SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(A) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
HARRIS & HARRIS GROUP, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 4, 2006
To the Shareholders of Harris & Harris Group, Inc.:
NOTICE IS HEREBY GIVEN that the 2006 Annual Meeting of the Shareholders of
Harris & Harris Group, Inc. (the "Company") will be held on May 4, 2006, at 3:00
p.m., local time, at The Princeton Club of New York, 15 West 43rd Street
(between 5th and 6th Avenues), New York, New York 10036. This meeting has been
called by the Board of Directors of the Company, and this notice is being issued
at its direction. It has called this meeting for the following purposes:
1. To elect 10 directors of the Company to hold office until the next
annual meeting of shareholders or until their respective successors
have been duly elected and qualified;
2. To ratify, confirm and approve the Audit Committee's selection of
PricewaterhouseCoopers LLP as the independent registered public
accountant for the fiscal year ending December 31, 2006;
3. To approve a proposal to authorize the Company to offer long-term
rights to purchase shares of the Company's common stock at an
exercise price that, at the time such rights are issued, will not be
less than the greater of the market value of the Company's common
stock or the net asset value of the Company's common stock. Such
rights may be part of or accompanied by other securities of the
Company (such as convertible preferred stock or convertible debt);
4. To approve the Company's Equity Incentive Plan;
5. To amend our Certificate of Incorporation to increase the number of
authorized shares of common stock from 30,000,000 to 45,000,000; and
6. To transact such other business as may properly come before the
meeting or any postponement or adjournments thereof.
We encourage you to contact us at 877-TINY TECH, from 9:00 a.m. to 5:00
p.m. EST, if you have any questions.
Holders of common stock of record at the close of business on March 14,
2006, will be entitled to vote at the meeting.
Whether or not you expect to be present in person at the meeting, please
sign and date the accompanying proxy and return it promptly in the enclosed
business reply envelope, which requires no postage if mailed in the United
States, so you will be represented at the Annual Meeting.
By Order of the Board of Directors
April 3, 2006 /s/ Susan T. Harris
----------------------------------
New York, New York Susan T. Harris
Secretary
IMPORTANT: PLEASE MAIL YOUR PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
THE MEETING DATE IS MAY 4, 2006.
Harris & Harris Group, Inc.
111 West 57th Street
New York, New York 10019
(212) 582-0900
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 4, 2006
General Information
This proxy statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Harris & Harris Group, Inc.
(the "Company," "us," "our," and "we"), to be voted at the 2006 Annual Meeting
of Shareholders (the "Annual Meeting"), to be held on May 4, 2006, and at any
adjournment thereof. This document will give you the information you need to
vote on the matters listed in the accompanying Notice of Annual Meeting of
Shareholders. Much of the information in this proxy statement ("Proxy
Statement") is required under rules of the Securities and Exchange Commission
("SEC"); some of it is technical. If there is anything you do not understand,
please contact us at 877-TINY TECH.
The Annual Meeting will be held on Thursday, May 4, 2006, at 3:00 p.m.,
local time, at The Princeton Club of New York, 15 West 43rd Street (between 5th
and 6th Avenues), New York, New York. At the Annual Meeting, our shareholders
will be asked to elect 10 directors to serve on the Board of Directors of the
Company and to hold office until the next annual meeting and to vote on the
other matters stated in the accompanying Notice and described in more detail in
this proxy statement. If any other matters properly come before the Annual
Meeting, the persons named on the proxies will, unless the shareholder otherwise
specifies in the proxy, vote upon such matters in accordance with their best
judgment. The enclosed proxy card and this Proxy Statement and Annual Report on
Form 10-K are being first transmitted on or about April 3, 2006, to our
shareholders.
The Board of Directors has fixed the close of business on March 14, 2006,
as the record date for the determination of our shareholders entitled to receive
notice of, and to vote at, the Annual Meeting. At the close of business on the
record date, an aggregate of 20,756,345 shares of common stock were issued and
outstanding. Each such share will be entitled to one vote on each matter to be
voted upon at the Annual Meeting. The presence, in person or by proxy, of the
holders of a majority of such outstanding shares is necessary to constitute a
quorum for the transaction of business at the Annual Meeting.
Solicitation and Revocation; Vote Required
All properly executed proxies received prior to the Annual Meeting will be
voted at the meeting in accordance with the instructions marked thereon or
otherwise as provided therein. Unless instructions to the contrary are marked,
shares represented by the proxies will be voted "for" all the proposals.
Any proxy given pursuant to this solicitation may be revoked by a
shareholder at any time, before it is exercised, by written notification
delivered to our Secretary, by voting in person at the Annual Meeting, or by
executing another proxy bearing a later date. If your shares are held for your
account by a broker, bank or other institution or nominee, you may vote such
shares at the Annual Meeting only if you obtain proper written authority, from
your institution or nominee, that you present at the Annual Meeting.
Approval of any of the matters submitted for stockholder approval requires
that a quorum be present. The presence, in person or by proxy, of at least a
majority of the total number of outstanding shares of common stock entitled to
vote is necessary to constitute a quorum. Abstentions and broker non-votes will
be counted as shares present at the Annual Meeting for purposes of determining
the existence of a quorum. Broker non-votes are proxies received by us from
brokers or nominees when the broker or nominee neither has received instructions
from the beneficial owner or other persons entitled to vote nor has
discretionary power to vote on the particular matter.If a quorum is present (in
person or by proxy), (i) for Proposal 1, the directors will be elected by a
plurality of the votes cast (i.e., the highest number of votes cast for each of
the 10 director slots); (ii) for Proposal 2, the proposal to ratify, confirm and
approve the Audit Committee's selection of the Company's independent registered
public accountants will be approved if a majority of the votes cast are cast in
favor; (iii) for Proposal 3, the financing proposal will be approved if a
majority of the votes cast are cast in favor; (iv) for Proposal 4, the proposal
to approve the Company's equity incentive plan will be approved if a majority of
the votes cast are cast in favor; and (v) for Proposal 5, the proposed amendment
to the Certificate of Incorporation will be approved if a majority of the shares
outstanding and entitled to vote are cast in favor. All other matters being
submitted to shareholder vote pursuant to the Notice of Annual Meeting will be
approved if a quorum is present in person or by proxy and a majority of the
votes cast on a particular matter are cast in favor of that matter.
For purposes of Proposals 1, 2, 4 and unspecified matters that come before
the meeting, votes withheld or abstentions will not be counted as votes cast on
the matter and will have no affect on the result of the vote. A broker
"non-vote" occurs when a broker holding shares for a beneficial owner does not
vote on a particular proposal because the broker does not have discretionary
voting power for that particular item and has not received instructions from the
beneficial owner. If your broker holds your shares in its "street" name, the
broker may vote your shares on Proposal 1 (Election of Directors), Proposal 2
(Ratification of Auditor), Proposal 4 (Approval of Equity Incentive Plan) and
unspecified matters that come before the meeting even if it does not receive
instructions from you. For purposes of Proposal 3 (Financing) and Proposal 5
(Amendment to the Certificate of Incorporation), because abstentions and broker
non-votes are treated as shares present but not voting, any abstentions and
broker non-votes will have the effect of votes against this proposal.
2
Proxies are being solicited by Innisfree M&A Incorporated, pursuant to its
standard contract as proxy solicitor, the cost of which will be borne by us and
is estimated to be approximately $7,500. Proxies will be solicited by telephone
or by mail. All expenses of preparing, printing, mailing, and delivering
proxies, and all materials used in the solicitation of proxies, will be borne by
us. Proxies may also be solicited by officers and regular employees of the
Company personally, by telephone or otherwise, but these persons will not be
specifically compensated for such services. Banks, brokers, nominees and other
custodians and fiduciaries will be reimbursed for their reasonable out-of-pocket
expenses in forwarding solicitation material to their principals, the beneficial
owners of our common stock. It is estimated that those costs will be nominal.
3
ELECTION OF DIRECTORS
(Proposal No. 1)
The 10 nominees listed below, all of whom currently serve as directors,
have been nominated to serve as our directors until the next annual meeting or
until their respective successors are duly elected and qualified. Although it is
not anticipated that any of the nominees will be unable or unwilling to serve,
in the unexpected event that any such nominees should become unable or decline
to serve, it is intended that votes will be cast for substitute nominees
designated by our present Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" ALL THE NOMINEES.
Nominees
Certain information, as of March 14, 2006, with respect to each of the 10
nominees for election at the Annual Meeting is set forth below, including their
names, ages and a brief description of their recent business experience,
including present occupations and employment, certain directorships held by each
and the year in which each became a director of the Company. All the nominees
have agreed to serve if elected and consent to being referred to in this proxy
statement. The nominees for election as directors of the Company have been
divided into two groups -- interested directors and independent directors.
Interested directors are "interested persons" as defined in the 1940 Act or
persons who may be considered "interested persons" because of consulting work
done for us. All 10 nominees are currently directors of the Company. We do not
have an advisory board.
Interested Directors
Charles E. Harris. Mr. Harris, age 63, currently serves as our Chairman,
Chief Executive Officer and as a Managing Director. He has served as our Chief
Executive Officer since July 1984 and as a Managing Director since January 2004.
He has been a member of our Board of Directors and served as Chairman of the
Board since April 1984. He also served as our Chief Compliance Officer from
February 1997 to February 2001. He is Chairman of the Board, Chief Executive
Officer and a Director of Harris & Harris Enterprises, a wholly owned subsidiary
of the Company. His wife serves as our Corporate Secretary. He is a Director of
Mersana Therapeutics, Inc., a privately held company in which we have an
investment. He was a member of the Advisory Panel for the Congressional Office
of Technology Assessment. Prior to joining us, he was Chairman of Wood,
Struthers and Winthrop Management Corporation, the investment advisory
subsidiary of Donaldson, Lufkin and Jenrette. He is currently a member of the
New York Society of Security Analysts. He was, until 2004, a Trustee and head of
the Audit Committee of Cold Spring Harbor Laboratory, a not-for-profit
institution that conducts research and education programs in the fields of
molecular biology and genetics, and he currently serves as Co-Chairman of its
President's Council. He also serves as a Trustee and head of the Audit Committee
of the Nidus Center, a not-for-profit life sciences business incubator in St.
Louis, Missouri. He is a life-sustaining fellow of MIT and a shareholder of its
Entrepreneurship Center. He is an "interested person" as defined in Section
2(a)(19) of the 1940 Act, as a beneficial owner of more than five percent of our
Common Stock, as a control person and as one of our officers. He was graduated
from Princeton University (A.B.) and the Columbia University Graduate School of
Business (M.B.A.).
4
Kelly S. Kirkpatrick. Ms. Kirkpatrick, age 39, has served as a member of
our Board of Directors since March 2002. She has served as a consultant to us on
nanotechnology and in our due diligence work on certain prospective investments.
She is an independent business consultant assessing and advising on early stage,
technology start-ups for venture capital companies. From 2000 to 2002, she
served in the Office of the Executive Vice Provost of Columbia University as
Director of the Columbia University Nanotechnology Initiative and as Director
for Research and Technology Initiatives. From 1998 to 2000, she served in the
White House Office of Science and Technology Policy as a Senior Policy Analyst
involved in the National Nanotechnology Initiative. From 1997 to 1998, she was a
Science Policy Coordinator for Sandia National Laboratories. From 1995 to 1996,
she served in the office of Senator Joseph Lieberman as Legislative Assistant,
Congressional Science and Engineering Fellow. She was graduated from University
of Richmond (B.S., Chemistry with a business option) and Northwestern University
(Ph.D., Materials Science and Engineering). She may be considered to be an
"interested person" of the Company because of the consulting work she does for
us.
Lori D. Pressman. Ms. Pressman, age 48, has served as a member of our
Board of Directors since March 2002. She has served as a consultant to us on
tiny technology, intellectual property and in our due diligence work on certain
prospective investments. She also acts as an observer for us at Board meetings
of certain portfolio companies in the Boston area. She is a business consultant
providing advisory services to start-ups and venture capital companies. She
consults internationally on technology transfer practices and metrics for
non-profit and government organizations. From 1999 to 2001, she was Chair of the
Survey Statistics and Metrics Committee of the Association of University
Technology Managers. From September 1989 to July 2000, she was employed by MIT
in its Technology Licensing Office. She served as a Technology Licensing Officer
from 1989 to 1995 and as Assistant Director of the Technology Licensing Office
from 1996 to 2000. She was graduated from the Massachusetts Institute of
Technology (S.B., Physics) and the Columbia School of Engineering (MSEE). She
may be considered to be an "interested person" of the Company because of the
consulting work she does for us.
