)
Charles E. 1997 574,380 - - - - 9,500 - -
Harris 1996 557,650 - - - - 9,500 - -
Chairman, 1995 543,818 - - - - 9,240 160,000
CEO & Chief
Compliance
Officer
(3)
Mel P. 1997 209,852 - - 61,992 9,500 300,000
Melsheimer 1996 203,248 - - - - - - - -
President & 1995 206,434 - - - - - - - -
COO (4)
David C. 1997 194,100 - - - - - - - -
Johnson,Jr. 1996 197,397 - - - - 9,500 - -
EVP (5) 1995 192,500 - - - - 9,240 200,000
<FN>
(1) Other than Mr. Melsheimer, amounts of "Other Annual Compensation"
earned by the named executive officers for the periods presented did
not meet the threshold reporting requirements.
(2) Amounts reported represent the Company's contributions on behalf of the
named executive to the Harris & Harris Group, Inc. 401(k) Plan
described below.
(3) The Company has an employment contract with Charles E. Harris that was
amended on June 30, 1992, January 3, 1993, June 30, 1994 and January 1,
1998 (the "Employment Contract"). The term of the Employment Contract
expires on December 31, 1999.
Mr. Harris is to receive compensation under his Employment Contract in
the form of salary and other benefits. Annual base salary is to be
increased annually as of January 1 of each year to reflect inflation
and in addition may be increased by such amounts as the Board deems
appropriate. The amendment on January 1, 1998 reduced Mr. Harris's
salary to $200,000 and allowed him to pursue other business
opportunities and investments.
The Employment Contract provides Mr. Harris with life insurance for the
benefit of his designated beneficiaries in the amount of $2,000,000.
The Employment Contract also provides reimbursement for uninsured
medical expenses, not to exceed $5,000 per annum, adjusted for
inflation, over the period of the contract, and disability insurance
in the amount of 100 percent of his base salary.
The Employment Contract provides severance pay in the event of
termination without cause or by constructive discharge and also
provides for certain death benefits payable to the surviving
spouse, for a period of two years, equal to the executive's base salary.
In addition, Mr. Harris is entitled to receive severance pay pursuant
to the severance compensation agreement that he entered into with the
Company, effective August 15, 1990 which expires December 31, 1999.
The severance compensation agreement provides that if, following a
42
change in control of the Company, as defined in the agreement, such
individual's employment is terminated by the Company without cause
or by the executive within one year of such change in control, the
individual shall be entitled to receive compensation in a lump sum
payment equal to 2.99 times the individual's average annualized
compensation and payment of other welfare benefits. If the executive's
termination is without cause or is a constructive discharge, the
amount payable under the Employment Contract will be reduced by the
amounts paid pursuant to the severance compensation agreement.
(4) Mr. Melsheimer joined the Company as President, Chief Operating
Officer and Chief Financial Officer in February 1997. From 1994 to
February 1997, Mr. Melsheimer was utilized by the Company as a
consultant.
Included in Mr. Melsheimer's 1997 Other Annual Compensation is $61,992
in relocation reimbursements.
(5) Effective December 15, 1997, Mr. Johnson resigned as Executive Vice-
President of the Company.
</FN>
</TABLE>
The following table sets forth information concerning stock options
granted during the fiscal year ended December 31, 1997, to each of the
executive officers identified in the Summary Compensation Table. No
Directors were granted options during 1997. The Company's 1988 Stock Option
Plan was canceled on December 31, 1997, canceling all outstanding stock
options and eliminating all future stock option grants.
<TABLE>
<S> <C> <C> <C> <C> <C>
Name Number % of Total Exercise Expiration Potential
of Shares Options Price Date Realizable Value
Under Granted to at Assumed Annual
Grant (1) Employees Rates of Stock
in 1997 Price Appreciation
for Option Term
(2)
------------------
5%(3) 10%(4)
--------- ---------- -------- ---------- ------------------
Charles E.
Harris - - - - - - - - - - - -
Mel P.
Melsheimer 300,000 100% $3.875 2/10/07 $ 731,090 $ 1,852,726
David C.
Johnson, Jr. - - - - - - - - - - - -
<FN>
(1) All options would have become exercisable over a five year period.
(2) The values shown are based on the indicated assumed annual rates of
appreciation compounded annually over the term of the option net of
the option exercise price. Actual gains realized, if any, on stock
option exercises and common stock holdings are dependent on the future
performance of the common stock and overall stock market conditions.
There can be no assurance that the values shown in this table will be
achieved.
(3) Represents an assumed market price per share of common stock of $6.312
on February 10, 2007.
(4) Represents an assumed market price per share of common stock of $10.051
on February 10, 2007.
</FN>
</TABLE>
43
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1997 by each of the
executive officers identified in the Summary Compensation Table and the
number and value of unexercised options as of such date. The Company's 1988
Stock Option Plan was canceled on December 31, 1997, canceling all
outstanding stock options and eliminating all potential stock option grants.
<TABLE>
<CAPTION>
Aggregated Option Exercises During 1997 and December 31, 1997 Option Value
<S> <C> <C> <C> <C>
Number of Value of
Unexercised Unexercised
Options at Options at
12/31/97 12/31/97 (1)
------------- -------------
Number of
Shares Value
Acquired Realized Exercisable/ Exercisable/
Name on Exercise (2) Unexercisable Unexercisable
- ----------- ----------- --------- ------------- -------------
Charles E. Harris - - - - 64,000/ 96,000 $0/$0
Mel P. Melsheimer - - - - -- /300,000 $0/$0
David C. Johnson, Jr. - - - - 80,000/ - - $0/$0
<FN>
(1) Based upon the difference between the exercise price of the options and
the closing price of the Corporation's common stock on December 31, 1997.
(2) Value realized is calculated as the number of shares acquired on exercise
multiplied by the difference between the closing price of the
Corporation's common stock on the date of exercise and the exercise
price of the options, before any related tax liabilities or transaction
costs.
</FN>
</TABLE>
The Company's 1988 Stock Option Plan was canceled as of December 31,
1997, canceling all outstanding stock options and eliminating all future
stock option grants. As of January 1, 1998, the Company implemented the
Harris & Harris Group, Inc. Employee Profit Sharing Plan ( the "Plan") that
provides for profit sharing equal to 20 percent of net after-tax income,
excluding any unrealized gains as of September 30, 1997, on which gains the
Company will not pay employee profit sharing. For the three months ended
December 31, 1997, the Company had accrued $423,808 for the Plan. Of this
total accrual of $423,808, $326,338 of the accrual reflected the unrealized
gain in Nanophase Technologies Corporation as of December 31, 1997. As of
March 24, 1998, no profit sharing has been paid and there is no accrual for
profit sharing, primarily reflecting the decline in the market price of
Nanophase Technologies Corporation common stock since December 31, 1997.
44
Compensation of Directors
<TABLE>
<S> <C> <C> <C> <C>
Pension Or
Retirement
Benefits
Accrued Estimated Total
As Part of Annual Compensation
Aggregate Company's Benefits Upon Paid to
Name of Director Compensation Expenses Retirement Directors
- ---------------- ------------ ---------- ------------- ------------
C. Wayne Bardin $ 6,500 - - - - $ 6,500
Phillip A. Bauman (1) $ 0 - - - - $ 0
G. Morgan Browne $10,295 (2) - - - - $10,295
Harry E. Ekblom $12,518 (3) - - - - $12,518
Dugald A. Fletcher $ 8,345 (4) - - - - $ 8,345
Charles F. Hays (5) $13,742 (6) - - - - $13,742
Jon J. Masters $ 8,500 - - - - $ 8,500
Glenn E. Mayer $ 8,500 - - - - $ 8,500
William R. Polk $23,096 (7) - - - - $23,096
James E. Roberts $ 7,500 - - - - $ 7,500
Robert B. Schulz (8) $ 1,500 - - - - $ 1,500
<FN>
(1) Dr. Bauman was elected to the Board of Directors on February 24, 1998.
(2) Includes $295 paid to Mr. Browne to reimburse him for travel expenses
to attend Board meetings.
(3) Includes $4,018 paid to Mr. Ekblom to reimburse him for travel expenses
to attend Board meetings.
(4) Includes $345 paid to Mr. Fletcher to reimburse him for travel expenses
to attend Board meetings.
(5) Mr. Hays resigned as a Director on February 3, 1998.
(6) Includes $3,242 paid to Mr. Hays to reimburse him for travel expenses
to attend Board meetings
(7) Includes $14,596 paid to Mr. Polk to reimburse him for travel expenses
to attend Board meetings.
(8) Mr. Schulz resigned as a Director on May 9, 1997.
</FN>
</TABLE>
During the fiscal year ended December 31, 1997, directors who were not
officers of the Company received $1,000 for each meeting of the Board of
Directors and $500 for each committee meeting they attended. The Company
also reimburses its directors for travel, lodging and related expenses they
incur in attending Board and committee meetings. The total compensation and
reimbursement for expenses to all directors in 1997 was $100,496. The same
director compensation arrangement is in effect for 1998.
As of December 31, 1997, all Directors' outstanding stock options were
cancelled. In 1997, the Board of Directors approved that effective January
1, 1998, 50 percent of all Director fees be used to purchase Company stock.
45
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of Directors, Nominees and Officers and other
principal holders of the Company's voting securities
The following table sets forth certain information with respect to
beneficial ownership (as that term is defined in the rules and regulations of
the Securities and Exchange Commission) of the Company's common stock as of
March 13, 1998 by (1) each person who is known by the Company to be the
beneficial owner of more than five percent of the outstanding common stock,
(2) each director of the Company, (3) each current executive officer listed in
the Summary Compensation Table and (4) all directors and executive officers of
the Company as a group. Except as otherwise indicated, to the Company's
knowledge, all shares are beneficially owned and investment and voting power
is held as stated by the persons named as owners.
