SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of the
Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
HARRIS & HARRIS GROUP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held May 12, 2004
To the Shareholders of Harris & Harris Group, Inc.:
NOTICE IS HEREBY GIVEN that the 2004 Annual Meeting of the
Shareholders of Harris & Harris Group, Inc. (the "Company") will be held
on Wednesday, May 12, 2004, at 2:30 p.m., local time, on the Concourse
Level at 780 Third Avenue (between 48th Street and 49th Street), New York,
New York 10017. This meeting has been called by the Board of Directors of
the Company, and this notice is being issued at its direction. It has
called this meeting for the following purposes:
1. To elect 10 directors of the Company to hold office until the
next annual meeting of shareholders or until their respective
successors have been duly elected and qualified;
2. To ratify, confirm and approve the Audit Committee's
selection of PricewaterhouseCoopers LLP as the independent
accountant for and during the fiscal year ending
December 31, 2004;
3. To approve a proposal to authorize the Company to offer
long-term rights to purchase shares of the Company's common
stock at an exercise price that, at the time such rights are
issued, will not be less than the greater of the market value of
the Company's common stock or the net asset value of the
Company's common stock. Such rights may be part of or
accompanied by other securities of the Company (such as
convertible preferred stock or convertible debt);
4. To remove certain investment restrictions that are not
applicable to business development companies; and
5. To transact such other business, including adjournments, as
may properly come before the meeting or any adjournment or
adjournments thereof.
Holders of common stock of record at the close of business on March
26, 2004 will be entitled to vote at the meeting.
Whether or not you expect to be present in person at the meeting,
please sign and date the accompanying proxy and return it promptly in the
enclosed business reply envelope, which requires no postage if mailed in the
United States.
By Order of the Board of Directors
April 12, 2004 /s/ Susan T. Harris
New York, New York ----------------------------------
Susan T. Harris
Secretary
IMPORTANT: PLEASE MAIL YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
THE MEETING DATE IS MAY 12, 2004.
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Harris & Harris Group, Inc.
111 West 57th Street
New York, New York 10019
(212) 582-0900
PROXY STATEMENT
2004 Annual Meeting of Shareholders
General Information
- -------------------
This proxy statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Harris & Harris Group,
Inc. (the "Company," "us," "our," and "we") to be voted at the 2004 Annual
Meeting of Shareholders (the "Annual Meeting") to be held on May 12, 2004 and
at any adjournment thereof.
The Annual Meeting will be held on Wednesday, May 12, 2004 at 2:30
p.m., local time, on the Concourse Level at 780 Third Avenue (between 48th
Street and 49th Street), New York, New York 10017. At the Annual Meeting, our
shareholders will be asked to elect 10 directors to serve on the Board of
Directors of the Company and to hold office until the next Annual Meeting and
to vote on the other matters stated in the accompanying Notice and described in
more detail in this proxy statement. IF ANY OTHER MATTERS PROPERLY COME BEFORE
THE ANNUAL MEETING, THE PERSONS NAMED ON THE PROXIES WILL, UNLESS THE
SHAREHOLDER OTHERWISE SPECIFIES IN THE PROXY, VOTE UPON SUCH MATTERS IN
ACCORDANCE WITH THEIR BEST JUDGMENT. The enclosed proxy card and this proxy
statement and annual report on Form 10-K are being first transmitted on or
about April 12, 2004 to our shareholders.
The Board of Directors has fixed the close of business on March 26,
2004 as the record date for the determination of our shareholders entitled to
receive notice of, and to vote at, the Annual Meeting. At the close of business
on the record date, an aggregate of 13,798,845 shares of common stock were
issued and outstanding. Each such share will be entitled to one vote on each
matter to be voted upon at the Annual Meeting. The presence, in person or by
proxy, of the holders of a majority of such outstanding shares is necessary to
constitute a quorum for the transaction of business at the Annual Meeting.
Solicitation and Revocation; Vote Required
- ------------------------------------------
All properly executed proxies received prior to the Annual Meeting
will be voted at the meeting in accordance with the instructions marked thereon
or otherwise as provided therein. UNLESS INSTRUCTIONS TO THE CONTRARY ARE
MARKED, SHARES REPRESENTED BY THE PROXIES WILL BE VOTED "FOR" ALL THE
PROPOSALS.
Any proxy given pursuant to this solicitation may be revoked by a
shareholder at any time, before it is exercised, by written notification
delivered to our Secretary, by voting in person at the Annual Meeting, or by
executing another proxy bearing a later date. If your shares are held for your
account by a broker, bank or other institution or nominee, you may vote such
shares at the Annual Meeting only if you obtain proper written authority from
your institution or nominee that you present at the Annual Meeting.
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Approval of any of the matters submitted for shareholder approval
requires that a quorum be present. The presence, in person or by proxy, of at
least a majority of the total number of outstanding shares of common stock
entitled to vote is necessary to constitute a quorum. Abstentions and broker
non-votes will be counted as shares present at the Annual Meeting for purposes
of determining the existence of a quorum. Broker non-votes are proxies received
by us from brokers or nominees when the broker or nominee neither has received
instructions from the beneficial owner or other persons entitled to vote nor
has discretionary power to vote on the particular matter.
If a quorum is present (in person or by proxy) and voting, (i) for
Proposal 1, the directors will be elected by a plurality of the votes cast;
(ii) for Proposal 2, the proposal to ratify, confirm and approve the
independent accountant will be approved if a majority of the votes cast are
cast in favor; (iii) for Proposal 3, the financing proposal will be approved if
a majority of the votes cast are cast in favor; and (iv) for Proposal 4,
approval of the proposal with respect to the removal of each investment
restriction will require the approval of the holders of a majority of the
voting securities outstanding on the record date (defined in the Investment
Company Act of 1940 (the "1940 Act") as the lesser of (a) more than 50% of the
shares outstanding on the record date or (b) 67% or more of the shares
represented at a meeting at which more than 50% of the shares outstanding on
the record date are represented). All other matters being submitted to
shareholder vote pursuant to the Notice of Annual Meeting will be approved if a
quorum is present in person or by proxy and a majority of the votes cast on a
particular matter are cast in favor of that matter. For purposes of Proposals
1, 2, 3 and unspecified matters that come before the meeting, votes withheld,
abstentions and broker non-votes will not be counted as votes cast on the
matter and will have no effect on the result of the vote. For purposes of
Proposal 4, because abstentions and broker non-votes are treated as shares
present but not voting, any abstentions and broker non-votes will have the
effect of votes against the proposal.
Proxies are being solicited by us. Proxies will be solicited by mail.
All expenses of preparing, printing, mailing, and delivering proxies and all
materials used in the solicitation of proxies will be borne by us. They may
also be solicited by officers and regular employees of the Company personally,
by telephone or otherwise, but these persons will not be specifically
compensated for such services. Banks, brokers, nominees, and other custodians
and fiduciaries will be reimbursed for their reasonable out-of-pocket expenses
in forwarding solicitation material to their principals, the beneficial owners
of our common stock. It is estimated that those costs will be nominal.
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ELECTION OF DIRECTORS
(Proposal No. 1)
The 10 nominees listed below, all of whom currently serve as
directors, have been nominated to serve as our directors until the next Annual
Meeting or until their respective successors are duly elected and qualified.
Although it is not anticipated that any of the nominees will be unable or
unwilling to serve, in the unexpected event that any such nominees should
become unable or decline to serve, it is intended that votes will be cast for
substitute nominees designated by our present Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL THE NOMINEES.
Nominees
- --------
Certain information, as of March 26, 2004, with respect to each of the
10 nominees for election at the Annual Meeting is set forth below, including
their names, ages and a brief description of their recent business experience,
including present occupations and employment, certain directorships held by
each and the year in which each became a director of the Company. The nominees
for election as directors of the Company have been divided into two groups --
interested directors and independent directors. Interested directors are
"interested persons" as defined in the 1940 Act or persons who may be
considered an "interested person" because of consulting work done for us. All
10 nominees are currently directors of the Company. We do not have an advisory
board.
Independent Directors
Dr. C. Wayne Bardin, age 69, was elected to our Board of Directors in
December 1994. From 1998 until the present, he served as President of Thyreos
Corp., a privately held, start-up pharmaceutical company. In 2003, Thyreos sold
its pharmaceutical assets but remains a holding company. From 1978 through
1996, Dr. Bardin was Vice President of The Population Council. Dr. Bardin's
professional appointments have included: Professor of Medicine, Chief of the
Division of Endocrinology, The Milton S. Hershey Medical Center of Pennsylvania
State University; and Senior Investigator, Endocrinology Branch, National
Cancer Institute. He has also served as a consultant to several pharmaceutical
companies. He has been appointed to the editorial boards of 15 journals. He has
also served on national and international committees and boards for National
Institute of Health, World Health Organization, The Ford Foundation, and
numerous scientific societies. Dr. Bardin received a B.A. from Rice University;
an M.S. and M.D. from Baylor University; and a Doctor Honoris Causa from the
University of Caen, the University of Paris and the University of Helsinki.
Dr. Phillip A. Bauman, age 48, was elected to our Board of Directors
in February 1998. He is Senior Attending in Orthopaedic Surgery at St. Luke's/
Roosevelt Hospital Center in Manhattan and has served as an elected member of
the executive committee of the Medical Board since 2000. He has been Assistant
Professor of Orthopaedic Surgery at Columbia University since 1998 and a Vice
President of Orthopaedic Associates of New York since 1994. He was elected a
fellow of the American Academy of Orthopaedic Surgeons in 1991. He is an
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active member of the American Orthopaedic Society for Sports Medicine, the
New York State Society of Orthopaedic Surgeons and the American Medical
Association. Dr. Bauman holds a B.A. and M.S. in biology from Harvard
University and a medical degree from Columbia University.
G. Morgan Browne, age 69, was elected to our Board of Directors in
June 1992. From 2001-2003, Mr. Browne was the Chief Financial Officer of Cold
Spring Harbor Laboratory, a not-for-profit institution that conducts research
and education programs in the fields of molecular biology and genetics. From
1985 to 2001, he was the Administrative Director of Cold Spring Harbor
Laboratory. In prior years, he was active in the management of numerous
scientifically based companies as an officer, as an individual consultant and
as an associate of Laurent Oppenheim Associates, Industrial Management
Consultants. He is a Director of OSI Pharmaceuticals, Inc., a publicly held
company principally engaged in drug discovery based on gene transcription. He
was a founding director of the New York Biotechnology Association and a
founding director of the Long Island Research Institute. Mr. Browne was
graduated from Yale University.