Independent Directors
Dr. C. Wayne Bardin. Dr. Bardin, age 71, has served as a member of our
Board of Directors since December 1994. Since 1996, he has served as the
President of Bardin LLC, a consulting firm to pharmaceutical companies. From
1998 to 2003, he served as President of Thyreos Corp., a privately held,
start-up pharmaceutical company. From 1978 through 1996, he was Vice President
of The Population Council. His professional appointments have included:
Professor of Medicine, Chief of the Division of Endocrinology, The Milton S.
Hershey Medical Center of Pennsylvania State University and Senior Investigator,
Endocrinology Branch, National Cancer Institute. He has also served as a
consultant to several pharmaceutical companies. He has been appointed to the
editorial boards of 15 journals. He has also served on national and
international committees and boards for the National Institutes of Health, World
Health Organization, The Ford Foundation and numerous scientific societies. He
was graduated from Rice University (B.A.), Baylor University (M.S., M.D.) and he
received a Doctor Honoris Causa from the University of Caen, the University of
Paris and the University of Helsinki.
5
Dr. Phillip A. Bauman. Dr. Bauman, age 50, has served as a member of our
Board of Directors since February 1998. He has been Senior Attending in
Orthopedic Surgery at St. Luke's/Roosevelt Hospital Center in Manhattan since
1999 and has served as an elected member of the Executive Committee of the
Medical Board since 2000. He has been on the Board of Managers for the Hudson
Crossing Surgery Center since 2005. He has been Assistant Professor of
Orthopedic Surgery at Columbia University since 1997 and a Vice President of
Orthopedic Associates of New York since 1994. He was elected a fellow of the
American Academy of Orthopaedic Surgeons in 1991. He is an active member of the
American Orthopaedic Society for Sports Medicine, the New York State Society of
Orthopaedic Surgeons and the American Medical Association. He was graduated from
Harvard College (B.A.), Harvard University (M.S., biology) and the College of
Physicians and Surgeons at Columbia University (M.D).
G. Morgan Browne. Mr. Browne, age 71, has served as a member of our Board
of Directors since June 1992. He is President since 2004 and a Trustee since
2000 of Planting Fields Foundation, a historic estate arboretum. From 2001 to
2003, he served as Chief Financial Officer of Cold Spring Harbor Laboratory, a
not-for-profit institution that conducts research and education programs in the
fields of molecular biology and genetics. From 1985 to 2000, he was the
Administrative Director of Cold Spring Harbor Laboratory. In prior years, he was
active in the management of numerous scientifically based companies as an
officer, as an individual consultant and as an associate of Laurent Oppenheim
Associates, Industrial Management Consultants. He is a Director of OSI
Pharmaceuticals, Inc., a publicly held company principally engaged in drug
discovery based on gene transcription. He is also a Director of Evinu
Corporation, a start-up company developing nutraceuticals. He was a founding
director of the New York Biotechnology Association and a founding Director of
the Long Island Research Institute. He was graduated from Yale University.
Dugald A. Fletcher. Mr. Fletcher, age 76, has served as a member of our
Board of Directors since May 1996. He has served as President of Fletcher &
Company, Inc., a management consulting firm since 1984. Until the end of 1997,
he was Chairman of Binnings Building Products Company, Inc. His previous
business appointments include: adviser to Gabelli/Rosenthal LP, a leveraged
buyout fund; Chairman of Keller Industries, building and consumer products;
Senior Vice President of Booz-Allen & Hamilton; President of Booz-Allen
Acquisition Services; Executive Vice President and a Director of Paine Webber,
Inc.; and President of Baker, Weeks and Co., Inc., a New York Stock Exchange
member firm. He is currently a Trustee of the Gabelli Growth Fund and a Director
of the Gabelli Convertible and Income Securities Fund, Inc. He was graduated
from Harvard College and Harvard Business School (M.B.A.).
6
Mark A. Parsells. Mr. Parsells, age 46, has served as a member of our
Board of Directors since November 2003. Since February 2004, he is the Chairman,
President and Chief Executive Officer of Montpelier Ventures, a management
consulting firm. From 2001 to 2003, he was the Chairman, President, Chief
Executive Officer and a Director of Fusura LLC, an AIG company that was an
Internet-based, direct-to-consumer auto insurance business. From 2000 to 2001,
he was President and Chief Operating Officer of Citibank Online. Previously, he
worked in executive positions for Bank One and American Express and acted as
Special Assistant to U.S. Senator John Heinz. He is a Director of Winterthur (a
former DuPont family estate) Business Associates, a board that oversees
corporate giving and events for corporations. He is an alumnus of The General
Manager Program at Harvard Business School. He was graduated from Emory
University (B.A.), Cornell University (M.B.A.) and Vlerick Leuven Gent Business
School (M.B.A.).
Charles E. Ramsey. Mr. Ramsey, age 63, has served as a member of our Board
of Directors since October 2002. He has been a consultant since 1997. He is a
retired founder and principal of Ramsey/Beirne Associates, Inc., an executive
search firm that specialized in recruiting top officers for high technology
companies, many of which were backed by venture capital. He works on
construction projects in Nicaragua as a member of the Nicaraguan Initiative
Committee for the Presbyterian Churches of the Hudson River and as Chairman of
Bridges to Community, a non-governmental organization dedicated to construction
projects in Nicaragua. He was graduated from Wittenberg University (B.A.).
James E. Roberts. Mr. Roberts, age 60, has served as a member of our Board
of Directors since June 1995. Since January 2006, he has been President of
AequiCap Insurance Company. Mr. Roberts is also a senior officer of various
other AequiCap affiliated entities. From November 2002 to October 2005, he was
Executive Vice President and Chief Underwriting Officer of the Reinsurance
Division of Alea North America Company and Senior Vice President of Alea North
America Insurance Company. From October 1999 to November 2002, he was Chairman
and Chief Executive Officer of the Insurance Corporation of New York, Dakota
Specialty Insurance Company, and Recor Insurance Company Inc., all members of
the Trenwick Group, Ltd. From October 1999 to March 2000, he served as Vice
Chairman of Chartwell Reinsurance Company and from March 2000 to November 2002
as the company's Chairman and CEO. He was graduated from Cornell University
(A.B.).
7
Set forth below is the dollar range of equity securities beneficially
owned by each director or nominee as of March 14, 2005.
==================================== ===========================================
Dollar Range of Equity Securities
Name of Director or Nominee Beneficially Owned (1)(2)(3)
------------------------------------ -------------------------------------------
Independent Directors
Dr. C. Wayne Bardin Over $100,000
Dr. Phillip A Bauman Over $100,000
G. Morgan Browne Over $100,000
Dugald A. Fletcher Over $100,000
Mark A. Parsells $10,001-$50,000
Charles E. Ramsey Over $100,000
James E. Roberts Over $100,000
Interested Directors
Charles E. Harris (4) Over $100,000
Kelly S. Kirkpatrick (5) $50,001 - $100,000
Lori D. Pressman (5) $50,001 - $100,000
==================================== ===========================================
(1) Beneficial ownership has been determined in accordance with Rule
16a-1(a)(2) of the 1934 Act.
(2) The dollar ranges are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000
and over $100,000.
(3) The dollar ranges are based on the price of the equity securities as of
March 14, 2006.
(4) Denotes an individual who is an "interested person" as defined in the 1940
Act.
(5) Denotes an individual who may be considered an "interested person" because
of consulting work performed for us.
Board of Directors and Committees
In 2005, there were seven meetings of the Board of Directors of the
Company, and the full Board acted 13 times by unanimous written consent. No
director attended fewer than 75 percent of the aggregate of Board of Directors'
and applicable committee meetings on which each director served (during the
periods that they so served).
It is a policy of the Company that at least a portion of our directors are
encouraged to attend annual meetings of shareholders. In 2005, all the directors
attended the annual meeting.
Shareholders and other interested parties may contact the Board or any
member of the Board by mail. To communicate with the Board or any member of the
Board, correspondence should be addressed to the Board or the Board members with
whom you wish to communicate by either name or title. All such correspondence
should be sent c/o Harris & Harris Group, Inc., 111 West 57th Street, Suite
1100, New York, New York 10019. Such correspondence will be forwarded to the
appropriate board member or members after screening to eliminate marketing and
junk mail.
8
The Company's Board of Directors currently has six committees comprised of
the following members, all of whom except Mr. Harris are independent both under
the rules of the NASD and for the purposes of the 1940 Act:
Board Committees
---------------------------- ------------------------- -------------------------
Executive Audit Compensation
---------------------------- ------------------------- -------------------------
Charles E. Harris (1) Dugald A. Fletcher (1) James E. Roberts (1)
Dr. C. Wayne Bardin Dr. Phillip A. Bauman Dr. Phillip A. Bauman
G. Morgan Browne G. Morgan Browne Mark A. Parsells
James E. Roberts James E. Roberts Charles E. Ramsey
---------------------------- ------------------------- -------------------------
---------------------------- ------------------------ --------------------------
Nominating Independent Directors
Valuation
---------------------------- ------------------------ --------------------------
Dr. C. Wayne Bardin (1) Dugald A. Fletcher (1) G. Morgan Browne (1)
Dr. Phillip A. Bauman Dr. C. Wayne Bardin Dr. C. Wayne Bardin
Mark A. Parsells G. Morgan Browne Dr. Phillip A. Bauman
Charles E. Ramsey Mark A. Parsells Dugald A. Fletcher
James E. Roberts Mark A. Parsells
Charles E. Ramsey
James E. Roberts
---------------------------- ------------------------ --------------------------
(1) Denotes the Chairman of the Committee.
Executive Committee
The Executive Committee meets from time to time between regular meetings
of the Board of Directors and exercises the authority of the Board to the extent
provided by law. The Executive Committee did not meet as a separate committee
and did not act by unanimous written consent in 2005.
Audit Committee
The Audit Committee (i) oversees all material aspects of our accounting
and financial reporting processes, internal control and audit functions, (ii)
monitors the independence and performance of our independent registered public
accountants, (iii) provides a means for open communication among our independent
registered public accountants, financial and senior management and the Board,
and (iv) oversees compliance by us with legal and regulatory requirements.
The Audit Committee operates pursuant to a written charter approved by our
Board of Directors, which is attached hereto as Appendix A. The Audit Committee
Charter sets out the responsibilities, authority and duties of the Audit
Committee. The Audit Committee met five times and did not act by unanimous
written consent in 2005.
9
Compensation Committee
The Compensation Committee has the full power and authority of the Board
with respect to all matters pertaining to the remuneration of our executive
officers. The Compensation Committee met two times and acted by unanimous
written consent six times in 2005.
Nominating Committee
The Nominating Committee acts as an advisory committee to the Board by
identifying individuals qualified to serve on the Board as directors and on
committees of the Board, and to recommend that the Board select the Board
nominees for the next annual meeting of shareholders. The Nominating Committee
met one time in 2005 and acted by unanimous written consent one time in 2005.
The Nominating Committee will consider director candidates recommended by
shareholders. In considering candidates submitted by shareholders, the
Nominating Committee will take into consideration the needs of the Board and the
qualifications of the candidate. The Nominating Committee may also take into
consideration the number of shares held by the recommending shareholder and the
length of time that such shares have been held. To have a candidate considered
by the Nominating Committee, a shareholder must submit the recommendation in
writing and must include:
o The name of the shareholder and evidence of the person's ownership
of shares of the Company, including the number of shares owned and
the length of time of ownership;
o The name of the candidate, the candidate's resume or a listing of
his or her qualifications to be a director of the Company and the
person's consent to be named as a director if selected by the
Nominating Committee and nominated by the Board; and
o If requested by the Nominating committee, a completed and signed
director's questionnaire.
The shareholder recommendation and information described above must be
sent to the Company's Corporate Secretary, c/o Harris & Harris Group, Inc., 111
West 57th Street, Suite 1100, New York, New York 10019, and must be received by
the Corporate Secretary not less than 120 days prior to the anniversary date of
the Company's most recent annual meeting of shareholders or, if the meeting has
moved by more than 30 days, a reasonable amount of time before the meeting.