<TABLE>
<S> <C> <C>
Name and Address of Number of Shares of
Beneficial Owner Common Stock Owned Percent of Class
- ------------------- ------------------- ----------------
Charles E. and Susan T. Harris
One Rockefeller Plaza, Suite 1430 1,489,557 (1) 13.93%
New York, NY 10020
American Bankers Insurance Group
11222 Quail Roost Drive 1,075,269 (2) 10.06%
Miami, FL 33157
Jordan American Holdings, Inc.
1875 Ski Time Square Drive, 1,465,221 (3) 13.70%
Steamboat Springs, CO 80487
Dr. C. Wayne Bardin 6,840 (4) *
Dr. Phillip A. Bauman 8,387 (5) *
Harry E. Ekblom 5,000 *
Glenn E. Mayer 72,000 (6) *
Mel P. Melsheimer 5,072 *
William R. Polk 71,000 *
James E. Roberts 2,000 *
All Directors and Officers
as a group (12 persons) 1,667,856 15.60%
*Less than one percent of issued and outstanding stock.
<FN>
(1) Includes 1,355,176 shares for which Mrs. Harris has sole power to vote
and dispose of; 8,500 shares for which Mr. Harris has sole power to
vote and dispose of; 21,996 shares held by Mrs. Harris as custodian
for Mr. & Mrs. Harris's son. Includes 103,885 shares owned by the Susan
T. and Charles E. Harris Foundation, in which Charles E. Harris and
Susan T. Harris are designated trustees; voting and dispositive power
are vested with the trustees.
46
(2) Represents shares owned by subsidiaries of American Bankers Insurance
Group, Inc.
(3) Represents shares owned by Jordan Financial Services Group as of
February 12, 1998. Jordan Financial Services Group is a registered
investment advisor that holds these shares for investment purposes only
on behalf of various clients.
(4) Includes 2,840 shares owned by Bardin LLC for the Bardin LLC Profit-
Sharing Keogh.
(5) Includes 5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's wife.
(6) Includes 2,000 shares owned by Mrs. Mayer.
</FN>
</TABLE>
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, 1997.
47
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) The following Financial Statements of the Company are set forth
under Item 8:
Statements of Assets and Liabilities as of December 31, 1997 and
1996
Statements of Operations for the years ended December 31, 1997, 1996
and 1995
Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995
Statements of Changes in Net Assets for the years ended December 31,
1997, 1996 and 1995
Schedule of Investments as of December 31, 1997
Footnote to Schedule of Investments
Notes to Financial Statements
Selected Per Share Data and Ratios for the years ended December 31,
1997, 1996, 1995, 1994 and 1993
(2) Report of Independent Public Accountants.
(3) 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.)
3.1(a) Restated Certificate of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1 (a) to the
Company's Form 10-K for the year ended December 31, 1995.
3.1(b) Restated By-laws of the Company, incorporated by reference
to Exhibit 3.1(b) to the Company's Form 10-K for the year ended
December 31, 1995.
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.
9.1 Harris & Harris Group, Inc. Custodian Agreement with JP Morgan,
incorporated by reference to Exhibit 9.1 to the Company's Form
10-K for the year ended December 31, 1995.
10.1* Amended and Restated Employment Agreement between Harris &
Harris Group, Inc. and Charles E. Harris dated January 1, 1998.
10.5* Severance Compensation Agreement by and between the Company
and Charles E. Harris dated August 15, 1990, incorporated by
reference to exhibit 10 (s) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1990.
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, incorporated by reference to Exhibit 10.13 to
the Company's Form 10-K for the year ended December 31, 1995.
48
10.14 Form of Indemnification Agreement which has been established
with all directors and executive officers of the Company,
incorporated by reference to Exhibit 10.14 to the Company's
Form 10-K for the year ended December 31, 1995.
10.16* Demand Promissory Note, Corporate Certificate-Borrowing,
Statement of Purpose for an Extension of Credit Secured by
Margin Stock by and among Harris & Harris Group, Inc. and
J.P. Morgan.
10.17* Harris & Harris Group, Inc. Employee Profit Sharing Plan.
11.0* Computation of Per Share Earnings is set forth under Item 8.
23* Consent of Arthur Andersen LLP.
27.0* Financial Data Schedule.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the last quarter of 1997.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARRIS & HARRIS GROUP, INC.
Date: March 30, 1998 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
Company and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Chairman of the Board, March 30, 1998
- ----------------------- Chief Compliance Officer and
Charles E. Harris Chief Executive Officer
/s/ President, Chief Operating March 30, 1998
- ------------------------ Officer and Chief Financial
Mel P. Melsheimer Officer
/s/ Vice President, Controller, March 30, 1998
- ------------------------ Treasurer and Principal
Rachel M. Pernia Accounting Officer
50
/s/
- ------------------------ Director March 25, 1998
C. Wayne Bardin
/s/
- ------------------------ Director March 26, 1998
Phillip A. Bauman
/s/
- ------------------------ Director March 24, 1998
G. Morgan Browne
/s/
- ------------------------ Director March 24, 1998
Harry E. Ekblom
/s/
- ------------------------ Director March 27, 1998
Dugald A. Fletcher
/s/
- ------------------------ Director March 25, 1998
Jon J. Masters
/s/
- ------------------------ Director March 26, 1998
Glenn E. Mayer
/s/
- ------------------------ Director March 25,1998
William R. Polk
/s/
- ------------------------ Director March 25, 1998
James E. Roberts
51
EXHIBIT INDEX
The following exhibits are filed with this report in accordance with
Rule 12b-32 under the Securities Exchange Act of 1934.
Exhibit No. Description
10.1 Amended and Restated Employment Agreement between Harris & Harris
Group, Inc. and Charles E. Harris dated January 1, 1998.
10.5 Severance Compensation Agreement by and between the Company and
Charles E. Harris dated August 15, 1990, incorporated by reference
to exhibit 10 (s) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
10.16 Demand Promissory Note, Corporate Certificate-Borrowing, Statement
of Purpose for an Extension of Credit Secured by Margin Stock by
and among Harris & Harris Group, Inc. and J.P. Morgan.
10.17 Harris & Harris Group, Inc. Employee Profit Sharing Plan.
11.0 Computation of Per Share Earnings is set forth under Item 8.
23 Consent of Arthur Andersen LLP.
27.0 Financial Data Schedule.
52
DEMAND PROMISSORY NOTE
Date: December 24, 1997
U.S. $4,000,000.00
FOR VALUE RECEIVED, Harris & Harris Group, Inc. (the "Borrower")
promises to pay to the order of MORGAN GUARANTY TRUST COMPANY OF NEW YORK (the
"Bank"), ON DEMAND at its office at 60 Wall Street, New York, New York 10260-
0060, U.S.A., for the account of its Lending Office (as hereinafter defined),
in lawful money of the United States of America in same day funds (or in such
funds as may from time to time become customary for the settlement of
international transactions in U.S. dollars), the lesser of (i) U.S.
$4,000,000.00 or (ii) the then-outstanding principal amount of each loan (the
"Loan") or "Loans") made by the Bank from time to time to the Borrower
hereunder. The Borrower shall pay interest on the unpaid principal amount of
each Loan until maturity on the dates and at a rate per annum as hereinafter
set forth. As used herein, "Lending Office" means, (i) with regard to Loans
bearing interest based on the Prime Rate (as hereinafter defined)
(collectively, "Domestic Loans"), the office of the Bank located at 60 Wall
Street, New York, New York or such other office as the Bank may designate, and
(ii) with regard to Loans bearing interest based on the Eurodollar Rate (as
hereinafter defined) (collectively, "Eurodollar Loans"), the Nassau (Bahamas)
office of the Bank or such other office as the Bank may designate.
Interest based on the Prime Rate shall be computed on the basis of a
year of 365 days (or 366 in a leap year) and paid for actual days elapsed
(including the first day but excluding the last day). Interest based on the
Eurodollar Rate shall be computed on the basis of a year of 360 days and paid
for the actual number of days elapsed (including the first day but excluding
the last day).
Each Eurodollar Loan shall bear interest at a rate per annum (the
"Eurodollar Rate") equal to the Adjusted Eurodollar Rate (as hereinafter
defined) plus 1.500% (the Eurodollar Margin"), payable on the last day of the
Interest Period applicable thereto and, if such Interest Period is longer than
three months, at intervals of three months after the first day thereof. The
"Adjusted Eurodollar Rate" applicable to any Interest Period (as hereinafter
defined) means a rate per annum equal to the quotient obtained (rounded
upwards, if necessary, to the next higher 1/100 of 1%) by dividing (i) the
applicable London Interbank Offered Rate by (ii) 1.00 minus the Eurodollar
Reserve Percentage. The "London Interbank Offered Rate" applicable to any
Interest Period means the rate per annum at which deposits in U.S. dollars are
offered to the Bank in the London interbank market at approximately 11:00 a.m.
