HARRIS & HARRIS GROUP, INC.
1995 ANNUAL REPORT
FINANCIAL SUMMARY
December 31, 1995 December 31, 1994 December 31, 1993
Financial Position
Total Assets $ 37,524,555 $ 32,044,073 $ 34,534,724
Deferred Income Tax Liability $ 550,630 $ 309,151 $ 717,806
Other Liabilities $ 412,016 $ 424,120 $ 1,067,621
Net Assets $ 36,561,909 $ 31,310,802 $ 32,749,297
Net Asset Value per
Outstanding Share $ 3.54 $ 3.43 $ 3.66
Shares Outstanding 10,333,902 9,136,747 8,944,828
% of % of % of
Classes of Assets Value Total Value Total Value Total
Publicly-traded
Equities $ 2,433,543 6.5% $ 1,177,359 3.7% $ 11,653,252 33.7%
Cash and Equivalents 364,354 1.0 221,457 0.7 127,214 0.4
U.S. Government
Obligations 20,161,558 53.7 13,639,018 42.6 14,010,514 40.6
Receivables
Receivable from
Brokers 205,789 0.5 4,041,391 12.6 0 0.0
Notes Receivable 0 0.0 54,664 0.2 71,769 0.2
Other Receivables 668,647 1.8 1,331,229 4.1 75,643 0.2
Private Placements 13,334,188 35.5 11,218,426 35.0 7,878,407 22.8
Other Assets 356,476 1.0 360,529 1.1 717,925 2.1
------------ ------ ------------ ------ ------------ ------
Total Assets $ 37,524,555 100.0% $ 32,044,073 100.0% $ 34,534,724 100.0%
============ ====== ============ ====== ============ ======
1
BUSINESS STRATEGY
Harris & Harris Group is a publicly-traded, venture capital investment
firm. It is an entrepreneurial company that has earned high returns on its
shareholders' capital by helping other entrepreneurs realize their potential.
Sometimes, Harris & Harris Group finds entrepreneurs to manage the development
of intellectual property or a business idea. Other times, entrepreneurs find
Harris & Harris Group.
Harris & Harris Group is perhaps best known for its co-founding of
high-technology start-ups that have become highly valued, publicly-traded
companies, including Alliance Pharmaceutical and Molten Metal Technology. But
it also has co-founded or been at least a fifty percent owner of early-stage,
low-technology companies that it has helped develop into successful,
publicly-traded entities, including Re Capital Corporation and Ag Services of
America. And it also invests in later stage companies, including
management-led buyouts, and in deals led by other venture capitalists.
Most of Harris & Harris Group's interests in privately-held companies are
intended to be sold eventually -- usually after a period of some years -- once
the entrepreneurial phase of development is over and the investee company can
flourish independently. But two of Harris & Harris Group's start-up
investments, the money management firms Highline Capital Management and PHZ
Capital Partners, may be held for longer periods, in order to share in their
generation of net free cash as they mature.
Sometimes, members of Harris & Harris Group's management team serve as
board members or even operating officers of investee companies. Other times,
Harris & Harris Group merely acts as an active investor, ready to assist the
investee company in ways small or large.
What is common to all of Harris & Harris Group's investments in
privately-held companies is that Harris & Harris Group is a resource,
supplying its own capital, experience and relationships to entrepreneurial
ventures. And Harris & Harris Group is constantly nurturing and drawing on its
relationships with leading research universities, scientific institutions, and
financial, consulting, professional and industrial organizations to bolster its
own resources.
As a result of this value-added approach, Harris & Harris Group's
thirteen-year, historical rate of return on its investments in private
ventures has been extremely high. The Company's goal is to keep its rate of
return on its venture capital investments high by continuing to find good
opportunities and add high value to them.
2
FELLOW SHAREHOLDERS:
During the third quarter, Harris & Harris Group became, in effect, a
publicly-traded venture capital firm: it became a Business Development Company
("BDC"), having obtained an exemptive order from the Securities and Exchange
Commission as authorized by the shareholders at the 1994 Annual Meeting. Harris
& Harris Group has been an investment company since late 1992, prior to which
time it was an operating company. As a BDC, the Company will continue to
invest as it has for the last thirteen years in early-stage and other venture
capital investments, but it will also have greaterflexibility, including the
ability to invest in entities in which other affiliated persons (not including
management or directors) invest, more choices with respect to capital
structure, and the ability to offer stock options as management incentives.
Since starting up Otisville BioTech (now named Alliance Pharmaceutical
Corporation) in 1983, Harris & Harris Group has made venture capital
investments. These high risk investments have included a few losers, but the
Company's overall rates of return on its venture capital investments have been
extraordinarily high. Profits from these investments have been largely
responsible for the Company's growth in net assets from $109,144 at the time
of incorporation in 1981 to $36,561,909 at December 31, 1995. But until the
Company became an investment company in late 1992, its venture
capital returns were commingled with the much lower overall returns of its
operating businesses, in which the Company then had most of its capital
invested.
As a BDC, the Company is in the process of investing a higher percentage
of its capital than heretofore possible in venture capital opportunities. The
Company still must maintain liquidity for working capital, new opportunities
and follow-on investments in existing portfolio companies. But now that the
Company has the flexibility of a BDC, management is studying new ways of
possibly leveraging the Company's relationships, deal flow and performance
record for the benefit of Harris & Harris Group's shareholders.
The Company reported net assets at December 31, 1995 of $36,561,909, as
compared with $31,310,802 at December 31, 1994. Total assets at December 31,
1995 were $37,524,555, as compared with $32,044,073 at December 31, 1994.
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at December 31, 1995 of $23,833,891, versus
$20,465,118 at December 31, 1994 and $25,938,392 at December 31, 1993.
For the year ended December 31, 1995, the Company reported net pre-tax
realized and unrealized appreciation on its investments of $2,109,768 and
$243,414, respectively. The Company's liquidity was boosted $5,000,001 by the
private placement on May 18, 1995 of 1,075,269 unregistered shares of the
Company's common stock at the then-current market price with subsidiaries of
American Bankers Insurance Group, Inc.
3
Harris & Harris Group restructured itself from an operating company that
also made entrepreneurial investments into a full time BDC simply because, over
the years, the Company's return on venture capital investments (defined as any
cash investment in a non-publicly traded security other than an operating
subsidiary of the Company), has been so high. Since the Company's first
venture capital investment in 1983, in the company now named Alliance
Pharmaceutical Corporation (NASDAQ/NMS symbol: ALLP), through December 31,
1995, the Company's annual internal rate of return on its venture capital
investments has been 92.2 percent.
The Company's nine completed venture capital investments (i.e., those in
which the Company has sold its interest), generated an annual internal rate of
return of 93.4 percent. In these completed investments, the Company invested
$9,754,581 and sold its interests for a total of $47,939,584. The Company's
initial investments in these ventures totaled $5,339,523, and its follow-on
investments totaled $4,415,058. From the time of its first investment to
final sale, the average duration of these investments was 3.7 years.
The Company's current portfolio of private investments is comprised of
interests in fourteen companies for which it paid a total of $13,462,816 and
that it values as of December 31, 1995 at a total of $14,813,980. On average,
these investments have been held for only 2.0 years and, so far, their internal
rate of return to the Company has been only 6.7 percent. It would be extremely
difficult (and realistically, shareholders should not expect) for the Company
to bring its internal rate of return on its current portfolio and on new
investments up to the extraordinary levels achieved by its completed
investments. But that is what the Company's management is striving to
do.
As always, we, the employees, management and directors of Harris & Harris
Group, thank the shareholders for their patient support of the Company in a
difficult, long-term business that requires patience. Shareholders and
potential shareholders should read carefully all of the sections of this
annual report, including "Company Business and Investment Objectives," to
understand the nature of the Company's business. The Company does not have a
balanced, diversified portfolio, and many of the Company's investments are
inherently long-term and risky. The Company's common stock is not a suitable
investment for investors who are impatient or are uncomfortable with or unable
to bear such risk, even though the Company's overall historical returns on
such investments have encouraged the Company to become a BDC.
/s/ /s/
Charles E. Harris Robert B. Schulz
Chairman and Chief Executive Officer President and Chief Operating Officer
February 29, 1996
4
SIGNIFICANT EVENTS OF 1995
January 31 Harris & Harris Group announced a $2,062,155 write-down, to
$618,845, of its investment in Sonex International Corporation and
estimated year-end 1994 net asset value of $3.43 per share.
February 1 Company received 108,736 shares of Charter Medical Corporation in
exchange for its interest in Magellan Health Services, as part of
a tax-free merger. The Company had paid $800,000 for its interest
in Magellan in December, 1993. On February 1, 1995, Charter
Medical's stock closed at $15 1/2 on the American Stock Exchange.
February 13 Company announced purchase of a 4.7 percent interest in Harber
Brothers Productions, Inc. for $150,000.
March 23 Company elected Charles F. Hays as a director.
March 28 Company announced purchase of an 11 percent interest in Gel
Sciences, Inc. for $650,000.
May 18 Company announced a $5,000,001 private placement of 1,075,269
unregistered shares of its common stock with American Bankers
Insurance Group. The shares were placed at $4.65 per share, which
was the average closing price of Harris & Harris Group on the
NASDAQ National Market System during the ten previous trading days.
June 1 Company announced purchase of a 24.9 percent interest in Highline
Capital Management, LLC. for $500,000.
June 7 Company elected James E. Roberts as a director.
June 8 Company announced purchase of an additional interest in Harber
Brothers Productions, Inc. for $827,500. Including this
investment, the Company now owns 21.5 percent of Harber Brothers
on a fully-diluted basis.
June 23 Company announced purchase of an additional interest in Intaglio,
Ltd., for $209,836. Including this investment, the Company now
owns 20.4 percent of Intaglio on a fully-diluted basis.
July 26 Effective July 26, 1995, the Board of Directors elected to have
the Company become a Business Development Company ("BDC").
July 28 Company reported net asset value of $3.56 per share as of June
30, 1995.
