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, 19961997
HARRIS & HARRIS GROUP, INC.
---------------------------------------------------------------------------------------------------
(Exact nameName of registrant specifiedRegistrant Specified in its charter)Its Charter)
New York 13-3119827
- ------------------------- ----------------------------------------------------------- ------------------------------------
(State or other jurisdictionOther Jurisdiction of (I.R.S. Employer Identification No.)
incorporationIncorporation or organization)Organization)
One Rockefeller Plaza, Rockefeller Center, New York, New York 10020
- ------------------------------------------------------------- ------------------
(Address of principal executive offices)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__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 14, 199713, 1998 was $37,414,515$21,434,648 based on the last sale price
as quoted by NASDAQNasdaq National Market on such date (only officers and directors
are considered affiliates for this calculation).
As of March 14, 1997,13, 1998, the registrant has 10,442,682had 10,692,971 shares of common
stock, par value $ .01$.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 MattersMatters. . . . . . . . . . . 7
Item 6. Selected Financial Data . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . 9
Item 8. Financial Statements and Supplementary Data 13
Item 9. Disagreements on Accounting and
Financial Disclosure. . . . . . . . . 13
PART III
Item 10. Directors and Executive Officers of the Company 14
Item 11. Executive Compensation . . . . . . . . 18
Item 12. Security Ownership of Certain
Beneficial Owners and Management. . . 20
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K . . . . . . . . . 21
Signatures.. . . . . 9
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . 22
Exhibit Index17
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 . . . . . . . . . . . . . . . . . 24. . . . 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 buy outbuyout 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 washad a class of
securities registered, and filed under the reporting requirements, of the
Securities and 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 business development companyBDC subject to the provisionprovisions of Sections 55 through 65 of the
1940 Act, as
amended by the Small Business Incentive Act of 1980.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 venturejoint-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 beenin the past and will continue in the future to beseek investments
which offer the potential for significantly higher returns but which involve
a significantly greater degree of risk seeking rather than risk
averse in its approach to its venture capital and other investments.
1
The Company may control aan 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's form of investment may include:Company invests principally in securities issued by companies
involved in: 1) funding of research and development in the development of a technology; 2)technology and/or obtaining
licensing rights to intellectual property or patents; 3)2) outright
acquisition of intellectual property or patents; and 4)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, fee income or some other form of remuneration. At some point during
the commercialization of a technology, the Company's investment may be
transformed into ownership of securities of a development stage or start-up
company as discussed above. Investing in intellectual property is highly
risky.
2
Illiquidity of Investments
Many of the Company's investments consist of securities acquired directly
from the issuer in private transactions. They may be subject to restrictions
on resale or otherwise be illiquid. The Company does not anticipate that
there will be any established trading market for such securities.
Additionally, many of the securities that the Company may invest in will not
be eligible for sale to the public without registration under the Securities
Act of 1933, as amended, which could prevent or delay any sale by the Company
of such investments or reduce the amount of proceeds that might otherwise be
realized therefrom. Restricted securities generally sell at a price lower
than similar securities not subject to restrictions on resale. Further,
even if a portfolio company or investee registers its securities and becomes
a reporting company under the Securities and Exchange1934 Act, of 1934, the Company may be considered an
insider by virtue of its board representation and would be restricted in
sales of such company's securities.
Managerial Assistance
The Company believes that providinggenerally is required by the 1940 Act to make significant
managerial assistance available with respect to its
investees is critical to its business development activities.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 is required by
the 1940 Act to make significantbelieves that providing managerial assistance
available at least
with respect to investee companies that the Company treats as qualifying
assets for purposes of the 70 percent test (see "Regulation").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 introducesmay 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.
3
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 on a pro forma basis could
acquireacquires a substantial
proportion of a more mature investee company's equity, the Company remainsmay remain
active in and will frequentlymay initiate planning of major transactions by the investee.
The Company's goal isCompany 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) in anto 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 modifiedadded the provisions
of the 1940 Act that are applicable to BDCs, which are a special type of closed-end
investment BDC.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 as modified by the Small Business Investment
Incentive Act of 1980,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." More specifically,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 or
have filed a registration statement with the SEC pursuant
to Section 12 of the Exchange Act of 1934;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) extendmake available significant
managerial assistance to such portfolio companies; (v) have a majority of
"disinterested" directors (as defined in the 1940 Act) and (vi) file (or, under certain
circumstances, intend to file) a
proper notice of election with the SEC.
4
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 registered on an exchangewhich "margin" credit can be extended; or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled
by a BDC and has an
affiliate of a BDC on its board of directors or (iii) meets such other
criteria as may be established by the SEC. Control(control under the 1940 Act is presumed to exist where a BDC owns
25 percent of the outstanding voting securities of the investee.investee).
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in certain types of companies, such as brokerage firms,
insurance companies, investment banking firms and investment companies.
Moreover, the 1940 Act limits the type of certain assets necessary for its
operations (such as office furniture, equipment and facilities) if,requires that at the
time of acquisition, less thanleast 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 such companythe Company acquired their securities; (ii) securities of
bankrupt or insolvent companies that were eligible at the time of such company'sthe
Company's initial investment in those companies; (iii) securities received
in exchange for or distributed in or with respect to any of the foregoingforegoing;
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 forfrom whom, securities can be purchased in order for
the securities to be considered qualifying assets.
Such restrictions include limiting
purchases to transactions not involving a public offering and acquiring
securities from either the portfolio company or their officers, directors or
affiliates.5
The Company is permitted by the 1940 Act, under specified conditions, to
issue multiple classes of senior debt and a single class of preferred stock
if its asset coverage, as defined in the 1940 Act, is at least 200 percent
after the issuance of the debt or the preferred stock (i.e., such senior
securities may not be in excess of 50 percent of its net assets). If
the value of the Company's assets, as defined, were to increase through the
issuance of additional capital stock or otherwise, the Company would be
permitted under the 1940 Act to issue senior securities.
The Company may sell its securities at a price that is below the
prevailing net asset value per share only after a majority of its
disinterested directors has determined that such sale would be in the best
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.
5
Most of the transactions involving the Company and its affiliates (as
well as affiliates of those affiliates) which were prohibited without the
prior approval of the Commission under the 1940 Act prior to its amendment by
the Small Business Investment Incentive Act are now permissible upon the
prior approval of a majority of the Company's independent directors and a
majority of the directors having no financial interest in the transactions.
However, certainCertain transactions involving certain closely affiliatedrelated persons of the
Company, including its directors, officers and employees may still
require the
prior approval of the Commission. In general, (i) any person who
owns, controls or holds power to vote, more than 5 percent ofSEC. However, the Company's
outstanding Common Stock; (ii) any director, executive officer or general
partner of that person and (iii) any person who directly or indirectly
controls, is controlled by, or is under common control with, that person,
must obtain the prior approval of a majority of the Company's independent
directors and, in some situations, the prior approval of the Commission,
before engaging in certain transactions involving the Company or any company
controlled by the Company. The 1940 Act generallyordinarily does not
restrict transactions between the Company and its portfolioinvestee companies.
WhileOn September 25, 1997, the Company's Board of Directors approved a
BDC
may changeproposal to seek qualification of the nature of its business so as to cease being a BDC (andCompany, beginning in connection therewith withdraw its election to be treated1998, as a
BDC) only if
authorized to do so by a majority vote (as defined inRIC under Sub-Chapter M of the 1940 Act)Code. See "Item 7. Management's Discussion
and Analysis of its
outstanding voting securities, stockholder approvalFinancial Condition and Results of changes in other
fundamental investment policies of a BDC is not required (in contrast to the
general 1940 Act requirement, which requires stockholder approval for a
change in any fundamental investment policy).Operations -- Recent
Developments."
Employees
The Company is entitled to
change its diversification status without stockholder approval.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 19961997 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 22W,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 NASDAQNasdaq National Market System under
the NASDAQ symbol "HHGP." The following table sets forth the range of the
high and low selling price of the Company's shares during each quarter of
the last two years, as reported by the National Association of Securities
Dealers, Inc. The quarterly stock prices quoted represent interdealer
quotations and do not include markups, markdowns, or commissions.