(London time) two business days prior to the first day of such Interest Period
in an amount approximately equal to the principal amount of the Loan to which
such Interest Period applies and for the period of time comparable to such
Interest Period. The "Eurodollar Reserve Percentage" means for any day that
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member bank
of the Federal Reserve System in New York City with deposits exceeding five
billion dollars in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which
the interest rate on the Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office of
the Bank to United States residents). The Adjusted Eurodollar Rate shall be
adjusted automatically on and as of the effective date of any change in the
Eurodollar Reserve Percentage. As used herein, the term "Interest Period"
means the period beginning on the date of each Eurodollar Loan and ending on
the numerically corresponding day in the calendar month One or three months
after such date; provided, that if an Interest Period would otherwise end on a
day which is not a business day it shall be extended to the next succeeding
business day unless such business day falls in the next calendar month, in
which case the Interest Period shall end on the next preceding business day;
provided, further, that if the Bank shall not have received written notice to
the contrary from the Borrower at least five business days prior to the end of
an Interest Period the Borrower shall be deemed to have requested to select an
Interest Period with a duration equal to that then ending. As used herein,
the term "business day" means any day on which dealings in U.S. dollar
deposits are carried on in the London interbank market and on which commercial
banks are open for domestic and foreign exchange business in London and New
York City. Notice by the Bank to the Borrower of the rate of interest so
determined shall be binding and conclusive upon the Borrower in the absence of
manifest error.
Each Domestic Loan shall bear interest payable on the last day of each
month at a rate per annum for each day equal to the rate of interest publicly
announced by the Bank in New York City from time to time as its Prime Rate
(the "Prime Rate") for such day, plus 0.000%.
The Borrower shall pay interest on the unpaid principal amount of each
Loan after the maturity thereof and, to the extent permitted by law, on
accrued and unpaid interest until paid at a rate per annum equal to the sum of
2% plus the Prime Rate.
If after the date of this Note any applicable rule, executive order,
decree, regulation or interpretation is amended, modified, enacted or
promulgated by any government or governmental authority so as to (i) change
the basis of taxation of payments to the Bank or the Lending Office of the
Bank extending a Eurodollar Loan (the "Eurodollar Lending Office") in respect
to the principal of and interest on any Eurodollar Loan (except for changes in
the rate of taxation on the overall net income of the Bank by the United
States of America or the Eurodollar Lending Office of the Bank by the
jurisdiction in which such Lending Office is located), or (ii) impose, modify
or deem applicable any reserve, special deposit or similar requirement against
any of the assets of, deposits with or for the account of, or credit extended
by the Bank's Eurodollar Lending Office, or (iii) impose on the Bank (or its
Eurodollar Lending Office) or the London interbank market any other conditions
affecting any Loan, the Loans or this Note, and the result of any of the
foregoing is to increase the cost to the Bank (or its Eurodollar Lending
Office) of agreeing to make or making, funding or maintaining any Loan
evidenced by this Note or would have the effect of reducing the rate of return
on the capital of the Bank or any entity controlling the Bank (its "Parent")
as a consequence of agreeing to make any Loan, or to reduce the amount of any
sum receivable by the Bank (or its Eurodollar Lending Office) on this Note,
then the Borrower shall pay to the Bank or its Parent upon demand such amount
as will compensate the Bank or its Parent for such additional cost or
reduction in return. A certificate of the Bank setting forth the basis for
the determination of any amount necessary to compensate the Bank or its Parent
as aforesaid shall be conclusive as to the determination of such amount in the
absence of manifest error.
If, after the date of this Notice, the introduction of, or any change
in, any applicable law, rule or regulation or in the interpretation or
administration thereof by any governmental authority charged with the
interpretation or administration thereof or compliance by the Bank (or its
Eurodollar Lending Office) with any request or directive (whether or not
having the force of law) of any such authority shall make it unlawful or
impossible for the Bank (or its Eurodollar Lending Office) to make, maintain
or fund its Eurodollar Loans, the Bank forthwith shall so notify the Borrower.
Upon receipt of such notice, the Borrower shall prepay in full the then
outstanding principal amount of each Eurodollar Loan, together with accrued
interest thereon, either (a) on the last day of the Interest Period applicable
thereto if the Bank may lawfully continue to maintain and fund such Loan to
such day or (b) immediately if the Bank may not lawfully continue to fund and
maintain such Loan to such day.
Eurodollar Loans may not be repaid at the Borrower's option on a date
other than the last day of an Interest Period. If, however, the Borrower
makes any payment of principal of any Eurodollar Loan or any day other than
the last day of the Interest Period applicable thereto, the Borrower shall
reimburse the Bank on demand for any loss or expense incurred by it as a
result of the timing of such payment, including (without limitation) any loss
incurred in obtaining, liquidating or employing deposits from third parties,
provided that the Bank shall have delivered to the Borrower a certificate as
to the amount of such loss, which certificate shall be conclusive in the
absence of manifest error.
Domestic Loans may be prepaid at any time without penalty or premium.
The Borrower hereby waives diligence, presentment, demand, protest and
notice of any kind whatsoever. The non-exercise by the Bank of its rights
hereunder in any particular instance shall not constitute a waiver of any
right in any subsequent instance.
The holder of this Note shall, and is hereby authorized by the Borrower
to, endorse on the schedule forming a part hereof appropriate notations
evidencing the date and the amount of each Loan made by the Bank, the date and
amount of each payment of principal, whether such Loan is a Domestic or
Eurodollar Loan and, in the case of Eurodollar Loans, the Eurodollar Rate
applicable thereto.
If this Note is not paid in full when due the Borrower agrees to pay all
costs and expenses of collection including reasonable attorney's fees.
To secure payment of this Note, the Borrower hereby transfers, pledges,
gives a security interest in and delivers to the Bank all present and future
contents of the Borrower's
USA Treasuries in Morgan Custody Account C88659
, all proceeds and products thereof, accessions thereto and substitutions
therefor (the "Collateral").
Upon the nonpayment of any amount when due hereunder, the holder shall
have the rights and remedies provided in the Uniform Commercial Code in force
in New York at the date of execution of this Note and in addition to, in
substitution for, in modification of, or in conjunction with those rights and
remedies, the holder or its agents may, in its discretion, sell, assign and
deliver all or any part of the Collateral at any broker's board or at public
or private sale without notice or advertisement, and bid and become purchasers
at any public sale or at any broker's board, and, if notice to the Borrower is
required by law, give written notice to the Borrower five days prior to the
date of public sale of the Collateral or prior to the date after which private
sale of the Collateral will be made by mailing such notice to the address
designated by the Borrower with the Borrower's signature below. The Borrower
agrees that the proceeds of the disposition of the collateral may be applied
by the holder to the satisfaction of the liabilities of the Borrower to the
holder in any order of preference which the holder, in its sole discretion,
chooses, and that the excess, if any, shall be returned to the Borrower, which
shall continue liable to the holder for any deficiency remaining with interest
thereon. The waiver or remedying of any default shall not operate as a waiver
of the default remedies or any other prior or subsequent default.
The undersigned, if more than one, shall be jointly and severally liable
hereunder and the term "Borrower" shall mean the undersigned or any one or
more of them and their heirs, executors, administrators, successors and
assigns.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES
OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS NOTE OR ANY
AGREEMENT RECEIVED BY THE BANK IN CONNECTION HEREWITH. THE BORROWER
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN IN AN INCONVENIENT FORUM. THE BORROWER
HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR ANY AGREEMENT RECEIVED
BY THE BANK IN CONNECTION HEREWITH.
SIGNATURE:
/s/ /s/
- --------------------------- ---------------------------
Charles E. Harris Mel P. Melsheimer
Chairman & CEO President & COO
Harris & Harris Group, Inc. Harris & Harris Group, Inc.
Address: One Rockefeller Plaza Address: One Rockefeller Plaza
Suite 1430 Suite 1430
New York, NY 10020 New York, NY 10020
CORPORATE CERTIFICATE-BORROWING
I HEREBY CERTIFY to MORGAN GUARANTY TRUST COMPANY OF NEW YORK that at a
meeting of the Board of Directors of Harris & Harris Group, Inc., a
corporation organized under the laws of New York, duly called and held on the
24th day of December, 1997, the following resolutions were duly adopted and
are now in full force and effect:
RESOLVED, that any (specify number) two of the following officers or
designated signers of this corporation.
(In this space officers and other persons authorized to sign must be
identified by name or title. It is suggested that titles, instead of names
of officers be used unless it is desired that only certain officers of
given rank may sign. The names of all those listed by title must appear
below in the certified list of officers.)
Charles E. Harris Chairman, Chief Executive Officer &
Chief Compliance Officer
Mel P. Melsheimer President, Chief Operating Officer &
Chief Financial Officer
Rachel M. Pernia Vice-President, Treasurer, Controller
& Secretary
are authorized:
1. To borrow from time to time, on behalf of this corporation, from
MORGAN GUARANTY TRUST COMPANY OF NEW YORK such sums of money, for such periods
of time and upon such terms as may to them in their discretion seem advisable;
and, to execute in the name and on behalf of this corporation notes, drafts,
acceptances or other obligations of this corporation to evidence such
borrowings; and, to enter into agreements, and amendments to such agreements,
in the name and on behalf of this corporation with MORGAN GUARANTY TRUST
COMPANY OF NEW YORK with respect to such borrowings, said agreements and
amendments to contain such provisions as the signer shall approve and his or
her signature thereon shall be conclusive evidence of such approval;
2. to discount with MORGAN GUARANTY TRUST COMPANY OF NEW YORK any
bills or notes receivable held by this corporation upon such terms as they may
deem proper, with full authority to endorse the same in the name of this
corporation;
3. to apply for and obtain from MORGAN GUARANTY TRUST COMPANY OF NEW
YORK letters of credit and to execute applications, agreements, trust receipts
and all other documents in connection therewith;
4. to execute and deliver, in their discretion, all guarantees,
indemnity agreements and other undertakings on behalf of this corporation; and
5. to pledge any of the bonds, stocks or other securities, bills
receivable, bills of lading, warehouse receipts, accounts receivable or other
property of this corporation, for the purpose of securing any of the foregoing
transactions or any transaction entered into by any other entity or person, to
endorse said securities and/or to issue appropriate powers of attorney,
documents or assignments in furtherance thereof.