5
September 22 Company purchased 24.9 percent ownership interest in PHZ Capital
Partners Limited Partnership. PHZ is a non-registered investment
company which manages third-party assets through private limited
partnerships investing primarily in publicly-traded securities in
both domestic and overseas markets.
October 19 Company reported net asset value of $3.52 per share as of
September 30, 1995.
November 8 Company announced purchase of an additional 600,000 shares of
Nanophase Technologies Corporation's Series D Preferred Stock for
$600,000. Including the 562,204 shares of Series D Preferred
Stock previously acquired, the Company's total investment is now
$1,162,204, representing approximately a 10.1 percent
fully-diluted interest in Nanophase.
December 22 Company announced that Mr. Joel Voelz had joined nFX Corporation
as President and CEO.
December 28 Company announced that it had sold its entire interest of
Guilford Pharmaceuticals, Inc., in the open market for $3,040,621.
The Company had acquired these shares in the second half of 1995
for a total of $1,624,195.
After December 31, 1995, but before publication of 1995 Annual Report
February 6 Company reported net asset value of $3.54 per share as of
December 31, 1995.
February 20 Company announced that nFX Corporation had closed a $1 million
equity private placement, in which the Company purchased an
additional $440,000 of nFX Series B Convertible Preferred Stock
and maintained its 37.8 percent fully-diluted ownership interest
in nFX. Prior to this financing, Harris & Harris Group had valued
its holdings in nFX at $3,988,959.
February 27 Company purchased for $400,000, Series A Convertible Preferred
Stock of PureSpeech, Inc., representing a 3.7 percent
fully-diluted equity interest.
6
HARRIS & HARRIS GROUP, INC.
1995 INVESTMENT ACTIVITY
Harber Brothers Productions, Inc.
In February 1995, the Company purchased 150,000 shares of Harber
Brothers Productions, Inc., Series A Voting Convertible Preferred Stock for
$150,000; and in June 1995, the Company purchased 827,500 shares of Harber
Brothers Productions, Inc., Series A Voting Convertible Preferred Stock for
$827,500. The Series A Preferred Stock is convertible into shares of common
stock. The combined purchases represent a 21.5 percent fully-diluted ownership
interest in Harber Brothers Productions.
Harber Brothers is a privately-held, New York City based company that
intends to finance, produce and market media products that combine
entertainment, music, learning and interactivity. Harber Brothers is producing
its first titles, interviewing developers, and establishing distribution
channels. Harber Brothers has received $1,500,000 in total paid-in capital.
Gel Sciences, Inc.
In March 1995, the Company purchased 1,181,819 shares of Series B
Preferred Stock and five-year warrants exercisable into 72,728 shares of
common stock of Gel Sciences, Inc., for $650,000. The Series B Preferred is
convertible into 1,181,819 shares of common stock at $.55 per share.
In December 1995, the Company purchased 41,250 shares of common stock
and 22,275 shares of Series A Non-Convertible Preferred Stock of Gel Sciences
for $26,812. Altogether, the Company owns an 11.8 percent fully-diluted
interest in Gel Sciences.
Gel Sciences is a privately-held company, founded in 1992, that has
developed a significant body of knowledge in responsive gels based on
technology licensed from several institutions including: Massachusetts
Institute of Technology, University of Minnesota, University of Cincinnati, and
University of Washington. Responsive gels expand or contract, in response to
changes in the environment, including changes in: temperature, pressure, pH,
solvent, light, and electric and magnetic fields. Responsive gels perform
useful functions by absorbing and expelling a liquid (chemical or
pharmaceutical) in response to a controlled stimulus. Gel Sciences is
pursuing a strategy of developing OEM relationships to accelerate the
commercialization of its technology with a particular focus in three areas:
separation, control of chemical reactivity, and drug delivery.
Highline Capital Management, LLC.
In June 1995, the Company purchased for $500,000, 24.9 percent of
Highline Capital Management, LLC., a Delaware limited liability company.
Highline is a non-registered investment company organized by Messrs. Jacob W.
Doft and Raji G. Khabbaz to manage third-party assets through private limited
partnerships that invest in publicly-traded securities. Mr. Khabbaz had served
in previous years as an employee and as a director of Harris & Harris Group.
7
PHZ Capital Partners Limited Partnership
In September 1995, the Company purchased, for $720,000, a 24.9 percent
ownership interest in PHZ Capital Partners Limited Partnership, a Delaware
limited partnership. The Company has loaned PHZ $500,000 for one year, which
PHZ is investing to establish its initial audited performance record.
PHZ Capital Partners is a non-registered investment company which will
manage third-party assets through private limited partnerships investing
primarily in publicly-traded securities in both domestic and overseas markets.
PHZ is dedicated to creating and implementing disciplined and model-based
quantitative trading strategies designed to achieve consistently superior
risk-adjusted returns through innovations in financial modeling and trading
technology. PHZ will use a balanced integration of expertise in finance,
leading edge statistics, and advanced computing to find and exploit the complex
relationships existing between financial markets and specific securities.
Harris & Harris Group's investments in Highline and PHZ may be held for
longer periods, as potential net free cash flow generating assets, with a view
towards increasing Harris & Harris Group's cash flow.
8
COMPANY BUSINESS AND INVESTMENT OBJECTIVES
The Company is a venture capital investment company, operating as a
Business Development Company ("BDC") under the Investment Company Act of 1940
(the "1940 Act"), whose objective is to achieve long-term capital appreciation,
rather than current income, from its investments. The Company has invested,
and expects to continue to invest, a substantial portion of its assets in
private, development stage or start-up companies, and in the development of new
technologies in a broad range of industry segments. These private businesses
tend to be thinly capitalized, unproven, small companies that lack management
depth and have not attained profitability or have no history of operations.
The Company may also invest to the extent permitted under the 1940 Act, in
publicly-traded securities, including high risk securities as well as
investment grade securities. The Company may participate in expansion
financing and leveraged buyout financing of more mature operating companies
as well as other investments. The Company does not seek to invest in any
particular industries or categories of investments. As a venture capital
company, the Company invests in, and provides managerial assistance to, its
private investees which, in its opinion, have significant potential for growth.
There is no assurance that the Company's investment objective will be achieved.
As a BDC, the Company operates as an internally managed investment company
whereby its officers and employees, under the general supervision of its Board
of Directors, conduct its operations.
Venture Capital Investments
The Company has invested, and expects to continue to invest, a substantial
portion of its assets in private, development stage or start-up companies. The
Company may initially own 100 percent of the securities of a start-up
investment for a period of time and may control such company for a substantial
period. In connection with its venture capital investments, the Company may be
involved in recruiting management, formulating operating strategies, product
development, marketing and advertising, assisting in financial plans, as well
as providing management in the initial, start-up stages and establishing
corporate goals. The Company may assist in raising additional capital for
such companies from other potential investors and may subordinate its own
investment to that of other investors. The Company may also find it necessary
or appropriate to provide additional capital of its own. The Company may
introduce such companies to potential joint venture partners, suppliers and
customers. In addition, the Company may assist in establishing relationships
with investment bankers and other professionals. The Company may also assist
with mergers and acquisitions. The Company may derive income from such
companies for the performance of any of the above services. Because of the
speculative nature of these investments and the lack of any market for such
securities, there is significantly greater risk of loss than is the case with
traditional investment securities. The Company expects that some of its
venture capital investments will be a complete loss or will be unprofitable and
that some will appear likely to become successful, but never realize their
potential. The Company has been and will continue to be risk seeking rather
than risk averse in its approach to its venture capital and other investments.
9
The Company may control a company for which it has provided venture capital,
or it may be represented on the company's board of directors by one or more of
its officers or directors, who may also serve as officers of such a company.
Particularly during the early stages of an investment, the Company may in
effect be conducting the operations of the company. As a venture company
emerges from the developmental stage with greater management depth and
experience, the Company expects that its role in the company's operations will
diminish. The Company seeks to assist each company in establishing its own
independent capitalization, management and board of directors. The Company
expects to be able to reduce its active involvement in the management of its
investment in those start-up companies that become successful by a liquidity
event, such as a public offering or sale of a company.
The Company has invested and expects to continue to invest a substantial
portion of its assets in securities that do not pay interest or dividends and
that are subject to legal or contractual restrictions on resale that may
adversely affect the liquidity and marketability of such securities.
The Company expects to make speculative investments that have limited
marketability and a greater risk of investment loss than less speculative
issues.
Intellectual Property
The Company believes there is a role for organizations that can assist in
technology transfer. Scientists and institutions that develop and patent
intellectual property increasingly seek the rewards of entrepreneurial
commercialization of their inventions, particularly as governmental,
philanthropic and industrial funding for research has become harder to obtain.
The Company believes that several factors combine to give it a high value-added
role to play in the commercialization of technology: its experience in
organizing and developing successful new companies; its willingness to invest
its own capital at the highest risk, seed stage; its access to high-grade
institutional sources of intellectual property; its experience in mergers,
acquisitions and divestitures; its access to and knowledge of the capital
markets; and its willingness to do as much of the early work as it is qualified
to do.
The Company's form of investment may include: 1) funding of research and
development in the development of a technology; 2) obtaining licensing rights
to intellectual property or patents; 3) outright acquisition of intellectual
property or patents; and 4) formation and funding of companies or joint
ventures to commercialize intellectual property. Income from the Company's
investments in intellectual property or its development may take the form of
participation in licensing or royalty income, fee income, or some other form of
remuneration. At some point during the commercialization of a technology, the
Company's investment may be transformed into ownership of securities of a
development stage or start-up company as discussed above. Investing in
intellectual property is highly risky.
10
Illiquidity of Investments
Many of the Company's investments consist of securities acquired directly
from the issuer in private transactions. They may be subject to restrictions
on resale or otherwise be illiquid. The Company does not anticipate that there
will be any established trading market for such securities. Additionally,
many of the securities that the Company may invest in will not be eligible for
sale to the public without registration under the Securities Act of 1933, as
amended, which could prevent or delay any sale by the Company of such
investments or reduce the amount of proceeds that might otherwise be realized
therefrom. Restricted securities generally sell at a price lower than similar
securities not subject to restrictions on resale. Further, even if a
portfolio company or investee registers its securities and becomes a reporting
company under the Securities and Exchange Act of 1934, the Company may be
considered an insider by virtue of its board representation and would be
restricted in sales of such company's securities.