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 $5.625 $7.875$5.6250 $7.8750
June 30 $5.500 $7.375$5.5000 $7.3750
September 30 $4.000 $5.875$4.0000 $5.8750
December 31 $3.625 $4.875
1995 Quarter Ending Low High
March 31 $4.875 $6.375
June 30 $4.375 $5.125
September 30 $4.625 $5.875
December 31 $4.375 $8.125$3.6250 $4.8750
The Company has not paid dividends since 1991. On February 19, 1991,September 25, 1997,
the Company's Board of Directors suspended
indefinitelyapproved a proposal to seek qualification
of the paymentCompany beginning in 1998 as a RIC under Sub-Chapter M of dividends.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 February 27, 1997,March 13, 1998, there were approximately 180160 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.
7
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.
BALANCE SHEET DATA
Financial Position as of December 31:
1997 1996 1995 1994 1993
1992
Total assets $ 39,273,784 $ 38,555,290 $ 37,524,555 $ 32,044,073 $ 34,534,724
Liabilities $ 29,377,482
Liabilities5,618,850 $ 2,622,687 $ 962,646 $ 733,271 $ 1,785,427
$ 6,724,139
Net asset
value $ 33,654,934 $ 35,932,603 $ 36,561,909 $ 31,310,802 $ 32,749,297
$ 22,653,343
Net asset
value per
share $ 3.15 $ 3.44 $ 3.54 $ 3.43 $ 3.66
$ 2.71
Shares
outstanding 10,692,971 10,442,682 10,333,902 9,136,747 8,944,828 8,350,999
Operating Data for year ended December 31 unless otherwise noted:
3 months ended
December 31,31:
1997 1996 1995 1994 1993
1992
Investment
income $ 614,046 $ 1,013,417 $ 1,109,517 $ 820,276 $ 453,950
$ 167,668
Net operating
loss (1,498,141) (1,291,065) (1,099,409) (2,278,882) (1,614,625) (203,295)
Net realized
(loss) gain
on
investments (2,079,677) (2,465,175) 1,371,349 96,856 23,590,570
(128,332)
Net realized
(loss) income(3,756,240)income(3,577,818) (3,756,240) 271,940 (2,182,026) 21,975,945 (331,627)
Net increase
(decrease)
in unrealized
appreciation
on investments 969,243 2,967,248 158,219 (886,040) (13,083,344) (1,247,191)
Net (decrease)
increase in
net assets
resulting from
operations (2,608,575) (788,992) 430,159 (3,068,066) 8,892,601 (1,578,818)
(Decrease) increase
in net assets
resulting from
operations per
outstanding
share $ (0.24) $ (0.08) $ 0.04 $ (0.34) $ 1.03 $ (0.19)
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 (decrease)
in net assets from operations," which is the sum of three elements. The
first element is "Net operating loss," which is the difference between the
Company's income from interest, dividends, and fees and its operating
expenses, net of applicable income tax provisions (benefits).benefit. The second element is "Net
realized (loss) gain (loss) on investments," which is the difference between the
proceeds received from dispositions of portfolio securities and their stated
cost, net of applicable income tax provisions (benefits). These two elements
are combined in the Company's financial statements and reported as "Net
realized income (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 (loss) on investments" and "Net increase (decrease) in
unrealized appreciation on investments" are directly related. When a
security is sold to realize a (loss) gain, (loss), net unrealized appreciation
(increases) decreases (increases) and net realized gain increases (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, versus $37,524,555 and
$36,561,909 at December 31, 1995.1996. Net asset value per share was $3.15 at December 31, 1997,
versus $3.44 at December 31, 1996,1996. The Company's shares outstanding as of
December 31, 1997 were 10,692,971, versus $3.5410,442,682 at December 31, 1995.1996.
The Company's financial condition is dependent on the success of its
investments. The Company has invested and expects to continue to invest a substantial portion of its assets in
private development stage or start-up companies. These private businesses
tend to be thinly capitalized, unproven, small companies that lack management
depth 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 $39.0$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 before taxes. At
December 31, 1995, 35.5 percent of the Company's $37.5 million in total
assets consisted of investments at fair value in private businesses, of which
net unrealized appreciation was approximately $0.8 million.
9
A summary of the Company's investment portfolio is as follows:
December 31, 19961997 December 31, 19951996
Investments, at cost $ 28,981,093 $ 33,826,696$30,500,498 $28,981,093
Unrealized appreciation 8,158,732 6,667,589
2,102,593
------------ ----------------------- -----------
Investments, at fair value $ 35,648,682 $ 35,929,289
============ ============
The accumulated unrealized appreciation on investments net of deferred taxes
is $4,371,591 at December 31, 1996, versus $1,404,343 at December 31, 1995.
$38,659,230 $35,648,682
=========== ===========
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 financingfinancing; 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,
1996:1997:
New Investments: Amount
---------------- ------MedLogic Global Corporation $ 128,990
-----------
Sub-total $ 128,990
Follow-on Investments:
BioSupplyNet, Inc. $ 575,000
Genomica Corporation 1,000,304200,000
Highline Offshore Advisors, LLP 500,000
MultiTarget, Inc. 60,811
NeuroMetrix, Inc. 210,000
PowerVoice Technologies, Inc. 500,000
PureSpeech, Inc. 999,999
------------97,387
NBX Corporation 1,190,002
-----------
Sub-total $ 3,346,114
Follow-on Investments:
----------------------
nFX Corporation1,987,389
Loans:
BioSupplyNet, Inc. $ 440,000
Micracor, Inc. 103,00050,000
Gel Sciences, Inc. 545,000
------------316,000
Harber Brothers Productions, Inc. 250,000
NeuroMetrix, Inc.* 1,100,000
nFX Corporation 220,000
Purespeech, Inc. 243,980
-----------
Sub-total $ 1,088,0002,179,980
10
Exercise of Warrants Held:
--------------------------NeuroMetrix, Inc. $ 200,000
Princeton Video Image, Inc. 15,075
------------
Sub-total $ 547,500215,075
------------
Total $ 4,981,6144,511,434
============
*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.
Subsequent to December 31, 1996, the Company made follow-on investments
of $850,000 in PowerVoice Technologies, Inc. and $500,000 in Highline
Offshore Advisors, LLC. In addition, the Company signed loan agreements with
two of its investee companies for up to $750,000.
10
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
and $719,293 in 1994.1995. 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 from certain portfolio
companies 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 and
$4,364,8061995. 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 1994.overall expenses as a result of the Company's effort to cut expenses.
The increase from 1995 to 1996 is primarily owingowed to additional consulting
fees incurred in 1996 related to prospective private portfolio investments. Operating expenses in 1994 included sign-up bonuses
totaling $1,000,000 to two executives hired by the Company.
Most of the Company's operating expenses are related to employee and director
compensation, office 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 and $3,544,530 in 1994.1995.
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 1995 and 1994,1995, 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 a net lossMicracor Corporation of $71,396, respectively.$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.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.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.
During 1994, the Company realized a net capital loss of $71,396 from
the disposition of various portfolio investments.
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 Corp;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.
Net unrealized appreciation on investments before taxes decreased
$1,142,734 during the year ended December 31, 1994, from $3,001,913 to
$1,859,179, owing primarily to unrealized losses in Sonex International
Corporation and Dynecology Incorporated; offset by an increase in unrealized
gain in Magellan Health Services, Inc.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 of $19,296,591,
versusand $23,833,891 at December 31, 19951995. Included in
marketable securities are the Company's holdings in Nanophase Technologies
Corporation of $6,854,660 and $20,465,118Princeton Video Image, Inc. of $1,064,895.
Both holdings are subject to lock-up agreements and are valued at December 31,
1994.1997 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.