RESOLVED, that loans, discounts, credits, guarantees, indemnities and other
agreements heretofore effected and at present outstanding with MORGAN GUARANTY
TRUST COMPANY OF NEW YORK, and endorsements, powers of attorney, assignments,
pledges and all agreements and documents made and issued in accordance
therewith be and hereby are ratified and confirmed; that MORGAN GUARANTY TRUST
COMPANY OF NEW YORK may act upon all instructions for the sale, delivery or
other disposition of any collateral at any time held when given by the above-
named signers; and that the foregoing powers and authority will continue until
written notice of revocation has been given to and received by MORGAN GUARANTY
TRUST COMPANY OF NEW YORK.
I also certify that the following are officers, etc., of this corporation
elected or appointed to act until their successors are elected or appointed:
(If signers are designated by title in the first resolution set
forth above, please list below the names of those individuals
having the designated title who are to sign. If signers are
designated by name rather than title in the resolution, the following
list need not be completed.)
Title Name
Chairman, Chief Executive Officer & Charles E. Harris
Chief Compliance Officer
President, Chief Operating Officer & Mel P. Melsheimer
Chief Financial Officer
Vice President, Treasurer, Controller & Secretary Rachel M. Pernia
IN WITNESS WHEREOF, I have hereunto set my hand as Secretary of the above-
named corporation and affixed its corporate seal this 24th day of December,
1997.
/s/
----------------------------
Rachel M. Pernia, Secretary
(The above certification must be
confirmed by a second corporate
officer if the Secretary is
authorized to sign alone on behalf
of the corporation pursuant to the
first resolution set forth above.)
Confirmed by
________________________
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Statement of Purpose for an Extension of Credit
Secured by Margin Stock
Morgan Guaranty Trust Company of New York
____________________________________________
Name of Bank
(Federal Reserve Form U-1)
This form is required by law (15 U.S.C. Sections 78g and 78w; 12 CFR 221)
Instructions
1. This form must be completed when a bank extends credit in excess of
$100,000 secured directly or indirectly, in whole or in part, by any margin
stock.
2. The term "margin stock" is defined in Regulation U (12 CFR 221) and
includes, principally: (1) stocks that are registered on a national securities
exchange or that are on the Federal Reserve Board's List of Marginable OTC
Stocks; (2) debt securities (bonds) that are convertible into margin stocks;
(3) any over-the-counter security designated as qualified for trading in the
National Market System under a designation plan approved by the Securities and
Exchange Commission (NMS security); and (4) shares of mutual funds, unless 95
per cent of the assets of the fund are continuously invested in U.S.
government, agency, state, or municipal obligations.
3. Please print or type (if space is inadequate, attach separate sheet).
Part 1 To be completed by borrower(s).
1. What is the amount of the credit being extended? $4,000,000 = Four
Million Dollars
2. Will any part of this credit be used to purchase or carry margin stock?
Yes ____ No _X_
If the answer is "no", describe the specific purpose of the credit. WORKING
CAPITAL
I (we) have read this form and certify that to the best of my (our) knowledge
and belief the information given in true, accurate, and complete, and that the
margin stock and any other securities collateralizing this credit are
authentic, genuine, unaltered, and not stolen, forged, or counterfeit.
Signed:
/s/
- ----------------------------
Rachel M. Pernia 12/30/97
Harris & Harris Group, Inc.
This form should not be signed in blank.
A borrower who falsely certifies the purpose of a credit on this
form or otherwise willfully or intentionally evades the provisions
of Regulation U will also violate Federal Reserve Regulation X
"Borrower of Securities Credit."
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
between
HARRIS & HARRIS GROUP, INC.
and
CHARLES E. HARRIS
dated as of January 1, 1998
1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Charles E. Harris
AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") dated as
of January 1, 1998, between HARRIS & HARRIS GROUP, INC. (the "Company"), a
New York corporation, and CHARLES E. HARRIS (the "Executive")
W I T N E S S E T H T H A T :
WHEREAS, the Executive is currently serving as Chairman and Chief
Executive Officer of the Company, pursuant to an Employment Agreement dated
as of August 15, 1990; and
WHEREAS, the agreement dated as of August 15, 1990 has been amended
as of June 30, 1992, January 6, 1993, and June 30, 1994 (as amended, the
Prior Agreement); and
WHEREAS, the Company and the Executive wish to make additional changes
to the Prior Agreement; and
WHEREAS, the Company and the Executive desire therefore to amend and
restate the Prior Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Employment. The Company shall employ the Executive, and the Executive
shall be employed by the Company, for the Period of Employment provided in
paragraph 3(a) below and upon the other terms and conditions set forth in
this Agreement.
2. Position and Responsibilities. During the Period of Employment, the
Executive shall:
(a) Serve as the Chairman and Chief Executive Officer of the Company;
2
(b) Be responsible for the general management of the affairs of the
Company and all its subsidiaries, reporting directly to the Board of
Directors of the Company (the "Board");
(c) Serve as a member of the Board for the period for which he is and
shall from time to time be elected or reelected; and
(d) Serve, if elected, as President of the Company and as an officer
and director of any subsidiary or affiliate of the Company.
3. Terms and Duties
(a) Period of Employment. The period of the Executive's employment
under this Agreement (the "Period of Employment") commenced 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).
(b) Duties. Throughout the Period of Employment (except for illness or
incapacity and vacation periods) the Executive shall perform and discharge
well and faithfully the duties which the Board may assign to him from time
to time. Subject to the foregoing, nothing in this Agreement shall preclude
the Executive from devoting time to other employment or other investments.
The Company specifically acknowledges that the Executive may seek to start a
health care investment business with Julie Kim and others, in which the
Company would have no interest, involving investing in publicly traded
companies, notwithstanding any other language in this Agreement.
4. Compensation. For all services rendered by the Executive in any capacity
during the Period of Employment, including, without limitation, services as
an executive, officer, director or member of any committee of the Company or
of any subsidiary, affiliate or division of the Company, the Company shall
compensate the Executive as described in paragraphs (a) through (e) below.
For purposes of this Section 4, the term "Board" shall mean either the Board
of Directors of the Company or a committee of the Board of Directors (i.e.,
the Compensation Committee of the Board of Directors).
3
(a) Base Salary. Notwithstanding any other language with respect to
Base Salary in this Employment Agreement, the Company shall pay the
Executive a fixed salary (the "Base Salary") at an annual rate of not less
than $200,000, effective January 1, 1998. On January 1, 1999, and on each
January 1 thereafter during the Period of Employment, the Base Salary shall
be increased so that the new Base Salary equals the product of the Base
Salary in effect on the immediately preceding December 31 times the quotient
obtained by dividing A 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 1982-84 = 100)
(the "CPI"), as published during the September immediately preceding the
January 1 with respect to which the increased Base Salary is being computed;
and
B is the CPI as published during the September twelve months prior to
the September referred to in "A" above. If during the Period of Employment
the United States Bureau of Labor Statistics (the "Bureau") ceases
publication of the CPI, the calculations required hereby shall thereafter
be made 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."
(b) Discretionary Base Salary Increases. At any time or from time
to time during the Period of Employment, the Board may increase the Base
Salary to an amount exceeding the Base Salary determined pursuant to
paragraph 3(a) above. Following any such discretionary increase in the
Base Salary, the Board may or may not maintain the Base Salary at that
increased level (or further increase the Base Salary beyond that level).
But in no event shall the Base Salary in effect for any portion of the
Period of Employment be an annual amount less than the amount determinable
in accordance with paragraph 3(a) above.
4
(c) Additional Benefits. In addition, the Executive shall be
entitled to participate in all compensation or employee benefit plans or
programs, and to receive all benefits, perquisites, and emoluments for
which any salaried employees are eligible under any plan or program,
now or hereafter established and maintained by the Company for salaried
employees (which shall be comparable to those provided to senior officers
of other comparable companies), to the extent permissible under the general
terms and provisions of such plans or programs and in accordance with the
provisions thereof, including group hospitalization, health, dental care,
life or other insurance, tax-qualified pension, savings, thrift and profit-
sharing plans, termination pay programs, sick-leave plans, travel or
accident insurance, disability insurance, auto allowance or auto lease
plans, and executive contingent compensation plans, including, without
limitation, capital accumulation programs and stock purchase, restricted
stock or stock option plans. Specifically, but without limitation, the
Company shall furnish the Executive, with (1) cash reimbursement for the
cost of total life insurance for the benefit of the Executive's designated
beneficiary in the amount of at least $2,000,000 (2) supplemental uninsured
medical reimbursement plan coverage of $5,000 for expenses incurred by the
Executive or his covered dependents which are not covered by the Company's
group hospitalization, health and dental care insurance plans, provided
that this $5,000 limit shall be increased so that on a cumulative basis,
such limit equals the product of $5,000 multiplied times the quotient
(the "CPI Factor") obtained by dividing the CPI published during the most
recent September by the CPI published for September, 1991, and (3)
disability insurance (through an insurance carrier and/or self-insured
by the Company) for the benefit of the Executive in the amount of 100%
of his base salary.