Need for Follow-On Investments
Following its initial investment in investees, the Company has made and
anticipates that it will continue to make additional investments in such
investees as "follow-on" investments, in order to increase its investment in
an investee, and may exercise warrants, options or convertible securities that
were acquired in the original financing. Such follow-on investments may be
made for a variety of reasons including: 1) to increase the Company's exposure
to an investee, 2) to acquire securities issued as a result of exercising
convertible securities that were purchased in the original financing, 3) to
preserve the Company's proportionate ownership in a subsequent financing, or 4)
in an attempt to preserve or enhance the value of the Company's investment.
There can be no assurance that the Company will make follow-on investments or
have sufficient funds to make such investments; the Company will have the
discretion to make any follow-on investments as it determines, subject to the
availability of capital resources. The failure to make such follow-on
investments may, in certain circumstances, jeopardize the continued viability
of an investee and the Company's initial investment, or may result in a missed
opportunity for the Company to increase its participation in a successful
operation.
11
STATEMENT OF ASSETS AND LIABILITIES
ASSETS
December 31, 1995 December 31, 1994
Investments, at value (See accompanying
schedule ofinvestments and notes). . . $ 35,929,289 $ 26,034,803
Cash. . . . . . . . . . . . . . . . . . . 364,354 221,457
Receivable from brokers . . . . . . . . . 205,789 4,041,391
Interest receivable . . . . . . . . . . . 300,718 73,326
Notes receivable. . . . . . . . . . . . . 0 54,664
Taxes receivable (Note 6) . . . . . . . . 367,929 1,257,903
Prepaid expenses. . . . . . . . . . . . . 86,976 65,220
Other assets. . . . . . . . . . . . . . . 269,500 295,309
------------ ------------
Total assets. . . . . . . . . . . . . . . $ 37,524,555 $ 32,044,073
============ ============
LIABILITIES & NET ASSETS
Accounts payable and accrued
liabilities. . . . . . . . . . . . . . $ 352,129 $ 365,261
Deferred rent . . . . . . . . . . . . . . 59,887 58,859
Deferred income tax liability (Note 6). . 550,630 309,151
------------ ------------
Total liabilities . . . . . . . . . . . . 962,646 733,271
------------ ------------
Commitments and contingencies (Note 7)
Net assets. . . . . . . . . . . . . . . . $ 36,561,909 $ 31,310,802
============ ============
Net assets are comprised of:
Preferred stock, $0.10 par value,
2,000,000 shares authorized;
none issued. . . . . . . . . . . . . . $ 0 $ 0
Common stock, $0.01 par value,
25,000,000 shares authorized;
10,333,902 issued and outstanding
at 12/31/95 and 9,841,099 issued and
9,136,747 outstanding at 12/31/94. . . 103,339 98,411
Additional paid in capital. . . . . . . . 15,691,978 11,543,948
Accumulated net realized income . . . . . 19,362,249 19,090,309
Accumulated unrealized appreciation of
investments, net of deferred tax
liability of $698,250 at 12/31/95
and $613,055 at 12/31/94 . . . . . . . 1,404,343 1,246,124
Treasury stock, at cost (none at
12/31/95; 704,352 at 12/31/94) . . . . 0 (557,707)
Reserve for restricted stock award
(Note 3) . . . . . . . . . . . . . . . 0 (110,283)
------------ ------------
Net assets. . . . . . . . . . . . . . . . $ 36,561,909 $ 31,310,802
============ ============
Shares outstanding. . . . . . . . . . . . 10,333,902 9,136,747
------------ ------------
Net asset value per outstanding share . . $ 3.54 $ 3.43
============ ============
The accompanying notes are an integral part of these financial statements.
12
STATEMENT OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Investment income:
Interest from:
Fixed-income securities. . . $ 999,869 $ 719,293 $ 276,059
Unaffiliated companies . . . 0 0 128,398
Affiliated companies . . . . 11,222 11,913 0
Controlled affiliates. . . . 0 0 6,223
Dividend income--
unaffiliated companies . . 8,436 88,067 28,374
Consulting and
administrative fees. . . . 88,209 0 0
Other income. . . . . . . . . 1,781 1,003 14,896
------------ ------------ ------------
Total income . . . . . . . . 1,109,517 820,276 453,950
Expenses:
Salaries and benefits . . . . 1,560,132 2,061,981 1,131,945
Sign-up bonuses . . . . . . . 0 1,000,000 0
------------ ------------ ------------
Total salaries and benefits. 1,560,132 3,061,981 1,131,945
Administration and
operations . . . . . . . . 440,605 424,714 368,241
Professional fees . . . . . . 461,526 421,865 285,772
Depreciation and
amortization . . . . . . . 161,876 271,430 363,752
Rent. . . . . . . . . . . . . 124,713 114,667 123,685
Directors' fees and expenses. 40,836 52,816 78,984
Custodian fees. . . . . . . . 16,453 17,333 0
Other expenses (Note 7) . . . 0 0 700,000
------------ ------------ ------------
Total expenses . . . . . . . 2,806,141 4,364,806 3,052,379
Operating loss before
income taxes . . . . . . . (1,696,624) (3,544,530) (2,598,429)
Income tax benefit (Note 6) . 597,215 1,265,648 983,804
------------ ------------ ------------
Net operating loss . . . . . . (1,099,409) (2,278,882) (1,614,625)
Net realized gain (loss) on investments:
Realized gain (loss) on
sale of investments. . . . 2,109,768 (71,396) 35,873,394
------------ ------------ ------------
Total realized gain (loss) . 2,109,768 (71,396) 35,873,394
Income tax (provision)
benefit (Note 6) . . . . . (738,419) 168,252 (12,282,824)
------------ ------------ ------------
Net realized gain on
investments. . . . . . . . 1,371,349 96,856 23,590,570
------------ ------------ ------------
Net realized income (loss) . . 271,940 (2,182,026) 21,975,945
Net increase (decrease) in unrealized appreciation on investments:
Increase as a result of
investment sales . . . . . 337,577 7,955 0
Decrease as a result of
investment sales . . . . . (562,765) (1,223,026) (22,078,808)
Increase on investments held. 1,002,347 1,028,961 3,054,485
Decrease on investments held. (533,745) (956,624) 0
------------ ------------ ------------
Total unrealized
appreciation
(depreciation) on
investments . . . . . . . 243,414 (1,142,734) (19,024,323)
Income tax (provision)
benefit (Note 6) . . . . . (85,195) 256,694 5,940,979
------------ ------------ ------------
Net increase (decrease) in
unrealized appreciation
on investments . . . . . . 158,219 (886,040) (13,083,344)
------------ ------------ ------------
Net increase (decrease) in net assets from operations:
Total . . . . . . . . . . . . $ 430,159 $ (3,068,066) $ 8,892,601
============ ============ ============
Per outstanding share . . . . $ 0.04 $ (0.34) $ 1.03
============ ============ ============
The accompanying notes are an integral part of these financial statements.
13
STATEMENT OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Cash flows provided (used) by operating activities:
Net increase (decrease) in net assets
resulting from operations . $ 430,159 $ (3,068,066) $ 8,892,601
Adjustments to reconcile
increase (decrease) in
net assets from operations
to net cash provided (used)
by operating activities:
Net realized and unrealized
(gain) loss on
investments. . . . . . . . (2,353,182) 1,214,130 (16,849,071)
Deferred income taxes . . . . 241,479 (408,655) (5,640,196)
Depreciation and
amortization . . . . . . . 161,876 271,430 363,752
Other . . . . . . . . . . . . 40,859 2,451 3,280
Changes in assets and liabilities:
Receivable from brokers . . . 3,835,602 (4,041,391) 0
Prepaid expenses. . . . . . . (21,756) 183,643 438,578
Interest receivable . . . . . (227,392) (64,949) (5,006)
Taxes receivable. . . . . . . 1,184,567 (1,190,637) (67,266)
Other assets. . . . . . . . . (9,372) 153,071 (120,248)
Accounts payable and accrued
liabilities. . . . . . . . (43,241) 142,570 (66,596)
Payable for securities
purchased. . . . . . . . . 0 (797,380) 720,530
Deferred rent . . . . . . . . 10,281 20,560 47,550
------------ ------------ ------------
Net cash provided (used)
by operating activities. . 3,249,880 (7,583,223) (12,282,092)
Cash (used) provided by investing activity:
Collection on note
receivable . . . . . . . . 54,664 17,105 15,802
Purchase of fixed assets. . . (16,409) (30,188) (258,269)
Net (purchase) sale of
short-term investments . . (6,522,541) 371,496 (10,218,494)
Purchase of investments . . . (8,246,694) (30,411,524) (25,880,690)
Proceeds from sale of
investments. . . . . . . . 7,207,926 36,321,570 47,582,159
------------ ------------ ------------
Net cash (used) provided
by investing activities. . (7,523,054) 6,268,459 11,240,508
Cash flows provided by financing activities:
Purchase of treasury stock. . (646,430) 0 0
Proceeds from exercise of
stock options. . . . . . . 62,500 0 0
Proceeds from private
placement of stock
(Note 4) . . . . . . . . . 5,000,001 0 0
Proceeds from sale of stock . 0 1,409,007 982,789
------------ ------------ ------------
Net cash provided by
financing activities . . . 4,416,071 1,409,007 982,789
------------ ------------ ------------
Net increase (decrease) in cash:
Cash at beginning of period . 221,457 127,214 186,009
Cash at end of period . . . . 364,354 221,457 127,214
------------ ------------ ------------
Net increase (decrease)
in cash. . . . . . . . . . $ 142,897 $ 94,243 $ (58,795)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
14
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
Changes in net assets from operations:
Net operating loss. . . . . . $ (1,099,409) $ (2,278,882) $ (1,614,625)
Net realized gain on
investments. . . . . . . . 1,371,349 96,856 23,590,570
Net decrease in unrealized
appreciation on
investments as a result
of sales . . . . . . . . . (146,372) (933,059) (15,215,508)
Net increase in unrealized
appreciation on
investments held . . . . . 304,591 47,019 2,132,164
------------ ------------ ------------
Net increase (decrease) in
net assets resulting
from operations. . . . . . 430,159 (3,068,066) 8,892,601
Capital stock transactions:
Purchase of stock . . . . . . (646,430) 0 0
Restricted stock award
(Note 3) . . . . . . . . . 110,283 220,564 220,564
Sales of stock to employees . 0 1,409,007 140,082
Proceeds from exercise of
stock options and
warrants . . . . . . . . . 62,500 0 842,707
Proceeds from private
placement of common stock
(Note 4) . . . . . . . . . 5,000,001 0 0
Tax benefit of restricted
stock award and common
stock transactions . . . . 294,594 0 0
------------ ------------ ------------
Net increase from capital
stock transactions . . . . 4,820,948 1,629,571 1,203,353
------------ ------------ ------------
Net increase (decrease)
in net assets . . . . . . . 5,251,107 (1,438,495) 10,095,954
Net assets:
Beginning of period . . . . . 31,310,802 32,749,297 22,653,343
------------ ------------ ------------
End of period . . . . . . . . $ 36,561,909 $ 31,310,802 $ 32,749,297
============ ============ ============
The accompanying notes are an integral part of these fincial statements.