12
Risks
Pursuant to Section 64(b)(1)Recent Developments
The Company is currently a corporation taxable under Sub-Chapter C of the
InvestmentCode (a "C Corporation"). On September 25, 1997, the Company's Board of
Directors approved a proposal to seek qualification of the Company Act(as of
1940,January 1, 1998) as a Business DevelopmentRIC 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 required to describe the risk factors
involved in an investment"principally
engaged in the securitiesfurnishing of such company inherentcapital to other corporations which are
principally engaged in the naturedevelopment 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 company's investment portfolio.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 does not currently pay or intend to
pay cash dividends. The Company has in the
past relied and continues to rely to a large extent upon proceeds from sales
of investments rather than investment income to defray a significant portion
of its operating expenses.
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
See Index to Financial Statements for a list of the Financial
Statements and Supplementary Data included in this Form 10-K.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
13
PART III
Item 10. Directors and Executive Officers of the Company
OFFICERS
- --------
* Charles E. Harris, Chairman and Chief Executive Officer. For additional
information about Mr. Harris, please see the Directors' biographical
information section below.
Mel P. Melsheimer, age 57, has served as President, Chief Operating
Officer and Chief Financial Officer since February 1997. Harris & Harris
Group has employed Mel P. Melsheimer as a nearly full-time consultant since
1994. Mr. Melsheimer has had extensive entrepreneurial experience as well as
senior operational and financial management responsibilities with public and
privately owned companies. Mr. Melsheimer has served as a consultant to the
Company or as an officer of an investee company since March 1994. 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).
David C. Johnson, Jr., age 40, joined the Company in February 1994, as
a Senior Vice President and has served as Executive Vice President since
January 1995. From 1984, until joining the Company, Mr. Johnson served as a
Vice President of Salomon Brothers Inc. He was graduated from The Darden
School at the University of Virginia (MBA, 1984) and the University of North
Carolina at Chapel Hill (B.A., 1978).
Rachel M. Pernia, age 37, has served since January 1992 as a Vice
President and Controller of the Company and as Treasurer since November 1994.
From 1988 until Ms. Pernia joined the Company, she was employed as Assistant
Controller for Cellcom Corp. From 1985 through 1988, she was employed as a
senior corporate accountant by Bristol-Myers Squibb Company. She was
graduated from Rutgers University (B.A., 1981) and is a certified public
accountant.
14
DIRECTORS
- ---------
Dr. C. Wayne Bardin, age 61, was elected to the Company's Board of
Directors in December 1994. Dr. Bardin's professional appointments have
included: Vice President, The Population Council; Professor of Medicine,
Chief of the Division of Endocrinology, The Milton S. Hershey Medical Center
of Pennsylvania State University; and Senior Investigator, Endocrinology
Branch, National Cancer Institute. Dr. Bardin also serves as a consultant to
several pharmaceutical companies. He has directed basic and clinical
research leading to over 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.
G. Morgan Browne, age 62, 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 Oncogene Science, 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.
Harry E. Ekblom, age 68, has been a director of the Company since 1984.
Mr. Ekblom currently serves as Vice Chairman of A.T. Hudson & Co., Inc. and
President of Harry E. Ekblom & Co., Inc., each of which is engaged in the
business of management consulting. He became President of Harry E. Ekblom &
Co., Inc. in 1984 and joined A.T. Hudson in March 1985. Before 1984, he was
employed by European American Bank as the Chairman of its Board of Directors
and Chief Executive Officer. Mr. Ekblom is a director of Pan Energy Corp.
(principally engaged in interstate transmission of natural gas) and The
Commercial Bank of New York. He is a graduate of Columbia College and the
New York University School of Law, a member of the New York Bar, and holds
honorary degrees from Hofstra University and Pace University.
Dugald A. Fletcher, age 67, 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 is also
Chairman of Binnings Building Products Company, Inc. and 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.
15
* Charles E. Harris, age 54, 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 Trustee of The Institute for Genomic Research, and a
director of the insurance company Dearborn Risk Management, Inc. He is a
member of the New York Society of Security Analysts. Among his eleemosynary
activities, he is a life-sustaining fellow at the Massachusetts Institute of
Technology and a member of the President's Council at Cold Spring Harbor
Laboratory. He was graduated from Princeton University (A.B., 1964) and the
Columbia University Graduate School of Business (MBA, 1967).
Charles F. Hays, age 51, joined the Board as a director in March 1995.
Since 1993, Mr. Hays has been Senior Vice President, Chief Financial and
Administrative Officer of Mid Ocean Ltd. His positions have included:
Managing Director & Chief Financial and Administrative Officer of Marsh &
McLennan, Incorporated, from 1984 to 1993; Vice President and Treasurer of
the Guy Carpenter & Company subsidiary of Marsh & McLennan Companies, from
1979 to 1984; Assistant Vice President of Corporate Development of Marsh &
McLennan Companies, from 1977 to 1979; Assistant Treasurer of Morgan Guaranty
Trust Company, from 1975 to 1977; and Deputy Director of AmerAsian Group of
Companies, from 1971 to 1972. He is a graduate of the University of Kansas
and Stanford University Graduate School of Business.
Jon J. Masters, age 59, 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.
Glenn E. Mayer, age 71, has been a director of the Company since 1981.
In December 1991, Mr. Mayer joined, as a Senior Vice President, the
Investment Banking division of Reich & Company. Reich & Co. is now a
division of Fahnestock & Company, Inc., a member firm of the New York Stock
Exchange. For fifteen years prior to that, he was employed by Jesup & Lamont
Securities Co. and its successor firms, in the Corporate Finance department.
Mr. Mayer is a graduate of Indiana University.
William R. Polk, age 68, has been a director of the Company since
August 1988. For the last seven years, Mr. Polk has been an author and
self-employed consultant. He is the former President of the Adlai Stevenson
Institute of International Affairs, a former member of the Policy Planning
Council of the United States Department of State, and a former Professor of
the University of Chicago and Harvard University. Mr. Polk is a graduate of
Harvard University and Oxford University.
16
James E. Roberts, age 51, 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.
Robert B. Schulz, age 39, was elected to the Company's Board of
Directors in February 1997. In February 1997, Mr. Schulz joined C B Health
Ventures, L.P. as a Venture Partner. Prior to that, he served as the
Company's President and Chief Operating Officer from March 1994 to his
resignation in February 1997. From 1984, until joining the Company, he was
employed by CS First Boston Corporation, most recently as a Director in the
Insurance Group. Mr. Schulz received his MBA degree from Columbia University
Graduate School of Business in 1983. Prior to attending Columbia University,
he was employed as a research engineer in the Alternate Energy Group of
Chevron Research Company and as a project manager of Dynecology,
Incorporated, a high technology, family owned engineering research firm. He
graduated from the Massachusetts Institute of Technology in 1979 with his
B.S. and M.S. degrees in chemical engineering.
* 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.
17
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 $100,000 for the year
ended December 31, 1996.
Annual Compensation Long Term
Compensation
Awards
Name and Principal Other Annual Stock All Other
Position Year Salary Bonus Compensation Options Compensation
- ------------------ ---- ------ ----- ------------ ------- ------------
($) ($) ($)(1) (#) ($)(2)
Charles E. Harris 1996 595,246 -- -- -- 9,500
Chairman & CEO 1995 592,400 -- -- 160,000 9,240
(3) 1994 605,739 -- -- -- 9,240
Robert B. Schulz 1996 207,194 -- -- -- 9,500
President & COO 1995 201,014 -- -- 250,000 9,240
(5) 1994 146,908 500,000 -- -- --
C. Richard Childress 1996 262,200 -- -- -- --
CFO & EVP 1995 254,953 -- -- 75,000 9,240
(4) 1994 264,458 -- -- -- 9,240
David C. Johnson,Jr. 1996 197,763 -- -- -- 9,500
EVP (5) 1995 192,500 -- -- 200,000 9,240
1994 158,246 500,000 -- -- 9,240
(1) 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) As of August 15, 1990, Mr. Harris entered into a non-competition and
employment contract with the Company that was amended on June 30,
1992, January 3, 1993, and June 30, 1994 (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 are 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 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.
18
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. The severance compensation agreement
provides that if, following a 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) On October 1, 1996, Mr. Childress resigned as Executive Vice President
and Chief Financial Officer of the Company. He currently is a
consultant to the Company. The numbers exclude $30,450, $28,960 and
$28,260 for 1996, 1995 and 1994, respectively, of non-accountable office
expense allowance received by Mr. Childress.