The Nominating Committee believes that the minimum qualifications for
serving as a director of the Company are that a nominee demonstrate, by
significant accomplishment in his or her field, an ability to make a meaningful
contribution to the Board's oversight of the business and affairs of the Company
and have a reputation for honest and ethical conduct. In addition, the
Nominating Committee examines a candidate's specific experiences and skills,
time availability in light of other commitments, potential conflicts of interest
and independence from management and the Company. The Nominating Committee also
seeks to have the Board represent a diversity of experience. We do not pay any
third party a fee to assist in the process of identifying and evaluating
candidates. The Nominating Committee evaluates all candidates for the Board
based on the above qualifications regardless of whether the candidate was
nominated by an officer, Board member or shareholder.
10
The Nominating Committee operates pursuant to a written charter approved
by our Board of Directors. The Nominating Committee Charter sets out the
responsibilities, authority and duties of the Nominating Committee. A current
copy of the Nominating Committee Charter of the Company is available on our
website
(www.tinytechvc.com/shareholder_information/Nominating_Committee_Charter.html).
Valuation Committee
The Valuation Committee has the full power and authority of the Board in
reviewing and approving the valuation of our securities for reporting purposes
pursuant to our Valuation Procedures that were established and approved by the
Board of Directors. The Valuation Committee met five times in 2005.
Independent Directors Committee
The Independent Directors Committee has the responsibility of proposing
corporate governance and long term planning matters to the Board of Directors,
overseeing compliance and making the required determinations pursuant to the
1940 Act. All of the independent Directors are members of the committee. The
Independent Directors Committee met three times in 2005.
Audit Committee Report
Our Audit Committee presents the following report:
The Audit Committee of the Company has performed the following
functions: (i) the Audit Committee reviewed and discussed the audited
financial statements of the Company with management, (ii) the Audit
Committee discussed with the independent auditors the matters required to
be discussed by the Statements on Auditing Standards No. 61, as amended,
(iii) the Audit Committee received the written disclosures and the letter
from the independent auditors required by ISB Standard No. 1, as amended,
and has discussed with the auditors the auditors' independence and (iv)
the Audit Committee recommended to the Board of Directors of the Company
that the audited financial statements be included in the Company's Annual
Report on Form 10-K for the past fiscal year.
Dugald A. Fletcher (Chair)
Dr. Phillip A. Bauman
G. Morgan Browne
James E. Roberts
11
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLC ("PwC") has been selected as the independent
registered public accounting firm by our Audit Committee and ratified by a
majority of our Board, including a majority of the Independent Directors by vote
cast in person, to audit the accounts of the Company for and during the
Company's fiscal year ending December 31, 2006, subject to shareholder
ratification. We do not know of any direct or indirect financial interest of PwC
in the Company.
Representatives of PwC will not attend the Annual Meeting in person but
will be available to respond to appropriate questions by telephone.
Audit Committee's Pre-Approval Policies
Since March 2003, the Audit Committee of the Company has pre-approved all
audit and non-audit services provided by PwC to us. The Audit Committee's
Pre-Approval Policies and Procedures provide that the Audit Committee (or the
Chairman pursuant to delegated authority) must pre-approve all auditing services
and permitted non-audit services and that all such requests to provide services
must be submitted to the Audit Committee or the Chairman, as the case may be, by
both the independent auditor and the Chief Financial Officer.
Audit Fees
The aggregate fees billed for professional services rendered by PwC, in
connection with its annual audit of the Company's consolidated financial
statements, reviews of the consolidated financial statements included in the
Company's quarterly reports on Form 10-Q for the fiscal year ended December 31,
2005, including $45,324 for the review of documents and matters associated with
our 2005 public offering, were approximately $227,867; and for the fiscal year
ended December 31, 2004, the aggregate audit fees, including $23,500 for the
review of documents and matters associated with our 2004 public offering, were
approximately $268,500.
Tax Fees
The aggregate fees billed for professional services rendered by PwC for
tax services for the fiscal year ended December 31, 2005, were approximately
$18,000; and for the fiscal year ended December 31, 2004, they were
approximately $18,000. The nature of the services was tax return preparation.
All Other Fees
There were no fees for professional services rendered by PwC, other than
the fees described above, during the fiscal years ended December 31, 2004 and
December 31, 2005. The Audit Committee has determined that the provision of
non-audit services that were provided during 2005 is compatible with maintaining
PwC's independence in performing audit services for the Company.
12
Principal Shareholders and Ownership by Directors and Executive Officers
Set forth below is information, as of March 14, 2006, with respect to the
beneficial ownership of our common stock by (i) each person who is known by us
to be the beneficial owner of more than five percent of the outstanding shares
of the common stock, (ii) each of our directors and (iii) all of our directors
and executive officers as a group. Except as otherwise indicated, to our
knowledge, all shares are beneficially owned and investment and voting power is
held by the persons named as owners. The information in the table below is from
publicly available information that may be as of dates earlier than March 14,
2006. At this time, we are unaware of any shareholder owning five percent or
more of the outstanding shares of common stock other than Charles E. and Susan
T. Harris. Unless otherwise provided, the address of each holder is c/o Harris &
Harris Group, Inc., 111 West 57th Street, Suite 1100, New York, New York 10019.
Name of Beneficial Owner Amount and Nature of Percentage of Outstanding Common
Beneficial Ownership Shares Owned
Independent Directors:
Dr. C. Wayne Bardin 25,077(1) *
Dr. Phillip A. Bauman 24,720(2) *
G. Morgan Browne 32,672 *
Dugald A. Fletcher 17,654 *
Mark A. Parsells 2,413(3) *
Charles E. Ramsey 29,914 *
James E. Roberts 18,796 *
Interested Directors:
Charles E. and Susan T. Harris 1,050,893(4) 5.1
Kelly S. Kirkpatrick 5,264 *
Lori D. Pressman 5,760 *
Executive Officers:
Alexei A. Andreev 0 *
Sandra M. Forman, Esq 520(5) *
Douglas W. Jamison 645 *
Daniel V. Leff 300 *
All directors and executive officers as
a group (18 persons) 1,213,415 5.85
----------------
* Less than 1%.
(1) Includes 5,441 shares owned by Bardin LLC for the Bardin LLC
Profit-Sharing Keogh.
(2) Includes 9,081 shares owned jointly with Ms. Milbry C. Polk, Dr. Bauman's
wife; 5,637 shares owned by Milbry C. Polk; 100 shares owned by Adelaide
Polk-Bauman, Dr. Bauman's daughter; 100 shares owned by Milbry
Polk-Bauman, Dr. Bauman's daughter; and 100 shares owned by Mary
Polk-Bauman, Dr. Bauman's daughter. Ms. Milbry C. Polk is the custodian
for the accounts of the three children.
(3) All shares are owned jointly with Mr. Parsells's wife.
(4) Includes 1,039,559 shares owned by Mrs. Harris, our Corporate Secretary,
and 11,334 shares owned by Mr. Harris.
(5) Includes 250 shares which are owned by Edward Forman, Ms. Forman's husband
and 270 shares owned jointly with Edward Forman.
13
Executive Officers
Our executive officers who are not directors are set forth below.
Information relating to our executive officers who are directors is set forth
under "Election of Directors - Nominees." Our executive officers are elected to
serve until they resign or are removed, or are otherwise disqualified to serve,
or until their successors are elected and qualified.
Douglas W. Jamison. Mr. Jamison, age 36, has served as President, Chief
Financial Officer and Chief Operating Officer since January 1, 2005, Treasurer
since March 2005 and as a Managing Director since January 2004. Since January
2005, he has been President and a Director of Harris & Harris Enterprises, Inc.,
a wholly owned subsidiary of Harris & Harris Group, Inc., and was a Vice
President of the Company from September 2002 through December 2004. He is a
director of Chlorogen, Inc, Evolved Nanomaterial Sciences, Inc., NanoOpto
Corporation and of Nextreme Thermal Solutions, Inc., privately held
nanotechnology-enabled companies in which we have an investment. He is
Co-Editor-in-Chief of "Nanotechnology Law & Business." He is Co-Chair of the
Advisory Board, Converging Technology Bar Association, a member of the
University of Pennsylvania Nano-Bio Interface Ethics Advisory Board, and a
member of the Advisory Board, Massachusetts Technology Collaborative
Nanotechnology Venture Forum. His professional societies include the Association
of University Technology Managers, for which he serves on its Survey Statistics
and Metrics Committee. Prior to joining us, he worked as a senior technology
manager at the University of Utah Technology Transfer Office, where he managed
intellectual property in physics, chemistry and the engineering sciences from
1997 to 2002. He was graduated from Dartmouth College (B.A.) and the University
of Utah (M.S.).
Daniel V. Leff. Mr. Leff, age 37, has served as an Executive Vice
President and a Managing Director since January 2004. Prior to joining us, he
was a Senior Associate with Sevin Rosen Funds in the firm's Dallas, Texas
office, where he focused on early-stage investment opportunities in
semiconductors, components, and various emerging technology areas from 2001 to
2003. Previously he worked for Redpoint Ventures in the firm's Los Angeles
office from 2000 to 2001. In addition, he previously held engineering, marketing
and strategic investment positions with Intel Corporation from 1997 to 2000. He
is a director of Nanomix, Inc., and CSwitch, Inc., privately held
nanotechnology-enabled companies in which we have an investment. He received his
Ph.D. degree in Physical Chemistry from UCLA's Department of Chemistry and
Biochemistry, where his thesis advisor was Professor James R. Heath (recipient
of the 2000 Feynman Prize in Nanotechnology). He also received a B.S. in
Chemistry from the University of California, Berkeley and an M.B.A. from The
Anderson School at UCLA, where he was an Anderson Venture Fellow. He has
published several articles in peer-reviewed scientific journals and has been
awarded two patents in the field of Nanotechnology. He is also a member of the
advisory board of The NanoBusiness Alliance.
Alexei A. Andreev. Mr. Andreev, age 34, joined us in March 2005, as an
Executive Vice President and as a Managing Director. From 2002 to March 2005, he
was an Associate with Draper Fisher Jurvetson, a venture capital firm. In 2001,
he was a Summer Associate with TLcom Capital Partners, a London-based venture
capital fund backed by Morgan Stanley. From 1997 to 2000, he was employed by
Renaissance Capital Group/Sputnik Funds, a private equity fund in Moscow,
Russia. Previously, he was a researcher at the Centre of Nanotechnology, Isan,
in Troitsk, Russia. He is a director of the American Business Association of
Russian Expatriates. He was graduated with a B.S. with honors in
Engineering/Material Sciences and a Ph.D. in Solid State Physics from Moscow
Steel and Alloys Institute and with an M.B.A. from the Stanford Graduate School
of Business.
14
Sandra Matrick Forman, Esq. Ms. Forman, age 40, has served as General
Counsel, Chief Compliance Officer and Director of Human Resources since August
2004. Prior to joining us, she was an Associate at Skadden, Arps, Slate, Meagher
& Flom LLP, in the Investment Management Group, from 2001 to 2004. From May to
August 2000, she was a summer associate with Latham & Watkins LLP in its London
office. Ms. Forman served as an intern from August to December 2000 in the
office of the General Counsel, United States Department of Defense, Office of
the Secretary of Defense. From June to August 1999, she served as an intern for
the Honorable Ronald S. Lew, United States Federal District Court, Central
District of California. She was graduated from New York University (B.A.), where
her honors included National Journalism Honor Society, and from the University
of California Los Angeles (J.D.), where her honors included Order of the Coif
and membership on the Law Review.
Daniel B. Wolfe. Mr. Wolfe, age 29, has served as a Vice President since
July 2004. He has served as Senior Associate since January 2006. He is a
director of Evolved Nanomaterial Sciences, Inc., a privately held
nanotechnology-enabled company in which we have an investment. Prior to joining
us, he served as a consultant to Nanosys, Inc. (from 2002 to 2004), CW Group
(from 2001 to 2004) and Bioscale, Inc. (from January 2004 to June 2004). From
February 2000 to January 2002, he was the Co-founder and President of Scientific
Venture Assessments, Inc., a provider of scientific analysis of prospective
investments for venture capital placements and of scientific expertise to
high-technology companies. Mr. Wolfe was graduated from Rice University (B.A.,
Chemistry), where his honors included the Zevi and Bertha Salsburg Memorial
Award in Chemistry and the Presidential Honor Roll, and from Harvard University
(Ph.D., Chemistry), where he was an NSF Predoctoral Fellow.