15
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
Method of
Valuation (3) Shares Value
------------- ------ -----
Investments in Unaffiliated Companies (9)(10) -- 10.5% of total investments
Publicly-Traded Portfolio (Common Stock unless noted otherwise)
Oil and Gas Related -- 1.1%
CORDEX Petroleums Inc. (1)(5)
Argentine oil and gas exploration
Class A Common Stock . . . . . . . . . . . . (C) 4,052,080 $ 381,763
Biotechnology and Healthcare Related -- 5.7%
Alliance Pharmaceutical Corporation (1)(4). . (C) 70,000 953,750
Magellan Health Services, Inc. (1)(2)(6). . . (C) 54,368 1,098,030
------------
Total Publicly-Traded Portfolio (cost: $1,140,399) $ 2,433,543
Private Placement Portfolio (Illiquid) -- 3.7%
CORDEX Petroleums Inc. (1)(2)(5)
Argentine oil and gas exploration
Special Warrants. . . . . . . . . . . . . . . (C) 1,667,000 $ 0
Exponential Business Development Company (1)(2)(4)
Venture capital partnership focused on
early stage companies
Limited partnership interest. . . . . . . . . (A) - - 25,000
Princeton Video Image, Inc. (1)(2)(5)(7)(8)
Real time sports and entertainment advertising
3.8% of fully-diluted equity. . . . . . . . . (B) 24,600 615,000
Warrants: 43,800 at $12.50 expiring 5/96;
6,700 at $2.25 expiring 8/97 . . . . . . . (D) 50,500 699,925
------------
Total Private Placement Portfolio (cost: $120,500) $ 1,339,925
------------
Total Investments in
Unaffiliated Companies (cost: $1,260,899). . . $ 3,773,468
------------
The accompanying notes are an integral part of this schedule.
16
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
Method of Shares/
Valuation (3) Principal Value
------------- --------- -----
Private Placement Portfolio in Non-Controlled Affiliates (9) (Illiquid) -- 22.3%
Dynecology Incorporated (1)(2)(5)(7) --
Develops various environmental
intellectual properties -- Option expiring
12/13/98 to purchase at $15 per share
135,000 shares of Common Stock equaling
18.1% of fully-diluted equity . . . . . . . (D) - - $ 60,000
Gel Sciences, Inc. (1)(2)(4)(7) --
Develops engineered response gels for
controlled release systems --
11.8% of fully-diluted equity
Warrants - 72,728 at $.55 expiring 02/01/00 (A) - -
Common Stock. . . . . . . . . . . . . . . . (A) 41,250
Series A Preferred Stock. . . . . . . . . . (A) 22,275
Series B Preferred Stock. . . . . . . . . . (A) 1,181,819 676,812
Harber Brothers Productions, Inc. (1)(2)(4)(7) --
Finances, produces and markets media
products that combine entertainment,
music, learning and interactivity --
21.5% of fully-diluted equity
Series A Voting Convertible Preferred Stock (A) 967,500 967,500
Highline Capital Management, LLC. (1)(2)(4)(7) --
Manages third-party assets --
24.9% of fully-diluted equity . . . . . . . (A) - - 500,000
Intaglio, Ltd. (1)(2) --
Manufactures and markets proprietary
decorative tiles and signs --
20.4% of fully-diluted equity
Common Stock. . . . . . . . . . . . . . . . (B) 565,792 2,263,168
Warrants at $4.00 expiring 11/28/01 . . . . (A) 166,667 167
Micracor, Inc. (1)(2)(5)(7) --
Designs and manufactures advanced
solid state photonic systems --
8.9% of fully-diluted equity
Series F Preferred Stock --
444,444 shares and 1,199,999
Warrants at $2.25 expiring 7/20/99. . . . . (A) - - 1,000,000
Nanophase Technologies Corporation (1)(2)(7) --
Manufactures and markets inorganic
crystals of nanometric dimensions
10.1% of fully-diluted equity
Series D Convertible Preferred Stock. . . . (A) 1,162,204 1,162,204
PHZ Capital Partners Limited Partnership (1)(2)(4)(7)
Manages third-party assets --
24.9% of fully-diluted equity . . . . . . . (A) - - 720,000
One year 8% note due 9/22/96. . . . . . . . (A) $ 500,000 500,000
Sonex International Corporation (1)(2) --
Manufactures and markets ultrasonic
toothbrush for home use
17.7% of fully-diluted equity
Series A Non-Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (D) 588,935 146,968
Common Stock. . . . . . . . . . . . . . . . (D) 34,000 8,485
------------
Total Private Placement Portfolio
in Non-Controlled Affiliates (cost: $10,307,519) $ 8,005,304
============
The accompanying notes are an integral part of this schedule.
17
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
Method of
Valuation (3) Shares Value
------------- ------ -----
Private Placement Portfolio in Controlled Affiliates (9) (Illiquid) -- 11.1%
nFX Corporation (1)(2)(5)(7) --
Develops neural-network software
37.4% of fully-diluted equity
Series A Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (B) 1,294,288 $ 2,888,980
Series B Non-Voting Convertible
Preferred Stock . . . . . . . . . . . . . . (B) 492,800 1,099,979
------------
Total Private Placement Portfolio
in Controlled Affiliates (cost: $2,096,720) $ 3,988,959
------------
U.S. Government Obligations -- 56.1%
U.S. Treasury Bill dated 7/27/95 due date
01/25/96 -- 4.3% yield . . . . . . . . . . . (A) $ 2,349,377
U.S. Treasury Bill dated 08/17/95 due date
02/15/96 -- 5.4% yield . . . . . . . . . . . (A) 5,623,636
U.S. Treasury Bill dated 09/14/95 due date
03/14/96 -- 5.4% yield . . . . . . . . . . . (A) 973,660
U.S. Treasury Bill dated 10/12/95 due date
04/11/96 -- 5.5% yield . . . . . . . . . . . (A) 1,266,254
U.S. Treasury Bill dated 05/04/95 due date
05/02/96 -- 6.0% yield . . . . . . . . . . . (A) 4,728,071
U.S. Treasury Bill dated 12/21/95 due date
06/20/96 -- 5.2% yield . . . . . . . . . . . (A) 2,048,667
U.S. Treasury Bill dated 06/29/95 due date
06/27/96 -- 5.0% yield . . . . . . . . . . . (A) 3,171,893
------------
Total Investments in U.S. Government Obligations
(cost: $20,161,558). . . . . . . . . . . . . . $ 20,161,558
------------
Total Investments -- 100% (cost: $33,826,696). . $ 35,929,289
============
The accompanying notes are an integral part of this schedule.
18
SCHEDULE OF INVESTMENTS DECEMBER 31, 1995
Notes to Schedule of Investments
(1) Represents a non-income producing security. Equity investments that have
not paid dividends within the last twelve months are considered to be
non-income producing.
(2) Legal restrictions on sale of investment.
(3) See Footnote to Schedule of Investments for a description of the Method of
Valuation A to L.
(4) These investments were made during 1995. Accordingly, the amounts shown
on the schedule represent the gross additions in 1995.
(5) No activity occurred in these investments during the year ended December
31, 1995.
(6) Formerly named National Mentor Holding Corp., Magellan Health Services,
Inc. was later acquired by Charter Medical Corporation, which subsequently
changed its name to Magellan Health Services, Inc.
(7) These investments are in development stage companies. A development stage
company is defined as a company that is devoting substantially all of its
efforts to establishing a new business, and either has not yet commenced
its planned principal operations or has commenced such operations but has
not realized significant revenue from them.
(8) Formerly Princeton Electronic Billboard, Inc.
(9) Investments in unaffiliated companies consist of investments where the
Company owns less than 5% of the investee company. Investments in
non-controlled affiliated companies consist of investments where the
Company owns more than 5% but less than 25% of the investee company.
Investments in controlled affiliated companies consist of investments
where the Company owns more than 25% of the investee company.
(10) The aggregate cost for federal income tax purposes of investments in
unaffiliated companies is $1,368,576. The gross unrealized appreciation
based on tax cost for these securities is $2,521,205. The gross
unrealized depreciation on the cost for these securities is $116,313.
(11) The percentage ownership of each investee disclosed in the Schedule of
Investments expresses the potential common equity interest in each such
investee. The calculated percentage represents the amount of issuer's
common stock the Company owns or can acquire as a percentage of the
issuer's total outstanding common stock plus common shares reserved for
issued and outstanding warrants, convertible securities and stock options.
The accompanying notes are an integral part of this financial schedule.