(5) Bonus amounts represent sign-up remuneration received upon beginning
employment with the Company during 1994.
There were no stock options granted to the executive officers included
in the above table during the year ended December 31, 1996.
19
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 14, 1997 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.
Name and Address of Number of Shares of
Beneficial Owner Common Stock Owned Percent of Class (1)
- ------------------- ------------------- --------------------
Charles E. and Susan T. Harris
One Rockefeller Plaza,
Suite 1430
New York, NY 10020 1,690,988 (2) 15.60%
American Bankers Insurance Group
11222 Quail Roost Drive
Miami, FL 33157 1,075,269 (3) 10.30%
Jordan Financial Services Group
1751 Mound Street, Suite 1A
Sarasota, FL 34236 1,404,011 (4) 13.44%
C. Wayne Bardin 20,000 (6) *
G. Morgan Browne 50,000 (5) *
Harry E. Ekblom 55,000 (5) *
Dugald A. Fletcher 20,000 (6) *
Charles F. Hays 26,300 (6) *
David C. Johnson, Jr. 337,574 (7) 3.18%
Jon J. Masters 50,000 (5) *
Glenn E. Mayer 72,000 (5)(8) *
Mel P. Melsheimer 305,072 (10) 2.84%
William R. Polk 71,000 (5) *
James E. Roberts 22,000 (6) *
Robert B. Schulz 131,845 (9) 1.25%
All Directors and Officers
as a group (15 persons) 2,959,779 24.87%
* Less than one percent of issued and outstanding stock.
20
(1) Shares of common stock subject to options and warrants are deemed
outstanding for computing the percentage of class of the person or
group holding such options or warrants, but are not deemed outstanding
for computing the percentage of class of any other person.
(2) Includes 504,732 shares for which Mrs. Harris has sole investment power;
766,655 shares for which Mr. Harris has sole investment power; 21,996
shares owned by a child for which Mrs. Harris has sole voting and
dispositive power; 1,271,387 shares for which Mr. Harris has sole voting
power, and 237,605 shares subject to currently exercisable warrants for
which Mr. Harris has sole investment power. Excludes 130,000 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. On August 17, 1995, the
Company granted Mr. Harris stock options to purchase 160,000 shares of
common stock that vest over a five-year period, of which 32,000 have
vested. The total shares have been included in the table.
(3) Represents shares owned by subsidiaries of American Bankers Insurance
Group, Inc.
(4) Represents shares owned by Jordan Financial Services Group as of March
12, 1997. Jordan Financial Services Group is a registered investment
advisor that holds these shares for investment purposes only on behalf of
various clients.
(5) Includes option to purchase 50,000 shares.
(6) Includes option to purchase 20,000 shares, which vest over a five-year
period. The total shares have been included in the table.
(7) On August 17, 1995, the Company granted Mr. Johnson stock options to
purchase 200,000 shares of common stock that vest over a five-year
period, of which 40,000 have vested. The total shares have been included
in the table.
(8) Includes 2,000 shares owned by Mrs. Mayer.
(9) On August 17, 1995, the Company granted Mr. Schulz stock options to
purchase 250,000 shares of common stock that vest over a five-year
period, of which 50,000 have vested. The vested shares have been
included in the table. On February 14, 1997, Mr. Schulz resigned as
President, COO & CCO from Harris & Harris Group, Inc. and was voted a
Director and granted an option to purchase 20,000 shares of common stock
that vest over a five-year period. Unless Mr. Schulz exercises the
50,000 stock options by May 14, 1997, the vested options will expire.
(10) On February 10, 1997, the Company granted Mr. Mel P. Melsheimer stock
options to purchase 300,000 shares of common stock that vest over a
five-year period. The total shares have been included in this 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, 1996.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) Exhibits. The exhibits which are filed with this Form 10-K or
incorporated herein by reference are set forth in the Exhibit Index on page
24.
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the last quarter of 1996.
21
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 31, 1997 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 31, 1997
Charles E. Harris Chief Compliance Officer and
Chief Executive Officer
/s/
- -------------------- President, Chief Operating March 31, 1997
Mel P. Melsheimer Officer and Chief Financial Officer
/s/
- -------------------- Executive Vice President March 31,1997
David C. Johnson, Jr.
/s/
- -------------------- Vice President, Controller, March 31,1997
Rachel M. Pernia Treasurer and Principal
Accounting Officer
22
/s/
- -------------------- Director March 21, 1997
C. Wayne Bardin
/s/
- -------------------- Director March 21, 1997
G. Morgan Browne
/s/
- -------------------- Director March 21, 1997
Harry E. Ekblom
/s/
- -------------------- Director March 21, 1997
Dugald A. Fletcher
/s/
- -------------------- Director March 21, 1997
Charles F. Hays
/s/
- -------------------- Director March 31, 1997
Jon J. Masters
/s/
- -------------------- Director March 21, 1997
Glenn E. Mayer
/s/
- -------------------- Director March 21, 1997
William R. Polk
/s/
- -------------------- Director March 21, 1997
James E. Roberts
/s/
- -------------------- Director March 21, 1997
Robert B. Schulz
23
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated
herein by reference to a prior filing, in accordance with Rule 12b-32 under
the Securities Exchange Act of 1934. (Asterisk denotes exhibits filed with
this report.)
Exhibit No. Description
- ----------- -----------
3.1(a) Restated Certificate of Incorporation of the 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.
8.1 Harris & Harris Group, Inc. 1988 Stock Option Plan, as amended and
restated, incorporated by reference to Exhibit 8.1 to the
Company's Form 10-K for the year ended December 31, 1995.
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 Employment Agreement by and between the Company and Charles E.
Harris dated August 15, 1990, incorporated by reference to Exhibit
10 (r) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990.
10.2 Amendment No.1 to the Employment Agreement dated as of August 15,
1990 between the Company and Charles E. Harris dated as of June
30, 1992, incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement in Form N-2 filed on October 29,
1992.
10.3 Amendment No.2 to the Employment Agreement dated as of August 15,
1990 between the Company and Charles E. Harris dated as of January
6, 1993, incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement in Form N-2 filed on December 3,
1993.
10.4 Amendment No.3 to the Employment Agreement dated as of August 15,
1990 between the Company and Charles E. Harris dated as of June 30,
1994.
24
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.
10.11 Warrant issued by the Company to Charles E. Harris dated September
23, 1985 as clarified and restated on May 1, 1989, incorporated by
reference to Exhibit 10 (n) to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
10.13 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.
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.
24* Consent of Arthur Andersen LLP
25
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 14(a).8.
Documents Page
- --------- ----
Report of Independent Public AccountantAccountants. . . . . . 27. . . . 18
Financial Statements
- --------------------
Statements of Assets and Liabilities
as of December 31, 19961997 and 19951996 . . . . . . 28. . . . . 19
Statements of Operations for the
years ended December 31, 1997, 1996 and 1995 and 1994 29. . . . . 20
Statements of Cash Flows for the
years ended December 31, 1997, 1996 1995 and 1994. 301995. . . . . . 21
Statements of Changes in Net Assets for the
years ended December 31, 1997, 1996 1995 and 1994. 311995. . . . . . 22
Schedule of Investments as of December 31, 19961997 . 32-35. . . . . 23-25
Footnote to Schedule of Investments . . . . . . . 36-39. . . . . 26-29
Notes to Financial Statements . . . . . . . . . . 40-46. . . . . 30-35
Selected Per Share Data and Ratios for the
years ended December 31, 1997, 1996, 1995 and 1994
and 1993
and the three month period ended December 31, 1992 471993. . . . . . . . . . . . . . . . . . . . . . . . 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.
2617
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, 19961997
and 1995,1996, including the schedule of investments, as of December 31, 1996,1997,
and the related statements of operations, cash flows and changes in net
assets for the three years ended December 31, 1996,1997, and the selected per
share data and ratios for each of the fourfive years ended December 31, 1996 and the period from commencement of investment company operations
(October 1, 1992) to December 31, 1992.1997.