Dugald A. Fletcher, age 74, was elected to our Board of Directors in
June 1996. He has served as President of Fletcher & Company, Inc., a management
consulting firm since 1984. Until the end of 1997, he was Chairman of Binnings
Building Products Company, Inc. Mr. Fletcher's previous business appointments
include: adviser to Gabelli/Rosenthal LP, a leveraged buyout fund; Chairman of
Keller Industries, building and consumer products; Senior Vice President of
Booz-Allen & Hamilton; President of Booz-Allen Acquisition Services; Executive
Vice President and a Director of Paine Webber, Inc.; and President of Baker,
Weeks and Co., Inc., a New York Stock Exchange member firm. He is currently a
Trustee of the Gabelli Growth Fund and a Director of the Gabelli Convertible
and Income Securities Fund, Inc. Mr. Fletcher was graduated from Harvard
College and Harvard Business School.
Mark A. Parsells, age 44, was elected to our Board of Directors in
November 2003. Since May 2001, Mr. Parsells has been Chairman, President and
Chief Executive Officer of Fusura LLC, an AIG company that is an
internet-based, direct to consumer auto insurance business. From February 2000
through May 2001, Mr. Parsells was President and Chief Operating Officer of
Citibank Online. From April 1999 through February 2000, Mr. Parsells was Senior
Vice President for Strategic Planning and General Manager of First USA,
Wingspan. He was graduated from Emory University (BA), Cornell University (MBA)
and Vlerick LeuvenGent Business School (MBA).
Charles E. Ramsey, age 61, was elected to our Board of Directors in
October 2002. He is a retired founder and principal of Ramsey/Beirne
Associates, Inc., an executive search firm that specialized in recruiting top
officers for high technology companies, many of which were backed by venture
capital. An active investor, he is a director of three privately held
companies, including Experion Systems, Inc. (in which we own an equity
interest). He works on construction projects in Nicaragua as a member of the
Nicaraguan Initiative Committee for the Presbyterian Churches of the Hudson
River and as Chair of Bridges to Community, a non-governmental organization
dedicated to construction projects in Nicaragua. He was graduated from
Wittenberg University (B.A.).
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James E. Roberts, age 58, was elected to our Board of Directors in
June 1995. Since November 2002, he has been Executive Vice President and Chief
Underwriting Officer of the Reinsurance Division of Alea North America Company.
From October 1999 to November 2002, he was Chairman and Chief Executive Officer
of the Insurance Corporation of New York, Dakota Specialty Insurance Company,
and Recor Insurance Company Inc., all members of the Trenwick Group, Ltd. From
October 1999 to March 2000, he served as Vice Chairman of Chartwell Reinsurance
Company. Prior to assuming those positions, he was Vice Chairman of Trenwick
America Reinsurance Corporation from May 1995 to March 2000. Mr. Roberts is a
graduate of Cornell University.
Interested Directors
Charles E. Harris, age 61, has been a Director, Chairman of
our Board of Directors and Chief Executive since April 1984 and Managing
Director since January 2004. He also served as our Chief Compliance
Officer from February 1997 to February 2001. He was a member of the
Advisory Panel for the Congressional Office of Technology Assessment.
Prior to joining us, he was Chairman of Wood, Struthers and Winthrop
Management Corporation, the investment advisory subsidiary of Donaldson,
Lufkin and Jenrette. He is currently a member of the New York Society of
Security Analysts. He acts as a Trustee and head of the audit committee of
Cold Spring Harbor Laboratory, a not-for-profit institution that conducts
research and education programs in the fields of molecular biology and
genetics. He also serves as a Trustee and head of the audit committee of
the Nidus Center, a life sciences business incubator in St. Louis,
Missouri. He is a life-sustaining fellow of MIT and a shareholder of its
Entrepreneurship Center. He was graduated from Princeton University (A.B.,
1964) and Columbia University Graduate School of Business (MBA, 1967). He
is an "interested person" as defined in Section 2(a)(19) of the 1940 Act,
as a beneficial owner of more than 5% of our common stock, as a control
person and as one of our officers. In addition, Mr. Harris's wife serves
as our corporate secretary.
Dr. Kelly S. Kirkpatrick, age 37, was elected to our Board of
Directors in March 2002. She has served as a consultant to us on nanotechnology
and in our due diligence work on Agile Materials & Technologies, Inc. and
Optiva, Inc. She is an independent business consultant assessing and advising
on early stage, technology start-ups for venture capital companies. From 2000
to 2002, she served in the Office of the Executive Vice Provost of Columbia
University as Director of the Columbia University Nanotechnology Initiative and
as Director for Research and Technology Initiatives. From 1998 to 2000, she
served in the White House Office of Science and Technology Policy as a Senior
Policy Analyst involved in the National Nanotechnology Initiative. From 1997 to
1998, she was a Science Policy Coordinator for Sandia National Laboratories.
From 1995 to 1996, she served in the office of Senator Joseph Lieberman as
Legislative Assistant, Congressional Science and Engineering Fellow. Dr.
Kirkpatrick received her B.S. in Chemistry with a business option from the
University of Richmond and received her Ph.D. in Materials Science and
Engineering from Northwestern University. She may be considered to be an
"interested person" of the Company because of the consulting work she does for
us.
Lori D. Pressman, age 46, was elected to our Board of Directors in
March 2002. She has served as a consultant to us on tiny technology,
intellectual property and in our due diligence work on Chlorogen, Inc.,
Continuum Photonics, Inc., NanoOpto Corporation, Nanopharma Corp.,
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Nanosys, Inc., Nantero, Inc. and NeoPhotonics Corporation. She also acts as an
observer for us at board meetings of certain portfolio companies in the Boston
area. She is a business consultant providing advisory services to start-ups and
venture capital companies. She consults internationally on technology transfer
practices and metrics for non-profit and government organizations. From 1999 to
2001, she was Chair of the Survey Statistics and Metrics Committee of the
Association of University Technology Managers. From September 1989 to July
2000, she was employed by MIT in its Technology Licensing Office. She served as
its Technology Licensing Officer from 1989 to 1995 and as Assistant Director
from 1996 to 2000. From September 1984 to September 1989, she was Senior
Development Engineer at Lasertron, Inc. Ms. Pressman was graduated from the
Massachusetts Institute of Technology, Physics (S.B.), and the Columbia School
of Engineering (MSEE). She may be considered to be an "interested person" of
the Company because of the consulting work she does for us.
Set forth below is the dollar range of equity securities beneficially
owned by each director or nominee as of March 25, 2004.
===========================================================================
| | Dollar Range of Equity Securities |
| Name of Director or Nominee | Beneficially Owned (1)(2)(3) |
| -----------------------------------|-------------------------------------|
| | |
| Dr. C. Wayne Bardin | Over $100,000 |
| Dr. Phillip A. Bauman | Over $100,000 |
| G. Morgan Browne | Over $100,000 |
| Dugald A. Fletcher | Over $100,000 |
| Mark A. Parsells | None |
| Charles E. Ramsey | Over $100,000 |
| James E. Roberts | Over $100,000 |
| Charles E. Harris (4) | Over $100,000 |
| Dr. Kelly S. Kirkpatrick (5) | $50,001 - $100,000 |
| Lori D. Pressman (5) | $50,001 - $100,000 |
==========================================================================
(1) Beneficial ownership has been determined in accordance with Rule
16a-1(a)(2) of the 1934 Act.
(2) The dollar ranges are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000
and over $100,000.
(3) The dollar ranges are based on the price of the equity securities as of
March 25, 2004.
(4) Denotes an individual who is an "interested person" as defined in the 1940
Act.
(5) Denotes an individual who may be considered an "interested person" because
of consulting work performed for us.
Board of Directors and Committees
- ---------------------------------
In 2003, there were five meetings of the Board of Directors of the
Company and the full Board acted 11 times by unanimous written consent. No
director attended fewer than 75 percent of the aggregate of Board of Directors'
and applicable committee meetings on which each director served (during the
periods that they so served), except that Mr. Ramsey attended one of the two
meetings of the Ad Hoc Long-Term Planning Committee.
It is the policy of the Company that a portion of our directors are
encouraged to attend annual meetings of shareholders. In 2003, one director
attended the annual meeting.
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Shareholders and other interested parties may contact the Board or any
member of the Board by mail. To communicate with the Board or any member of the
Board, correspondence should be addressed to the Board or the Board members
with whom you wish to communicate by either name or title. All such
correspondence should be sent c/o the Company, 111 West 57th Street, Suite
1100, New York, New York 10019.
The Company's Board of Directors has seven committees comprised of the
following members, all of whom except Mr. Harris are independent both under the
rules of the NASD and for purposes of the 1940 Act:
Board Committees
-----------------------------------------------------------------------------
| Executive | Audit | Compensation |
| -------------------------|-------------------------|------------------------|
| | | |
| Charles E. Harris (1) | Dugald A. Fletcher (1) | James E. Roberts (1) |
| Dr. C. Wayne Bardin | Dr. Phillip A. Bauman | Dr. Phillip A. Bauman |
| G. Morgan Browne | G. Morgan Browne | Mark A. Parsells |
| James E. Roberts | | Charles E. Ramsey |
-----------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
| Nominating | Valuation | Independent Directors | Pricing |
|--------------------------|-------------------------|------------------------|------------------------|
| | | | |
| Dr. C. Wayne Bardin (1) | Dugald A. Fletcher (1) | G. Morgan Browne(1) | Charles E. Harris(1) |
| Dr. Phillip A. Bauman | Dr. C. Wayne Bardin | Dr. C. Wayne Bardin | G. Morgan Browne |
| Mark A. Parsells | G. Morgan Browne | Dr. Phillip A. Bauman | Dugald A. Fletcher |
| Charles E. Ramsey | Mark A. Parsells | Dugald A. Fletcher | |
| | James E. Roberts | Mark A. Parsells | |
| | | Charles E. Ramsey | |
| | | James E. Roberts | |
| | | | |
------------------------------------------------------------------------------------------------------
|(1) Denotes the Chairman of the Committee.
Executive Committee
- -------------------
The Executive Committee meets from time to time between regular
meetings of the Board of Directors and exercises the authority of the Board to
the extent provided by law. The Executive Committee did not meet as a separate
committee and did not act by unanimous written consent in 2003.
Audit Committee
- ---------------
The Audit Committee has been delegated the sole authority to
appoint or replace our independent accountant, subject to shareholder
ratification. The Audit Committee discusses and reviews the scope and fees
of the prospective annual audit, reviews the results thereof with the
independent accountant, reviews and approves non-audit services of the
independent accountant, reviews compliance with existing major accounting
and financial policies relative to the adequacy of the Company's
internal accounting controls, reviews compliance with federal and
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state laws relating to accounting practices and reviews and approves
transactions, if any, with affiliated parties.
The Audit Committee operates pursuant to a written charter approved by
our Board of Directors, which is attached hereto as Appendix A. The Audit
Committee Charter sets out the responsibilities, authority and duties of the
Audit Committee. The Audit Committee met three times and acted by unanimous
written consent one time in 2003.
Compensation Committee
- ----------------------
The Compensation Committee has the full power and authority of the
Board with respect to all matters pertaining to the remuneration of our
employees. The Compensation Committee met one time and acted by unanimous
written consent two times in 2003.