(d) Perquisites. The Company shall also furnish the Executive,
without cost to him, with (1) a Company-owned or leased automobile which
will be replaced with a new automobile every four years, provided that
the Executive may select the automobile and, if the value of the
automobile selected by the Executive is greater than $40,000 times the
CPI Factor, the Executive shall pay to the Company, each month during
which he shall have use of the automobile, the difference between the
monthly market rental of the vehicle being furnished to the Executive
and the monthly market rental of an
5
automobile with a value of $40,000 time the CPI Factor; and (2) membership
in one health club, one luncheon club, and one social or country club of the
Executive's choosing. The Company shall also reimburse the Executive for the
cost of (1) an annual physical examination of the Executive by a physician
selected by the Executive, and (2) personal financial, investment or tax
advice, not to exceed $2000 times the CPI Factor per annum. The Executive
shall properly document such costs for federal income taxation purposes to
perserve any deduction for such reimbursements to which the Company may be
entitled.
5. Business Expenses. The Company shall pay or reimburse the Executive for
all reasonable travel or other expenses incurred by the Executive in
connection with the performance of his duties and obligations under this
Agreement, including, without limitation, routine and necessary costs of
maintaining the automobile (including garage space) provided to the
Executive by the Company pursuant to paragraph 4(d) above, subject to the
Executive's presentation of appropriate vouchers in accordance with such
procedures as the Company may from time to time establish for senior
officers and to perserve any deductions for federal income taxation purposes
to which the Company may be entitled.
6. Disability.
(a) In the event of the disability of the Executive during the Period of
Employment, the Company shall, subject to the provisions of the next
following sentence, continue to pay to the Executive the compensation
provided in paragraph 4 above during the period of his disability. But if
the Executive's disability continues until the Executive becomes entitled to
receive the proceeds of the disability insurance described in paragraph 4(c)
above (the "Disability Period"), the Company may, at its election,
terminate the Period of Employment in which event the Company's
obligation to make payments under paragraph 4 shall cease, except for
earned but unpaid Base Salary, incentive compensation awards (if any) and
Retirement Benefits, which shall be payable on a pro-rated basis for the
year in which such disability is determined. However, the benefits
described in paragraph 4(c) and the perquisites described in paragraph
4(d), shall continue to be provided for a period of ten years, except
that the Company shall only continue to provide the automobile described
in paragraph 4(d) for six months following termination
6
of the Period of Employment and then allow the Executive to assume (without
any continuing obligations under the lease, if any, on the part of the
Company) the Company's rights and obligations to lease or purchase such
automobile (to the extent any lease is so assumable) or to purchase such
automobile at its then book value.
(b) During the period the Executive is receiving payments, either
under paragraph 6 or under the disability insurance described in
paragraph 4(c) above, to the extent that he is physically and mentally
able to do so, he shall furnish information and assistance to the Company
and, upon a reasonable request in writing by the Board from time to time,
he shall make himself available to the Company to undertake reasonable
assignments consistent with the dignity, importance, and scope of his
prior position with the Company and his physical and mental health.
During the Disability Period, the Executive shall report directly to
the Board. If the Company fails to make a payment or provide a benefit
required under paragraph 6(a), the Executive's obligation to furnish
information and assistance and undertake assignments shall terminate.
(c) Upon any cessation of payments under the disability insurance
described in paragraph 4(c) above, the Company shall also pay to the
Executive or his wife, if he predeceases her during such period, for a
period of three years the Base Salary amount that existed at the time of
the Disability Period in the form of severance or disability benefits, or
both, in the manner and at the times provided in paragraph 4(a) above.
(d) If the Executive dies during the Disability Period the Company
shall pay his wife, if she survives him, for a period of two years the Base
Salary amount that existed at the onset of the disability in the form of a
death benefit, in the manner and at the times provided in paragraph 4(a)
above.
(e) As used in this Agreement, the term "disability" shall have the
following meaning:
7
Executive is unable to perform with reasonable continuity the material
duties of his position with the Company as a result of sickness, illness, or
accidental bodily injury.
7. Death. If the Executive dies during the Period of Employment, the
Executive's designated beneficiary shall be entitled to receive the proceeds
of any life or other insurance or other death benefit program provided
pursuant to paragraph 4(c) above in accordance with the provisions thereof,
and the Period of Employment and the Company's obligation to make payments
under paragraph 4 shall cease as of the date of death, except for earned but
unpaid Base Salary, incentive compensation awards (if any) and Retirement
Benefits, which shall be payable on a pro-rated basis for the year in which
such death occurs. The Company shall pay the Executive's wife, if she
survives him, for a period of two years the Base Salary amount that existed
at the time of death in the form of a death benefit, in the manner and at
the times provided in paragraph 4(a) above.
8. Effect of Termination of Employment.
(a) If the Executive's employment hereunder terminates because of
either a Without Cause Termination or Constructive Discharge, the
Company shall, as liquidated damages or severance pay, or both, pay to
the Executive two times his Base Salary in effect at the time of such
termination, in the manner and at the times provided in paragraph 4(a)
above to the Executive or, in the event of his subsequent death, to the
residuary beneficiary named in the Executive's Last Will or in accordance
with the laws of intestacy. Such payments shall commence immediately
following such termination and shall continue for a period of time equal
to the remainder of the Period of Employment at the time of such
termination (the "Severance Period"). In addition, earned but unpaid
Base Salary and incentive compensation awards (if any) shall be payable
on a pro-rated basis for the year in which such termination occurs, and
benefits described in paragraph 4(c) and the perquisites described in
paragraph 4(d) shall continue to be provided during the Severance Period,
except that the Company shall only continue to provide the automobile
described in paragraph 4(d) for six months following such termination
and then allow the Executive to assume (without any continuing obligations
under the lease, if any, on the part of the
8
Company) the Company's rights and obligations to lease or purchase such
automobile (to the extent any lease is so assumable) or to purchase such
automobile at its then book value. To the extent that the Executive is
entitled to receive cash compensation that is (or would be, if any elective
deferral were disregarded) subject to federal income taxation in respect of
any other employment or a consulting position with another company during the
Severance Period, the payments to be made pursuant to this paragraph 8(a)
shall be correspondingly reduced by such cash compensation and, to the
extent that benefits of the kind required by this paragraph 8(a) to be
continued are payable in respect of such other employment or consulting
position, such benefits shall be deemed the primary coverage for purposes
of coordination of benefits and avoiding duplication of benefits. However,
at no time shall such benefits of a kind described herein, be less than
those required by this paragraph 8(a) or paragraphs 4(c) and 4(d).
(b) If the Executive's employment hereunder terminates because of a
Termination for Cause, earned but unpaid Base Salary shall be payable on a
pro-rated basis for the year in which such termination occurs and earned
but unpaid incentive awards for any prior years shall be payable in full,
but no other payments shall be made, or benefits provided, by the
Company.
(c) Upon any termination of the Executive's employment other than
because of death or disability, the Period of Employment and the Company's
obligation to make payments under paragraph 4 above shall cease as of the
date of termination except to the extent expressly provided in paragraph 8.
(d) As used in this Agreement:
1. "Termination for Cause" means a termination of
the Executive's employment by the Company, by written notice to the
Executive, specifying the event relied upon for such termination, because
of the Executive's serious, willful misconduct in respect of his duties
under this Agreement, including, without limitation, conviction of a
felony or for perpetration of a common law fraud which has resulted in
material economic damage to the Company or any of its subsidiaries or
affiliates.
9
2. "Constructive Discharge" means a termination of the
Executive's employment by the Executive because of (A) a failure of the
Company to fulfill its obligations under this Agreement in any material
respect, including any failure to elect or reelect or to appoint or
reappoint the Executive to the offices of Chairman of the Company and its
Chief Executive Officer or as a member of the Board or other material
change by the Company in the functions, duties, or responsibilities of
the Executive's position with the Company which would reduce the ranking
or level, dignity, responsibility, importance, or scope of such position,
or (B) any assignment or reassignment by the Company of the Executive to
a place of employment other than the Company's headquarters, (which shall
be located in New York, New York, or other location of the Executive's
choosing). A Constructive Discharge shall apply to any case in which the
Company shall have failed to remedy within 30 days from delivery to the
Company of a written demand by the Executive that it do so, which demand
shall specify the circumstances being relied upon for termination pursuant
to this paragraph 8(d).
3. "Without Cause Termination" means a termination of
the Executive's employment by the Company other than because of disability
or expiration of the Period of Employment and other than a Termination for
Cause. The exercise by the Company or the Executive, as the case may be of
a right to terminate the Executive's employment under this paragraph 8(d)
shall not abrogate the rights and remedies of the terminating party in
respect of the circumstances giving rise to such termination.
9. Other Duties of Executive During and After Period of Employment.
(a) The Executive shall, upon reasonable notice, during or after the
Period of Employment, furnish such information as may be in his possession
to, and cooperate with, the Company, as the Company may reasonably request in
connection with the analysis, negotiation, and settlement of any pending
claims and any litigation in which the Company or any of its subsidiaries or
affiliates, is, or may become, a party.
10
(b) The Executive recognizes and acknowledges that all information
pertaining to the affairs, business, or clients of the Company or any of its
subsidiaries or affiliates, as such information may exist from time to time,
is confidential information and is a unique and valuable asset of the
Company, access to and knowledge of which are essential to the performance
of the Executive's duties under this Agreement. The Executive shall not,
during the Period of Employment or thereafter, except to the extent
reasonably necessary in the performance of his duties under this Agreement,
divulge to any person, firm, association, corporation or governmental agency,
any information concerning the affairs, business, clients, or customers of
the Company or any of its subsidiaries or affiliates (except such information
as it is required by law to be divulged to a government agency), or make use
of any such information for his own purposes or for the benefit of any person,
firm, association or corporation (except the Company or its subsidiaries or
affiliates) and shall use his best efforts to prevent the disclosure of
any such information by others. All records, memoranda, letters, books,
papers, reports, accountings, experience or other data, and other records
and documents relating to the business of the Company or any of its
subsidiaries or affiliates, whether made by the Executive or otherwise
coming into his possession, are confidential information and are, and shall
be, and shall remain the property of the Company.