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, 19961997 and 1995,1996,
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 $18,825,365 (52.4$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, 19961997 and
1995,1996, the results of its operations, its cash flows and the changes in its
net assets for the three years ended December 31, 1996,1997, and the selected per
share data and ratios for each of the fourfive years ended December 31, 1996 and the
three month period ended December 31, 1992,1997 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
New York, New York
February 10, 1997
271998
18
STATEMENTS OF ASSETS AND LIABILITIES
ASSETS
December 31, 19961997 December 31, 19951996
Investments, at value (See accompanying
schedule of investments and notes). . $ 35,648,68238,659,230 $ 35,929,28935,648,682
Cash and cash equivalents. . . . . . . . 145,588 155,440 364,354
Receivable from brokers. . . . . . . . . 0 205,789
Interest receivable. . . . . . . . . . . 111,106 198,342 300,718
Taxes receivable (Note 6). . . . . . . . 0 2,119,492 367,929
Prepaid expenses . . . . . . . . . . . . 85,126 81,501 86,976
Other assets . . . . . . . . . . . . . . 272,734 351,833
269,500
------------ --------------------------- ---------------
Total assets . . . . . . . . . . . . . . $ 39,273,784 $ 38,555,290
$ 37,524,555
============ =========================== ===============
LIABILITIES & NET ASSETS
Accounts payable and accrued
liabilities . . . . . . . . . . . . . $ 899,491 $ 374,326 $ 352,129
Deferred rent. . . . . . . . . . . . . . 51,662 60,914 59,887
Deferred income tax liability (Note 6) . 667,697 2,187,447
550,630
------------ ------------Note Payable (Note 7). . . . . . . . . . 4,000,000 0
--------------- ---------------
Total liabilities. . . . . . . . . . . . 5,618,850 2,622,687 962,646
Commitments and contingencies (Note 7) ------------ --------------------------- ---------------
Net assets . . . . . . . . . . . . . . . $ 33,654,934 $ 35,932,603
$ 36,561,909
============ =========================== ===============
Net assets are comprised of:
Preferred stock, $0.10 par value,
2,000,000 shares authorized; none
issuedissued. . . . . . . . . . . . . . . . $ 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 and 10,333,902
issued and outstanding at 12/31/95.96. . . . . . . . . . . . . . . 106,930 104,427 103,339
Additional paid in capital . . . . . . . 16,178,979 15,850,576 15,691,978
Accumulated net realized income. . . . . 12,028,191 15,606,009 19,362,249
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
and $698,250 at 12/31/95.96. . . . . . . .5,340,834 4,371,591
1,404,343
------------ -------------------------- ---------------
Net assets . . . . . . . . . . . . . . . $ 33,654,934 $ 35,932,603
$ 36,561,909
============ ========================== ===============
Shares outstanding . . . . . . . . . . . 10,692,971 10,442,682
10,333,902
------------ -------------------------- ---------------
Net asset value per outstanding share. . $ 3.15 $ 3.44
$ 3.54
============ ========================== ===============
The accompanying notes are an integral part of these financial statements.
2819
STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
Investment income:
Interest from:
Fixed-income
securities $ 490,807 $ 803,819 $ 999,869
$ 719,293
Affiliated companies. .companies 40,000 40,779 11,222
11,913
Dividend income--unaffiliated
companiesincome--
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 . . . . . . . . 8,024 8,436 88,067
Consulting and
administrative392,114 474,537 440,605
Professional fees . . . 68,185 88,209 0
Other income . . . . . . . 92,610 1,781 1,003
------------ ------------ ------------
Total investment income 1,013,417 1,109,517 820,276
Expenses:
Salaries and benefits. . . 1,524,826 1,560,132 2,061,981
Sign-up bonuses. . . . . . 0 0 1,000,000
------------ ------------ ------------
Total salaries and benefits 1,524,826 1,560,132 3,061,981
Administration and operations 474,537 440,605 424,714
Professional fees. . . . .327,038 675,241 461,526 421,865
Depreciation and amortization 48,968 57,426 161,876
271,430
RentRent. . . . . . . . . . . .130,092 160,601 124,713 114,667
Directors' fees and expenses 100,496 80,702 40,836
52,816
Custodian feesfees. . . . . . 15,517 11,983 16,453
Restructuring charges
(Note 6) . . . . . . 11,983 16,453 17,333
------------ ------------ ------------. . 100,000 0 0
----------- ----------- -----------
Total expenses. . . . .3,045,290 2,985,316 2,806,141
4,364,806
------------ ------------ ----------------------- ----------- -----------
Operating loss before
income taxes.taxes . . . . . . (2,431,244) (1,971,899) (1,696,624) (3,544,530)
Income tax benefit
(Note 6) 680,834 597,215 1,265,648
------------ ------------ ------------
Net operating loss. . . . . . . . . 933,103 680,834 597,215
----------- ----------- -----------
Net operating loss . . . . (1,498,141) (1,291,065) (1,099,409) (2,278,882)
Net realized (loss) gain
on investments:
Realized (loss) gain on
sale of investments . . (3,199,502) (3,792,576) 2,109,768
(71,396)
------------ ------------ -----------------------
Total realized
(loss) gain . . . . . (3,199,502) (3,792,576) 2,109,768 (71,396)
Income tax benefit
(provision) (Note 6). . 1,119,825 1,327,401 (738,419)
168,252
------------ ------------ -----------------------
Net realized (loss) gain
on investments. . . . . (2,079,677) (2,465,175) 1,371,349 96,856
------------ ------------ ------------
Net realized (loss) income (3,577,818) (3,756,240) 271,940 (2,182,026)
Net increase (decrease) in
unrealized appreciation on
investments:
Increase as a result of
investment sales. . . . 93,999 2,525,548 337,577 7,955
Decrease as a result of
investment sales. . . . (2,892,408) 0 (562,765) (1,223,026)
Increase on investments
heldheld. . . . . . . . . . 7,297,164 4,112,413 1,002,347 1,028,961
Decrease on investments
heldheld. . . . . . . . . . (3,007,612) (2,072,965) (533,745)
(956,624)
------------ ------------ ----------------------
Change in unrealized
appreciation (depreciation)
on
investments.investments . . . . . 1,491,143 4,564,996 243,414
(1,142,734)
Income tax (provision)
benefitprovision
(Note 6). . . . . . . . (521,900) (1,597,748) (85,195)
256,694
------------ ------------ ----------------------
Net increase (decrease) in unrealized
appreciation on
investments. . . . . . 969,243 2,967,248 158,219
(886,040)
------------ ------------ ------------============ ============ ==========
Net (decrease) increase in
net assets from operations:
Total. . . . . . . . . . ..$(2,608,575) $ (788,992) $ 430,159
$(3,068,066)
============ ============ =====================
Per outstanding share. . ..$ (0.24) $ (0.08) $ 0.04
$ (0.34)
============ ============ =====================
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements.