Nominating Committee
- --------------------
The Nominating Committee acts as an advisory committee to the Board by
making recommendations to the Board of potential new directors, committee
members and officers of the Company. The Board must ratify, approve or
otherwise confirm the Nominating Committee's selections and appointments to
render them effective. The Nominating Committee met one time and acted by
unanimous written consent two times in 2003.
The Nominating Committee will consider Director candidates recommended
by shareholders. In considering candidates submitted by shareholders, the
Nominating Committee will take into consideration the needs of the Board and
the qualifications of the candidate. The Nominating Committee may also take
into consideration the number of shares held by the recommending shareholder
and the length of time that such shares have been held. To have a candidate
considered by the Nominating Committee, a shareholder must submit the
recommendation in writing and must include:
o The name of the shareholder and evidence of the person's ownership of
shares of the Company, including the number of shares owned and the
length of time of ownership;
o The name of the candidate, the candidate's resume or a listing of his or
her qualifications to be a Director of the Company and the person's
consent to be named as a Director if selected by the Nominating Committee
and nominated by the Board; and
o If requested by the Nominating Committee, a completed and signed
directors' questionnaire.
The shareholder recommendation and information described above must be
sent to the Company's Corporate Secretary, c/o Harris & Harris Group, Inc., 111
West 57th Street, Suite 1100, New York, New York 10019 and must be received by
the Corporate Secretary not less than 120 days prior to the anniversary date of
the Company's most recent annual meeting of shareholders or, if the meeting has
moved by more than 30 days, a reasonable amount of time before the meeting.
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The Nominating Committee believes that the minimum qualifications for
serving as a director of the Company are that a nominee demonstrate, by
significant accomplishment in his or her field, an ability to make a meaningful
contribution to the Board's oversight of the business and affairs of the
Company and have an impeccable record and reputation for honest and ethical
conduct in both his or her professional and personal activities. In addition,
the Nominating Committee examines a candidate's specific experiences and
skills, time availability in light of other commitments, potential conflicts of
interest and independence from management and the Company. The Nominating
Committee also seeks to have the Board represent a diversity of backgrounds and
experience. The Company does not pay any third party a fee to assist in the
process of identifying and evaluating candidates.
The Nominating Committee operates pursuant to a written charter
approved by our Board of Directors. The Nominating Committee Charter sets out
the responsibilities, authority and duties of the Nominating Committee. Our
Nominating Committee Charter is attached hereto as Appendix B.
Valuation Committee
- -------------------
The Valuation Committee has the full power and authority of the Board
in reviewing and approving the valuation of our assets for reporting purposes
pursuant to our Asset Valuation Policy Guidelines that were established and
approved by the Board of Directors. Glenn E. Mayer(1) was a member of the
Valuation Committee from October 21, 2003 through December 24, 2003. The
Valuation Committee met seven times in 2003.
- ---------------------------------
(1) Mr. Mayer is currently a Director but is not a nominee for reelection
at this Annual Meeting.
Ad Hoc Long-Term Planning Committee
- -----------------------------------
The Board of Directors approved the appointment of an Ad Hoc Long-Term
Planning Committee on February 5, 2003, which acted as an advisory committee to
the Board. The members of the Ad Hoc Long-Term Planning Committee during 2003
were G. Morgan Browne, Dr. C. Wayne Bardin, Glenn E. Mayer and Charles E.
Ramsey, and such committee members were considered independent as defined in
the 1940 Act. The Ad Hoc Long-Term Planning Committee met two times in 2003.
This committee was terminated by the Board of Directors on March 10, 2004.
Independent Directors Committee
- -------------------------------
The Board of Directors approved the appointment of an Independent
Directors Committee on March 10, 2004, which will have the responsibility of
proposing corporate governance and long term planning matters to the Board of
Directors.
Pricing Committee
- -----------------
The Board of Directors approved the appointment of a Pricing
Committee on October 21, 2003 to fix the price of the 2003 public offering
and to handle such details as were necessary to effect the public offering.
The members of the Pricing Committee were Charles E. Harris, Dugald A.
Fletcher and Glenn E. Mayer. The Pricing Committee met one time during 2003 and
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upon the completion of the offering on December 24, 2003, the Pricing
Committee was terminated.
The Board of Directors approved the appointment of a Pricing Committee
on February 12, 2004 to fix the price of future public or private offerings and
to handle such details as are necessary to effect such offerings.
Audit Committee Report
- ----------------------
The Audit Committee of the Company presents the following report:
The Audit Committee of the Company has performed the following
functions: (i) the Audit Committee reviewed and discussed the audited
financial statements of the Company with management, (ii) the Audit
Committee discussed with the independent auditors the matters required
to be discussed by the Statements on Auditing Standards No. 61, (iii)
the Audit Committee received the written disclosures and the letter
from the independent auditors required by ISB Standard No. 1 and has
discussed with the auditors the auditors' independence and (iv) the
Audit Committee recommended to the Board of Directors of the Company
that the financial statements be included in the Company's Annual
Report on Form 10-K for the past fiscal year.
Dugald A. Fletcher (Chair)
Dr. Phillip A. Bauman
Glenn E. Mayer
Audit Committee's Pre-Approval Policies
- ---------------------------------------
Since March 2003, the Audit Committee of the Company has pre-approved
all audit and non-audit services provided by PricewaterhouseCoopers LLC to the
Company. On November 11, 2003, the Audit Committee adopted Pre-Approval
Policies and Procedures.
Audit Fees
- ----------
The aggregate fees for professional services rendered by
PricewaterhouseCoopers LLP in connection with their annual audit of the
Company's consolidated financial statements, and reviews of the consolidated
financial statements included in the Company's quarterly reports on Form 10-Q
for the fiscal year ended December 31, 2003, and the review of documents and
matters associated with our 2003 public offering was approximately $98,800 and
for the fiscal year ended December 31, 2002 was approximately $55,500.
Tax Fees
- --------
The aggregate fees for professional services rendered by
PricewaterhouseCoopers LLP for tax services for the fiscal year ended December
31, 2003 was approximately $13,450 and for the fiscal year ended December 31,
2002 was approximately $13,400.
10
All such fees for services rendered during 2003 were pre-approved by
the Audit Committee. The Audit Committee has determined that the provision of
non-audit services that were provided during 2003 is compatible with
maintaining PricewaterhouseCoopers LLP's independence in performing audit
services for the Company.
Principal Shareholders
- ----------------------
Set forth below is information as of March 25, 2004 with respect
to the beneficial ownership of our common stock by (i) each person who is
known by us to be the beneficial owner of more than 5% of the outstanding
shares of the common stock, (ii) each of our directors and executive
officers (iii) all of our directors and executive officers as a group.
Except as otherwise indicated, to our knowledge, all shares are
beneficially owned and investment and voting power is held by the persons
named as owners. The information in the table below is from publicly
available information that may be as of dates earlier than March 25, 2004.
At this time, we are unaware of any shareholder owning more than 5% of the
outstanding shares of common stock other than the ones noted below. Unless
otherwise provided, the address of each holder is c/o Harris & Harris
Group, Inc., 111 West 57th Street, Suite 1100, New York, New York 10019.
Amount and Nature of Percentage of Outstanding
Name and Address of Beneficial Owner Beneficial Ownership Common Shares Owned
- ------------------------------------------------ -------------------- --------------------------
Directors and Executive Officers:
Charles E. and Susan T. Harris............... 1,050,893(1) 7.6
Dr. C. Wayne Bardin.......................... 21,316(2) *
Dr. Phillip A. Bauman........................ 22,476(3) *
G. Morgan Browne............................. 34,172 *
Dugald A. Fletcher........................... 13,370 *
Douglas W. Jamison........................... 625 *
Dr. Kelly S. Kirkpatrick..................... 3,313 *
Daniel V. Leff............................... 0 *
Glenn E. Mayer............................... 100,000 *
Mark A. Parsells............................. 0 *
Mel P. Melsheimer............................ 80,210(4) *
Lori D. Pressman............................. 3,871 *
Charles E. Ramsey............................ 28,046
James E. Roberts............................. 16,392 *
Helene B. Shavin............................. 3,000 *
All directors and executive officers as
a group (16 persons).......................... 1,377,684 10.0
5% Shareholders:
Jonathan Rothschild
c/o Arterio, Inc.
1061-B Shary Circle
Concord, California 94518................... 770,330 5.6
Masters Capital Management
LLC/Michael Masters(5)
3060 Peachtree Road, N.E., Suite 1815
Atlanta, Georgia 30305...................... 886,962(6) 6.4
11
________________
* Less than 1%.
(1) Includes 1,039,559 shares owned by Mrs. Harris and 11,334 shares owned by
Mr. Harris.
(2) Includes 3,786 shares owned by Bardin LLC for the Bardin LLC Profit-
Sharing Keogh.
(3) Includes 5,637 shares owned by Ms. Milbry C. Polk, Dr. Bauman's wife; 100
shares owned by Adelaide Polk-Bauman, Dr. Bauman's daughter; 100 shares
owned by Milbry Polk-Bauman, Dr. Bauman's daughter; and 100 shares owned
by Mary Polk-Bauman, Dr. Bauman's daughter. Ms. Milbry C. Polk is the
custodian for the accounts of the three children.
(4) Includes 13,334 shares which are owned jointly by Mel P. Melsheimer and
his wife.
(5) Pursuant to a Schedule 13G/A dated February 9, 2004, Masters Capital
Management LLC ("Masters") and Michael Masters beneficially owned 568,200
shares and Marlin Fund Offshore, Ltd. beneficially owns 318,762 shares
(all with shared voting and dispositive power).
(6) See Footnote 5.
Executive Officers
- ------------------
Our executive officers who are not directors are set forth below.
Information relating to our executive officers who are directors is set forth
under "Election of Directors - Nominees." Our executive officers are elected to
serve until they resign or are removed, or are otherwise disqualified to serve,
or until their successors are elected and qualified.
Mel P. Melsheimer, age 64, has served as President, Chief Operating
Officer and Chief Financial Officer since February 1997 and Managing Director
since January 2004. Since February 2001, he has also served as our Chief
Compliance Officer and since July 2001, as Treasurer. From March 1994 to
February 1997, he served as a nearly full-time consultant to us or as an
officer to one of our portfolio companies. From November 1992 to February 1994,
he served as Executive Vice President, Chief Operating Officer and Secretary of
Dairy Holdings, Inc. He was graduated from the University of Southern
California (MBA) and Occidental College (B.A.).