(c) During the Period of Employment and for a one year period
thereafter in the event of a Termination for Cause, a termination of the
Executive's employment by the Executive during the Period of Employment
that is not a Constructive Discharge, or the disability of the Executive,
the Executive shall not:
Make any statement or perform any act intended to
advance an interest of any existing or prospective competitor of the
Company or any of its subsidiaries or affiliates in any way that will
injure an interest of the Company or any of its subsidiaries or affiliates
in its relationship and dealings with existing or potential clients,
customers or brokers or to do any act that is disloyal to the Company or
inconsistent with the Company's interests or in violation of any provision
of this Agreement.
11
(d) The Company's obligation to make payments under paragraph
4 shall cease upon any violation of the preceding provisions of this
paragraph 9 which is not inadvertent and which has resulted in material
economic damage to the Company or any of its subsidiaries.
10. Retirement Benefits. 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.
11. Indemnification, Litigation.
(a) In the event of any litigation or other proceeding
between the Company and the Executive with respect to the subject matter
of this Agreement and the enforcement of rights hereunder, the Company
shall reimburse the Executive for all costs and expenses relating to such
litigation or other proceeding, including reasonable attorneys' fees and
expenses, provided that such litigation or proceeding results in any:
(1) Settlement requiring the Company to make a payment to the
Executive; or
(2) Judgment, order, or award in favor of the Executive,
regardless of whether such judgment, order, or award is subsequently
reversed on appeal or in a collateral proceeding.
(b) In no event shall the Executive be required to reimburse the
Company for any of the costs and expenses relating to such litigation or
other proceeding.
12. Withholding Taxes. The Company may directly or indirectly withhold
from any payments made under this Agreement all federal, state, city, or
12
other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
13. Effect of Prior Agreements. This Agreement between the Company and the
Executive contains the entire understanding between the Company and the
Executive with respect to the subject matter hereof and supersedes any prior
employment agreement (including the "Prior Agreement") between the Company
or any predecessor of the Company and the Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided and not expressly
provided in this Agreement.
14. Consolidation, Merger, or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertakings of the
Company hereunder. Upon such a consolidation, merger, or transfer of assets
and assumption, the term "Company" as used herein shall mean such other
corporation and this Agreement shall continue in full force and effect.
15. Notices. All notice, requests, demands, and other communications
required or permitted hereunder shall be given in writing and shall be
deemed to have been duly given if hand delivered or mailed, postage prepaid
by same day or overnight mail as follows:
(a) To the Company: Harris & Harris Group, Inc.
One Rockefeller Plaza, Suite 1430
New York, NY 10020
Attn.: Secretary
(b) To the Executive: Charles E. Harris
641 Fifth Avenue, #40D
New York, NY 10022
or to such other address as either party shall have previously specified in
writing to the other.
13
16. No Attachment. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation
or to execution, attachment, levy, or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void, and of no effect. But nothing in this
paragraph 16 shall preclude the executors, administrators, or other legal
representatives of the Executive from assigning any rights hereunder to the
person or persons entitled thereto.
17. Binding Agreement. This Agreement shall benefit and bind (a) the
Executive, his heirs, beneficiaries, and personal representatives, and (b)
the Company and its successors and assigns.
18. Severability. If any provision of this Agreement shall be held
or deemed to be invalid, inoperative or unenforceable in any jurisdiction
or jurisdictions, because of conflicts with any constitution, statute, rule
or public policy or for any other reason, such circumstance shall not have
the effect of rendering the provision in question unenforceable in any other
jurisdiction or in any other case of circumstance or of rendering any other
provisions herein contained unenforceable to the extent that such other
provisions are not themselves actually in conflict with such constitution,
statute or rule or public policy, but this Agreement shall be reformed and
construed in any such jurisdiction or case as if such invalid, inoperative,
or unenforceable provision had never been contained herein and such
provision reformed so that it would be enforceable to the maximum extent
permitted in such jurisdiction or in such case.
19. Modification and Waiver. This Agreement may not be modified or amended
except by an instrument in writing signed by the parties hereto. No terms
or condition of the Agreement shall be deemed to have been waived, nor shall
there be any estoppel against the enforcement of any provision of this
Agreement except by written instrument signed by the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing
waiver unless specifically stated therein, and each such waiver shall operate
only as to the specific term or condition waived and shall not constitute a
waiver of such term or condition for the future as to any act other than that
specifically waived.
14
20. Headings of No Effect. The paragraph headings contained in this
Agreement are included solely for convenience of reference and shall not in
any way affect the meaning or interpretation of any of the provisions of
this Agreement.
21. Governing Law. The laws of New York shall govern the validity,
construction, and interpretation of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and its seal to be affixed hereunto by its duly authorized officers, and
the Executive has signed and delivered this Agreement, all as of January 1,
1998, but actually on the dates set forth below.
HARRIS & HARRIS GROUP, INC.
By:
Title:
Date:
ATTEST:
Secretary
Date:
Charles E. Harris
Date:
15
SEVERANCE COMPENSATION AGREEMENT
THIS AGREEMENT, made effective as of August 15, 1990 by and between
Harris & Harris Group, Inc., a New York corporation (the "Company"), and
Charles E. Harris (the "Executive").
WHEREAS, the Company and the Executive are parties to an employment
agreement effective as of August 15, 1990 (the "Employment Agreement")
providing for the employment of the Executive by the Company for a period
and upon the other terms and conditions therein stated; and
WHEREAS, the Company considers the maintenance of a sound and vital
senior management to be essential to protecting and enhancing the interests
of the Company and its shareholders; and
WHEREAS, the Company recognizes that, as is the case with many
publicly owned corporations, the possibility of a change in control of the
Company may arise and that such possibility, and the uncertainty and
questions which it may raise among senior management, may result in the
departure or distraction of senior management personnel to the detriment of
the Company and its shareholders; and
WHEREAS, accordingly the Company has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's senior management to their assigned
duties and long-range responsibilities without distraction in circumstances
arising from the possibility of a change in control of the Company; and
WHEREAS, the Company believes it important and in the best interests of
the Company and its shareholders, should the Company face the possibility of
a change in control, that the senior management of the Company be able to
assess and advise the Board of Directors of the Company whether such a
proposed change in control would be in the best interests of the Company and
its shareholders and to take such other action regarding such a proposal as
the Board of Directors might determine to be appropriate, without senior
management being influenced by the uncertainties of their own employment
situations; and
1
WHEREAS, in order to induce the Executive to remain in the employ of
the Company in the event of any actual or threatened change in control of
the Company, the Company has determined to set forth the severance benefits
which the Company will provide to the Executive under the circumstances set
forth below;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Definitions.
(a) All capitalized terms not otherwise defined herein shall have
the meanings ascribed thereto in the Employment Agreement.
(b) "Change in Control" shall mean the occurrence of any of the
following events:
(i) any person, within the meaning of Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
group of persons, within the meaning of Exchange Act Rule 13d-5, other
than the Company or any of its subsidiaries, becomes a beneficial owner,
directly or indirectly, of thirty percent (30%) or more in voting power or
amount of the Company's then outstanding equity securities, without the
approval of not less than two-thirds of the Board in existence prior to
such ownership;
(ii) individuals who constitute the Board on any day (the
"Incumbent Board") cease for any reason other than their deaths or
resignations to constitute at least a majority of the Board on the
following day (which day shall be considered the day upon which occurs the
Change in Control), provided that any individual becoming a director
subsequent to the date of this Agreement whose election or nomination for
election by the Company's shareholders was approved by a vote of not less
than three-quarters of the Incumbent Board or not less than two-thirds of
the then incumbent Nominating Committee of the Board shall be for purposes
of this subsection considered as though such person were a member of the
Incumbent Board;
2
(iii) The necessary majority of the Company's
shareholders approve any reorganization (other than a mere change in
identity, form or place of organization of the Company, however effected),
merger or consolidation of the Company, or any other transaction with one
or more business entities or persons as a result of which the stock of the
Company is exchanged for or converted into cash or property or securities
not issued by the Company, or as a result of which there is a change in
ownership of existing equity securities of the Company or issuance of new
equity securities of the Company (or the right or option to acquire such
equity securities) which equals or exceeds thirty percent (30%) in voting
power or amount of the equity securities of the Company outstanding upon
completion of such transaction, unless such reorganization, merger
consolidation or other transaction shall have been affirmatively recommended
to the Company's shareholders by not less than two-thirds of the Incumbent
Board;
(iv) the necessary majority of the Company's shareholders
approve the sale of (or agreement to sell or grant of a right or option
to purchase as to) all or substantially all of the assets of the Company
to any person or business entity, unless such sale or other transaction
shall have been affirmatively recommended to the Company's shareholders by
not less than two-thirds of the Board;
(v) the dissolution or liquidation of the Company;
(vi) the occurrence of any circumstance having the effect
that persons who were nominated for election as directors by the Board
shall fail to become directors of the Company other than because of their
death or withdrawal;
(vii) a change in control of a nature that would be required to
be reported in response to Item 1(a) of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act, unless such change in control is approved by not less than
two-thirds of the Board in existence prior to such change in control;
(viii) such other events as the Board may designate.