2920
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
December 31, 1994
Cash flows provided by (used in) provided by operating activities:
Net (decrease) increase in
net assets resulting from
operationsoperations. . . . . . . . .$(2,608,575) $ (788,992) $ 430,159 $(3,068,066)
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)
loss on investmentsinvestments. . . . . 1,708,359 (772,420) (2,353,182) 1,214,130
Deferred income taxes. . .(1,442,094) 1,636,817 241,479
(408,655)
Depreciation and
amortizationamortization. . . . . . 48,968 57,426 161,876 271,430
Other. . . . . . . . . . .0 (10,144) 40,859 2,451
Changes in assets and liabilities:
Receivable from brokers. .0 205,789 3,835,602 (4,041,391)
Prepaid expenses . . . . .(3,625) 5,475 (21,756) 183,643
Interest receivable. . . .87,236 102,376 (227,392) (64,949)
Taxes receivable . . . . .2,119,492 (1,679,377) 1,184,567 (1,190,637)
Other assets . . . . . . .40,296 (103,981) (9,372) 153,071
Accounts payable and accrued
liabilities . . . . . . 473,363 22,197 (43,241) 142,570
Payable for securities purchased 0 0 (797,380)
Deferred rent. . . . . . .(9,252) 10,279 10,281 20,560
Collection on note
receivablereceivable. . . . . . . 0 0 54,664 17,105
Purchase of fixed assets (10,169) (35,777) (16,409)
(30,188)----------- ------------ ------------- ---------------------
Net cash provided by (used
in) operating activities 403,999 (1,350,332) 3,288,135
Cash (used in) provided by operating activities (1,350,332) 3,288,135 (7,596,306)
Cash provided by (used in) investing activities:
Net (purchase) sale of
short-term investments and
marketable securities . (155,667) 6,035,532 (3,324,957) 9,953,393
Investment in private
placements and loans. . . . . . .(4,511,434) (4,981,614) (4,236,352)
(3,671,851)
------------ ------------- ----------------------- ------------
Net cash (used in) provided
by (used in)
investing activities (4,667,101) 1,053,918 (7,561,309) 6,281,542
Cash flows provided by financing activities:
Purchase of treasury stock 0 0 (646,430) 0
Proceeds from exercise of
stock options . . . . . 253,250 87,500 62,500 0
Proceeds from private
placement of stock
(Note 4). . . . . . . . 0 0 5,000,001
0
Proceeds from sale of stocknote payable
(Note 7). . . . . . . . 4,000,000 0 0
1,409,007
------------ ------------------------ -----------
Net cash provided by
financing activitiesactivities. . 4,253,250 87,500 4,416,071 1,409,007
------------ ------------- -----------
Net (decrease) increase in
cash and cash equivalents:
Cash and cash equivalents
at beginning of the year 155,440 364,354 221,457 127,214
Cash and cash equivalents
at end of the yearyear. . . 145,588 155,440 364,354
221,457
------------ ------------------------ ----------- -----------
Net (decrease) increase
in cash. .cash and cash
equivalents . . . . . . $ (9,852) $ (208,914) $ 142,897
$ 94,243
============ ======================== =========== ===========
Supplemental disclosures of
cash flow information:
Income taxes paid .paid. . . . $ 5,909 $ 57,234 $ 8,323 $ 26,820
The accompanying notes are an integral part of these financial statements.
30
21
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
Changes in net assets from operations:
Net operating lossloss. . . $(1,498,141) $(1,291,065) $(1,099,409) $(2,278,882)
Net realized (loss)
gain on investmentsinvestments. . .(2,079,677) (2,465,175) 1,371,349
96,856
Net (decrease) increase (decrease)
in unrealized appreciation
on investments as a
result of sales. . . . (1,818,966) 1,641,606 (146,372) (933,059)
Net increase in unrealized
appreciation on investments
held . . . . . . . . . 2,788,209 1,325,642 304,591 47,019
------------ ------------ ------------
Net (decrease) increase in
net assets resulting from
operations . . . . . . (2,608,575) (788,992) 430,159 (3,068,066)
Changes in net assets from
capital stock transactions:
Purchase of stock.stock . . . 0 0 (646,430) 0
Restricted stock award
(Note 3) 0 110,283 220,564
Sales of stock to employees. . . . . . . 0 0 1,409,007110,283
Proceeds from exercise of
stock options and warrants 253,250 87,500 62,500 0
Proceeds from private placement
of common stock (Note 4) 0 0 5,000,001 0
Tax benefit of restricted
stock award and common
stock transactions . . 77,656 72,186 294,594
0
---------- ---------- -------------------- ------------ -----------
Net increase in net assets
resulting from capital
stock transactions . . 330,906 159,686 4,820,948 1,629,571
---------- ---------- -----------
Net (decrease) increase
in net assets. . . . . . (2,277,669) (629,306) 5,251,107 (1,438,495)
Net assets:
Beginning of the year.year . 35,932,603 36,561,909 31,310,802
32,749,297
------------ ------------ ----------------------- ----------- -----------
End of the year.year . . . . $ 35,932,603 $ 36,561,909 $ 31,310,802
============ ============ ============
The accompanying footnotes$33,654,934 $35,932,603 $36,561,909
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
31
22
SCHEDULE OF INVESTMENTS DECEMBER 31, 19961997
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Investments in Unaffiliated Companies (9)(12)(13)(14) --
17.3%11.4% of total investments
Publicly Traded Portfolio (Common stock unless noted otherwise) --
9.7%8.9% of total investments
(Common Stock unless noted otherwise)
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) 4,052,080 $ 263,786
Biotechnology and Healthcare Related
Alliance Pharmaceutical60,000 384,375
Energy Research Corporation (1)(4)
-- Fuel Cell Energy. . . . . . . . (C) 70,000 945,000
Biofield Corp.35,000 556,719
Princeton Video Image, Inc. (1)(4)(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. . . . . . . . . . . . (C) 75,000 1,050,938
Magellan Health Services, Inc. (1)(2)(6) . (C) 54,368 1,206,347
------------
Total Publicly Traded Portfolio (cost: $1,827,774) . . . . . $ 3,466,071
Private Placement Portfolio (Illiquid) -- 7.6% of total investments
Exponential Business Development Company (1)(2)(5)
Venture capital partnership focused
on early stage companies
Limited partnership interest. . . . . . (A) - - $ 25,000
Micracor, Inc. (1)(2) -- Designs and manufactures
advanced solid state photonic systems
Convertible Note. . . . . . . . . . . . (D) $ 103,000 69,000
Princeton Video Image, Inc. (1)(2)(7)(8) --
Real time sports and entertainment advertising
3.5% of fully diluted equity
Common Stock. . . . . . . . . . . . . . (B) 68,400
Warrants at $2.25 expiring 8/25/97. . . (D) 6,700 2,613,425
------------115,869 943,296
----------
Total Private Placement Portfolio (cost: $771,000). . . . . . $ 2,707,425
------------
Total Investments in
Unaffiliated Companies (cost: $2,598,774) . .$1,058,775) . . . . . . . $ 6,173,496
------------
The accompanying notes are an integral part of this schedule.
32
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Private Placement Portfolio968,296
Total Investments in Non-Controlled Affiliates
(9)(13) (Illiquid) -- 32.1% of total investments
Dynecology Incorporated (1)(2)(5)(7)
Develops various environmental
intellectual properties -- Option expiring
12/13/98 to purchase at $15 per share
135,000 shares of Common Stock equaling
18.1% of fully diluted equity. . . . . . .(D) - - $ 40,000
Gel Sciences, Inc. (1)(2)(7) -- Develops
engineered response gels for controlled
release systems -- 10.3% of fully diluted equity
Warrants at $1.65 expiring 02/01/00. . . .(D) 27,766
Common StockUnaffiliated
Companies (cost: $4,077,197) . . . . . . . . . . . . . . .(B) 171,172
Series A Preferred Stock . . . . . . . . .(D) 135,178
Series A-1 Preferred Stock . . . . . . . .(D) 57,607
Series B Convertible Preferred Stock . . .(B) 397,409
Series C Convertible Preferred Stock . . .(B) 101,515 2,349,312
Harber Brothers Productions, Inc. (1)(2)(5)(7)
Finances, produces and markets media
products that combine entertainment, music,
learning and interactivity$4,394,771
The accompanying notes are an integral part of this schedule.