Daniel V. Leff, age 35, has served as Executive Vice President and
Managing Director since January 2004. Prior to joining us, he was a Senior
Associate with Sevin Rosen Funds in the firm's Dallas, Texas office where he
focused on early-stage investment opportunities in semiconductors, components,
and various emerging technology areas. Mr. Leff has also worked for Redpoint
Ventures in the firm's Los Angeles office. In addition, he previously held
engineering, marketing and strategic investment positions with Intel
Corporation. Mr. Leff received his Ph.D. degree in Physical Chemistry from
UCLA's Department of Chemistry and Biochemistry. He also received a B.S. in
Chemistry from the University of California, Berkeley and an MBA from The
Anderson School at UCLA, where he was an Anderson Venture Fellow.
Douglas W. Jamison, age 34, has served as Vice President since
September 2002 and Managing Director since January 2004. Prior to joining
us, he worked for five years as a senior technology manager at the
University of Utah Technology Transfer Office, where he managed
intellectual property for the University of Utah. He was graduated from
Dartmouth College (B.A.) and the University of Utah (M.S.).
Helene B. Shavin, age 50, has served as our Vice President
and Controller since November 2001. Prior to joining us, she was
a Vice President with Citicorp Venture Capital
12
from 1986 to 2000. Ms. Shavin is a graduate of Queens College (B.A.) and
Baruch College (MBA) and is a certified public accountant.
Susan T. Harris, 59, was employed by Harris & Harris Enterprises,
Inc., a wholly owned subsidiary of Harris & Harris Group, Inc., from July 1999
through July 2003, working primarily in financial public relations. From July
2001 through July 2003, she served as its Secretary and Treasurer. Also since
July 2001, Ms. Harris has served as corporate secretary of Harris & Harris
Group, Inc. She has been an investor relations consultant since 1972, operating
as a sole proprietor prior to 1999, and again from July 2001 to the present.
From 1966 to 1972, she was a securities analyst with several securities firms,
including Eastman Dillion, Union Securities, Inc., where she was Vice President
and Senior Consumer Products Analyst. She is a graduate of Wellesley College
with a B.A. in economics. Ms. Harris's husband serves as the Chairman, Chief
Executive Officer and a Managing Director of the Company.
Remuneration of Chief Executive Officer and Other Executive Officers
- --------------------------------------------------------------------
The following table sets forth a summary for each of the last three
years of the cash and non-cash compensation awarded to, earned by, or paid to
our Chief Executive Officer and our other executive officers.
=============================================
| Annual Compensation |
=========================================================================================================
| | | | | Other Annual | All Other |
| Name and | Year | Salary | Bonus | Compensation | Compensation |
| Principal Position | | ($) | ($)(1) | ($)(2) | ($)(3) |
|------------------------------| ----------|-------------|--------------|----------------|----------------|
| | | | | | |
| Charles E. Harris | 2003 | 224,567 | 0 | 43,006 | 318,296 |
| Chairman of the Board, | 2002 | 221,217 | 10,503 | 46,570 | 165,468 |
| Chief Executive Officer (4) | 2001 | 215,510 | 0 | 48,453 | 232,000 |
| | | | | | |
| | | | | | |
| Mel P. Melsheimer | 2003 | 254,106 | 0 | 0 | 14,000 |
| President, Chief Operating, | 2002 | 250,327 | 3,224 | 0 | 12,000 |
| Officer, Chief Financial | 2001 | 243,869 | 0 | 0 | 10,500 |
| Officer, Treasurer & | | | | | |
| Chief Compliance Officer | | | | | |
| | | | | | |
| | | | | | |
| Helene B. Shavin | 2003 | 89,241 | 0 | 0 | 14,000 |
| Controller | 2002 | 85,353 | 1,161 | 0 | 11,000 |
| | 2001 | 13,333 | 0 | 0 | 1,867 |
| | | | | | |
| | | | | | |
| Susan T. Harris | 2003 | 9,522 | 0 | 0 | 0 |
| Secretary | 2002 | 12,703 | 0 | 0 | 2,332 |
| | 2001 | 12,376 | 0 | 0 | 1,578 |
| | | | | | |
| | | | | | |
| Douglas W. Jamison | 2003 | 137,182 | 0 | 0 | 12,000 |
| Vice President | 2002 | 35,936 | 0 | 0 | 1,050 |
| | | | | | |
=========================================================================================================
(1) For 2002, these amounts represent the actual amounts earned as a result of
realized gains during the year ended December 31, 2002 under the Harris &
Harris Group Employee Profit-Sharing Plan and paid out in 2003. You may
find more information on our Employee Profit-Sharing Plan under Incentive
Compensation Plans.
(2) Other than Mr. Harris, amounts of "Other Annual Compensation" earned by
the named executive officers for the periods presented did not meet the
threshold reporting requirements.
13
(3) Except for Mr. Harris, amounts reported represent our contributions on
behalf of the named executive to the Harris & Harris Group, Inc. 401(k)
Plan. For 2003, Mr. Harris's "All Other Compensation" consists of: $14,000
401(k) Plan employer contribution; $298,306 for his 2003 SERP
contribution; and $5,990 in life insurance premiums for the benefit of his
beneficiaries. With respect to 2002 and 2003, an additional $73,739 was
accrued for Mr. Harris's SERP account in 2002, but not paid until 2003.
(4) Mr. Harris has an employment agreement with us.
Incentive Compensation Plans
- ----------------------------
As of January 1, 2003, we implemented the Amended and Restated Harris
& Harris Group, Inc. Employee Profit-Sharing Plan, which we refer to as the
2002 Plan.
The Plan (and its predecessor) provides for profiting sharing by our
officers and employees equal to 20% of our "qualifying income" for that plan
year. For the purposes of the Plan, qualifying income is defined as net
realized income as reflected on our consolidated statements of operations for
that year, less nonqualifying gains, if any.
For purposes of the Plan, our net realized income includes investment
income, realized gains and losses, and operating expenses (including taxes paid
or payable by us), but is calculated without including dividends paid or
distributions made to shareholders, payments under the Plan, unrealized gains
and losses, and loss carry-overs from other years. The proportion of net
after-tax realized gains attributable to asset values as of September 30, 1997
is considered nonqualifying gain, which reduces qualifying income.
On October 15, 2002, our shareholders approved the performance goals
under the 2002 Plan in accordance with Section 162(m) of the Code, effective as
of January 1, 2003. The Code generally provides that a public company such as
we are may not deduct compensation paid to its chief executive officer or to
any of its four most highly compensated officers to the extent that the
compensation paid to the officer/employee exceeds $1,000,000 in any tax year,
unless payment is made upon the attainment of objective performance goals that
are approved by our shareholders.
Under the 2002 Plan, our net realized income includes investment
income, realized qualifying gains and losses, and operating expenses (including
taxes paid or payable by us), but is calculated without including dividends
paid or loss carry-overs from other years, which we refer to as qualifying
income. As soon as practicable following the year-end audit, the Compensation
Committee will determine whether, and if so how much, qualifying income exists
for a plan year. Once determined, 90% of the qualifying income will be paid out
to Plan participants pursuant to the distribution percentages set forth in the
Plan. The remaining 10% will be paid out after we have filed our federal tax
return for that plan year.
Under the 2002 Plan, awards previously granted to the four
current Participants (Messrs. Harris and Melsheimer and Ms. Shavin and
Jacqueline M. Matthews, herein referred to as the "grandfathered
participants") will be reduced by 10% with respect to "Non-Tiny Technology
Investments" (as defined in the 2002 Plan) and by 25% with respect to
"Tiny Technology Investments" (as defined in the 2002 Plan) and will
become permanent. These reduced awards are herein referred to as
"grandfathered participations." The amount by which the awards are reduced
will be allocable and reallocable each year by the the Compensation
Committee among current and new
14
participants as awards under the 2002 Plan. The grandfathered
participations will be honored by us whether or not the grandfathered
participant is still employed by us or is still alive (in the event of
death, the grandfathered participations will be paid to the grandfathered
participant's estate), unless the grandfathered participant is dismissed
for cause, in which case all awards, including the grandfathered
participations, will be immediately cancelled and forfeited. With regard to
new investments and follow-on investments made after the date on which the
first new employee begins participating in the 2002 Plan, both current and
new participants will be required to be employed by us at the end of a plan
year in order to participate in profit-sharing on our investments with
respect to that year.
Notwithstanding any provisions of the 2002 Plan, in no event may the
aggregate amount of all awards payable for any Plan Year during which we remain
a "business development company" within the meaning of the 1940 Act be greater
than 20% of our "net income after taxes" within the meaning of Section
57(n)(1)(B) of the 1940 Act. In the event the awards as calculated exceed that
amount, the awards will be reduced pro rata.
The 2002 Plan may be modified, amended or terminated by the
Compensation Committee at any time. Notwithstanding the foregoing, the
grandfathered participations may not be further modified. Nothing in the 2002
Plan will preclude the Compensation Committee from naming additional
participants in the 2002 Plan or, except for grandfathered participations,
changing the Award Percentage of any Participant (subject to the overall
percentage limitations contained in the 2002 Plan). Currently, under the 2002
Plan, the distribution amounts for non-grandfathered investments for each
officer and employee currently are as follows: Charles E. Harris, 7.790%; Mel
P. Melsheimer, 3.733%; Douglas W. Jamison, 3.5%; Daniel V. Leff, 3.0%; Helene
B. Shavin, 1.524%; and Jacqueline M. Matthews, 0.453%, which together equal
20%. In one case, for a former employee who left other than due to termination
for cause, any amount earned will be accrued and may subsequently be paid to
the participant.
The grandfathered participations are set forth below:
Grandfathered Participations
-------------------------------------------------
Name of Officer/Employee Non-Tiny Technology (%) Tiny Technology (%)
- ------------------------ ----------------------- -------------------
Charles E. Harris 12.41100 10.34250
Mel P. Melsheimer 3.80970 3.17475
Helene B. Shavin 1.37160 1.14300
Jacqueline M. Matthews 0.40770 0.33975
TOTAL 18.00000 15.00000
Accordingly, an additional 2% of Qualifying Income with respect to
grandfathered Non-Tiny Technology Investments, 5% of Qualifying Income with
respect to grandfathered Tiny Technology Investments and the full 20% of
Qualifying Income with respect to new investments are available for allocation
and reallocation from year to year. Currently, Douglas W. Jamison and Daniel V.
Leff are each allocated 0.80% of the Non-Tiny Technology Grandfathered
Participations and 2% of the Tiny Technology Grandfathered Participations.
We calculate the profit-sharing accrual based on the terms of the
plan in effect. During the first quarter of 2003, we paid out 90 percent of
the 2002 profit sharing in the amount of $13,710. The remaining 10
percent of the 2002 profit sharing, $1,523, was paid out upon the
15
completion and filing of our 2002 federal tax return. During 2003, we made
no accrual for profit sharing.
401(k) Plan
- -----------
As of January 1, 1989, we adopted an employee benefits program
covering substantially all employees under a 401(k) Plan and Trust Agreement.