Patricia N. Egan. Ms. Egan, age 31, has served as Chief Accounting
Officer, Vice President, Senior Controller since June 2005. She served as
Assistant Secretary from June 2005 to December 2005. Prior to joining us, she
served as a Manager at PricewaterhouseCoopers LLP in its financial services
group from 1996 to 2005. Ms. Egan was graduated from Georgetown University
(B.S., Accounting), where her honors included the Othmar F. Winkler Award for
Excellence in Community Service. She is a Certified Public Accountant.
15
Mary P. Brady. Ms. Brady, age 44, has served as Vice President, Controller
and Assistant Secretary since December 2005. Prior to joining us, she served as
a senior accountant at Clarendon Insurance Company in its program accounting
group from 2003 through 2005. She served from 2000 to 2003 as a senior associate
at PricewaterhouseCoopers LLP in its financial services group. Ms. Brady was
graduated Summa Cum Laude from Lehman College (B.S., Accounting). She is a
Certified Public Accountant.
Susan T. Harris. Ms. Harris, age 61, has served as our Secretary since
July 2001. She was employed by Harris & Harris Enterprises, Inc., our wholly
owned subsidiary, from July 1999 to July 2003, working primarily in financial
public relations, and from July 2001 to July 2003, she served as its Secretary
and Treasurer. She has been an investor relations consultant since 1972,
operating as a sole proprietor prior to 1999, and again from July 2003 to the
present. She was graduated from Wellesley College (B.A., Economics). Ms.
Harris's husband serves as the Chairman, Chief Executive Officer and a Managing
Director of the Company.
16
Remuneration of Chief Executive Officer and Other Executive Officers
The following table sets forth a summary for the last fiscal year of
the cash and non-cash compensation awarded to, earned by, or paid to our Chief
Executive Officer and our four most highly compensated officers.
====================================================================================
Annual Compensation
---------------------------------- ------------------------------------------------------------------------------------
Name and Other Annual All Other Aggregate
Principal Position Year Salary Bonus Compensation Compensation Compensation
($) ($)(1) ($)(2) ($)(3) ($)
---------------------------------- ------- -------- --------- ---------- --------- -------------
Charles E. Harris 2005 235,609 1,107,088 76,145 261,889 1,680,731
Chairman of the Board, 2004 229,778 0 42,193 245,778 517,749
Chief Executive Officer(4)(5) 2003 224,567 0 43,006 318,296 585,869
Douglas W. Jamison 2005 250,000 165,308 0 14,000 429,308
President, Chief Operating 2004 153,183 0 0 13,000 166,183
Officer & Chief Financial 2003 137,182 0 0 12,000 149,182
Officer, Former Vice President
Daniel V. Leff 2005 250,000 153,514 0 14,000 417,514
Executive Vice President 2004 228,667 0 0 13,000 241,667
Alexei A. Andreev 2005 187,500(6) 106,770 0 11,520 305,790
Executive Vice President
Sandra M. Forman, Esq 2005 175,000 62,685 0 14,000 251,685
General Counsel & Chief 2004 66,667(7) 16,500 0 7,587 90,754
Compliance Officer
================================== ======= ========= ========= ========= ========= =========
(1) These amounts represent the actual amounts earned as a result of realized
gains during the year ended December 31, 2005, and paid out in 2006, under
the Harris & Harris Group Employee Profit-Sharing Plan. You may find more
information on our Employee Profit-Sharing Plan under Incentive
Compensation Plans. The amount shown for Mr. Andreev includes a $35,000
signing bonus. For 2004, the amount shown for Ms. Forman represents a
signing bonus.
(2) Other than Mr. Harris, amounts of "Other Annual Compensation" earned by
the named executive officers for the periods presented did not meet the
threshold reporting requirements. The amounts reported for Mr. Harris
represent benefits including personal use of an automobile and garage,
membership in a private club, membership in a health club and use of a
trainer, medical care reimbursement, consultation with a financial
planner, long-term disability insurance, group term life insurance and
long-term care insurance for him and his wife.
(3) Except for Mr. Harris, amounts reported represent our contributions on
behalf of the named executive to the Harris & Harris Group, Inc. 401(k)
Plan. Mr. Harris's "All Other Compensation" consists of: $18,000 401(k)
Plan employer contribution, $235,609 for his 2005 SERP contribution and
$8,280 for a term life insurance premium paid. In 2005, Mr. Harris
received a $125,000 distribution from his SERP account.
(4) Mr. Harris has an employment agreement with us.
(5) In 2005 and 2004, Mr. Harris's wife received compensation of $19,000 and
$17,000, respectively for serving as our Secretary. Additionally, she was
employed by a subsidiary in 2003 and earned salary and all other
compensation of $9,522.
(6) Commenced employment March 31, 2005.
(7) Commenced employment August 1, 2004.
17
Incentive Compensation Plans
As of January 1, 2003, we implemented an Amended and Restated Harris &
Harris Group, Inc. Employee Profit-Sharing Plan, which we refer to as the 2002
Plan. This section describes only the operation of the 2002 plan, which was the
plan in operation for 2005. On March 23 2006, our Board of Directors terminated
the 2002 Plan and established the Harris & Harris Group, Inc. 2006 Equity
Incentive Plan, both subject to shareholder approval of Proposal 4 in this Proxy
Statement.
The 2002 Plan (and its predecessor) provides for profit sharing for our
officers and employees equal to 20 percent of our "qualifying income" for that
plan year. For the purposes of the 2002 Plan, qualifying income is defined as
net realized income as reflected on our consolidated statements of operations
for that year (excluding the profit-sharing expense), less nonqualifying gains,
if any.
For purposes of the 2002 Plan, our net realized income includes investment
income, realized gains and losses, and operating expenses (including taxes paid
or payable by us), but is calculated without including dividends paid or
distributions made to shareholders, payments under the Plan, unrealized gains
and losses, and loss carry-overs from other years, which net realized income we
refer to as qualifying income. The proportion of net after-tax realized gains
attributable to asset values as of September 30, 1997, is considered
nonqualifying gain, which reduces qualifying income. As soon as practicable
following the end of the year, the Compensation Committee determines whether,
and if so how much, qualifying income exists for a plan year. Ninety percent of
the amount determined by the Compensation Committee is then paid out to Plan
participants pursuant to the distribution percentages set forth in the 2002
Plan. The remaining 10 percent is paid out after we have filed our federal tax
return for that plan year.
On October 15, 2002, our shareholders approved the performance goals under
the 2002 Plan in accordance with Section 162(m) of the Code, effective as of
January 1, 2003. The Code generally provides that a public company such as we
are may not deduct compensation paid to its chief executive officer or to any of
its four most highly compensated officers to the extent that the compensation
paid to the officer/employee exceeds $1,000,000 in any tax year, unless payment
is made upon the attainment of objective performance goals that are approved by
our shareholders.
Under the 2002 Plan, awards previously granted to the four individuals who
were participants at that time (Charles Harris, Mel Melsheimer, Helene Shavin
and Jacqueline Matthews, herein referred to as the "grandfathered participants")
were reduced by 10 percent with respect to "Non-Tiny Technology Investments" (as
defined in the 2002 Plan) and by 25 percent with respect to "Tiny Technology
Investments" (as defined in the 2002 Plan), and these reduced awards became
permanent. We refer to these reduced awards as "grandfathered participations."
Grandfathered participations include only investments made prior to the time the
2002 Plan was adopted and do not affect awards relating to any investments made
after that date. The amount by which the awards of the grandfathered
participants are reduced are allocable and reallocable each year by the
Compensation Committee among current and new participants as awards under the
2002 Plan. The grandfathered participations will be honored by us whether or not
the grandfathered participant is still employed by us or is still alive (in the
event of death, the grandfathered participations will be paid to the
grandfathered participant's estate), unless the grandfathered participant is
dismissed for cause, in which case all future awards, including the
grandfathered participations, will be immediately cancelled and forfeited. With
regard to new investments and follow-on investments made after January 1, 2003,
both current and new participants are required to be employed by us at the end
of a plan year in order to participate in profit-sharing on our investments with
respect to that year.
18
Notwithstanding any provisions of the 2002 Plan, in no event may the
aggregate amount of all awards payable for any Plan Year during which we remain
a "business development company" within the meaning of the 1940 Act be greater
than 20 percent of our "net income after taxes" within the meaning of Section
57(n)(1)(B) of the 1940 Act. In the event the awards as calculated exceed that
amount, the 2002 Plan requires that the awards be reduced on a pro rata basis.
The 2002 Plan may be modified, amended or terminated by the Compensation
Committee at any time. Notwithstanding the foregoing, the grandfathered
participations may not be further modified or amended. Nothing in the 2002 Plan
precludes the Compensation Committee from naming additional participants in the
2002 Plan or, except for grandfathered participations, changing the Award
Percentage of any Participant (subject to the overall percentage limitations
contained in the 2002 Plan). In one case, for a former employee who left on July
27, 2001, any amount earned will be accrued and may subsequently be paid to the
participant.
At December 31, 2005, under the 2002 Plan, the distribution amounts for
non-grandfathered investments for each officer and employee were: Charles E.
Harris, 8.43 percent; Douglas W. Jamison, 4.06 percent; Daniel V. Leff, 3.77
percent; Sandra M. Forman, 1.62 percent; Daniel B. Wolfe, 1.62 percent; and
Jacqueline M. Matthews, 0.50 percent, which together equal 20 percent.
The grandfathered participations are set forth below:
Grandfathered Participations
----------------------------------------------
Name of Officer/Employee Non-Tiny Technology (%) Tiny Technology (%)
------------------------ ----------------------- -------------------
Charles E. Harris 12.41100 10.34250
Mel P. Melsheimer 3.80970 3.17475
Helene B. Shavin 1.37160 1.14300
Jacqueline M. Matthews 0.40770 0.33975
--------- ---------
TOTAL 18.00000 15.00000
======== ========
19
Accordingly, an additional two percent of qualifying income with respect
to grandfathered Non-Tiny Technology Investments, five percent of qualifying
income with respect to grandfathered Tiny Technology Investments and the full 20
percent of qualifying income with respect to non-grandfathered investments is
available for allocation and reallocation from year to year.
At December 31, 2005, Douglas W. Jamison, Daniel V. Leff, Sandra M. Forman
and Daniel B. Wolfe were allocated 0.7329229 percent, 0.6807388 percent,
0.2931692 percent and 0.2931692 percent, respectively, of the Non-Tiny
Technology Grandfathered Participations and 1.8323072 percent, 1.701847 percent,
0.7329229 percent and 0.7329229 percent, respectively, of the Tiny Technology
Grandfathered Participations.
We perform a calculation each quarter to determine the accrual for
profit-sharing. We calculate 20 percent of qualifying income (i.e., net realized
income after taxes) pursuant to the terms of the 2002 Plan and estimate the
amount of additional qualifying income, if any, that would result from selling
all the portfolio investments that are valued above cost (i.e., that are in an
unrealized appreciation position). Although the accrual will fluctuate as a
result of changes in qualifying income and changes in unrealized appreciation,
payments are only made to the extent that qualifying income exists. At December
31, 2005, we had $2,107,858, and at December 31, 2004, we had $311,594, accrued
for profit sharing. On March 1, 2006, the Company paid $1,897,072 to the plan
participants (employees and former employees), which represents 90 percent of
the total estimated profit-sharing payment. The balance is expected to be paid
in September 2006.
401(k) Plan
As of January 1, 1989, we adopted an employee benefits program covering
substantially all of our employees under a 401(k) Plan and Trust Agreement. As
of January 1, 1999, we adopted the Harris & Harris Pension Plan and Trust, a
money purchase plan that would allow us to stay compliant with the 401(k)
top-heavy regulations and deduction limitation regulations. In 2001, Congress
enacted the Economic Growth and Tax Relief Reconciliation Act of 2001, which has
increased the deduction limits for plans such as the 401(k) Plan. This Act
eliminated the need for us to maintain two separate plans. Effective December
31, 2001, the Pension Plan merged into the 401(k) Plan, with the 401(k) Plan
being the surviving plan. Matching contributions to the plan are at the
discretion of the Compensation Committee. During 2005, matching contributions to
the plan charged to operations were approximately $119,360.