23
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
Method of Shares/
Valuation (3) Principal Value
Investments in Non-Controlled Affiliates (12)(14) --
21.5%42.8% of fully diluted equity
Series A Voting Convertible
Preferred Stock. . . . . . . . . . . . . .(A) 967,500 967,500
Highline Capital Management, LLC. (2)(7)
Organizes and manages investment partnerships
24.9%total investments
Publicly Traded Portfolio -- 17.7% of fully diluted equity. . . . . . .(A) - - 500,000total investments
Nanophase Technologies Corporation
(1)(2)(7)(6)(8) -- Manufactures
and markets inorganic crystals of
nanometric dimensions 7.6% of fully diluted equity
Series D Convertible Preferred Stock . . .(B) 1,162,204 2,614,959
NeuroMetrix, Inc. (1)(2)(4)(7) -- Developing a
device for diabetics to monitor their
blood glucose -- 30% of fully diluted equity
Warrants at $1.60 expiring 6/2/97. . . . .(A) 125,000
Series A Convertible Preferred Stock . . .(A) 175,000 210,000
PHZ Capital Partners Limited Partnership (1)(2)(5)
Organizes and manages investment partnerships
20.0% of fully diluted equity
Limited partnership interest . . . . . . .(B) 1,000,000
One year 8% note due 9/22/97 . . . . . . .(A) $ 500,000 500,000
PureSpeech, Inc. (1)(2)(4)(7) -- Develops and markets
innovative speech recognition technology
7.3% of fully diluted equity
Series A Convertible Preferred Stock . . .(A) 190,476 999,999
Questech Corporation (1)(2)(5)(11)
Manufactures and markets proprietary
decorative tiles and signs -- 18.9%5.1%
of fully diluted equity
Common Stock . . . . . . . . . . . . . . .(B) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01 . . .(A) 166,667 167
-----------(C) 730,916 $6,854,660
----------
Total Private PlacementPublicly Traded Portfolio in Non-Controlled Affiliates (cost: $8,381,515) . . . . . . $11,445,105
-----------
The accompanying notes are an integral part of this schedule.
33
SCHEDULE OF INVESTMENTS DECEMBER 31, 1996
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Private Placement Portfolio in Controlled Affiliates
(9)(13) (Illiquid) -- 13.1% of total investments
BioSupplyNet, Inc. (1)(2)(4)(7) -- Expands
commercially the print and World Wide Web
product directories developed by
Cold Spring Harbor Laboratory Press --
34.5% fully diluted equity
Series A Voting Convertible
Preferred Stock.$1,626,204) . . . . . . . . . . . (A) 575,000 $ 575,000$6,854,660
Private Placement Portfolio (Illiquid) -- 25.1% of total investments
Genomica Corporation (1)(2)(4)(7)(10)(5)(6)(9)
-- Develops software that enables
the study of complex genetic
diseases 23.9%-- 11.0% of fully
diluted equity
Common Stock . . . . . . . . . . . . . (A) 199,800
Series A Voting Convertible
Preferred Stock. . . . . . . . . . . . (A) 1,660,200 1,000,304
MultiTarget, Inc. (1)(2)(4)(7) -- Developing
intellectual property related to
localized treatment of cancer
37.5% of fully diluted equity
Series A Convertible Preferred Stock (A) 375,000 60,811
nFX$1,000,304
NBX Corporation (1)(2)(6)(10) -- Develops neural-network
software -- 37.4% of fully diluted equity
Series A Voting Convertible
Preferred Stock. . . . . . . . . . (D) 1,294,288 996,740
Series B Non-Voting Convertible
Preferred Stock . . . . . . . . . . . (D) 689,920 1,539,980
PowerVoice Technologies, Inc. (1)(2)(4)(7)
Exploits innovative distributed
computing technology for use in
small business telephone systems
-- 29.2%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.
24
SCHEDULE OF INVESTMENTS DECEMBER 31, 1997
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: $4,672,835)$2,545,000) . . . . . . . . 4,672,835. . . $ 2,545,000
U.S. Government Obligations -- 37.5%39.2% of total investments
U.S. Treasury Note dated 3/03/01/93
due date 02/28/98 -- 5.125% rate. . . . . . . . (K)rate (H) $ 5,000,000 $ 4,967,9504,996,100
U.S. Treasury Bill dated 07/18/9601/09/97
due date 01/16/9708/98 -- 5.1% yield . . . . . . . . (H) 1,513,000 1,499,8945.2% yield. (K) $ 975,000 966,383
U.S. Treasury Bill dated 08/15/9607/17/97
due date 02/13/9701/15/98 -- 5.3% yield . . . . . . . . (H) 3,935,000 3,833,7425.2% yield. (K) $ 425,000 421,229
U.S. Treasury Bill dated 08/22/9614/97
due date 02/20/9712/98 -- 5.0% yield . . . . . . . . (H) 1,100,000 1,082,193yield. (K) $ 1,125,000 1,115,294
U.S. Treasury Bill dated 10/24/9608/28/97
due date 04/24/9702/26/98 -- 5.2% yield . . . . . . . . (H) 1,015,000 998,493
U.S. Treasury Bill dated 12/12/96 due date
06/12/97 -- 5.1% yield . . . . . . . . (H) 1,000,000 974,974
------------yield. (K) $ 7,720,000 7,656,232
----------
Total Investments in U.S. Government Obligations
(cost: $13,327,969)$15,097,810) . . . . . . . . . . . . . . . . . . . . $ 13,357,246
------------. . . $15,155,238
-----------
Total Investments -- 100% (cost: $28,981,093) $30,500,498). . . . . . . . $ 35,648,682
============
. . . $38,659,230
===========
The accompanying notes are an integral part of this schedule.
34
25
SCHEDULE OF INVESTMENTS DECEMBER 31, 19961997
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 1996.1997. Accordingly, the amounts shown
on the schedule represent the gross additions in 1996.1997.
(5) No activitychanges in valuation occurred in these investments during the year
ended December 31, 1996.1997.
(6) Formerly named National Mentor Holding Corp., Magellan Health
Services, Inc. was later acquired by Charter Medical Corporation, which
subsequently changed its name to Magellan Health Services, Inc.
(7) These investments are development stage companies. A development stage
company is defined as a company that is devoting substantially all of
its efforts to establishing a new business, and either has not yet
commenced its planned principal operations or has commenced such
operations but has not realized significant revenue from them.
(8)(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 ")"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.
(10) 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 the Company and is Administrative Director of Cold Spring
Harbor Laboratory.
(11) Formerly named Intaglio, Ltd.
(12)(13) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $2,706,451.$4,184,874. The gross unrealized
appreciation based on tax cost for these securities is $3,735,334.$644,217.
The gross unrealized depreciation on the cost for these securities
is $268,290.
(13)$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.
3526
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 partythird-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.
36
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
NASDAQNasdaq National Market System is the last reported sales price on the day of
valuation. For other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that day, market value
is the mean of the closing bid price and asked price on that day.
This method is the preferred method of valuation when there is an
established public market for a company's securities, as that market provides
the most objective basis for valuation.
D. Analytical Method: The analytical method is generally used to value
an investment position when there is no established public or private market
in the company's securities or when the factual information available to the
Company dictates that an investment should no longer be valued under either
the cost or private market method. This valuation method is inherently
imprecise and ultimately the result of reconciling the judgments of the
Company's Investment and Valuation Committee members, based on the data
available to them. The resulting valuation, although stated as a precise
number, is necessarily within a range of values that vary depending upon the
significance attributed to the various factors being considered. Some of the
factors considered may include the financial condition and operating results
of the company, the long-term potential of the business of the company, the
values of similar securities issued by companies in similar businesses, the
proportion of the company's securities owned by the Company and the nature
of any rights to require the company to register restricted securities under
applicable securities laws.
37
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.
38
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.
3929
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company") is a venture capital
investment company operating as a business development company ("BDC") under
the Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized
type of investment company under the 1940 Act. The Company operates as an
internally managed investment company whereby its officers and employees,
under the general supervision of its Board of Directors, conduct its
operations.
The Company elected to become a BDC on July 26, 1995, after receiving
the necessary approvals. From July 31,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 basis.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.
40
Reclassifications. Certain reclassifications have been made to the
December 31, 19941995 and December 31, 19951996 financial statements to conform to the
December 31, 19961997 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 31,199631,1997 and 1995,1996, and the reported amounts of
revenues and expenses for the three years ended December 31, 1996.1997. 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 iswas 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 providesprovided 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 hashad 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 behave 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 providesprovided that payment by the optionee upon exercise of an
option may behave been made using cash or Company stock held by the optionee.
41
The Company accountsaccounted 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 formapro-forma amounts:
31
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
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:
1996 1995
Stock volatility 0.60 0.59
Risk-free interest rate 6.8% 6.5 %
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 - - - - - -
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.