3
2. Termination of Employment
If the Executive is an employee of the Company on the day before a
Change in Control and the Executive's employment with the Company is
terminated (i) by the Executive or (ii) by the Company as a Without Cause
Termination, in either case within one year from the date of such Change in
Control, the Company hereby agrees to provide to the Executive the following
benefits:
(a) a lump sum payment, payable in cash, cashier's check or
by wire, within ten (10) business days from the date of such termination of
employment equal to 2.99 times the Executive's average base salary,
incentive compensation, bonus and any other amounts which may be included
in the Executive's income as compensation from the Company) over the most
recent five (5) years (or such lesser time as the Executive was employed by
the Company as an employee) preceding the year in which occurred the Change
in Control;
(b) a lump sum payment, payable in cash, cashier's check or
by wire, within ten (10) business days from the date of such termination
of employment in an amount equal to such termination of employment in an
amount equal to any amounts forfeited, on account of such termination of
employment, under any employee pension benefit plan, as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained or contributed to by the Company and participated
in by the Executive at any time between the day before the Change in Control
and the day of the Executive's termination of employment;
(c) to the extent not otherwise payable to the Executive,
continued coverage of the Executive and the Executive's beneficiaries for
a period extending through the latter of the date the Executive commences
any subsequent full-time employment for pay and the date that is three (3)
years after the Executive's termination of employment, under all employee
welfare benefit plans, as defined in Section 3(1) of ERISA, maintained or
contributed to by the Company and covering the Executive at any time between
the day before the Change in Control and the day of the Executive's
4
termination of employment; such continuation coverage shall (i) be provided
at the expense of the Company to the extent so provided prior to the
termination of employment, (ii) as of the time the coverage is being
provided be identical to the highest level of coverage provided under each
such plan to the Executive and the Executive's beneficiaries at any time
between the day before the Change in Control and the day of the Executive's
termination of employment, and (iii) not be conditioned upon, or discriminate
on the basis or lack of, evidence of insurability; and
(d) in the event of the termination of employment by the
Company that is a Without Cause Termination or a Constructive Discharge,
all benefits provided for by the Employment Agreement under such
circumstances, reduced by all benefits provided pursuant to (a) through
(c) above.
3. No Obligation to Mitigate Damages; No Effect on Other
Contractual Rights.
(a) The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment provided
for under this Agreement be reduced by any compensation earned by the
Executive as the result of employment by another employer after the date of
termination of his employment with the Company or otherwise.
(b) Except as expressly provided in Section 2(d), the
provisions of this Agreement, and any payment provided for hereunder, shall
not reduce any amounts otherwise payable, supersede, affect or in any way
diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any applicable law or any
pension benefit or welfare benefit plan, employment agreement or other
contract, plan or arrangement.
4. Limitation on Benefits; Attorney's Fees; Interest
(a) Notwithstanding any provisions to the contrary in this
Agreement, if any part of the payments provided for under Section 2
of this Agreement
5
(the "Agreement Payments") would if paid constitute a "parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), then the Agreement Payments shall be payable to the Executive only
if (i) the sum of the value of the Agreement Payments and of the value of
all other to or for the benefit of the Executive that constitute "parachute
payments" less the amount of any excise taxes payable under Code Section
4999, and any similar or comparable taxes in connection with such sum, is
greater than (ii) the greatest value of payments in the nature of compensation
contingent upon a change in control that could be paid at such time to or for
the benefit of the Executive and not constitute a "parachute payment" (the
"Alternative Payment"); otherwise, only the Alternative Payment shall be
payable to the Executive. For purposes of this Section 4(a), the value of
payments shall be determined in accordance with Code Section 280G(d)(4)
and any regulations issued thereunder.
(b) The determination of the operation of Section 4(a) and of any
reduction in benefits necessary thereunder shall be made by the Executive upon
reasonable advice of the Executive's counsel or accountant, except that,
should the Internal Revenue Service ever determine to the Executive's
satisfaction that any of the payments provided under this Agreement
constitute a "parachute payment," the Executive shall repay to the Company
an amount sufficient at that time to prevent any of such payments from
constituting a "parachute payment". In any case in which the level of
benefits provided for under this Agreement is reduced or not provided to
the Executive on account of the operation of Section 4(a), the Executive may
select those benefits which are to be reduced or not provided.
(c) If the Company shall fail to pay or provide at any time any
benefits under this Agreement or under any benefit plan, agreement or
arrangement established, agreed to or contracted for by the Company for
the benefit of or with the Executive, the Executive shall be entitled to
consult with independent counsel, and the Company shall pay the reasonable
fees and expenses of such counsel for the Executive in advising him in
connection therewith or in bringing any proceedings, or in defending any
proceedings, involving the Executive's rights under this Agreement, such
right to reimbursement to be immediate upon the presentment by the
Executive of written
6
billings of such reasonable fees and expenses. The Executive shall be
entitled to interest at the "prime rate" established from time to time by
the Bank of New York for any payments of such expenses, or any other
payments following the Executive's termination of employment, that are
overdue.
(d) The Company shall have the right to withhold from all
payments due hereunder all income and excise taxes required to be withheld
by applicable law and regulations.
5. Governing Law
This agreement shall be governed by and construed in accordance with
the laws of the State of New York.
6. Miscellaneous
(a) If any rights pursuant to Section 2 above have accrued to the
Executive prior to the Executive's death or a judicial determination of the
Executive's incompetence, but have not been fully satisfied hereunder at the
time of such event, such rights shall survive and shall inure to the benefit
of the Executive's heirs, beneficiaries and legal representative. Otherwise,
this Agreement shall terminate upon the Executive's death or a judicial
determination of the Executive's incompetence.
(b) Nothing herein (other than as provided in Section 2(d)) shall be
deemed to affect or alter the Executive's current employment status and the
status of the Employment Agreement.
(c) In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected
thereby and shall remain in full force and effect to the fullest extent
permitted by law.
7
7. Notice.
All notices or communications hereunder shall be given in accordance
with the requirements for notices contained in the Employment Agreement.
8. Amendment; Termination; Waiver.
No provisions of this Agreement may be amended, modified or waived and
this Agreement may not be terminated unless such is authorized by a majority
of the Board and agreed to in writing by the Executive; provided that if the
term of the Employment Agreement, as such may be extended, expires, this
Agreement shall simultaneously be terminated. No waiver by either party
hereto of any breach by the other party hereto of any condition or any
provision of this Agreement to be performed by such other party shall be
deemed a waiver of a subsequent breach of such condition or provision or
waiver of a similar or dissimilar condition or provision at the same time
or any subsequent time.
9. Successors.
(a) Except as otherwise provided herein, the Company's rights,
duties and obligations under this Agreement shall be binding upon and
inure to the benefit of the Company and any successor of the Company,
including, without limitation, any business entity or business entities
acquiring directly or indirectly all or substantially all of the assets
or shares of Stock whether by merger, consolidation, sale or otherwise --
and such successor shall thereafter be deemed the "Company" for all purposes
of this Agreement -- but such rights, duties and obligations shall not
otherwise be assignable by the Company.
(b) Within thirty (30) days following a Change in Control, the
Company (including any successor of the Company) shall in writing affirm
to the Executive its obligations under this Agreement, and any failure by
the Company to so affirm this Agreement shall, for purposes of this
Agreement only, be considered a Without Cause Termination.
8
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed and its seal to be affixed hereunto by its duly authorized
officers, and the Executive has signed and delivered this Agreement, all
as of August 15, 1990, but actually on the dates set forth below.
HARRIS & HARRIS GROUP, INC.
By:
Title:
Date:
ATTEST:
Secretary
Date:
Charles E. Harris
Executive
Date:
9
HARRIS & HARRIS GROUP, INC.
EMPLOYEE PROFIT SHARING PLAN
Purpose of Plan
The purpose of this Plan is to provide a special incentive for
designated employees ("Participants") of Harris & Harris Group, Inc. (the
"Company") to increase the future profits of the Company, by allowing the
Participants to share in the historical after-tax profits of the Company as
set forth herein.
SECTION 1.
Definitions
As used herein, unless otherwise required by the context, the
following terms shall have these meanings:
"Award Percentage" shall mean, with respect to Charles E. Harris,
13.790%; with respect to Mel P. Melsheimer, 4.233%; with respect to Rachel M.
Pernia, 1.524%; with respect to Julie A. Kim, 0.381% and with respect to
Jacqueline M. Matthews 0.072%.
"Award" shall mean an award made or due to a Participant
pursuant to the provisions of the Plan.