Retirement Healthcare Benefit Plan
On June 30, 1994, we adopted a plan to provide medical and dental
insurance for retirees, their spouses and dependents who, at the time of their
retirement, have 10 years of service with us and have attained 50 years of age
or have attained 45 years of age and have 15 years of service with us. On
February 10, 1997, we amended this plan to include employees who "have seven
full years of service and have attained 58 years of age." On November 3, 2005,
we amended this plan to reverse the 1997 amendment for future retirees and to
remove dependants other than spouses from the plan. The coverage is secondary to
any government or subsequent employer provided health insurance plans. The
annual premium cost to us with respect to the entitled retiree shall not exceed
$12,000, subject to an index for inflation. Based upon actuarial estimates, we
provided an original reserve of $176,520 that was charged to operations for the
period ending June 30, 1994. As of December 31, 2005, we had a reserve of
$685,600 for the plan.
20
Executive Mandatory Retirement Plan
On March 20, 2003, in order to begin planning for eventual management
succession, the Board of Directors voted to establish the Executive Mandatory
Retirement Benefit Plan for individuals who are employed by us in a bona fide
executive or high policy making position. There are currently three such
individuals that qualify under the plan, Charles E. Harris, the Chairman and
Chief Executive Officer, Douglas W. Jamison, the President, Chief Operating
Officer and Chief Financial Officer and Mel P. Melsheimer, the former President,
Chief Operating Officer and Chief Financial Officer. Under this plan, mandatory
retirement will take place effective December 31 of the year in which the
eligible individuals attain the age of 65. On an annual basis beginning in the
year in which the designated individual attains the age of 65, a committee of
the Board consisting of non-interested directors may determine to postpone the
mandatory retirement date for that individual for one additional year for our
benefit.
Under applicable law prohibiting discrimination in employment on the basis
of age, we can impose a mandatory retirement age of 65 for our executives or
employees in high policy-making positions only if each employee subject to the
mandatory retirement age is entitled to an immediate retirement benefit at
retirement age of at least $44,000 per year. The benefits payable at retirement
to Mr. Harris and Mr. Melsheimer under our existing retirement plans do not
equal this threshold. A plan was established to provide the difference between
the benefit required under the age discrimination laws and that provided under
our existing plans. The total expense to us of providing the benefit under this
new plan is currently estimated to be $50,547 as it relates to Mr. Harris, and
$231,109 as it relates to Mr. Melsheimer. Currently, there is no accrual for Mr.
Jamison. On December 31, 2004, Mr. Melsheimer retired pursuant to the mandatory
retirement plan. Under the mandatory retirement plan, he will receive an annual
benefit of $22,915, the difference between the benefit required under the age
discrimination laws and that provided under our existing plans. The estimated
annual benefit for Mr. Harris upon his retirement is $11,543.
Employment Agreement
On October 19, 1999, Charles E. Harris signed an Employment Agreement with
us (the "Employment Agreement"), which superseded an employment agreement that
was about to expire on December 31, 1999. The Employment Agreement expires on
December 31, 2004 ("Term"); provided, on January 1, 2000 and on each day
thereafter, the Term extends automatically by one day, unless at any time we or
Mr. Harris, by written notice, decide not to extend the Term, in which case the
Term will expire five years from the date of the written notice. On October 14,
2004, Mr. Harris entered into an Amended and Restated Employment Agreement (the
"Amended Employment Agreement") for the purpose of changing the termination date
to be consistent with the date in the Executive Mandatory Retirement Benefit
Plan. The Amended Employment Agreement provides that the Term of Mr. Harris's
employment may not be extended beyond December 31, 2008, the mandatory
retirement date pursuant to the Executive Mandatory Retirement Benefit Plan,
unless a committee of the Board consisting of non-interested Directors extends
the date by one year pursuant to the plan, and Mr. Harris agrees to serve beyond
December 31, 2008.
21
During the period of employment, Mr. Harris shall serve as our Chairman
and Chief Executive Officer; be responsible for our general management of the
affairs of the Company and all its subsidiaries, reporting directly to our Board
of Directors; serve as a member of the Board for the period of which he is and
shall from time to time be elected or reelected; and serve, if elected, as an
officer and director of any subsidiary or affiliate of the Company.
Mr. Harris is to receive compensation under his Employment Agreement in
the form of base salary, with automatic yearly adjustments to reflect inflation,
which amounted to $235,609 for 2005. In addition, the Board may increase such
salary, and consequently decrease it, but not below the level provided for by
the automatic adjustments described above. For 2006, the Compensation Committee
increased Mr. Harris's base salary to $300,000. Mr. Harris is also entitled to
participate in our Profit-Sharing Plan as well as in all compensation or
employee benefit plans or programs, and to receive all benefits, perquisites,
and emoluments for which salaried employees are eligible. Under the Amended
Employment Agreement, we furnish Mr. Harris with certain perquisites which
include a company car, a personal trainer, membership in certain clubs and up to
a $5,000 annual reimbursement for personal, financial or tax advice, adjusted
for inflation.
The Amended Employment Agreement provides Mr. Harris with life insurance
for the benefit of his designated beneficiaries in the amount of $2,000,000;
provides reimbursement for uninsured medical expenses, not to exceed $10,000 per
annum, adjusted for inflation, over the period of the contract; and provides Mr.
Harris and his spouse with long-term care insurance and with disability
insurance in the amount of 100 percent of his base salary. These benefits are
for the term of the Amended Employment Agreement.
The Amended Employment Agreement provides severance pay in the event of
termination without cause or by constructive discharge and also provides for
certain death benefits payable to the surviving spouse equal to the executive's
base salary for a period of two years.
In addition, Mr. Harris is entitled to receive severance pay pursuant to
the severance compensation agreement that he entered into with us, effective
August 15, 1990. The severance compensation agreement provides that if,
following a change in our control, as defined in the agreement, his employment
is terminated by us without cause or by him within one year of such change in
control, he shall be entitled to receive compensation in a lump sum payment
equal to 2.99 times his average annualized compensation and payment of other
welfare benefits. If Mr. Harris's termination is without cause or is a
constructive discharge, the amount payable under the Amended Employment
Agreement will be reduced by the amounts paid pursuant to the severance
compensation agreement.
22
SERP
The Amended Employment Agreement provides that we adopt a supplemental
executive retirement plan (the "SERP") for the benefit of Mr. Harris. Under the
SERP, we will cause an amount equal to one-twelfth of Mr. Harris's current base
salary to be credited each month (a "Monthly Credit") to a special account
maintained for this purpose on our books for the benefit of Mr. Harris (the
"SERP Account"). The amounts credited to the SERP Account will be deemed
invested or reinvested in such investments as determined by Mr. Harris. The SERP
Account is credited and debited to reflect the deemed investment returns, losses
and expenses attributed to such deemed investments and reinvestments. Mr.
Harris's benefit under the SERP equals the balance in the SERP Account and such
benefit will always be 100 percent vested (i.e., not forfeitable). In 2005, Mr.
Harris received a $125,000 distribution from the SERP Account. The balance in
the SERP Account will be distributed to Mr. Harris in a lump sum on December 31,
2008; provided, however, in the event of the termination of Mr. Harris's
employment, the balance in the SERP Account will be distributed to Mr. Harris or
his beneficiary, as the case may be, in a lump-sum payment within 30 days of
such termination. We have established a rabbi trust for the purpose of
accumulating funds to satisfy the obligations incurred by us under the SERP,
which amounted to $1,730,434 at December 31. 2005. The restricted funds for the
SERP Plan total $1,730,434 at December 31, 2005. Mr. Harris's rights to benefits
pursuant to this SERP will be no greater than those of a general creditor of the
Company.
23
Remuneration of Directors
The following table sets forth the compensation paid by us for the fiscal
year ended December 31, 2005, to our directors. During the fiscal year ended
December 31, 2005, we did not pay any pension or retirement benefits to
directors.
Total Compensation Paid to
Name of Director Directors ($)
---------------------- ---------------------------
Independent Directors:
Dr. C. Wayne Bardin 28,500
Dr. Phillip A. Bauman 31,500
G. Morgan Browne(1) 40,941
Dugald A. Fletcher 40,500
Mark A. Parsells(2) 37,463
Charles E. Ramsey 28,500
James E. Roberts 39,000
Interested Directors:
Kelly S. Kirkpatrick(3) 29,278
Lori D. Pressman(4) 93,854
Charles E. Harris(5) 0
--------------------
(1) Includes $441 for reimbursement for travel expenses to attend board
meetings.
(2) Includes $1,463 for reimbursement for travel expenses to attend board
meetings.
(3) Includes $2,278 for reimbursement for travel expenses to attend board
meetings and $0 for consulting services. Ms. Kirkpatrick may be considered
an "interested person" because of consulting work performed for us in
previous years.
(4) Includes $2,192 for reimbursement for travel expenses to attend board
meetings and $66,162 for consulting services. Ms. Pressman may be
considered an "interested person" because of consulting work performed for
us.
(5) Mr. Harris is an "interested person" as defined in the 1940 Act. He is not
compensated directly for his services as a director of the Company.
In 2006, the directors who are not officers will receive $1,500 for each
meeting of the Board of Directors and $1,500 for each committee meeting they
attend, in addition to a monthly retainer of $750. We also reimburse our
directors for travel, lodging and related expenses they incur in attending board
and committee meetings. The total compensation and reimbursement for expenses
paid to all directors in 2005 was $303,374.
The Board of Directors has adopted a policy that 50 percent of all
director fees must be used to purchase our common stock. In 2005, the directors
bought 9,985 shares in the open market pursuant to this policy.
24
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10 percent of our common stock, to
file reports (including a year-end report) of ownership and changes in ownership
with the Securities and Exchange Commission (the "SEC") and to furnish the
Company with copies of all reports filed.
Based solely on a review of the forms furnished to us, or written
representations from certain reporting persons, we believe that all persons who
were subject to Section 16(a) in 2005 complied with the filing requirements.
25
SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
(Proposal No. 2)
PricewaterhouseCoopers LLP ("PwC") has been selected as the independent
registered public accounting firm by our Audit Committee and ratified by a
majority of our Board, including a majority of the independent directors by vote
cast in person, to audit the accounts of the Company for and during the
Company's fiscal year ending December 31, 2006. This selection is subject to
ratification or rejection by the stockholders of the Company. The Company knows
of no direct or indirect financial interest of PwC in the Company.
Representatives of PwC will not attend the Annual Meeting in person but
will be available to respond to appropriate questions by telephone.
Unless marked to the contrary, the shares represented by the enclosed
proxy card will be voted for ratification of the appointment of
PricewaterhouseCoopers LLP as the independent registered public accounting firm
of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
26
SALE OF RIGHTS TO PURCHASE COMMON STOCK AT NOT
LESS THAN THE GREATER OF THE MARKET VALUE OR THE
NET ASSET VALUE PER SHARE AT THE TIME OF ISSUANCE
(Proposal No. 3)
Proposal
During the coming year, the Board of Directors believes it would be in our
best interest to have the ability to offer long-term rights (which may be
accompanied by or be part of other securities -- e.g., convertible debt,
convertible preferred securities, warrants and debt securities or warrants and
preferred securities) to purchase common stock at an exercise price that will
not be less than the greater of the market value or the net asset value per
share at the time of issuance of such long-term rights. For example, if the
securities are priced for issuance on June 30 and at that time the net asset
value per share is $5.00 and the market price is $10.00, the exercise price will
not be less than $10.00, subject to anti-dilution adjustments. Section 61(a) of
the 1940 Act permits a business development company such as us to sell such
securities on such terms (and to issue shares of common stock upon their
exercise) only if several conditions are satisfied. Specifically, such proposal
must be approved by a majority of the Board of Directors who have no financial
interest in the transaction and a majority of the independent directors, and
shareholders of the issuer within 12 months prior to sale. In addition, a
majority of the issuer's independent directors must determine in good faith that
the issuance of such securities is in the best interests of the Company and our
shareholders and that the price at which such rights or other securities are to
be sold (which refers to the exercise or conversion price in the case of rights
such as warrants, options or conversion rights) is not less than a price which
closely approximates the market value for the underlying shares of common stock
at the time of issuance of such rights or other securities. Finally, the
long-term rights or other securities outstanding at any particular time may not
be exercisable or convertible for more than 25% of the common stock outstanding
at that time. The subsequent issuance of shares upon exercise of properly
authorized rights is permitted without regard to net asset value or market value
at the time of exercise. As our Board of Directors has done each year since
2002, it has approved and recommends to the shareholders for their approval a
proposal authorizing us, over the next year, to issue long-term rights to
purchase common stock (subject to the 25% limitation stated above) at exercise
prices that will not be less than the greater of the market value or the net
asset value per share at the time of issuance of such rights. Upon obtaining the
requisite shareholder approval, we will comply with the foregoing requirements
in connection with any financing undertaken pursuant to this proposal. See below
for a discussion of the risks of dilution and leverage.