As of January 1, 1999, we adopted the Harris & Harris Pension Plan and Trust, a
money purchase plan that would allow us to stay compliant with the 401(k)
top-heavy regulations and deduction limitation regulations. In 2001, Congress
enacted the Economic Growth and Tax Relief Reconciliation Act of 2001 which has
increased the deduction limits for plans such as the 401(k) Plan. This
eliminated the need for us to maintain two separate plans. Effective December
31, 2001, the Pension Plan merged into the 401(k) Plan, with the 401(k) Plan
being the surviving plan. Contributions to the plan are at our discretion.
During 2003, contributions to the plan charged to operations were approximately
$64,500.
Medical Benefits
- ----------------
On June 30, 1994, we adopted a plan to provide medical and health
insurance for retirees, their spouses and dependents who, at the time of their
retirement, have 10 years of service with us and have attained 50 years of age
or have attained 45 years of age and have 15 years of service with us. On
February 10, 1997, we 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 or subsequent employer provided health insurance
plans. Based upon actuarial estimates, we provided an original reserve of
$176,520 that was charged to operations for the period ending June 30, 1994. As
of December 31, 2003 we had a reserve of $531,293 for the plan.
Mandatory Retirement Plan
- -------------------------
On March 20, 2003, in order to begin planning for eventual management
succession, the Board of Directors voted to establish a mandatory retirement
plan for individuals who are employed by us in a bona fide executive or high
policy making position. There are currently two such individuals, the Chairman
and CEO, and the President and COO. Under this plan, mandatory retirement will
take place effective December 31 of the year in which the eligible individuals
attain the age of 65. On an annual basis beginning in the year in which the
designated individual attains the age of 65, a committee of the Board
consisting of non-interested directors may determine to postpone the mandatory
retirement date for that individual for one additional year for our benefit.
Under applicable law prohibiting discrimination in employment on the
basis of age, we can impose a mandatory retirement age of 65 for our
executives or employees in high policy-making positions only if each employee
subject to the mandatory retirement age is entitled to an immediate
retirement benefit at retirement age of at least $44,000 per year. The
benefits payable at retirement to Charles E. Harris, our Chairman and Chief
Executive Officer, and Mel P. Melsheimer, our President, Chief Operating
Officer and Chief Financial Officer, under our existing retirement plans do
not equal this threshold. Mr. Harris has offered, for our benefit, to
16
waive his right to exclude certain other benefits from this calculation,
which makes it unlikely that any provision will have to be made for him in
order for us to comply with this threshold requirement. For Mr. Melsheimer,
however, a new plan was established to provide him with the difference
between the benefit required under the age discrimination laws and that
provided under our existing plans. The expense to us of providing the
benefit under this new plan is currently estimated to be $450,000. This
benefit will be unfunded, and the expense is being amortized over the fiscal
periods through the year ended December 31, 2004.
Employment Agreement
- --------------------
On October 19, 1999, Charles E. Harris signed an Employment Agreement
with us (the "Employment Agreement"), which superseded an employment agreement
that was about to expire on December 31, 1999. The Employment Agreement expires
on December 31, 2004 ("Term"); provided, on January 1, 2000, and on each day
thereafter, the Term extends automatically by one day unless at any time we or
Mr. Harris, by written notice, decides not to extend the Term, in which case
the Term will expire five years from the date of the written notice.
Accordingly, if we or Mr. Harris were to provide notice on June 30, 2004, the
Term would expire on June 30, 2009.
During the period of employment, Mr. Harris shall serve as our
Chairman and Chief Executive Officer; be responsible for our general management
of the affairs and all subsidiaries, reporting directly to our Board of
Directors; serve as a member of the Board for the period of which he is and
shall from time to time be elected or reelected; and serve, if elected, as our
President and as an officer and director of any subsidiary or affiliate of the
Company.
Mr. Harris is to receive compensation under his Employment Agreement
in the form of base salary of $208,315 for 2000, with automatic yearly
adjustments to reflect inflation. In addition, the Board may increase such
salary, and consequently decrease it, but not below the level provided for by
the automatic adjustments described above. Mr. Harris is also entitled to
participate in our Profit-Sharing Plan as well as in all compensation or
employee benefit plans or programs, and to receive all benefits, perquisites,
and emoluments for which salaried employees are eligible. Under the Employment
Agreement, we will furnish Mr. Harris with certain perquisites which include a
company car, membership in certain clubs and up to a $5,000 annual
reimbursement for personal, financial or tax advice.
The Employment Agreement provides Mr. Harris with life insurance
for the benefit of his designated beneficiaries in the amount of
$2,000,000; provides reimbursement for uninsured medical expenses, not to
exceed $10,000 per annum, adjusted for inflation, over the period of the
contract; provides Mr. Harris and spouse with long-term care insurance;
and provides disability insurance in the amount of 100 percent of his base
salary. These benefits are for the term of the contract.
The Employment Agreement 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 equal to the
executive's base salary for a period of two years.
In addition, Mr. Harris is entitled to receive severance pay
pursuant to the severance compensation agreement that he entered into
with us, effective August 15, 1990. The severance
17
compensation agreement provides that if, following a change in our control,
as defined in the agreement, such individual's employment is terminated by us
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 Mr. Harris's termination is without
cause or is a constructive discharge, the amount payable under the Employment
Agreement will be reduced by the amounts paid pursuant to the severance
compensation agreement.
SERP
- ----
The Employment Agreement provides that we adopt a supplemental
executive retirement plan (the "SERP") for the benefit of Mr. Harris. Under the
SERP, we will cause an amount equal to one-twelfth of Mr. Harris's current base
salary to be credited each month (a "Monthly Credit") to a special account
maintained for this purpose on our books for the benefit of Mr. Harris (the
"SERP Account"). The amounts credited to the SERP Account will be deemed
invested or reinvested in such mutual funds or U.S. Government securities as
determined by Mr. Harris. The SERP Account will be credited and debited to
reflect the deemed investment returns, losses and expenses attributed to such
deemed investments and reinvestments. Mr. Harris's benefit under the SERP will
equal the balance in the SERP Account and such benefit will always be 100
percent vested (i.e., not forfeitable). Mr. Harris will determine the form and
timing of the distribution of the balance in the SERP Account; provided,
however, in the event of the termination of Mr. Harris's employment, the
balance in the SERP Account will be distributed to Mr. Harris or his
beneficiary, as the case may be, in a lump-sum payment within 30 days of such
termination. We contributed $298,306 during 2003 to a rabbi trust established
for the purpose of accumulating funds to satisfy the obligations incurred by
the Company under the SERP. The restricted funds for the SERP Plan total
$1,212,078 at December 31, 2003. Mr. Harris's rights to benefits pursuant to
this SERP will be no greater than those of a general creditor of the Company.
Senior Code of Ethics
- ---------------------
On March 19, 2004, the Board of Directors adopted a Senior Code of
Ethics for Chief Executive and Senior Financial Officers. A copy of this code
of ethics will be provided, free of charge, to each shareholder as of March 26,
2004, upon the written request of such shareholder by writing to: Investor
Relations, Harris & Harris Group, Inc., 111 West 57th Street, Suite 1100, New
York, New York 10019.
Remuneration of Directors and Others
- ------------------------------------
The following table sets forth the compensation paid by us for the
fiscal year ended December 31, 2003 to our directors and others. During the
fiscal year ended December 31, 2003, we did not pay any pension or retirement
benefits.
18
Aggregate Total Compensation
Name of Director Compensation ($) Paid to Directors ($)
- --------------------------- ---------------- ---------------------
Dr. C. Wayne Bardin 19,000 19,000
Dr. Phillip A. Bauman 18,000 18,000
G. Morgan Browne(1) 21,462 21,462
Dugald A. Fletcher 19,000 19,000
Dr. Kelly S. Kirkpatrick(2) 18,926 18,926
Glenn E. Mayer 18,000 18,000
Mark A. Parsells(3) 1,214 1,214
Lori D. Pressman(4) 75,725 75,725
Charles E. Ramsey 13,000 13,000
James E. Roberts 16,000 16,000
Charles E. Harris(5) 0 0
______________________
(1) Includes $462 for reimbursement for travel expenses to attend board
meetings.
(2) Includes $1,613 for reimbursement for travel expenses to attend board
meetings and $1,313 for consulting services. Dr. Kirkpatrick may be
considered an "interested person" because of consulting work performed for
us.
(3) Includes $414 for reimbursement for travel expenses to attend board
meetings.
(4) Includes $1,725 for reimbursement for travel expenses to attend board
meetings and $57,000 for consulting services. Ms. Pressman may be
considered an "interested person" because of consulting work performed for
us.
(5) Mr. Harris is an "interested person" as defined in the 1940 Act.
Effective June 18, 1998, directors who were not officers received
$1,000 for each meeting of the Board of Directors and $1,000 for each committee
meeting they attended in addition to a monthly retainer of $500. Prior to June
18, 1998, the directors were paid $500 for committee meetings and no monthly
retainer. We also reimburse our directors for travel, lodging and related
expenses they incur in attending board and committee meetings. The total
compensation and reimbursement for expenses paid to all directors in 2003 was
$162,014.
In 1998, the Board of Directors approved that effective January 1,
1998, 50 percent of all director fees be used to purchase our common stock from
us. However, effective March 1, 1999, the Board of Directors approved that
directors purchase our common stock in the open market, rather than from us.
During 2000 and 2001, the outside directors (i.e., all directors except Mr.
Harris) bought a total of 15,818 and 7,944 shares, respectively, in the open
market. In 2002, the outside directors bought 9,524 shares in the open market
and 43,426 shares through exercise of rights in a public offering of our common
stock. In 2003, the directors bought 7,860 shares in the open market.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers and directors, and persons who own more than 10 percent of our 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 Company with copies of all reports filed.
Based solely on a review of the forms furnished to us, or written
representations from certain reporting persons, we believe that all persons who
were subject to Section 16(a) in 2003 complied with the filing requirements.
19
SELECTION OF INDEPENDENT ACCOUNTANT
(Proposal No. 2)
PricewaterhouseCoopers LLP has been selected as the independent
accountant to audit our accounts for and during the fiscal year ending December
31, 2004. This selection has been made by the Audit Committee and is subject to
ratification or rejection by our shareholders. We know of no direct or indirect
financial interest of PricewaterhouseCoopers LLP in us.