The Company may grant options for up to 2,088,536 shares under the 1988
Plan. The Company has granted options on 1,317,605 shares through December 31,
1996. Under the 1988 Plan, the option exercise price equals the stock's market
price on date of grant. The options granted vest over a five year period and
expire after 10 years.
4232
A summary of the status of the Company's 1988 Plan at December 31, 19961997
and 19951996 and changes during the years then ended is presented in the table
and narrative below:
December 31, 1997 December 31, 1996
December 31, 1996 December 31, 1995
Shares Weighted Shares Weighted
Average Average
------ -------- ------ --------
Exercise Exercise Price Exercise Price
Outstanding at
beginning of year 1,080,000 $4.584 1,050,000 $4.445
678,102 $1.998
Granted 300,000 $3.875 160,000 $5.008
742,000 $5.375
Exercised 158,000 $1.603 50,000 $1.750
370,102 $1.778
Forfeited 397,000 $5.267 80,000 $5.375
Expired - - Expired- - - - - -
Canceled 825,000 $4.569 - - - -
Outstanding at end
of year 0 0 1,080,000 $4.584 1,050,000 $4.445
Exercisable at end
of year 0 0 390,000 $3.334 375,212 $2.788
Weighted average
fair value of
options granted $2.50 - - $3.222 - $3.424 -
The rangeDuring 1997, the Chairman of exercise prices for the outstanding options as of December
31, 1996 are: 8,000 options at $1.1875, withCompany exercised a remaining life of 4.7 years;
150,000 options at $1.625, with a remaining life of 2.3 years; 180,000
options at $3.00 to $3.75, with an average exercise price of $3.375 and an
average remaining life of 5.1 years; 742,000 options at $5.375 to $7.00, with
an average exercise price of $5.485 and an average remaining life of 8.4 years.
As of December 31, 1996, there were outstanding warrantswarrant to purchase
237,605 shares of common stock at a price of $2.0641 per share expiring in 1999.$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 Harris & Harris Groupthe Company's common stock on the NASDAQNasdaq National Market System
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.
43
NOTE 5. EMPLOYEE BENEFITS
As of August 15, 1990, theThe Company entered into a non-competition,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. This contract was amended on June 30, 1992, January 3, 1993,
and June 30, 1994. 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 1996,1997, contributions to the plan that have been
charged to operations totaled $40,254.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,
1996,31,1997, the Company had a reserve of $206,630$232,415 for the plan.
NOTE 6. INCOME TAXES
TheAs of December 31, 1997, the Company hashad not elected tax treatment
available to regulated
investment companiesRICs under Sub-Chapter M of the Internal Revenue Code. Accordingly, for federal
and state income tax purposes, the Company is taxed at statutory corporate
rates on its income, which enables the Company to offset any future net
operating losses against prior years' net income. The Company may carry back
operating losses against net income threetwo years and carry forwardcarryforward such losses fifteen15
years.
44
For the years ended December 31, 1997, 1996 1995 and 1994,1995, the Company's
income tax (benefit) provision was allocated as follows:
1997 1996 1995
1994
Investment Operationsoperations $ (933,103) $ (680,834) $(597,215) $(1,265,648)
Realized (loss) gain on investments (1,119,825) (1,327,401) 738,419 (168,252)
Increase (decrease) in unrealized
appreciation on investments 521,900 1,597,748 85,195
(256,694)------------ ------------ ---------- ------------
Total income tax (benefit)
provision $(1,531,028) $ (410,487) $ 226,399
$(1,690,594)============ ============ ========== ============
The above tax (benefit) provision consists of the following:
Current -- Federal $ 0 $(2,047,304) $ (38,319)
$(1,281,939)
Deferred -- Federal (1,531,028) 1,636,817 264,718
(408,655)------------ ------------ ---------- ------------
Total income tax (benefit)
provision $(1,531,028) $ (410,487) $ 226,399
$(1,690,594)============ ============ ========== ============
The Company's net deferred tax liability at December 31, 19961997 and 19951996
consists of the following:
1997 1996 1995
Unrealized appreciation on investments $ 2,295,998 $ 698,2502,817,898 $2,295,998
Net operating loss carryforward (1,856,989) 0
Medical retirement benefits (72,320)(81,345) (72,320)
Other (211,867) (36,231)
(75,300)
----------- --------------------- ----------
Net deferred income tax liability $ 2,187,447 $ 550,630
=========== =========667,697 $2,187,447
============ ==========
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, 1996,1997, was $160,601.$130,092. Future minimum lease payments in each of the
following years are: 1997 -- $164,484; 1998 -- $168,768; 1999 -- $176,030; 2000 -- $178,561;
2001 -- $178,561; 2002 -- $178,561; thereafter $280,507.
The Company has guaranteed a three-year lease obligation of approximately
$21,000 per annum for the office space of one of its investees, Highline
Capital Management LLC.$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. 45
At December 31, 1996,1997, the Company
would have to fund additional cash and/or property that would have to be
valued at a total of $756,720approximately $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
In January 1997,On February 27, 1998, the Company signed loan agreements with twoconverted its $1,100,000
NeuroMetrix, Inc. Convertible Note into 229,620 shares of its
investee companies for up to $750,000. In addition, the Company has guaranteedSeries C-2
Preferred Stock, as part of a bonus$4 million financing of up to $100,000 to the key employees of one of its investee companies.
Also in January 1997, the Company made a follow-on investment of $850,000
in PowerVoice Technologies. In addition, the Company invested $500,000 in
Highline Offshore Investors.
46NeuroMetrix, Inc.
35
SELECTED PER SHARE DATA AND RATIOS
Per share operating performance:
Year Ended Year Ended Year Ended Year Ended 3 MonthsYear Ended
December 31,December December December December
31, December 31, December 31, December1997 31, 1996 31, 1995 31, 1994 31, 1993
1992
------------ ------------ ------------ ------------ ------------------------ ---------- ---------- ---------- ----------
Net asset value,
beginning
of period $ 3.54 $ 3.43 $ 3.66 $ 2.71 $ 2.90
Net operating
loss (0.12) (0.11) (0.25) (0.19) (0.02)
Net realized
(loss) gain (0.24) 0.14 0.01 2.75 (0.02)
Net increase
(decrease) in
unrealized
appreciation
as a result
of sales 0.16 (0.01) (0.11) (1.78) (0.01)
Net increase
(decrease)in
unrealized
appreciation
on investments
held 0.13 0.03 0.01 0.25 (0.14)
Net (decrease)
increase from
capital stock
transactions (0.03) 0.06 0.11 (0.08) 0
------------ ------------ ------------ ------------ --------------
Net asset
value, end 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
$ 4.375
Deferred income
tax per share $ 0.06 $ 0.21 $ 0.050 $ 0.030 $ 0.080
$ 0.760
Ratio of expenses
to average net assets 9.1% 8.1% 8.3% 13.6% 11.3% 2.0%
Ratio of net operating
loss to average net
assets 4.5% 3.5% 3.2% 7.1% 6.0% 6.7%
Investment return based on:
Stock price (6.7)% (52.4)% 23.5% (22.7)% 88.6%
49.0%
Net asset value (8.4)% (2.8)% 3.2% (6.3)% 35.0%
(6.5)%
Portfolio turnover 51.2%77.2% 51.3% 51.2% 136.4% 118.1% 8.7%
Net assets, end of
period $ 35,932,603 $ 36,561,909 $ 31,310,802 $ 32,749,297 $ 22,653,343$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 8,350,999
The accompanying notes are an integral part of this schedule.
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.
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 $100,000 for
the year ended December 31, 1997. The Company's 1988 Stock Option Plan was
canceled on December 31, 1997, canceling all stock options and eliminating
all potential stock option grants.
Annual Compensation Long-Term
Compensation
Awards
--------------------------------------------------- -----------
Name Other All
and Principal Annual Other Stock
Position Year Salary Bonus Compensation Compensation Options
- ------------ ----- ------ ----- ------------ ------------ -------
($) ($) ($) (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
(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.
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.
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. - - - - - - - - - - - -
(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.
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.
Aggregated Option Exercises During 1997 and December 31, 1997 Option Value
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
(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.
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
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
(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.
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.
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.
(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.
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