We may determine to issue such rights and/or other securities in a
registered public offering or may issue them in a private placement either with
or without an obligation to seek to register their resale at the request of the
holders. We may also determine to use an underwriter or placement agent to
assist in selling such securities if we conclude that doing so would assist in
marketing such securities on favorable terms.
27
Reasons for the Proposal
Management and the Board of Directors have determined that it would be
advantageous to us to have the ability to sell, either alone or as part of
another security, warrants, options or rights to purchase common stock in
connection with our financing and capital raising activities. This ability may
give us a cost-effective way to raise capital. Our Board of Directors has
determined that it would be in the best interest of the Company and our
shareholders to be in a position to increase our assets so that we may be in a
better position to be a lead investor more often, to make follow-on investments
and take advantage of attractive new investment opportunities in tiny
technology, including nanotechnology, microsystems and microelectromechanical
systems (MEMS), augment working capital, increase the diversification of our
portfolio and achieve other net benefits to us. We believe that our prior
investment and expertise in the tiny technology sector are likely to lead to
several attractive investment opportunities in the tiny technology sector
becoming available to us over the next one to two years. We do not have any
current plans to issue rights or other securities and would determine to do so
only after reviewing the pace at which we are investing the proceeds of our
recent stock offerings and the level and attractiveness of investment
opportunities becoming available.
The Board also believes that increasing our assets will lower our expense
ratio by spreading our fixed costs over a larger asset base. The issuance of
additional common stock resulting from the exercise might also enhance the
liquidity of our common stock on the Nasdaq National Market.
Although we are permitted without shareholder approval to engage in rights
offerings to our existing shareholders of short-term rights to purchase common
stock at less than net asset value per share, these offerings must either be
non-transferable, in which case shareholders who decide not to participate will
have no means of capturing any portion of the value of the right to acquire
shares at a discount, or, if they involve transferable rights, must be limited
in frequency and size in such a manner that we can increase our capital base in
any particular year by only approximately 25 percent less the effect of the
discount. In addition, offerings of transferable rights for which the exercise
price is at a discount to net asset value may be made only once per year. In
2002, we made such a transferable rights offering.
We believe that the investment opportunities in tiny technology over the
coming year are likely to be sufficient to justify raising capital should we
choose to do so. Any such decision to raise capital would take into account
likely investment opportunities and liquid assets on hand, including possible
sale of freely marketable corporate securities. Inasmuch as the Board of
Directors believes that it would not be in the best interests of shareholders
for us to engage in large scale nontransferable rights offerings at a discount,
it believes that the proposal is an attractive way to give us additional
flexibility over and above the limited amount that can be raised in any year
without shareholder approval through short-term transferable rights offerings to
take advantage of investment opportunities that may arise over the next one or
two years.
28
The Board of Directors has approved and is seeking shareholder approval of
the proposal described above to sell, either alone or as part of another
security, warrants, options or rights to purchase common stock. The final terms
of any such sale, including price, terms, and vesting requirements, would be
determined by the Board of Directors at the time of issuance of the rights.
Also, the nature and amount of consideration that would be received by us at the
time of issuance and the use of any such consideration would be considered and
approved by the Board of Directors at the time of issuance. Any such issuance
may be made pursuant to either a registered or non-registered offering, as
determined by the Board of Directors in an appropriate manner prior to the time
of issuance. Any such sale would be anticipated to result in a potential
increase in the number of outstanding shares of common stock. The long-term
rights or other securities outstanding at any particular time may not be
exercisable or convertible for more than 25% of the common stock outstanding at
that time.
Dilution
Any such sale, other than to existing shareholders, would be potentially
dilutive to the voting power of existing shareholders and could be dilutive with
regard to dividends and other economic aspects of the common stock. Because the
number of shares of common stock that could be so issued and the timing of any
issuance is not currently known, the actual dilutive effect cannot be predicted.
In addition, because the exercise price per share at the time of exercise could
well be less than the net asset value per share at the time of exercise and
because we could well incur expenses in connection with any such sale, such
exercise could result in a dilution of net asset value per share at the time of
exercise for all shareholders. Such dilution would disproportionately affect
shareholders who own less than their proportional share of such rights.
Leverage
Any long-term rights issued may be accompanied by or be part of other
securities, including convertible debt or convertible preferred securities. If
we issue convertible debt or convertible preferred securities or debt or
preferred securities accompanied by long-term rights, such issuance would result
in the use of leverage by us and would require us to make periodic interest or
dividend payments. The use of leverage results in additional risks and can
magnify the effect of any losses. If the income and gains earned on securities
purchased with the proceeds of such convertible securities are greater than the
cost of leverage, our return on the shares will be greater than if leverage had
not been used. Conversely, if the income or gains from the securities purchased
with such proceeds does not cover the cost of leverage, the return to us will be
less than if leverage had not been used. There is no assurance that a leveraging
strategy will be successful. Also, the cost of interest or dividend payments on
any debt or preferred securities issued will be borne by the common
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
29
APPROVAL OF THE COMPANY'S EQUITY INCENTIVE PLAN
(Proposal No. 4)
Proposal
On March 23 2006, Board of Directors of the Company voted to terminate the
Profit Sharing Plan (see "Reasons for the Proposal" below) and established the
Harris & Harris Group, Inc. 2006 Equity Incentive Plan (the "Stock Plan"), both
subject to shareholder approval of this Proposal. The Stock Plan provides for
the grant of equity-based awards, including restricted stock and stock options
to our directors, officers and other employees, advisors and consultants who are
selected by our Compensation Committee for participation in the plan and subject
to compliance with the 1940 Act. If the Securities and Exchange Commission
provides exemptive relief to that effect, our Compensation Committee may also
authorize awards under the Stock Plan to selected former employees of the
Company.
The Stock Plan was adopted to encourage stock ownership in the Company by
eligible participants, thus giving them a proprietary interest in the Company's
performance, to reward performance, to provide a means to attract and retain
persons of outstanding ability to the service of the Company, to more
successfully compete with private sector venture capital firms to hire and
retain personnel and to retain and add to the cash in the Company. The Stock
Plan is attached to this Proxy Statement as Appendix B.
The Company's Board of Directors and its Compensation Committee, which
consists entirely of directors who are not employees of the Company, believe
that in light of the Company's development, stock-based incentive compensation,
particularly the award of stock options and restricted stock, should be used
instead of our existing profit-sharing plan. Stock-based compensation advances
the interests of the Company by providing substantial motivation for superior
performance and more fully aligning the interests of officers and directors with
the interests of the shareholders.
Business development companies that do not maintain a profit-sharing plan
are permitted under the 1940 Act to issue to officers and employees (and to
non-officer/employee directors, with exemptive relief) options, warrants or
rights to purchase voting securities pursuant to an executive compensation plan,
if:
o The options, warrants or rights expire by their terms within 10
years;
o The options, warrants or rights are not separately transferable
unless no class of such options, warrants or rights and the
securities that accompany them have been publicly distributed;
o The exercise or conversion price is not less than the current market
value at the date of issuance (or if no market value exists, the
current net asset value of the voting securities); and
o The proposal to issue the securities is approved by the shareholders
of the business development company.
30
The Company intends to apply for exemptive relief from the Securities and
Exchange Commission permitting the Company to issue restricted stock pursuant to
the Stock Plan, to permit the exercise price of the options to be adjusted to
reflect any taxes paid by the Company on behalf of shareholders when it
designates deemed dividends of its long-term gains, to be able to include
certain former employees in the Stock Plan who were grandfathered participants
in the profit-sharing plan before it was terminated and to permit non-employee
directors to participate in the plan. Until such time as the Company receives
such exemptive relief, the Company will not issue any shares of restricted
stock, the exercise price on options will not be adjusted to reflect any taxes
paid on behalf of shareholders; and former employees and our non-employee
directors will not participate in the Option Plan.
We are submitting the Stock Plan to our shareholders for approval in order
to comply with the 1940 Act and NASD listing rules, in order to exempt grants
under the plan for purposes of Rule 16b under the Exchange Act, and so that
awards under the plan intended to qualify as "performance based compensation"
under Section 162(m) of the Code may so qualify.
The plan will be administered by our Compensation Committee, which has the
authority, among other things, to determine who will be granted awards and all
of the terms and conditions of the awards, including but not limited to the
effect of a change in control of the Company on those awards. The Compensation
Committee is also authorized to determine to what extent an award may be
settled, cancelled, forfeited or surrendered, to interpret the plan and any
awards granted under the plan and to make all other determinations necessary or
advisable for the administration of the plan. Where the vesting or payment of an
award under the plan is subject to the attainment of performance goals, the
Compensation Committee will be responsible for determining that the performance
goals have been attained. Neither the Compensation Committee nor our Board of
Directors has the authority under the plan to reprice, or to cancel and
re-grant, any stock option granted under the plan, or to take any action that
would lower the exercise, base or purchase price of any award granted under the
plan without first obtaining the approval of our shareholders. In addition, no
award may be granted under the plan if the grant of the award would cause the
Company to fail to comply with the 1940 Act.
Reasons for the Proposal
As of January 1, 2000, the Company implemented the Harris & Harris Group,
Inc. Employee Profit-Sharing Plan, which provides for profit sharing by its
officers and employees up to a maximum of 20 percent of the net realized income
of the Company as reflected on the consolidated statements of operations of the
Company for such year, less the nonqualifying gain, if any. Section 57(n) of the
1940 Act prohibits the Company from paying profit sharing in an amount that
exceeds "net income after taxes."
31
Thus, when the Company chooses to retain its net realized long-term
capital gains for reinvestment for growth and declares a deemed dividend, rather
than distribute such gains as a cash dividend, the taxes paid by the Company on
behalf of shareholders (who receive a tax credit for such taxes) reduce the
amount of profit against which the profit sharing payable to employees is
calculated. The practical effect of deducting the taxes paid on behalf of
shareholders in conjunction with deemed dividends from "net income after taxes"
in any fiscal year is to reduce the maximum payment under profit sharing plans
governed by Section 57(n)(1)(B) to less than 13 percent (20% of 65% before
adjustment for state and local taxes) of our net income before these taxes.
Because the Company must compete with private sector venture capital firms
to hire and retain personnel, and private sector venture capital firms typically
have a carried interest of at least 20 percent of profits before any taxes, the
Company would be placed at a serious competitive disadvantage as a result of the
taxes as described above. Although the Company could avoid this result by paying
cash dividends in respect of its long-term gains, this would increase the cost
of building the Company's capital and would not, in the view of the Board of
Directors, be in the best interests of the Company and its shareholders if other
reasonably competitive compensation structures can be utilized. If the Company
were to distribute all of its net realized long-term capital gains, it would
have no reinvestment rate and therefore could not generate internal growth.
Moreover, profit-sharing payments in the form of cash reduce the Company's
reinvestment rate, and therefore its potential rate of growth, whereas the
exercise of stock options would increase the Company's cash. In this regard, the
Board of Directors also noted that profit-sharing payments by the Company result
in ordinary income to the plan participants, whereas employees of private
venture capital operations generally receive a carried interest characterized as
long-term gain for income tax purposes. Although the Stock Plan could also
result eventually in ordinary income to participants with respect to all or a
portion of their awards under the Stock Plan, long-term options and restricted
stock provide forms of tax-free compounding until exercised or sold.
Description of the Option Plan
Authorization. A maximum of 4,000,000 shares of our common stock will be
available for awards under the plan, subject to adjustment as described below.