19
FOOTNOTE TO SCHEDULE OF INVESTMENTS
ASSET VALUATION POLICY GUIDELINES
The Company's investments can be classified into five broad categories for
valuation purposes:
1) EQUITY-RELATED SECURITIES
2) INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR RESEARCH AND
DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT
3) LONG-TERM FIXED-INCOME SECURITIES
4) SHORT-TERM FIXED-INCOME INVESTMENTS
5) ALL OTHER INVESTMENTS
The Investment Company Act of 1940 (the "1940 Act") requires periodic
valuation of each investment in the Company's portfolio to determine net asset
value. Under the 1940 Act, unrestricted securities with readily available
market quotations are to be valued at the current market value; all other
assets must be valued at "fair value" as determined in good faith by or under
the direction of the Board of Directors.
The Company's Board of Directors is responsible for 1) determining overall
valuation guidelines and 2) ensuring the valuation of investments within the
prescribed guidelines.
The Company's Investment and Valuation Committee, comprised of at least
three or more Board members, is responsible for reviewing and approving the
valuation of the Company's assets within the guidelines established by the
Board of Directors.
Fair value is generally defined as the amount that an investment could be
sold for in an orderly disposition over a reasonable time. Generally, to
increase objectivity in valuing the assets of the Company, external measures of
value, such as public markets or third-party transactions, are utilized
whenever possible. Valuation is not based on long-term work-out value, nor
immediate liquidation value, nor incremental value for potential changes that
may take place in the future.
Valuation assumes that, in the ordinary course of its business, the Company
will eventually sell its investment.
20
The Company's valuation policy with respect to the five broad investment
categories is as follows:
EQUITY-RELATED SECURITIES
Equity-related securities are carried at fair value using one or more of
the following basic methods of valuation:
A. Cost: The cost method is based on the original cost to the Company.
This method is generally used in the early stages of a company's development
until significant positive or negative events occur subsequent to the date of
the original investment that dictate a change to another valuation method. Some
examples of such events are: 1) a major recapitalization; 2) a major
refinancing; 3) a significant third-party transaction; 4) the development of a
meaningful public market for the company's common stock; 5) significant
positive or negative changes in the company's business.
B. Private Market: The private market method uses actual third-party
transactions in the company's securities as a basis for valuation, using
actual, executed, historical transactions in the company's securities by
responsible third parties. The private market method may also use, where
applicable, unconditional firm offers by responsible third parties as a basis
for valuation.
C. Public Market: The public market method is used when there is an
established public market for the class of the company's securities held by
the Company. The Company discounts market value for securities that are
subject to significant legal, contractual or practical restrictions, including
large blocks in relation to trading volume. Other securities, for which market
quotations are readily available, are carried at market value as of the time of
valuation.
Market value for securities traded on securities exchanges or on the NASDAQ
National Market System is the last reported sales price on the day of
valuation. For other securities traded in the over-the-counter market and
listed securities for which no sale was reported on that day, market value is
the mean of the closing bid price and asked price on that day.
This method is the preferred method of valuation when there is an
established public market for a company's securities, as that market provides
the most objective basis for valuation.
D. Analytical Method: The analytical method is generally used to value an
investment position when there is no established public or private market in
the company's securities or when the factual information available to the
Company dictates that an investment should no longer be valued under either the
cost or private market method. This valuation method is inherently imprecise
and ultimately the result of reconciling the judgments of the Company's
Investment and Valuation Committee members, based on the data available to
them. The resulting valuation, although stated as a precise number, is
necessarily within a range of values that vary depending upon the significance
attributed to the various factors being considered. Some of the factors
considered may include the financial condition and operating results of the
company, the long-term potential of the business of the company, the values of
similar securities issued by companies in similar businesses, the proportion of
the company's securities owned by the Company and the nature of any rights to
require the company to register restricted securities under applicable
securities laws.
21
INVESTMENTS IN INTELLECTUAL PROPERTY OR PATENTS OR RESEARCH AND
DEVELOPMENT IN TECHNOLOGY OR PRODUCT DEVELOPMENT
Such investments are carried at fair value using the following basic
methods of valuation:
E. Cost: The cost method is based on the original cost to the Company.
Such method is generally used in the early stages of commercializing or
developing intellectual property or patents or research and development in
technology or product development until significant positive or adverse events
occur subsequent to the date of the original investment that dictate a change
to another valuation method.
F. Private Market: The private market method uses actual third-party
investments in intellectual property or patents or research and development in
technology or product development as a basis for valuation, using actual
executed historical transactions by responsible third parties. The private
market method may also use, where applicable, unconditional firm offers by
responsible third parties as a basis for valuation.
G. Analytical Method: The analytical method is used to value an
investment after analysis of the best available outside information where the
factual information available to the Company dictates that an investment should
no longer be valued under either the cost or private market method. This
valuation method is inherently imprecise and ultimately the result of
reconciling the judgments of the Company's Investment and Valuation Committee
members. The resulting valuation, although stated as a precise number, is
necessarily within a range of values that vary depending upon the significance
attributed to the various factors being considered. Some of the factors
considered may include the results of research and development, product
development progress, commercial prospects, term of patent and projected
markets.
LONG-TERM FIXED-INCOME SECURITIES
H. Fixed-Income Securities for which market quotations are readily
available are carried at market value as of the time of valuation using the
most recent bid quotations when available.
Securities for which market quotations are not readily available are
carried at fair value using one or more of the following basic methods of
valuation:
I. Fixed-Income Securities are valued by independent pricing services
that provide market quotations based primarily on quotations from dealers and
brokers, market transactions, and other sources.
J. Other Fixed-Income Securities that are not readily marketable are
valued at fair value by the Investment and Valuation Committee.
22
SHORT-TERM FIXED-INCOME INVESTMENTS
K. Short-Term Fixed-Income Investments are valued at market value at the
time of valuation. Short-term debt with remaining maturity of 60 days or less
is valued at amortized cost.
ALL OTHER INVESTMENTS
L. All Other Investments are reported at fair value as determined in good
faith by the Investment and Valuation Committee.
The reported values of securities for which market quotations are not
readily available and for other assets reflect the Investment and Valuation
Committee's judgment of fair values as of the valuation date using the outlined
basic methods of valuation. They do not necessarily represent an amount of
money that would be realized if the securities had to be sold in an immediate
liquidation. The Company makes many of its portfolio investments with the view
of holding them for a number of years, and the reported value of such
investments may be considered in terms of disposition over a period of time.
Thus valuations as of any particular date are not necessarily indicative of
amounts that may ultimately be realized as a result of future sales or other
dispositions of investments held.
23
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
Harris & Harris Group, Inc. (the "Company") is a venture capital investment
company operating as a business development company ("BDC") under the
Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
investment company under the 1940 Act. The Company operates as an internally
managed investment company whereby its officers and employees, under the
general supervision of its Board of Directors, conduct its operations.
The Company elected to become a BDC on July 26, 1995, after receiving the
necessary approvals. From July 31, 1992 until the election of BDC status, the
Company operated as a closed-end, non-diversified, investment company under the
1940 Act. Upon commencement of operations as an investment company, the
Company revalued all of its assets and liabilities at fair value as defined
in the 1940 Act. Prior to such time, the Company was registered and filed
under the reporting requirements of the Securities and Exchange Act of 1934 as
an operating company and, while an operating company, operated directly and
through subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
Portfolio Investment Valuations. Investments are stated at "fair
value" as defined in the 1940 Act and in the applicable regulations of the
Securities and Exchange Commission. All assets are valued at fair value as
determined in good faith by, or under the direction of, the Board of Directors.
See the Asset Valuation Policy Guidelines in the Footnote to Schedule of
Investments.
Securities Transactions. Securities transactions are accounted for on
the date the securities are purchased or sold (trade date); dividend income is
recorded on the ex-dividend date; and interest income is accrued as earned.
Realized gains and losses on investment transactions are determined on the
first-in, first-out basis for financial reporting and tax basis.
Income Taxes. The Company records income taxes using the liability
method in accordance with the provision of Statement of Financial Accounting
Standards No. 109. Accordingly, deferred tax liabilities have been established
to reflect temporary differences between the recognition of income and expenses
for financial reporting and tax purposes, the most significant difference of
which relates to the Company's unrealized appreciation on investments.
Reclassifications. Certain reclassifications have been made to the
December 31, 1993 and December 31, 1994 financial statements to conform to the
December 31, 1995 presentation.
Estimates by Management. The preparation of the financial statements
in conformity with Generally Accepted Accounting Principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of December 31,1995 and 1994, and the reported amounts of
revenues and expenses for the three years then ended. Actual results could
differ from these estimates.
24
NOTE 3. STOCK OPTION PLAN AND WARRANTS OUTSTANDING
On August 3, 1989, the shareholders of the Company approved the 1988 Long
Term Incentive Compensation Plan. On June 30, 1994, the shareholders of the
Company approved various amendments to the 1988 Long Term Incentive
Compensation Plan: 1) to conform to the provisions of the Business Development
Company regulations under the 1940 Act, which allow for the issuance of stock
options to qualified participants; 2) to increase the reserved shares under the
amended plan; 3) to call the plan the 1988 Stock Option Plan, as Amended and
Restated (the "1988 Plan"); and 4) to make various other amendments. On
October 20, 1995, the shareholders of the Company approved an amendment to the
1988 Plan authorizing automatic 20,000 share grants of non-qualified stock
options to newly elected non-employee directors of the Company. This amendment
is subject to the receipt of an exemptive order from the Securities and
Exchange Commission which is presently pending.
Under the 1988 Plan, the number of shares of common stock of the Company
reserved for issuance is equal to 20 percent of the outstanding shares of
common stock of the Company at the time of grant. However, so long as
warrants, options, and rights issued to persons other than the Company's
directors, officers, and employees at the time of grant remain outstanding, the
number of reserved shares under the 1988 Plan may not exceed 15 percent of the
outstanding shares of common stock of the Company at the time of grant, subject
to certain adjustments.