A representative of PricewaterhouseCoopers LLP is not expected to be
present at the meeting.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
CARD WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT ACCOUNTANT.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
20
SALE OF RIGHTS TO PURCHASE COMMON STOCK AT NOT
LESS THAN THE GREATER OF THE MARKET VALUE OR THE
NET ASSET VALUE PER SHARE AT THE TIME OF ISSUANCE
(Proposal No. 3)
Proposal
- --------
During the coming year the Board of Directors believes it would be in
our best interest to have the ability to offer long-term rights (which may be
accompanied by or be part of other securities -- e.g., convertible debt or
convertible preferred securities) to purchase common stock at an exercise price
that will not be less than the greater of the market value or the net asset
value per share at the time of issuance of such long-term rights. Section 61(a)
of the 1940 Act permits a business development company such as us to sell such
securities on such terms (and to issue shares of common stock upon their
exercise), only if several conditions are satisfied. Specifically, such
practice must be approved by a majority of the independent directors and
shareholders of the issuer within 12 months prior to sale. In addition, a
majority of the issuer's independent directors must determine in good faith
that the issuance of such securities is in the best interests of the Company
and our shareholders and that the price at which such rights or other
securities are to be sold (which refers to the exercise or conversion price in
the case of rights such as warrants, options or conversion rights) is not less
than a price which closely approximates the market value for the underlying
shares of common stock at the time of issuance of such rights or other
securities. Finally, the long-term rights or other securities outstanding at
any particular time may not be exercisable or convertible for more than 25% of
the common stock outstanding at that time. The subsequent issuance of shares
upon exercise of properly authorized rights is permitted without regard to net
asset value or market value at the time of exercise. Our Board of Directors has
approved and recommends to the shareholders for their approval a proposal
authorizing us, over the next year, to issue long-term rights to purchase
common stock (subject to the 25% limitation stated above) at exercise prices
that will not be less than the greater of the market value or the net asset
value per share at the time of issuance of such rights. Upon obtaining the
requisite shareholder approval, we will comply with the foregoing requirements
in connection with any financing undertaken pursuant to this proposal.
Reasons for the Proposal
- ------------------------
Management and the Board of Directors have determined that it would
be advantageous to us to have the ability to sell, either alone or as part
of another security, warrants, options or rights to purchase common stock in
connection with our financing and capital raising activities. This ability
may be a cost-effective way for us to raise capital. Our Board of Directors
has determined that it would be in the best interest of the Company and our
shareholders to increase our assets so that we may be in a better position
to make follow-on investments and take advantage of attractive new
investment opportunities in tiny technology, including nanotechnology,
microsystems and microelectromechanical systems (MEMS), augment working
capital, increase the diversification of our portfolio and achieve other net
benefits to us. We believe that our prior investment and expertise in the
tiny technology sector are likely to lead to several attractive investment
opportunities in the tiny technology sector becoming available to us over the
next one to two years. We do not have any current plans to issue rights or other
21
securities and would determine to do so only after reviewing the pace at
which we are investing the proceeds of our recent stock offering and the
level and attractiveness of investment opportunities becoming available.
The Board also believes that increasing our assets will lower our
expense ratio by spreading our fixed costs over a larger asset base. The
issuance of additional common stock may also enhance the liquidity of our
common stock on the Nasdaq National Market.
Although we are permitted without shareholder approval to engage in
rights offerings to our existing shareholders of short-term rights to purchase
common stock at less than net asset value per share, these offerings must
either be non-transferable, in which case shareholders who decide not to
participate will have no means of capturing any portion of the value of the
right to acquire shares at a discount, or must be limited in such a manner that
we, after applying the offering discount, can increase our capital base by only
approximately 25 percent per year. In addition, offerings of transferable
rights whose exercise price is at a discount to net asset value may be made
only once per year. In 2002, we made such a transferable rights offering and
believe that the investment opportunities in tiny technology over the coming
year are likely to be sufficient to justify raising capital. Inasmuch as the
Board of Directors believes that it would not be in the best interests of
shareholders for us to engage in large scale nontransferable rights offerings,
it believes that the proposal is an attractive way to give us additional
flexibility to take advantage of investment opportunities that may arise over
the next one to two years.
The Board of Directors has approved and is seeking shareholder
approval of the proposal described above to sell, either alone or as part of
another security, warrants, options or rights to purchase common stock. The
final terms of any such sale, including price, term, and vesting requirements,
will be determined by the Board of Directors at the time of issuance. Also, the
nature and amount of consideration that would be received by us at the time of
issuance and the use of any such consideration would be considered and approved
by the Board of Directors at the time of issuance. Any such issuance may be
made pursuant to either a public or non-public offering, as determined by the
Board of Directors in an appropriate manner prior to the time of issuance. Any
such sale would be anticipated to result in a potential increase in the number
of outstanding shares of common stock. The long-term rights or other securities
outstanding at any particular time may not be exercisable or convertible for
more than 25% of the common stock outstanding at that time.
Dilution
- --------
Any such sale, other than to existing shareholders, would be
potentially dilutive to the voting power of existing shareholders and could be
dilutive with regard to dividends and other economic aspects of the common
stock. Because the number of shares of common stock that could be so issued and
the timing of any issuance is not currently known, the actual dilutive effect
cannot be predicted. In addition, because the exercise price per share at the
time of exercise could be less than the net asset value per share at the time
of exercise and because we could well incur expenses in connection with any
such sale, such exercise could result in a dilution of net asset value per
share at the time of exercise for all shareholders. Such dilution would
disproportionately affect non-subscribing shareholders.
22
Leverage
- --------
Any long-term rights issued may be accompanied by or be part of other
securities, including convertible debt or convertible preferred securities. If
we issue convertible debt or convertible preferred securities accompanied by
long-term rights, such issuance would result in the use of leverage by us and
would require us to make periodic interest or dividend payments. The use of
leverage results in additional risks and can magnify the effect of any losses.
If the income and gains earned on securities purchased with the proceeds of
such convertible securities are greater than the cost of leverage, our return
on the shares will be greater than if leverage had not been used. Conversely,
if the income or gains from the securities purchased with such proceeds does
not cover the cost of leverage, the return to us will be less than if leverage
had not been used. There is no assurance that a leveraging strategy will be
successful.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
REMOVAL OF CERTAIN INVESTMENT RESTRICTIONS
(Proposal No. 4)
Proposal
- --------
The Board of Directors, including the independent directors, has
proposed that shareholders approve the elimination of certain fundamental
investment restrictions we adopted years ago when we were an investment
company. We propose this change because we are concerned that these investment
restrictions are outdated and could unnecessarily limit our operations going
forward. The Board recently reviewed each of our investment restrictions and
determined that it would be in the best interests of shareholders to eliminate
certain investment restrictions that are not required under applicable law.
Under the 1940 Act, a registered investment company is required to
recite its policy with respect to certain investment activities. Under the 1940
Act, an investment policy that is classified as "fundamental" may not be
changed without the approval of a company's shareholders. When we were a
registered investment company, we adopted certain fundamental investment
restrictions as required by the 1940 Act. The provisions of the 1940 Act
regarding fundamental investment restrictions and objectives are not applicable
to business development companies. When we elected to be treated as a business
development company, we did not formally remove these investment restrictions.
Although we believe that these restrictions do not apply to us, our Board is
recommending that the shareholders approve this proposal to ensure there is no
doubt regarding their applicability.
Although the proposed elimination of the investment restrictions
generally give us broader authority to make certain investments or engage in
certain investment practices, we do not currently intend to change in any way
our investment strategy or operations. In addition, many of the investment
restrictions are no longer relevant to our business strategy. The proposal was
approved by the Board of Directors, subject to shareholder approval, at a
meeting held on March 10, 2004.
23
At the Annual Meeting, shareholders will vote on the proposal to
remove the investment restrictions listed below. If approved, the removal of
these investment restrictions will become effective immediately. If the
proposal is not approved, the current restrictions will remain in effect unless
we are correct in our assessment that they do not apply. If these restrictions
do remain in effect, we will be limited in our future ability to implement
certain techniques, while other business development companies will be able to
implement those techniques because they do not have these restrictions.
Approval of the proposal with respect to the removal of each
investment restriction will require the approval of the holders of a majority
of the voting securities outstanding on the record date (defined in the 1940
Act as the lesser of (a) more than 50% of the shares outstanding on the record
date or (b) 67% or more of the shares represented at a meeting at which more
than 50% of the shares outstanding on the record date are represented). Because
abstentions and broker non-votes are treated as shares present but not voting,
any abstentions and broker non-votes will have the effect of votes against this
proposal.
Items described below in Proposals 4A through 4G will require a single
vote.
PROPOSAL 4A
ELIMINATION OF THE INVESTMENT
RESTRICTION REGARDING CONCENTRATION
The fundamental investment restriction regarding concentration
currently reads as follows:
"[The Company may not] invest more than 25% of the value of its total
assets in any one industry."
The Company makes initial venture capital investments exclusively in
tiny technology. Tiny technology companies permeate a variety of industries.
Accordingly, the Company has no present intention to concentrate in any one
industry, although it desires the freedom to do so to the extent its investment
opportunities develop in that manner.
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding industry concentration
because such an investment restriction is not required for a business
development company, although the Company has no present intention to
concentrate in any one industry.
PROPOSAL 4B
ELIMINATION OF THE INVESTMENT RESTRICTION REGARDING
BORROWING AND THE ISSUANCE OF SENIOR SECURITIES
The fundamental investment restriction regarding borrowing and issuing
senior securities currently reads as follows:
24
"[The Company may not] issue senior securities other than:
(a) preferred stock not in excess of the excess of 50%
of its total assets over any senior securities
described in clause (b) below that are outstanding,
(b) senior securities other than preferred stock
(including borrowing money, including on margin if
margin securities are owned and through entering
into reverse repurchase agreements, and providing
guaranties) not in excess of 33 1/3% of its total
assets, and
(c) borrowings of up to 5% of its total assets for
temporary purposes without regard to the amount of
senior securities outstanding under clauses (a) and
(b) above; provided, however, that its obligations
under interest rate swaps, when issued and forward
commitment transactions and similar transactions are
not treated as senior securities if covering assets
are appropriately segregated; or pledge its assets
other than to secure the issuances or in connection
with hedging transactions, short sales, when-issued
and forward commitment transactions and similar
investment strategies.
For purposes of clauses (a), (b) and (c) above, "total
assets" shall be calculated after giving effect to the net
proceeds of any issuance and net of any liabilities and
indebtedness that do not constitute senior securities except
for liabilities and indebtedness as are excluded from
treatment as senior securities by the proviso to this item
(2)."
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding the issuance of senior
securities because such an investment restriction is not required for a
business development company, although the Company has no present intention to
issue senior securities. In fact this restriction is inconsistent with the
capital structure authorized by the 1940 Act for business development companies
such as the Company. These provisions would permit us to issue debt or
preferred stock so long as our total assets immediately after the issuance,
less some ordinary course liabilities, exceed 200% of the sum of the debt and
any preferred stock outstanding, subject to some exceptions. Under the 1940
Act, we can issue options and/or warrants for 25% or less of our outstanding
voting securities.
PROPOSAL 4C
INVESTMENT RESTRICTION REGARDING LENDING
The fundamental investment restriction regarding making loans
currently reads as follows:
25
"[The Company may not] make loans of money or property to any person,
except through loans and guaranties to entities, loans of portfolio
securities, the acquisition of fixed income obligations consistent
with our investment objective and policies or the acquisition of
securities subject to repurchase agreements."