Shares issued under the plan may be authorized but unissued shares or treasury
shares. If any shares subject to an award granted under the plan are forfeited,
cancelled, exchanged or surrendered or if an award terminates or expires without
a distribution of shares, or if shares of stock are surrendered or withheld as
payment of either the exercise price of an award and/or withholding taxes in
respect of an award, those shares will again be available for awards under the
plan. Under the plan, no more than 4,000,000 shares of our common stock may be
made subject to stock options, and no more than 1,000,000 shares of our common
stock may be made subject to awards of restricted stock. If any shares of
restricted stock are awarded, such awards will reduce on a share-for-share basis
the total number of shares of stock for which options may be awarded. If the
Company does not receive exemptive relief from the Securities and Exchange
Commission to issue restricted stock, all 4,000,000 shares may be subject to
stock options. No more than 1,000,000 shares of our common stock may be made
subject to awards under the plan to any individual in any year. In the event
that the Compensation Committee determines that any corporate event, such as a
stock split, dividend or other distribution (including deemed dividends),
reorganization, merger, consolidation, repurchase or share exchange, affects our
common stock such that an adjustment is appropriate in order to prevent dilution
or enlargement of the rights of plan participants, then the Compensation
Committee will make those adjustments as it deems necessary or appropriate to
any or all of (i) the number and kind of shares or other property that may
thereafter be issued in connection with future awards, (ii) the number and kind
of shares or other property that may be issued under outstanding awards, (iii)
the exercise price or purchase price of any outstanding award and (iv) the
performance goals applicable to outstanding awards.
32
Terms of Awards. The terms and conditions of stock options granted under the
plan will be determined by the Compensation Committee and set forth in an
agreement. Stock options granted under the plan may be "incentive stock options"
within the meaning of Section 422 of the Code, or non-qualified stock options.
The exercise price of an option granted under the plan will not be less than the
fair market value of our common stock on the date of grant. The vesting of a
stock option will be subject to such conditions as the Compensation Committee
may determine.
The terms and conditions of awards of restricted stock granted under the plan
will be determined by the Compensation Committee and set forth in an award
agreement. The Compensation Committee may determine that the holder of
restricted stock may receive dividends, including deemed dividends, that may be
deferred during the restricted period applicable to these awards.
Unless earlier terminated by our Board of Directors, the Stock Plan will expire
on the 10th anniversary of the date on which it was adopted. The expiration of
the Stock Plan will not by itself adversely affect the rights of plan
participants under awards that are outstanding at the time the Stock Plan
expires. Our Board of Directors may terminate, modify or suspend the plan at any
time, provided that no modification of the plan will be effective unless and
until any required shareholder approval has been obtained. The Compensation
Committee may terminate, modify or amend any outstanding award under the Stock
Plan at any time, provided that in such event, the award holder may exercise any
vested options prior to such termination of the Stock Plan or award.
Inasmuch as awards under the plan will be determined by our Compensation
Committee and may vary from year to year and from participant to participant,
benefits to be paid under the plan are not determinable at this time.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
33
AMENDMENT OF THE CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FROM 30,000,000 TO 45,000,000
(Proposal No. 5)
Proposal
We propose to amend paragraph 4 of the Certificate of Incorporation to
increase the number of authorized shares of common stock from 30,000,000 to
45,000,000.
Of the 30,000,000 shares authorized for issuance under our Certificate of
Incorporation, there are only approximately 7,414,915 shares unissued. Our
proposed amendment would increase the number of authorized shares of common
stock by 15,000,000 shares.
The rights of additional authorized shares would be identical to the
rights of the shares you now hold. The authorization will not, in itself, have
any effect on your rights as a stockholder. If the Board were to issue
additional shares for other than a stock split or dividend, however, it could
have a dilutive effect on your voting power. This proposal is not in response to
any effort we know of to accumulate our common stock or to obtain control of the
Company. The Board of Directors has no present plans, agreements, commitments or
understandings for the issuance or use of these proposed additional shares.
Reason for the Proposal
We believe that the proposed increase is in the best interests of the
Company and our shareholders. It is important for the Board of Directors to have
the flexibility to act promptly to meet future business needs as they arise.
Sufficient shares should be readily available to maintain our capital raising
flexibility and for employee benefit plan issuances. By having additional shares
readily available for issuance, the Board of Directors will be able to act
expeditiously without spending the time and incurring the expense of soliciting
proxies and holding special meetings of shareholders.
We do not have any current plans to issue any newly authorized additional
shares of common stock if approved by shareholders, and would determine to do so
only after reviewing the pace at which we are investing the proceeds of our
recent stock offerings and our other liquid assets and the level and
attractiveness of investment opportunities becoming available and likely to
become available.
Issuance of new shares of common stock, other than to existing
shareholders, would be potentially dilutive to the voting power of existing
shareholders and could also be dilutive with regard to dividends and other
economic aspects of the common stock. Because the number of shares and the
timing of any issuance is not currently known, the actual dilutive effect cannot
be predicted. In addition, we could incur expenses in connection with any such
sale of additional shares, which could result in a dilution of net asset value
per share at the time of sale for all shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THIS PROPOSAL.
34
Other Business
The Board of Directors does not intend to bring any other matters before
the Annual Meeting and, at the date of mailing of this proxy statement, has not
been informed of any matter that others may bring before the Annual Meeting.
However, if any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the accompanying proxy to vote such proxy in
accordance with their judgment on such matters.
Annual Reports on Form 10-K
Our Annual Report on Form 10-K, as filed with the SEC, is being delivered
with this Proxy Statement.
We undertake to provide, without charge, to each shareholder as of March
14, 2006, upon the written request of such shareholder, a copy of our Annual
Report on Form 10-K and/or our last Quarterly Report on Form 10-Q, including the
financial statements and the financial statement schedules, required to be filed
with the SEC for our most recent fiscal year and/or quarter. Any shareholder who
would like to request a copy of our most recent Annual Report on Form 10-K or
Quarterly Report on Form 10-Q may do so by calling toll-free 1-877-TINY-TECH or
submitting a written request to the following address, which shall contain a
representation in good faith that such shareholder was a beneficial owner, as of
March 14, 2006, of our securities, entitled to vote:
Investor Relations
Harris & Harris Group, Inc.
111 West 57th Street, Suite 1100
New York, NY 10019
Submission of Shareholder Proposals
Any shareholder proposals intended to be presented for inclusion in our
proxy statement and form of proxy for the next Annual Meeting of Shareholders to
be held in 2007 must be received in writing by the Secretary of the Company at
Harris & Harris Group, Inc., 111 West 57th Street, New York, New York 10019, no
later than January 5, 2007, in order for such proposals to be considered for
inclusion in the proxy statement and proxy relating to the 2007 Annual Meeting
of Shareholders. Submission of a proposal does not guarantee inclusion in the
proxy statement, as the requirements of certain federal laws and regulations
must be met by such proposals.
Under our Bylaws, nominations for director may be made only by the Board
or by the Nominating Committee, or by a shareholder entitled to vote who has
delivered written notice to our Secretary (containing certain information
specified in the Bylaws) not less than 90 days nor more than 120 days prior to
the anniversary of the date of the immediately preceding Annual Meeting of
Shareholders; provided, however, that in the event that the Annual Meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the shareholder in order to be timely must be so received not
later than the close of business on the 10th day following the day on which
notice of the date of the Annual Meeting was mailed or such public disclosure of
the date of the Annual Meeting was made, whichever first occurs. The Bylaws also
provide that no business may be brought before an Annual Meeting of the
Shareholders except as specified in the Notice of the Meeting or as otherwise
properly brought before the meeting by or at the direction of the Board or by a
shareholder entitled to vote who has delivered written notice to our Secretary
(containing certain information specified in the Bylaws) not less than 90 days
nor more than 120 days prior to the anniversary of the date of the immediately
preceding Annual Meeting of Shareholders; provided, however, that in the event
that the Annual Meeting is called for a date that is not within 30 days before
or after such anniversary date, notice by the shareholder in order to be timely
must be so received not later than the close of business on the 10th day
following the day on which notice of the date of the Annual Meeting was mailed
or such public disclosure of the date of the Annual Meeting was made, whichever
first occurs.
35
Rule 14a-4 of the Securities and Exchange Commission's proxy rules allows
us to use discretionary voting authority to vote on matters coming before an
Annual Meeting of shareholders, if we do not have notice of the matter at least
45 days before the anniversary of the date on which we first mailed our proxy
materials for the prior year's Annual Meeting of shareholders or the date
specified by the advance notice provision in our Bylaws. Our Bylaws contain such
an advance notice provision as described above. For our Annual Meeting of
Shareholders expected to be held on May 3, 2007, shareholders must submit such
written notice to our Secretary in accordance with our advance notice provision,
as described above.
A copy of the full text of the Bylaw provisions discussed above may be
obtained by writing to our Secretary.
By Order of the Board of Directors
New York, New York /s/ Susan T. Harris
----------------------------------
April 3, 2006 Susan T. Harris
Secretary
36
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
of
Harris & Harris Group, Inc.
The Board of Directors (the "Board") of Harris & Harris Group, Inc. (the
"Company") has determined that the Audit Committee of the Board shall assist the
Board in fulfilling certain of the Board's oversight responsibilities. The Board
hereby adopts this Charter to establish the governing principles of the Audit
Committee and shall review and reassess the adequacy of this Charter on an
annual basis.
I. Role of the Audit Committee
The role of the Audit Committee is to act on behalf of the Board in
fulfilling the following responsibilities of the Board:
A. To oversee all material aspects of the Company's accounting and
financial reporting processes, internal control and audit functions,
except those that are specifically related to the responsibilities
of another committee of the Board;
B. To monitor the independence and performance of the Company's
independent registered public accountants;
C. To provide a means for open communication among the Company's
independent registered public accountants, financial and senior
management and the Board; and
D. To oversee compliance by the Company with legal and regulatory
requirements.
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
financial statement audits or to determine that the Company's financial
statements are complete and accurate or are in accordance with generally
accepted accounting principles. The responsibility to plan and conduct financial
statement audits is that of the Company's independent registered public
accountants. The Company's management has the responsibility to determine that
the Company's financial statements are complete and accurate and in accordance
with generally accepted accounting principles. Nor is it the duty of the Audit
Committee to assure the Company's compliance with laws and regulations. The
primary responsibility for these matters also rests with the Company's
management.
A-1
II.Composition of the Audit Committee
A. The Board shall designate the members of the Audit Committee at the
Board's annual organizational meeting and each member shall serve,
subject to his or her earlier resignation or removal from the Audit
Committee or his or her ceasing to be a director, until the next
such meeting and until their successors are designated by the Board.
B. The Audit Committee shall consist of at least three members, but no
more than six members. The members of the Audit Committee shall meet
the independence and experience requirements of the rules of the
principal market or transaction reporting system on which the
Company's securities are traded or quoted (currently, the Nasdaq
National Market), Section 10A(m)(3) of the Securities Exchange Act
of 1934 and the rules and regulations of the Securities and Exchange
Commission (the "SEC").
III. Meeting of the Audit Committee
The Audit Committee shall meet at least four (4) times each year and more
frequently as circumstances may require. The Audit Committee shall be
responsible for meeting with the independent registered public accountants at
their request to discuss the interim financial statements. The Audit Committee
shall meet privately with the independent registered public accountants at least
annually in a separate executive session.
IV. Responsibilities of the Audit Committee
The Audit Committee shall assist the Board in overseeing the Company's
financial and operating reporting practices, internal controls and compliance
with laws and regulations.
Specifically, the Audit Committee shall have the responsibility with
respect to:
A. The Company's Risks and Control Environment:
o To discuss with the Company's management and independent
registered public accountants the integrity of the Company's
financial reporting processes and controls, particularly the
controls in areas representing significant financial and
business risks; and
A-2
o To investigate and follow up on any matters brought to its
attention within the scope of its duties.