At December 31, 1995, there were 2,066,780 shares of common stock reserved
for the issuance of stock option awards under the Amended 1988 Plan, of which
1,393,763 were subject to outstanding options and warrants and 673,017 were
available for future awards.
The 1988 Plan provides for the issuance of incentive stock options and
non-qualified stock options to eligible employees as determined by the
Compensation Committee of the Board (the "Committee"), which is composed of
four non-employee directors. The Committee also has the authority to construe
and interpret the 1988 Plan; to establish rules for the administration of the
1988 Plan; and, subject to certain limitations, to amend the terms and
conditions of any outstanding awards. Options may be exercised for up to 10
years from the date of grant at prices not less than the fair market value of
the Company's common stock at the date of grant. The 1988 Plan provides that
payment by the optionee upon exercise of an option may be made using cash or
Company stock held by the optionee.
25
The following table summarizes changes in outstanding stock options under
the 1988
Plan:
Option Exercise
Number of Shares Price Per Share
---------------- ---------------
Outstanding at December 31, 1994 678,102 $1.1875 - $3.750
Issued 742,000 $5.3750 - $5.750
Canceled 0 0
Exercised 370,102 $1.2500 - $2.500
---------
Outstanding at December 31, 1995 1,050,000 $1.1875 - $5.750
=========
On June 30, 1995, pursuant to the 1988 Plan, the Company issued 136,454
common shares under two restricted stock awards, that vested on such date,
net of shares withheld to fulfill tax obligations.
During 1995, the Chairman of the Company exercised a total of 173,349 stock
options, at an average price of $1.87, by exchanging 64,703 shares of the
Company's stock owned by him.
As of December 31, 1995, there were outstanding warrants to purchase
343,763 shares of common stock at a price of $2.0641 per share expiring in
1999.
NOTE 4. CAPITAL STOCK TRANSACTIONS
On May 18, 1995, the Company completed a $5,000,001 private placement to
subsidiaries of American Bankers Insurance Group of 1,075,269 unregistered
shares of its common stock at $4.65 per share, which was the average closing
price of Harris & Harris Group on the NASDAQ National Market System during the
prior ten trading days. As part of the transaction, American Bankers has been
granted certain registration rights and has executed a standstill agreement.
NOTE 5. EMPLOYEE BENEFITS
As of August 15, 1990, the Company entered into non-competition, employment
and severance contracts with its Chairman, Charles E. Harris, and with its
Executive Vice President, C. Richard Childress, pursuant to which they are to
receive compensation in the form of salaries and other benefits. These
contracts were amended on June 30, 1992, January 3, 1993, and June 30, 1994.
The term of the contracts expires on December 31, 1999.
Base salaries are to be increased annually to reflect inflation and in
addition may be increased by such amounts as the Compensation Committee of
the Board of Directors of the Company deems appropriate.
26
In addition, Messrs. Harris and Childress would be entitled, under certain
circumstances, to receive severance pay under the employment and severance
contracts.
As of January 1, 1989, the Company adopted an employee benefits program
covering substantially all employees of the Company under a 401(k) Plan and
Trust Agreement. During 1995, contributions to the plan that have been charged
to operations totaled $46,283.
On June 30, 1994, the Company adopted a plan to provide medical and health
coverage for retirees, their spouses and dependents who, at the time of their
retirement, have ten years of service with the Company and have attained 50
years of age or have attained 45 years of age and have 15 years of service with
the Company. The coverage is secondary to any government provided or
subsequent employer provided health insurance plans. Based upon actuarial
estimates, the Company provided an original reserve of $176,520 that was
charged to operations for the period ending June 30, 1994. During 1995, the
Company expensed $16,965 and $13,145 for the plan's service cost and interest
expense, respectively. As of December 31, 1995, the Company had a reserve of
$206,630 for the plan.
NOTE 6. INCOME TAXES
The Company has not elected tax treatment available to regulated investment
companies under Subchapter M of the Internal Revenue Code. Accordingly, for
federal and state income tax purposes, the Company is taxed at statutory
corporate rates on its income, which enables the Company to offset any future
net operating losses against prior years' net income. The Company may carry
back operating losses against net income three years and carry forward such
losses fifteen years.
For the years ended December 31, 1995, 1994 and 1993, the Company's income
tax (benefit) provision was allocated as follows:
1995 1994 1993
Investment Operations. . . . . . . . .$ (597,215) $ (1,265,648) $ (983,804)
Realized (loss) gain on investments. . 738,419 (168,252) 12,282,824
Increase (decrease) in unrealized
appreciation on investments . . . . 85,195 (256,694) (5,940,979)
----------- ------------ ------------
Total income tax (benefit) provision .$ 226,399 $ (1,690,594) $ 5,358,041
=========== ============ ============
The above tax (benefit) provision consists of the following:
Current -- Federal . . . . . . . . . .$ (38,319) $ (1,281,939) $ 10,998,237
Deferred -- Federal. . . . . . . . . . 264,718 (408,655) (5,640,196)
----------- ------------ ------------
Total income tax (benefit) provision .$ 226,399 $ (1,690,594) $ 5,358,041
=========== ============ ============
27
The Company's deferred tax liability at December 31, 1995 and 1994 consist
of the following:
1995 1994
Unrealized appreciation on investments $ 698,250 $ 613,055
Restricted Stock 0 (192,992)
Medical retirement benefits (72,320) (61,782)
Other (75,300) (49,130)
--------- ---------
Net deferred income tax liability $ 550,630 $ 309,151
========= =========
NOTE 7. COMMITMENTS AND CONTINGENCIES
During 1993, the Company signed a ten-year lease with sublet provisions for
office space. Rent expense under this lease for the year ended December 31,
1995, was $124,713. Future minimum lease payments in each of the following
years are: 1996 -- $154,203; 1997 -- $164,484; 1998 -- $168,768; 1999 --
$176,030; 2000 -- $178,560; thereafter $459,067.
The Company has guaranteed a three-year lease obligation of approximately
$21,000 per annum for the office space of one of its investees, Highline
Capital Management LLC.
In December 1993, the Company and MIT announced the establishment by the
Company of the Harris & Harris Group Senior Professorship at MIT. Prior to the
arrangement for the establishment of this Professorship, the Company had made
gifts of stock in start-up companies to MIT. These gifts, together with the
contribution of $700,000 in cash in 1993, which was expensed by the Company in
1993, were used to establish this named chair.
The Company contributed to MIT securities with a cost basis of $3,280,
$20,000 and $20,000 in 1993, 1994, and 1995, respectively. These contributions
will be applied to the MIT Pledge at their market value at the time the shares
become publicly traded or otherwise monetized in a commercial transaction and
are free from restriction as to sale by MIT.
At December 31, 1995, the Company would have to fund additional cash and/or
property that would have to be valued at a total of $756,720 by December, 1998,
in order for the Senior Professorship to become permanent.
28
SELECTED PER SHARE DATA AND RATIOS
Per share operating performance:
Year Ended Year Ended Year Ended 3 Months Ended
December December December December
31, 1995 31, 1994 31, 1993 31, 1992
---------- ---------- ---------- --------------
Net asset value,
beginning of period $ 3.43 $ 3.66 $ 2.71 $ 2.90
Net operating loss (0.11) (0.25) (0.19) (0.02)
Net realized gain (loss) 0.14 0.01 2.75 (0.02)
Net decrease in
unrealized
appreciation as a
result of sales (0.01) (0.11) (1.78) (0.01)
Net increase (decrease)
in unrealized
appreciation on
investments held 0.03 0.01 0.25 (0.14)
Net increase (decrease)
from capital stock
transactions 0.06 0.11 (0.08) 0
------------ ------------ ------------ ------------
Net asset value,
end of period $ 3.54 $ 3.43 $ 3.66 $ 2.71
============ ============ ============ ============
Market value per share,
end of period $ 7.875 $ 6.375 $ 8.250 $ 4.375
Deferred income tax
per share $ 0.050 $ 0.030 $ 0.080 $ 0.760
Ratio of expenses to
average net assets 8.3% 13.6% 11.3% 2.0%
Ratio of net operating
loss to average
net assets 3.2% 7.1% 6.0% 6.7%
Investment return based on:
Stock price 23.5% (22.7)% 88.6% 49.0%
Net asset value 3.2% (6.3)% 35.0% (6.5)%
Portfolio turnover 51.2% 136.4% 118.1% 8.7%
Net assets,
end of period $ 36,561,909 $ 31,310,802 $ 32,749,297 $ 22,653,343
Number of shares
outstanding 10,333,902 9,136,747 8,944,828 8,350,999
The accompanying notes are an integral part of this schedule.
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To Harris & Harris Group, Inc.:
We have audited the accompanying statement of assets and liabilities
of Harris & Harris Group, Inc. (a New York corporation) as of December 31, 1995
and 1994, including the schedule of investments as of December 31, 1995, and
the related statements of operations, cash flows and changes in net assets for
the three years ended December 31, 1995, and the selected per share data and
ratios for each of the three years ended December 31, 1995 and the period from
commencement of investment company operations (October 1, 1992) to December 31,
1992. These financial statements and selected per share data and ratios are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and selected per share data
and ratios based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements and
selected per share data and ratios are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995 and 1994, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data
and ratios referred to above present fairly, in all material respects, the
financial position of Harris & Harris Group, Inc. as of December 31, 1995 and
1994, the results of its operations, its cash flows and the changes in its net
assets for the three years ended December 31, 1995, and the selected per share
data and ratios for each of the three years ended December 31, 1995 and the
three month period ended December 31, 1992, in conformity with generally
accepted accounting principles.