"Capped Qualifying Income" for a Capped Participant for a
particular year shall mean the net income after taxes of the Company as
reflected in the tax returns of the Company for such year less the modified
nonqualifying gain, if any. Modified nonqualifying gain is intended to
reduce Qualifying Income by the portion of net after-tax realized gain
allocable to increases in value after the time such person becomes a Capped
Participant as well as by the amount of nonqualifying gain, and shall be so
interpreted. The modified nonqualifying gain shall be the excess of (1) the
sum, on a first-in first-out basis, of (a) the gain (net of costs of
disposition) on the sale or other disposition of all or any portion of any
portfolio investment position held by the Company on September 30, 1997 plus
(b) such net gain with respect to all or any portion of any portfolio
1
investment position acquired by the Company after September 30, 1997 and
held on the date such person becomes a Capped Participant plus (c) such net
gain with respect to all or any portion of any portfolio investment position
acquired by the Company after the date such person becomes a Capped
Participant less (2) the portion of the gain on assets in item 1(a) above
attributable to sale proceeds in excess of the Fair Market Value of such
position or portion thereof as of September 30, 1997 and not in excess of
such Fair Market Value as of the end of the quarter ending on or prior the
date such person became a Capped Participant and the portion of the gain on
assets in item 1(b) above attributable to sale proceeds not in excess of the
Fair Market Value of such position or portion thereof as of the end of the
quarter ending on or prior to the date such person became a Capped
Participant, less (3)(a) the amount of taxes attributable to the portion of
the gain on assets in item 1(a) above attributable to sale proceeds not in
excess of the Fair Market Value of such position or portion thereof as of
September 30, 1997 and to the portion of such gain attributable to sale
proceeds in excess of the Fair Market Value as of the end of the quarter
ending on or prior to the date such person became a Capped Participant, (b)
the amount of taxes attributable to the portion of the gain on assets in item
1(b) above attributable to sale proceeds in excess of the Fair Market Value as
of the end of the quarter ending on or prior to the date such person became a
Capped Participant and (c) the amount of taxes attributable to the gain on
assets in item 1(c) above, less (4) an amount equal to the expenses of the
Company (other than taxes and expenses of sale) multiplied by a fraction the
numerator of which is the amount calculated pursuant to items (1) through (2)
above and the denominator of which is the aggregate gross income of the
Company for such year before expenses and taxes of any sort.
"Capped Participant" shall mean a person whose full
participation in Qualifying Income has been terminated pursuant to this Plan.
"Company" shall mean Harris & Harris Group, Inc., a New York
corporation.
"Fair Market Value" shall mean, with respect to any asset of
the Company, the value thereof most recently determined by or under direction of
the Board.
"Board" or "Board of Directors" shall mean the board of
directors of the Company.
"Committee" shall mean the Compensation Committee of the Board.
All references to the Board contained herein (other than for purposes of the
2
definition of Fair market Value [and for purposes of Section 4 hereof]) shall
be deemed to refer to such Committee, for so long as the Board delegates the
administration of the Plan to the Committee. (1)
"Full Participant" shall mean, until such person shall become a
Capped Participant, each of the following individuals: Charles E. Harris, Mel
P. Melsheimer, Rachel M. Pernia, Julie A. Kim and Jacqueline M. Matthews.
"Participant" shall mean each Full Participant, each Capped
Participant and any additional person named by the Board to be a participant.
"Plan" shall mean the Harris & Harris Group, Inc. Employee
Profit Sharing Plan, as amended from time to time.
"Qualifying Income" shall mean the net income after taxes of the
Company for a particular year as reflected in the tax returns of the Company
for such year less the nonqualifying gain, if any. Nonqualifying gain is
intended to reduce Qualifying Income by the portion of net after-tax realized
gain allocable to value as of September 30, 1997, and shall be so interpreted.
The nonqualifying gain shall be the excess of (1) the gain (net of the costs
of disposition) on the sale or other disposition, on a first-in first-out
basis, of all or any portion of any portfolio investment position held by the
Company on September 30, 1997 less (2) the portion of such gain attributable
to sale proceeds in excess of the Fair Market Value of such position or
portion thereof as of September 30, 1997, less (3) the amount of taxes
attributable to the portion of such gain attributable to sale proceeds not in
excess of the Fair Market Value of such position or portion thereof as of
September 30, 1997, less (4) an amount equal to the expenses of the Company
for such year (other than taxes and expenses of sales) multiplied by a
fraction the numerator of which is the amount calculated pursuant to items (1)
through (2) above and the denominator of which is the aggregate gross income
of the Company for such year before expenses and taxes of any sort.
[FN]
(1) We will need to make the Committee good for Code Section 162(m) purposes
and obtain shareholder approval, if the Company is publicly traded and
if we wish Awards to qualify for the 162(m) exemption.
</FN>
3
SECTION 2.
Amount of Award; Payment of Award
As soon as practicable following the end of each Plan Year, the
Board shall determine whether, and if so, how much, Qualifying Income exists
with respect to such Plan Year and whether, and if so, how much, Capped
Qualifying Income exists with respect to any Capped Participant. The Board
shall make a provisional determination, based on accruals provided by
management, within 45 days after the end of each Plan Year.
Not later than 60 days after the end of each Plan Year the
Company shall pay (1) to each Full Participant an Award in an amount equal
to the product of (a) 90% of the estimated Qualifying Income for such Plan
Year, multiplied by (b) such Full Participant's Award Percentage and (2) to
each Capped Participant an Award in an amount equal to the product of (a) 90% of
the estimated Capped Qualifying Income for such Plan Year, multiplied by (b)
such Capped Participant's Award Percentage. Not later than 45 days after
filing of the Company's federal tax returns the Board shall finalize the
foregoing determinations and pay any excess to the appropriate Participants.
Any portion of the maximum amount authorized to be paid under this Plan that
is not required for the foregoing payments may be paid to any or all of the
Participants in such manner as the Board determines. Upon the termination of
employment of any Full Participant for any reason other than termination by
the Company for cause such Full Participant shall become a Capped Participant.
If the Board terminates the employment of any Participant for cause, the
participation of such former employee shall terminate and any Awards not yet
earned shall automatically be forfeited.
Notwithstanding any other provision of the Plan, in no event
shall the aggregate amount of all Awards payable for any Plan Year be
greater than twenty percent (20%) of the Company's Qualifying Income. In
the event that any portion of any Award may not be paid pursuant to the
limitation set forth in the preceding sentence (a "prohibited payment"),
each Participant's Award for such Plan Year shall be reduced, pro-rata, by
the minimum amount necessary to allow the aggregate Awards for such fiscal
year not to constitute a prohibited payment. If such a reduction is
necessary, each Participant shall unconditionally forfeit the amount of any
reduction made pursuant to this paragraph.
4
SECTION 3.
Administration
The Plan shall be administered by the Compensation Committee
of the Board, with decisions taken in accordance with its normal procedures.
Members of such Committee shall not be liable for any acts or omissions to
act in the administration of the Plan.
A secretary selected by the Committee shall keep full and
accurate minutes of all meetings and records of the actions of the Committee,
and these minutes and records shall be at all times open to inspection by the
members of the Board of Directors. The Secretary shall periodically transmit
to the Board certified copies of any statements or schedules prepared in
connection with the administration of the Plan.
SECTION 4.
Amendment, Termination or Modification of the Plan
The Plan may be modified or amended from time to time or
terminated by the Board and the Board may name additional persons to
participate in the Plan; provided, however, that no such amendment,
modification or termination of the Plan or naming of any additional
participant shall adversely affect any Participant that has not consented
to, such amendment, modification or termination.
Section 5.
General Provisions.
Compliance with Legal Requirements. The Plan and the granting
and payment of Awards, and the other obligations of the Company under the
Plan shall be subject to all applicable federal and state laws, rules and
regulations, and to such approvals by any regulatory or governmental agency
as may be required.
Nontransferability. Awards not yet earned shall not be
transferable in any circumstances. Awards earned but not yet paid shall not
be transferable by a Participant except by will or the laws of descent and
distribution.
No Right To Continued Employment. Nothing in the Plan or in any
Award granted or other agreement entered into pursuant hereto shall confer
upon any Participant the right to continue in the employ of the Company or to
be entitled to any remuneration or benefits not set forth in the Plan or other
agreement or to interfere with or limit in any way the right of the Company to
terminate such Participant's employment.
5
Withholding Taxes. Where a Participant or other person is
entitled to receive a cash payment pursuant to an Award hereunder, the Company
shall have the right to require the Participant or such other person to pay to
the Company the amount of any taxes that the Company may be required to
withhold before delivery to such Participant or other person of such payment.
Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company.
Governing Law. The Plan and all determinations made and actions
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
Effective Date. The Plan shall be effective on January 1, 1998;
provided that all options theretofore granted by the Company shall have been
exercised or cancelled.
Beneficiary. A Participant may file with the Committee a
written designation of a beneficiary on such form as may be prescribed by
the Board and may, from time to time, amend or revoke such designation. If
no designated beneficiary survives the Participant, the executor or
administrator of the Participant's estate shall be deemed to be the
grantee's beneficiary.
6
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000893739
<NAME> HARRIS & HARRIS GROUP, INC.
<S> <C>
<PERIOD TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 30,500,498
<INVESTMENTS-AT-VALUE> 38,659,230
<RECEIVABLES> 111,106
<ASSETS-OTHER> 272,734
<OTHER-ITEMS-ASSETS> 85,126
<TOTAL-ASSETS> 39,273,784
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<OTHER-ITEMS-LIABILITIES> 5,618,850
<TOTAL-LIABILITIES> 5,618,650
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,178,979
<SHARES-COMMON-STOCK> 10,692,971
<SHARES-COMMON-PRIOR> 10,442,682
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 12,028,191
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,340,834
<NET-ASSETS> 33,654,934
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 490,807
<OTHER-INCOME> 123,239
<EXPENSES-NET> 3,045,290
<NET-INVESTMENT-INCOME> (1,498,141)
<REALIZED-GAINS-CURRENT> (2,079,677)
<APPREC-INCREASE-CURRENT> 969,243
<NET-CHANGE-FROM-OPS> (2,608,575)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (2,608,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 34,793,768
<PER-SHARE-NAV-BEGIN> 3.44
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 3.15
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 10-K of our report dated February 10, 1998. It
should be noted that we have not audited any financial statements of the
company subsequent to December 31, 1997 or performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen LLP
------------------------
New York, New York
March 30, 1997