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding making loans because such an
investment restriction is not relevant to the Company, which does not have any
investment objective and is not required to have any policy regarding loans.
PROPOSAL 4D
INVESTMENT RESTRICTION REGARDING
UNDERWRITING SECURITIES
The fundamental investment restriction regarding underwriting
securities currently reads as follows:
"[The Company may not] underwrite the securities of other issuers,
except to the extent that in connection with the disposition of
portfolio securities or the sale of its own securities we may be
deemed to be an underwriter."
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding underwriting securities
because such an investment restriction is not required for a business
development company, although the Company has no present intention to
underwrite securities.
PROPOSAL 4E
INVESTMENT RESTRICTION REGARDING THE PURCHASE
OR SALE OF REAL ESTATE
The fundamental investment restriction regarding the purchase or sale
of real estate currently reads as follows:
"[The Company may not] purchase or sell real estate or interests
therein in excess of its total assets or interests therein in excess
of its total assets."
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding the sale of real estate
because such an investment restriction is not required for a business
development company, although the Company has no present intention to
purchase or sell real estate.
26
PROPOSAL 4F
INVESTMENT RESTRICTION REGARDING THE
PURCHASE OR SALE OF COMMODITIES
The fundamental investment restriction regarding the purchase or sale
of commodities currently reads as follows:
"[The Company may not] purchase or sell commodities or purchase or
sell commodity contracts except for hedging purposes or in connection
with business operations and except for precious metals and coins."
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding the purchase or sale of
commodities because such an investment restriction is not required for a
business development company, although the Company has no present intention to
purchase or sell commodities.
PROPOSAL 4G
INVESTMENT RESTRICTION REGARDING MAKING SHORT SALES
The fundamental investment restriction regarding making short sales
currently reads as follows:
"[The Company may not] make any short sale of securities except in
conformity with applicable laws, rules and regulations and unless, in
giving effect to the sale, the market value of all securities sold
short does not exceed 25%, except short sales "against the box" which
are not subject to the limitation, of the value of its total assets
and our aggregate short sales of a particular class of securities does
not exceed 25% of the then-outstanding securities of that class."
If Proposal 4 is adopted, the Company would have the authority to
effect short sales. A short sale is a transaction in which a company sells a
security it does not own by borrowing it from a broker, and consequently
becomes obligated to replace that security.
The Board of Directors proposes that shareholders remove the
above-referenced investment restriction regarding short sales because such an
investment restriction is not required for a business development company,
although the Company has no present intention to make short sales.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
Other Business
- --------------
The Board of Directors does not intend to bring any other
matters before the Annual Meeting and, at the date of mailing
of this proxy statement, has not been informed of any matter
27
that others may bring before the Annual Meeting. However, if any other
matters properly come before the Annual Meeting, it is the intention of the
persons named in the accompanying proxy to vote such proxy in accordance
with their judgment on such matters.
Annual Reports on Form 10-K
- ---------------------------
Our Annual Report on Form 10-K, as filed with the SEC, is being
delivered with this proxy statement.
We undertake to provide, without charge, to each shareholder as of
March 26, 2004, upon the written request of such shareholder, a copy of our
Annual Report on Form 10-K, including the financial statements and the
financial statement schedules, required to be filed with the SEC for our most
recent fiscal year. Any shareholder who would like to request a copy of our
most recent Annual Report on Form 10-K may do so by submitting a written
request, which shall contain a representation in good faith that such
shareholder was a beneficial owner as of March 26, 2004 of our securities
entitled to vote, to the following address:
Investor Relations
Harris & Harris Group, Inc.
111 West 57th Street, Suite 1100
New York, NY 10019
Submission of Shareholder Proposals
- -----------------------------------
Any shareholder proposals intended to be presented for inclusion in
our proxy statement and form of proxy for the next annual meeting of
shareholders to be held in 2005 must be received in writing by the Secretary of
the Company at Harris & Harris Group, Inc., 111 West 57th Street, New York, New
York 10019 no later than January 23, 2005, in order for such proposals to be
considered for inclusion in the proxy statement and proxy relating to the 2005
annual meeting of shareholders. Submission of a proposal does not guarantee
inclusion in the proxy statement, as the requirements of certain federal laws
and regulations must be met by such proposals.
Under our Bylaws, nominations for director may be made only by the
Board or the Nominating Committee, or by a shareholder entitled to vote who
has delivered written notice to our Secretary (containing certain information
specified in the Bylaws) not less than 90 days nor more than 120 days prior
to the anniversary of the date of the immediately preceding annual meeting of
shareholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the shareholder in order to be timely must be so received not
later than the close of business on the 10th day following the day on which
notice of the date of the annual meeting was mailed or such public disclosure
of the date of the annual meeting was made, whichever first occurs. The
Bylaws also provide that no business may be brought before an annual meeting
of the shareholders except as specified in the notice of the meeting or as
otherwise properly brought before the meeting by or at the direction of the
Board or by a shareholder entitled to vote who has delivered written notice
to our Secretary (containing certain information specified in the
28
Bylaws) not less than 90 days nor more than 120 days prior to the
anniversary of the date of the immediately preceding annual meeting of
shareholders; provided, however, that in the event that the annual meeting
is called for a date that is not within 30 days before or after such
anniversary date, notice by the shareholder in order to be timely must be
so received not later than the close of business on the 10th day following
the day on which notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made,
whichever first occurs.
Rule 14a-4 of the Securities and Exchange Commission's proxy rules
allows us to use discretionary voting authority to vote on matters coming
before an annual meeting of shareholders, if we do not have notice of the
matter at least 45 days before the anniversary of the date on which we first
mailed our proxy materials for the prior year's annual meeting of shareholders
or the date specified by the advance notice provision in our Bylaws. Our Bylaws
contain such an advance notice provision as described above. For our Annual
Meeting of Shareholders expected to be held on April 22, 2005, shareholders
must submit such written notice to our Secretary in accordance with our advance
notice provision, as described above.
A copy of the full text of the Bylaw provisions discussed above may be
obtained by writing to our Secretary.
By Order of the Board of Directors
New York, New York /s/ Susan T. Harris
April 12, 2004 -------------------
Susan T. Harris
Secretary
29
Appendix A
CHARTER
of the AUDIT COMMITTEE
of the BOARD of DIRECTORS
of
Harris & Harris Group, Inc.
The Board of Directors (the "Board") of Harris & Harris Group, Inc.
(the "Corporation") has determined that the Audit Committee of the Board shall
assist the Board in fulfilling certain of the Board's oversight
responsibilities. The Board hereby adopts this Charter to establish the
governing principles of the Audit Committee and shall review and reassess the
adequacy of this Charter on an annual basis.
I. Role of the Audit Committee
The role of the Audit Committee is to act on behalf of the Board in
fulfilling the following responsibilities of the Board:
A. To oversee all material aspects of the Corporation's accounting
and financial reporting processes, internal control and audit
functions, except those that are specifically related to the
responsibilities of another committee of the Board;
B. To monitor the independence and performance of the Corporation's
independent accountants;
C. To provide a means for open communication among the
Corporation's independent accountants, financial and senior
management and the Board; and
D. To oversee compliance by the Corporation with legal and
regulatory requirements.
While the Audit Committee has the responsibilities and powers set
forth in this Charter, it is not the duty of the Audit Committee to plan or
conduct financial statement audits or to determine that the Corporation's
financial statements are complete and accurate or are in accordance with
generally accepted accounting principles. The responsibility to plan and
conduct financial statement audits is that of the Corporation's independent
accountants. The Corporation's management has the responsibility to determine
that the Corporation's financial statements are complete and accurate and in
accordance with generally accepted accounting principles. Nor is it the duty of
the Audit Committee to assure the Corporation's compliance with laws and
regulations. The primary responsibility for these matters also rests with the
Corporation's management.
II. Composition of the Audit Committee
A. The Board shall designate the members of the Audit Committee at
the Board's annual organizational meeting and each member shall
serve, subject to his or her earlier resignation or removal
from the Audit Committee or his or her ceasing to be a
30
director, until the next such meeting and until their successors
are designated by the Board.
B. The Audit Committee shall consist of at least three members, but
no more than six members. The members of the Audit Committee
shall meet the independence and experience requirements of the
rules of the principal market or transaction reporting system on
which the Corporation's securities are traded or quoted
(currently, the Nasdaq National Market), Section 10A(m)(3) of
the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission (the
"SEC").
III. Meeting of the Audit Committee
The Audit Committee shall meet at least two times a year and more
frequently as circumstances may require. The Audit Committee shall be
responsible for meeting with the independent accountants at their request to
discuss the interim financial statements. The Audit Committee shall meet
privately with the independent accountants at least annually in a separate
executive session.
IV. Responsibilities of the Audit Committee
The Audit Committee shall assist the Board in overseeing the
Corporation's financial and operating reporting practices, internal controls
and compliance with laws and regulations.
Specifically, the Audit Committee shall have the responsibility with
respect to:
A. The Corporation's Risks and Control Environment:
o To discuss with the Corporation's management and
independent accountants the integrity of the Corporation's
financial reporting processes and controls, particularly
the controls in areas representing significant financial
and business risks; and
o To investigate and follow up on any matters brought to its
attention within the scope of its duties.
B. The Corporation's Independent Accountants:
o The Audit Committee shall have the sole authority to
appoint or replace the independent accountants (subject, to
ratification by the Board). The Audit Committee shall be
directly responsible for the compensation and oversight of
the work of the independent accountants (including
resolution of disagreements between management and the
independent accountants regarding financial reporting) for
the purpose of preparing or issuing an audit report or
related work. The independent accountants shall report
directly to the Audit Committee;
o To ensure that the Audit Committee receives annually from
the Corporation's independent accountants the
information about all of the relationships between the
31
independent accountants and the Corporation that the
independent accountants are required to provide to the
Audit Committee, to actively engage in a dialogue with
the independent accountants about any relationships
between the independent accountants and the
Corporation or any services that the independent
accountants provide or propose to provide that may
affect the objectivity and independence of the
independent accountants and to take, or recommend that
the Board take, any appropriate action to oversee the
independence of the independent accountants;
o The Audit Committee shall establish guidelines similar
to those set forth in Annex A relating to the
Corporation's hiring of employees or former employees
of the independent accountants who participated in any
capacity in the audit of the Corporation;
o The Audit Committee shall establish policies or
procedures similar to those set forth in Annex B to
pre-approve all auditing services and permitted
non-audit services (including fees and terms thereof)
(the "Covered Services") to be performed for the
Corporation by its independent accountants. The Audit
Committee may form and delegate authority to the
Chairman of the Audit Committee or subcommittees
consisting of one or more members when appropriate,
including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that
decisions of the Chairman or such subcommittee to
grant pre-approvals shall be presented to the full
Audit Committee at its next scheduled meeting; and
o To ensure the rotation of the lead (or coordinating)
audit partner (or, if required by the rules and
regulations of the SEC, other employees of the
independent accountants) having primary responsibility
for the audit and the audit partner responsible for
reviewing the audit as required by law.