As discussed in Note 2, the financial statements include investment
securities valued at $13,334,188 (35.5 percent of total assets), whose values
have been estimated by the Board of Directors in the absence of readily
ascertainable market values. We have reviewed the procedures used by the Board
of Directors in arriving at its estimate of value of such securities and have
inspected the underlying documentation, and in the circumstances, we believe
the procedures are reasonable and the documentation appropriate. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
Arthur Andersen LLP
New York, New York
February 6, 1996
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statement of Operations
The Company accounts for its operations under Generally Accepted Accounting
Principles for investment companies. On this basis, the principal measure of
its financial performance is captioned "Net increase (decrease) in net assets
from operations," which is the sum of three elements. The first element is
"Net operating loss," which is the difference between the Company's income from
interest, dividends, and fees and its operating expenses, net of applicable
income taxes (or credit). The second element is "Net realized gain (loss) on
investments," which is the difference between the proceeds received from
dispositions of portfolio securities and their stated cost, net of applicable
income taxes (or credit). These two elements are combined in the Company's
financial statements and reported as "Net realized income (loss)." The third
element, "Net increase (decrease) in unrealized appreciation on investments,"
is the net change in the fair value of the Company's investment portfolio, net
of increase (decrease) in deferred income taxes that would become payable if
the unrealized appreciation were realized through the sale or other disposition
of the investment portfolio.
"Net realized gain (loss) on investments" and "Net increase (decrease) in
unrealized appreciation on investments" are directly related in that when a
security is sold to realize a gain (loss), net unrealized appreciation
decreases (increases) and net realized gain increase (decreases).
Financial Condition
The Company's total assets and net assets were, respectively, $37,524,555
and $36,561,909 at December 31, 1995 versus $32,044,073 and $31,310,802 at
December 31, 1994. Net asset value per share was $3.54 at December 31, 1995,
and $3.43 at December 31, 1994.
The Company's financial condition is dependent on the success of its
investments. The Company has invested and expects to continue to invest a
substantial portion of its assets in private development stage or start-up
companies. These private businesses tend to be thinly capitalized, unproven,
small companies that lack management depth and have not attained profitability
or have no history of operations. At December 31, 1995, 36 percent of the
Company's $37 million in total assets consisted of investments at fair value in
private businesses, of which net unrealized appreciation was $0.8 million. At
December 31, 1994, 35 percent of the Company's $32 million in total assets
consisted of investments at fair value in private businesses, of which net
unrealized appreciation was $2.1 million. The Company's total investment
portfolio also includes cash and marketable securities.
31
A summary of the Company's investment portfolio is as follows:
December 31, 1995 December 31, 1994
Investments, at cost $ 33,826,696 $ 24,175,624
Unrealized appreciation 2,102,593 1,859,179
------------ ------------
Investments, at fair value $ 35,929,289 $ 26,034,803
============ ============
Following an initial investment in a private company, the Company may
make additional investments in such investee in order to increase its ownership
percentage, to exercise warrants or options that were acquired in a prior
financing, to preserve the Company's proportionate ownership in a subsequent
financing or in an attempt to preserve or enhance the value of the Company's
investment. Such additional investments are referred to as "follow-on"
investments. There can be no assurance that the Company will make follow-on
investments or have sufficient funds to make additional investments. The
failure to make such follow-on investments could jeopardize the viability of
the investee company and the corresponding value of the Company's investment
in it. Such failure to invest could also result in a missed opportunity for
the Company to participate to a greater extent in an investee's successful
operations. The Company attempts to maintain adequate liquid capital to make
follow-on investments in its private investee portfolio companies. The
Company may elect not to make a follow-on investment either because it does not
want to increase its concentration of risk or because it prefers other
opportunities, even though the follow-on investment opportunity appears
attractive.
The following table is a summary of the cash investment changes in the
Company's private placement portfolio during the year ended December 31, 1995:
Amount
Harber Brothers Productions, Inc. (1) $ 967,500
Gel Sciences, Inc. (1)(2) 676,812
Highline Capital Management, LLC. (1) 500,000
Intaglio, Ltd. (2) 209,836
Nanophase Technologies Corporation (2) 662,204
PHZ Capital Partners Limited Partnership (1) 1,220,000
-----------
$ 4,236,352
===========
(1) New investee company
(2) Addition to existing investment in an investee company
32
Results of Operations
Investment Income and Expenses:
The Company's principal objective is to achieve capital appreciation.
Therefore, a significant portion of the investment portfolio is structured to
maximize the potential for capital appreciation and provides little or no
current yield in the form of dividends or interest. The Company does earn
interest income from fixed-income investments. The amount of interest income
varies based upon the average level of cash funds invested during the year and
fluctuations in interest rates. The Company had interest income of $999,869 in
1995, $719,293 in 1994 and $276,059 in 1993. The Company also receives
consulting and administrative fees from certain portfolio companies which
totaled $88,209 in 1995.
Operating expenses were $2,806,141 in 1995, $4,364,806 in 1994 and
$3,052,379 in 1993. Operating expenses in 1994 included sign-up bonuses
totaling $1,000,000 to two executives hired by the Company. Most of the
Company's operating expenses are related to employee and director compensation,
office expenses and legal and accounting fees.
Net operating losses before taxes were $1,696,624, in 1995, $3,544,530 in
1994 and $2,598,429 in 1993. The Company has in the past relied, and
continues to rely to a large extent, upon proceeds from sales of investments,
rather that investment income to defray a significant portion of its operating
expenses. Because such sales cannot be predicted with certainty, the Company
attempts to maintain adequate working capital to provide for fiscal periods
when there are no such sales.
Realized Gains and Losses on Sales of Portfolio Securities:
Net realized gain on investments before taxes was $2,109,768 in 1995,
compared with a loss of $71,396 during 1994 and a gain of $35,873,394 during
1993.
During 1995, the Company sold various publicly-traded securities,
realizing a net pre-tax capital gain of $2,109,768.
During 1994, the Company realized a net capital loss of $71,396 from the
disposition of various portfolio investments.
During 1993, the Company sold its entire interest in the public market in
Molten Metal Technology, Inc., for net sales proceeds of $30,660,754 and
realized a capital gain of $30,631,685. In addition, the Company realized a
$4,908,908 capital gain from the disposition of its interest in Capital Trust
Company, a $841,915 capital gain from the sale of its remaining equity position
in Ag Services of America, Inc., and a $357,590 capital loss from the sale of
other portfolio investments.
33
Unrealized Appreciation and Depreciation of Portfolio Securities:
Net unrealized appreciation on investments before taxes increased
$243,414 during the year ended December 31, 1995, from $1,859,179 to
$2,102,593, owing primarily to increased valuations for CORDEX Petroleums,
Inc., Intaglio, Ltd., Alliance Pharmaceutical Corporation and Magellan Health
Services, Inc., offset primarily by the decreased valuation of Sonex
International Corporation.
Net unrealized appreciation on investments before taxes decreased
$1,142,734 during the year ended December 31, 1994, from $3,001,913 to
$1,859,179, owing primarily to unrealized losses in Sonex International
Corporation and Dynecology Incorporated, offset by an increase in unrealized
gain in Magellan Health Services, Inc.
Net unrealized appreciation on investments before taxes decreased
$19,024,323 during the year ended December 31, 1993, from $22,026,236 to
$3,001,913, owing primarily to the realization of the appreciation in Molten
Metal Technology, Inc. and Capital Trust Corporation, as a result of the
disposition of the Company's investments in those entities.
Liquidity and Capital Resources
The Company reported total cash, receivables and marketable securities
(the primary measure of liquidity) at December 31, 1995 of $23,833,891 versus
$20,465,118 at December 31, 1994 and $25,938,392 at December 31, 1993. The
primary factors contributing to increased liquidity include sales of illiquid
venture capital investments and sales of the Company's common stock. The
primary factors that reduce liquidity include purchasing venture capital
securities and funding the Company's corporate overhead expenses. The
Company's liquidity was increased on May 18, 1995, by a $5,000,001 private
placement of 1,075,269 unregistered shares of the Company's common stock with
subsidiaries of American Bankers Insurance Group, Inc. Management believes
that its cash, receivables and marketable securities provide it with sufficient
liquidity for its operations.
34
Risks
Pursuant to Section 64(b)(1) of the Investment Company Act of 1940, a
Business Development Company is required to describe the risk factors involved
in an investment in the securities of such company due to the nature of the
company's investment portfolio. There are significant risks inherent in the
registrant's venture capital business. The Company has invested and will
continue to invest a substantial portion of its assets in private development
stage or start-up companies. These private businesses tend to be thinly
capitalized, unproven, small companies that lack management depth and have not
attained profitability or have no history of operations. Because of the
speculative nature and the lack of a public market for these investments, there
is significantly greater risk of loss than is the case with traditional
investment securities. The Company expects that some of its venture capital
investments will be a complete loss or will be unprofitable and that some will
appear to be likely to become successful but never realize their potential.
The Company has been and will continue to be risk seeking rather than risk
averse in its approach to venture capital and other investments. Neither the
Company's investments nor an investment in the Company is intended to
constitute a balanced investment program. The Company does not currently pay,
or intend to pay cash dividends. The Company has in the past relied and
continues to rely to a large extent upon proceeds from sales of investments
rather than investment income to defray a significant portion of its operating
expenses.
35
SHAREHOLDER INFORMATION
Stock Transfer Agent
The Bank of New York, 101 Barclay Street, Suite 22W, New York, New York
10286 (Telephone (800) 524-4458, Attention: Ms. Diane Ajjan) serves as transfer
agent for the Company's common stock. Certificates to be transferred should be
mailed directly to the transfer agent, preferably by registered mail.
Market Prices
The Company's common stock is traded on the NASDAQ National Market System
under the NASDAQ symbol "HHGP." The following table sets forth the range of
the high and low selling price of the Company's shares during each quarter of
the last two years, as reported by the National Association of Securities
Dealers, Inc.
1995 Quarter Ending Low High
March 31 $4.875 $6.375
June 30 $4.375 $5.125
September 30 $4.625 $5.875
December 31 $4.375 $8.125
1994 Quarter Ending Low High
March 31 $7.000 $8.875
June 30 $5.500 $7.875
September 30 $5.125 $7.125
December 31 $5.125 $6.500
Shareholders
As of February 27, 1996, there were approximately 181 holders of record
of the Company's common stock which, the Company has been informed, hold the
Company's common stock for approximately 2,000 beneficial owners.
Annual Meeting
The Annual Meeting of Shareholders of Harris & Harris Group, Inc., will
be held on Thursday, April 11, 1996, at 2:00 p.m. at the Princeton Club, 15
West 43rd Street, New York, New York.