C. The Corporation's Financial Reporting Process:
o To oversee the Corporation's selection of and major
changes to its accounting policies;
o To meet with the Corporation's independent accountants
and financial management both to discuss the proposed
scope of the audit and to discuss the conclusions of
the audit, including any items that the independent
accountants are required by generally accepted
auditing standards to discuss with the Audit
Committee, such as, any significant changes to the
Corporation's accounting policies, the integrity of
the Corporation's financial reporting process and any
proposed changes or improvements in financial,
accounting or auditing practices;
o To discuss with the Corporation's financial management
and independent accountants the Corporation's annual
results and, when appropriate, the interim results
before they are made public;
32
o To review with management and the independent
accountants, prior to the filing of an audit report
with the SEC, all alternative treatments of financial
information within generally accepted accounting
principles that have been discussed with management,
ramifications of the use of such alternative
disclosures and treatments, and the treatment
preferred by independent accountants;
o To review with management and the independent
accountants, prior to the filing of an audit report
with the SEC, material written communications between
the independent accountants and management, such as
any management letter or schedule of unadjusted
differences;
o Review disclosures made to the Audit Committee by the
Corporation's Chief Executive Officer and Chief
Financial Officer during their certification process
for the Form 10-K and Form 10-Q about any significant
deficiencies in the design or operation of internal
controls or material weaknesses therein and any fraud
involving management or other employees who have a
significant role in the Corporation's internal controls;
o To review with the independent accountants, prior to
the filing of an audit report with the SEC, all
critical accounting policies and practices to be used;
o To review and discuss with the Corporation's financial
management and independent accountants the
Corporation's audited financial statements including
qualitative judgments, appropriateness of accounting
principles (old and new), financial disclosure
practices, and any observations regarding the quality
of accounting principles and underlying estimates and,
when appropriate, the Corporation's interim financial
statements, before they are made public;
o To recommend to the Board of Directors that the
audited financial statements be included in the
Corporation's Annual Report on Form 10-K; and
o To issue for public disclosure by the Corporation the
report required by the rules of the SEC.
D. Other Matters
o To review and reassess the adequacy of this charter on
an annual basis;
o To review reports and any financial information
submitted by the Corporation to a government body or
the public;
o To report to the Board the matters discussed at each
meeting of the Audit Committee;
o To administer the procedures set forth in Annex C
relating to the receipt, retention and treatment of
complaints received by the Corporation regarding
accounting, internal accounting controls or auditing
matters, and the confidential, anonymous
33
submission by employees or any other provider of
accounting related services of concerns regarding
questionable accounting or auditing matters;
o To keep an open line of communication with the
financial and senior management and the independent
accountants and the Board; and
o To review in advance and approve any "related party"
transaction, or series of similar transactions, to
which the Corporation or any of its subsidiaries was
or is to be a party, in which the amount involved
exceeds $60,000 and in which such related party had,
or will have, a direct or indirect material interest.
For purposes of this item, a "related party" includes
any director or executive officer of the Corporation,
any nominee for election as a director, any security
holder who is known to the Corporation to own of
record or beneficially more than five percent of any
class of the Corporation's voting securities, and any
member of the immediate family(1) of any of the
foregoing persons. The materiality of any interest is
to be determined on the basis of the significance of
the information to investors in light of all the
circumstances of the particular case.
V. Advisors/Funding
In discharging its duties hereunder, the Audit Committee shall have
the authority, to the extent it deems necessary or appropriate, to retain
independent legal, accounting or other advisors. The Corporation shall provide
for appropriate funding, as determined by the Audit Committee, for payment of
such compensation as is determined by the Audit Committee to the independent
accountants and to any other advisors employed by the Audit Committee. The
Corporation shall also provide funding for any other functions or initiatives
undertaken by the Audit Committee.
___________
(1) A person's immediate family shall include such person's spouse,
parents, children, siblings, mothers and fathers-in-law, sons and
daughters-in-law, and brothers and sisters-in-law.
34
Appendix B
NOMINATING COMMITTEE CHARTER
OF THE
BOARD OF DIRECTORS OF
HARRIS & HARRIS GROUP, INC.
AS APPROVED BY THE BOARD OF DIRECTORS
MARCH 10, 2004
1. PURPOSE OF THE NOMINATING COMMITTEE
The purpose of the Nominating Committee (the "Nominating Committee")
of the Board of Directors (the "Board") of Harris & Harris Group, Inc. (the
"Company") is to identify individuals qualified to serve on the Board as
directors and on committees of the Board, and to select, or to recommend that
the Board select, the Board nominees for the next annual meeting of
shareholders.
2. COMPOSITION OF THE NOMINATING COMMITTEE
The Nominating Committee shall be comprised of at least three of the
Directors as determined by the Board that are "independent" as defined in
Section 2(a)(19) of the Investment Company Act of 1940 (the "1940 Act").
3. MEETINGS AND PROCEDURES OF THE NOMINATING COMMITTEE
The Nominating Committee shall fix its own rules of procedure, which
shall be consistent with the charter documents of the Company and this
Nominating Committee Charter. The Nominating Committee shall meet as
circumstances require. The chairperson of the Nominating Committee or a
majority of the members of the Nominating Committee may call a meeting of the
Nominating Committee.
A majority of the members of the Nominating Committee present in
person or by means of a conference telephone or other communications equipment
by means of which all persons participating in the meeting can communicate with
each other shall constitute a quorum and shall act by majority vote. The
Nominating Committee may also take action by written consent of the number of
members that would be required to adopt a resolution if all members of the
Nominating Committee were present.
The Nominating Committee may form subcommittees for any purpose that
the Nominating Committee deems appropriate and may delegate to such
subcommittees such power and authority as the Nominating Committee deems
appropriate; provided, however, that no subcommittee shall consist of fewer
than two members; and provided further that the Nominating Committee shall not
delegate to a subcommittee any power or authority required by any law,
regulation or listing standard to be exercised by the Nominating Committee.
The Nominating Committee may request that any directors, officers or
employees of the Company, or other persons whose advice and counsel are sought
by the Nominating Committee, attend any meeting of the Nominating Committee to
provide such pertinent information as the Nominating Committee requests.
35
The Nominating Committee shall keep written minutes of its meetings,
which minutes shall be maintained with the books and records of the Company and
delivered to the Board, including a description of all actions taken by the
Nominating Committee at the meeting.
4. AUTHORITY
(1) The Nominating Committee shall have the authority to carry out its duties
and responsibilities as set forth in this Nominating Committee Charter. The
Nominating Committee shall have sole authority to retain and terminate any
search firm to be used to identify director candidates, including sole
authority to approve the search firm's fees and other retention terms.
5. DUTIES OF THE NOMINATING COMMITTEE
The Nominating Committee shall have the following goals and
responsibilities with respect to Board candidates and nominees:
(i) establish procedures for evaluating the suitability
of potential director nominees;
(ii) select the nominees for election by the shareholders
or appointment by the Board, as the case may be,
pursuant to the Bylaws of the Company. Persons
selected by the Nominating Committee shall possess
such knowledge, experience, skills, expertise and
diversity so as to enhance the Board's ability to
manage and direct the affairs and business of the
Company, including, when applicable, to enhance the
ability of committees of the Board to fulfill their
duties and/or to satisfy any independence
requirements imposed by law, regulation or the
Nasdaq National Market listing requirements; and
(iii) review the suitability for continued service as a
director when his or her term expires and at such
other times as the Nominating Committee deems
necessary or appropriate, and to recommend whether
or not the director should be re-nominated.
6. OUTSIDE ADVISERS
The Nominating Committee may retain, at the Company's expense, such
independent counsel or other advisers as it deems necessary.
36
DETACH PROXY CARD HERE
|_| Sign, Date and Return the |x|
Proxy Card Promptly Using Votes must be indicated
the Enclosed Envelope. (x) in Black or Blue ink.
1. ELECTION OF DIRECTORS
FOR all nominees |_| WITHHOLD AUTHORITY to vote |_| *EXCEPTIONS |_|
listed below for all nominees listed
below
Nominees: Dr. C. Wayne Bardin, Dr. Phillip A. Bauman, G. Morgan Browne,
Dugald A. Fletcher, Charles E. Harris, Dr. Kelly S. Kirkpatrick,
Mark A. Parsells, Lori D. Pressman, Charles E. Ramsey,
James E. Roberts.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
mark the "Exceptions" box and write that nominee's name in the space
provided below.)
*Exceptions: ___________________________________________________________
2. To ratify, confirm and approve the Audit FOR AGAINST ABSTAIN
Committee's selection of PricewaterhouseCoopers
LLP as the independent public accountant for its |_| |_| |_|
fiscal year ending December 31, 2004.
3. To approve a proposal to authorize the
Company to issue, long-term rights (which may FOR AGAINST ABSTAIN
be accompanied by or be part of other securities -
e.g., convertible debt or convertible preferred |_| |_| |_|
securities) to purchase common stock at an exercise
price that will not be less than the greater of
the market value or the net asset value per share
at the time of issuance.
4. To remove certain investment restrictions that FOR AGAINST ABSTAIN
are not applicable to business development
companies. |_| |_| |_|
5. At their discretion, the Proxies are authorized
to vote upon such other business, including
adjournment, as may properly come before the
meeting or any adjournment or adjournments thereof.
To change your address, please mark this box. |_|
To include any comments, please mark this box. |_|
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S C A N L I N E
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Please sign exactly as name appears to the left. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporation name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
- ----------------------------------- --------------------------------------
Date Share Owner sign here Co-Owner sign here
HARRIS & HARRIS GROUP, INC.
One Rockefeller Plaza, Rockefeller Center
New York, NY 10020
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints CHARLES E. HARRIS and HELENE B. SHAVIN
and each of them, with full power of substitution, proxies to vote at the
annual meeting of shareholders to be held on May 12, 2003, or an adjournment
thereof, to represent and to vote all the shares of common stock of Harris &
Harris Group, Inc. that the undersigned is entitled to vote with all powers
the undersigned would have if personally present, on the following matters as
designated on the reverse side and in their discretion with respect to such
other business as may properly come before the meeting or any adjournment
thereof.
The Board of Directors recommends a vote "FOR" all the nominees listed in
item 1 and "FOR" item 2 and item 3 and item 4.
When properly executed, this proxy will be voted as specified and in
accordance with the accompanying proxy statement. If no instruction is
indicated, this proxy will be voted "FOR" items 1, 2 and 3. For purposes of
item 4, any abstentions and broker non-votes will have the effect of votes
against the proposal,
(Continued and to be dated and signed on the reverse side.)
HARRIS & HARRIS GROUP, INC.
P.O. BOX 11469
NEW YORK, N.Y. 10203-0469