36
HARRIS & HARRIS GROUP, INC. OFFICERS AND DIRECTORS
OFFICERS
* Charles E. Harris, Chairman and Chief Executive Officer. For additional
information about Mr. Harris, please see the Directors' biographical
information section below.
Robert B. Schulz, age 38, joined the Company, in March 1994, as President
and Chief Operating Officer and has served as Chief Compliance Officer since
November 1994. From 1984, until joining the Company, he was employed by CS
First Boston Corporation, most recently as a Director in the Insurance Group.
Mr. Schulz received his M.B.A. degree from Columbia University in 1983. Prior
to attending Columbia University, he was employed as a research engineer in the
Alternate Energy Group of Chevron Research Company and as a project manager in
Dynecology, Incorporated, a high-technology, family-owned engineering research
firm. He graduated from the Massachusetts Institute of Technology in 1979 with
his B.S. and M.S. degrees in chemical engineering.
C. Richard Childress, age 44, has served as Executive Vice President of
the Company since February 1994 and as Chief Financial Officer since June 1994.
Mr. Childress has served in various executive capacities as a senior officer of
the Company since February 1986. He served as managing general partner of
Consolidating Banks Fund, an investment partnership, from December 1983 to
December 1985, before joining the Company. In addition to such duties, he was
self-employed as a consultant from January 1983 to February 1986. He is a
certified public accountant and began his career with Coopers & Lybrand. He
received his undergraduate degree from Northern Arizona University.
David C. Johnson, Jr., age 39, joined the Company in February 1994, as a
Senior Vice President and has served as Executive Vice President since January
1995. From 1984, until joining the Company, Mr. Johnson served as a Vice
President of Salomon Brothers Inc. He received his M.B.A. from The Darden
School at the University of Virginia in 1984 and his undergraduate degree from
the University of North Carolina at Chapel Hill in 1978.
Rachel M. Pernia, age 36, has served since January 1992 as a Vice
President and Controller of the Company and as Treasurer since November 1994.
From 1988 until Ms. Pernia joined the Company, she was employed as Assistant
Controller for Cellcom Corp. From 1985 through 1988, she was employed as a
senior corporate accountant by Bristol-Myers Squibb Company. She is a graduate
of Rutgers University and is a certified public accountant.
Susan Neissa-Carey, age 23, has served as Secretary of the Company since
July 1995. Ms. Carey joined the Company in January of 1995. She graduated
from Villanova University in 1994.
37
DIRECTORS
Dr. C. Wayne Bardin, age 61, was elected to the Company's Board of
Directors in December 1994. Dr. Bardin's professional appointments have
included: Vice President, The Population Council; Professor of Medicine, Chief
of the Division of Endocrinology, The Milton S. Hershey Medical Center of
Pennsylvania State University; and Senior Investigator, Endocrinology Branch,
National Cancer Institute. Dr. Bardin also serves as a consultant to several
pharmaceutical companies. He has directed basic and clinical research leading
to over 450 publications and patents. He has negotiated 15 licensing and
manufacturing agreements. He is currently directing clinical R&D under 18 INDs
filed with the U.S. FDA. Dr. Bardin has been appointed to the editorial boards
of 15 journals. He has also served on national and international committees
and boards for NIH, WHO, The Ford Foundation, and numerous scientific
societies. Dr. Bardin received a B.A. from Rice University; a M.S. and M.D.
from Baylor University and a Ph.D. from the University of Caen.
G. Morgan Browne, age 60, was elected to the Company's Board of Directors
in June 1992. Since 1985, Mr. Browne has been Administrative Director of the
Cold Spring Harbor Laboratory, a not-for-profit institution that conducts
research and education programs in the fields of molecular biology and
genetics. In prior years, he was active in the management of numerous
scientifically-based companies as an individual consultant or as an associate
of Laurent Oppenheim Associates, Industrial Management Consultants. He is a
director of Oncogene Science, Inc. (principally engaged in drug discovery
based on gene transcription), a director of the New York Biotechnology
Association, and a director and Treasurer of the Long Island Research
Institute. He is a graduate of Yale University and attended New York
University Graduate School of Business.
Harry E. Ekblom, age 67, has been a director of the Company since 1984.
Mr. Ekblom currently serves as Vice Chairman of A.T. Hudson & Co., Inc. and
President of Harry E. Ekblom & Co., Inc., each of which is engaged in the
business of management consulting. He became President of Harry E. Ekblom &
Co., Inc. in 1984 and joined A.T. Hudson in March 1985. Before 1984, he was
employed by European American Bank as the Chairman of its Board of Directors
and Chief Executive Officer. Mr. Ekblom is a director of Pan Energy Corp.
(principally engaged in interstate transmission of natural gas) and The
Commercial Bank of New York. He is a graduate of Columbia College and the
New York University School of Law, a member of the New York Bar, and holds
honorary degrees from Hofstra University and Pace University.
* Charles E. Harris, age 53, has been a director of the Company and
Chairman of its Board of Directors since April 1984. He has served as Chief
Executive Officer of the Company since July 1984. From April 1990 to August
1991, he served as Chairman of publicly-owned Ag Services of America, Inc., in
which the Company then held an equity interest. From its formation in November
1989 until June 1990, he served as Chairman and Chief Executive Officer of
publicly-owned Molten Metal Technology, Inc., which the Company co-founded and
in which the Company then held an equity interest. From July 1986 to January
1989, he served as Chairman of publicly-owned Re Capital Corporation, which the
Company founded and in which the Company then held an equity interest. From
July 1984 to July 1985, he served as a director and was the control person of
publicly-owned Alliance Pharmaceutical, which the Company founded and in which
the Company then held an equity interest. Prior to 1984, he was Chairman of
Wood, Struthers and Winthrop Management Corp., the investment advisory
subsidiary of Donaldson, Lufkin & Jenrette. Mr. Harris was a member of the
Advisory Panel for the Congressional Office of Technology Assessment. He is a
graduate of Princeton University and the Columbia University Graduate School of
Business.
38
Charles F. Hays, age 49, joined the Board as a director in March 1995.
Since 1993, Mr. Hays has been Senior Vice President, Chief Financial and
Administrative Officer of Mid Ocean Reinsurance Company Ltd. His positions
have included: Managing Director & Chief Financial and Administrative Officer
of Marsh & McLennan, Incorporated, from 1984 to 1993; Vice President and
Treasurer of the Guy Carpenter & Company subsidiary of Marsh & McLennan
Companies, from 1979 to 1984; Assistant Vice President of Corporate Development
of Marsh & McLennan Companies, from 1977 to 1979; Assistant Treasurer of Morgan
Guaranty Trust Company, from 1975 to 1977; and Deputy Director of AmerAsian
Group of Companies, from 1971 to 1972. He is a graduate of the University of
Kansas and Stanford University Graduate School of Business.
Jon J. Masters, age 58, was elected to the Company's Board of Directors in
February 1992. Since 1976, he has been a member of the law firm of Christy &
Viener, which he co-founded. Mr. Masters is a graduate of Princeton University
and Harvard Law School.
Glenn E. Mayer, age 70, has been a director of the Company since 1981. In
December 1991, Mr. Mayer joined, as a Senior Vice President, the Investment
Banking division of Reich & Company. Reich & Co. is now a division of
Fahnestock & Company, Inc., a member firm of the New York Stock Exchange.
For fifteen years prior to that, he was employed by Jesup & Lamont Securities
Co. and its successor firms, in the Corporate Finance department. Mr. Mayer is
a graduate of Indiana University.
William R. Polk, age 67, has been a director of the Company since August
1988. For the last seven years, Mr. Polk has been an author and self-employed
consultant. He is the former President of the Adlai Stevenson Institute of
International Affairs, a former member of the Policy Planning Council of the
United States Department of State, and a former Professor of the University of
Chicago and Harvard University. Mr. Polk is a graduate of Harvard University
and Oxford University.
James E. Roberts, age 50, was elected to the Company's Board of Directors
in June 1995. Since May 1995, Mr. Roberts has been Vice Chairman of Trenwick
America Reinsurance Corporation. During the nine years prior to that Mr.
Roberts held the following positions at Re Capital Corporation: President and
Chief Executive Officer, from 1992 to 1995; President and Chief Operating
Officer, 1991 to 1992; Director since 1989 and Senior Vice President, 1986 to
1991; President and Chief Executive Officer of the Company's principal
operating subsidiary, Re Capital Reinsurance Company from 1991 to 1995. Mr.
Roberts has also served as Senior Vice President and Chief Underwriting Officer
of North Star Reinsurance Company, from 1979 to 1986; Vice President of Rollins
Burdick Hunter of New York, Inc., 1977 to 1979; Secretary of American Home
Assurance/National Union Insurance Group of American International Group, Inc.,
1973 to 1977; and commercial casualty underwriter at Continental Insurance
Company, 1972 to 1973. Mr. Roberts is a graduate of Cornell University.
* Charles E. Harris is an "interested person" of the Company, as defined
in the Investment Company Act of 1940, as an owner of more than five percent
of the Company's stock, as a control person and as an officer of the Company.
39
HARRIS & HARRIS GROUP, INC.
Officers
Charles E. Harris
Chairman and Chief Executive Officer
Robert B. Schulz
President, Chief Operating Officer and Chief Compliance Officer
C. Richard Childress
Executive Vice President and Chief Financial Officer
David C. Johnson, Jr.
Executive Vice President
Rachel M. Pernia
Vice President, Treasurer and Controller
Susan Neissa-Carey
Secretary
Executive Offices
One Rockefeller Plaza
Rockefeller Center
New York, New York 10020
TEL (212) 332-3600 / FAX (212) 332-3601
Stock Listing
NASDAQ National Market
Symbol: HHGP
Auditors
Arthur Andersen LLP
General Counsel
Skadden, Arps, Slate, Meagher & Flom
Custodian
J.P. Morgan & Co. Incorporated
Registrar and Transfer Agent
The Bank of New York