B. The Company's Independent Registered Public Accountants:
o The Audit Committee shall have the sole authority to appoint
or replace the independent registered public accountants
(subject, to ratification by the independent directors of the
Board). The Audit Committee shall be directly responsible for
the compensation and oversight of the work of the independent
registered public accountants (including resolution of
disagreements between management and the independent
registered public accountants regarding financial reporting)
for the purpose of preparing or issuing an audit report or
related work. The independent registered public accountants
shall report directly to the Audit Committee;
o To ensure that the Audit Committee receives annually from the
Company's independent registered public accountants the
information about all of the relationships between the
independent registered public accountants and the Company that
the independent registered public accountants are required to
provide to the Audit Committee, to actively engage in a
dialogue with the independent registered public accountants
about any relationships between the independent registered
public accountants and the Company or any services that the
independent registered public accountants provide or propose
to provide that may affect the objectivity and independence of
the independent registered public accountants and to take, or
recommend that the Board take, any appropriate action to
oversee the independence of the independent registered public
accountants;
o The Audit Committee shall establish guidelines similar to
those set forth in Annex A relating to the Company's hiring of
employees or former employees of the independent registered
public accountants who participated in any capacity in the
audit of the Company;
o The Audit Committee shall establish policies or procedures
similar to those set forth in Annex B to pre-approve all
auditing services and permitted non-audit services (including
fees and terms thereof) (the "Covered Services") to be
performed for the Company by its independent registered public
accountants. The Audit Committee may form and delegate
authority to the Chairman of the Audit Committee or
subcommittees consisting of one or more members when
appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that
decisions of the Chairman or such subcommittee to grant
pre-approvals shall be presented to the full Audit Committee
at its next scheduled meeting;
o Obtain and review a report from the independent registered
public accountant at least annually regarding (a) the
independent registered public accountant's internal
quality-control procedures, (b) any material issues raised by
the most recent internal quality-control review, or peer
review, of the firm, or by any inquiry or investigation by
governmental or professional authorities within the preceding
five years respecting one or more independent audits carried
out by the firm, (c) any steps taken to deal with any such
issues, and (d) all relationships between the independent
registered public accountant and the Company. Evaluate the
qualification, performance and independence of the independent
registered public accountant, including considering whether
the auditor's quality controls are adequate and provision of
permitted non-audit service is compatible with maintaining the
independent registered public accountant's independence, and
taking into account the opinions of management; and
A-3
o To ensure the rotation of the lead (or coordinating) audit
partner (or, if required by the rules and regulations of the
SEC, other employees of the independent registered public
accountants) having primary responsibility for the audit and
the audit partner responsible for reviewing the audit as
required by law.
C. The Company's Financial Reporting Process:
o To oversee the Company's selection of and major changes to its
accounting policies;
o To meet with the Company's independent registered public
accountants and financial management both to discuss the
proposed scope of the audit and to discuss the conclusions of
the audit, including any items that the independent registered
public accountants are required by generally accepted auditing
standards to discuss with the Audit Committee, such as, any
significant changes to the Company's accounting policies, the
integrity of the Company's financial reporting process and any
proposed changes or improvements in financial, accounting or
auditing practices;
o To discuss with the Company's financial management and
independent registered public accountants the Company's annual
results and, when appropriate, the interim results before they
are made public;
o To review with management and the independent registered
public accountants, prior to the filing of an audit report
with the SEC, all alternative treatments of financial
information within generally accepted accounting principles
that have been discussed with management, ramifications of the
use of such alternative disclosures and treatments, and the
treatment preferred by independent registered public
accountants;
o To review with management and the independent registered
public accountants, prior to the filing of an audit report
with the SEC, material written communications between the
independent registered public accountants and management, such
as any management letter or schedule of unadjusted
differences;
o To review disclosures made to the Audit Committee by the
Company's Chief Executive Officer and Chief Financial Officer
during their certification process for the Form 10-K and Form
10-Q about any significant deficiencies in the design or
operation of internal controls or material weaknesses therein
and any fraud involving management or other employees who have
a significant role in the Company's internal controls;
A-4
o To review with the independent registered public accountants,
prior to the filing of an audit report with the SEC, all
critical accounting policies and practices to be used;
o To review and discuss with the Company's financial management
and independent registered public accountants the Company's
audited financial statements including qualitative judgments,
appropriateness of accounting principles (old and new),
financial disclosure practices, and any observations regarding
the quality of accounting principles and underlying estimates
and, when appropriate, the Company's interim financial
statements, before they are made public;
o To recommend to the Board of Directors that the audited
financial statements be included in the Company's Annual
Report on Form 10-K;
o To issue for public disclosure by the Company the report
required by the rules of the SEC; and
o To review and concur in the appointment, replacement or
dismissal of outside accounting firms.
D. Other Matters
o To review and reassess the adequacy of this charter on an
annual basis;
o To review reports and any financial information submitted by
the Company to a government body or the public;
o To report to the Board the matters discussed at each meeting
of the Audit Committee;
o To administer the procedures set forth in Annex C relating to
the receipt, retention and treatment of complaints received by
the Company regarding accounting, internal accounting controls
or auditing matters, and the confidential, anonymous
submission by employees or any other provider of accounting
related services of concerns regarding questionable accounting
or auditing matters;
o To keep an open line of communication with the financial and
senior management and the independent registered public
accountants and the Board;
o To review in advance and approve any "related party"
transaction, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in
which the amount involved exceeds $60,000 and in which such
related party had, or will have, a direct or indirect material
interest. For purposes of this item, a "related party"
includes any director or executive officer of the Company, any
nominee for election as a director, any security holder who is
known to the Company to own of record or beneficially more
than five percent of any class of the Company's voting
securities, and any member of the immediate family(1) of any
of the foregoing persons. The materiality of any interest is
to be determined on the basis of the significance of the
information to investors in light of all the circumstances of
the particular case; and
(1) A person's immediate family shall include such person's spouse, parents,
children, siblings, mothers and fathers-in-law, sons and daughters-in-law,
and brothers and sisters-in-law.
A-5
o To perform other oversight functions as requested by the full
Board.
V. Advisors/Funding
In discharging its duties hereunder, the Audit Committee shall have the
authority, to the extent it deems necessary or appropriate, to retain
independent legal, accounting or other advisors. The Company shall provide for
appropriate funding, as determined by the Audit Committee, for payment of such
compensation as is determined by the Audit Committee to the independent
registered public accountants and to any other advisors employed by the Audit
Committee. The Company shall also provide funding for any other functions or
initiatives undertaken by the Audit Committee.
A-6
APPENDIX B
HARRIS & HARRIS GROUP, INC.
2006 EQUITY INCENTIVE PLAN
Section Page
1. Purpose; Types of Awards; Construction 1
2. Definitions 1
3. Administration 4
4. Eligibility 5
5. Stock Subject to the Plan 5
6. Terms of Awards 6
7. General Provisions 9
HARRIS & HARRIS GROUP, INC.
2006 EQUITY INCENTIVE PLAN
1. Purpose; Types of Awards; Construction.
The purposes of the Harris & Harris Group, Inc. 2006 Equity Incentive Plan
(the "Plan") are to enable Harris & Harris Group, Inc. (the "Company") to afford
an incentive to non-employee and employee directors, selected officers and other
employees, advisors and consultants of the Company to continue as non-employee
directors, officers, employees, advisors or consultants, as the case may be, to
increase their efforts on behalf of the Company and its subsidiaries and to
promote the success of the Company's business. In the event that the Company
receives an exemptive order from the U.S. Securities and Exchange Commission
("SEC") to that effect, the Plan shall provide for the issuance of Awards to
former employees of the Company, as well. The Plan provides for the grant of
Options (including "incentive stock options" and "nonqualified stock options"),
stock appreciation rights, restricted stock, restricted stock units and other
equity-based awards. The Plan is designed so that Awards granted hereunder that
are intended to comply with the requirements for "performance-based
compensation" under Section 162(m) of the Code may comply with such
requirements. Various provisions of the Plan may require an exemptive order from
the U.S. Securities and Exchange Commission (the "SEC") prior to their
implementation and accordingly, Awards will be granted only after consultation
with the Company's general counsel.
2. Definitions.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Award" means any Option or Restricted Stock Award granted under
the Plan.
(b) "Award Agreement" means any written agreement, contract or other
instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" means the occurrence of any of the
following:
(i) any Person is or becomes the "beneficial owner" (as such
term is used in Rule 13d-3 and Rule 13d-5 under the Exchange Act),
directly or indirectly, of securities of the Company (not including
in the securities beneficially owned by such Person any securities
acquired directly from the Company or its affiliates) representing
40% or more of the combined voting power of the Company's then
outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in
clause (i) of paragraph (iii) below; or
B-1
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the Effective Date, constitute the Board and any
new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by
the Company's stockholders was approved or recommended by a vote of
at least two-thirds (2/3) of the directors then still in office who
either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with any
other corporation, other than a merger or consolidation immediately
following which the individuals who comprise the Board immediately
prior thereto constitute at least a majority of the board of
directors of (A) any parent of the Company or the entity surviving
such merger or consolidation (B) if there is no such parent, of the
Company or such surviving entity; or
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the Company
of all or substantially all of the Company's assets, other than a
sale or disposition by the Company of all or substantially all of
the Company's assets to an entity, at least 60% of the combined
voting power of the voting securities of which are owned by
stockholders of the Company in substantially the same proportions as
their ownership of the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have
occurred by virtue of the consummation of any transaction or series of
integrated transactions immediately following which the record holders of the
common stock of the Company immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of the Company
immediately following such transaction or series of transactions.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder.
(f) "Committee" means the committee established by the Board to
administer the Plan, the composition of which shall at all times consist of
"non-employee directors" within the meaning of Rule 16b-3, and "outside
directors" within the meaning of Section 162(m) of the Code.
(g) "Company" means Harris & Harris Group, Inc., a corporation
organized under the laws of the State of New York, or any successor corporation.
(h) "Effective Date" means March 23, 2006, the date on which the
Plan was adopted by the Board.
B-2
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and the rules and regulations promulgated thereunder.
(j) "Fair Market Value" means, with respect to Stock or other
property, the fair market value of such Stock or other property determined by
such methods or procedures as shall be established from time to time by the
Board. Unless otherwise determined by the Board in good faith, the per share
Fair Market Value of Stock as of a particular date shall mean (i) the closing
sales price per share of Stock on the national securities exchange on which the
Stock is principally traded, for the last preceding date on which there was a
sale of such Stock on such exchange; (ii) if the shares of Stock are then traded
in an over-the-counter market, the average of the closing bid and asked prices
for the shares of Stock in such over-the-counter market for the last preceding
date on which there was a sale of such Stock in such market; or (iii) if the
shares of Stock are not then listed on a national securities exchange or traded
in an over-the-counter market, such value as the Board, in its sole discretion,
shall determine.
(k) "ISO" means any Option intended to be and designated as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "NQSO" means any Option that is not designated as an ISO.
(m) "Option" means a right, granted to a Participant under Section
6(b)(i), to purchase shares of Stock. An Option may be either an ISO or an NQSO,
provided that ISOs may be granted only to employees of the Company or a
"subsidiary corporation" of the Company (within the meaning of Section 424(f) of
the Code).
(n) "Participant" means a person who, as a non-employee director,
employee director, officer or other employee, advisor or consultant to the
Company or a subsidiary of the Company (or, if the SEC provides exemptive relief
to that effect, a former employee of the Company), has been granted an Award
under the Plan.
(o) "Performance Goals" means performance goals based on one or more
of the following criteria, determined in accordance with generally accepted
accounting principles, where applicable: (i) pre-tax income or after-tax income;
(ii) cumulative realized and unrealized net appreciation; (iii) stock price or
total stockholder return; (iv) strategic business criteria, consisting of one or
more objectives based on meeting specified market penetration or market share,
geographic business expansion, customer satisfaction, employee satisfaction,
human resources management, supervision of litigation, information technology,
or goals relating to divestitures, joint ventures or similar transactions; or
(v) any other criteria determined by the Board to be appropriate. Where
applicable, the Performance Goals may be expressed in terms of attaining a
specified level of the particular criterion or the attainment of a percentage
increase or decrease in the particular criterion, and may be applied to one or
more of the Company or a subsidiary of the Company, or a division or strategic
business unit of the Company, all as determined by the Board. The Performance
Goals may include a threshold level of performance below which no payment will
be made (or no vesting will occur), levels of performance at which specified
payments will be paid (or specified vesting will occur) and a maximum level of
performance above which no additional payment will be made (or at which full
vesting will occur). Each of the foregoing Performance Goals shall be evaluated
in accordance with generally accepted accounting principles, where applicable,
and shall be subject to certification by the Board. The Board shall have the
authority to make equitable adjustments to the Performance Goals in recognition
of unusual or non-recurring events affecting the Company or any subsidiary of
the Company or the financial statements of the Company or any subsidiary of the
Company, in response to changes in applicable laws or regulations or to account
for items of gain, loss or expense determined to be extraordinary or unusual in
nature or infrequent in occurrence or related to the disposal of a segment of a
business or related to a change in accounting principles.
B-3
(p) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company.
(q) "Plan" means this Harris & Harris Group, Inc. 2006 Equity
Incentive Plan, as amended from time to time.
(r) "Restricted Stock" means an Award of shares of Stock to a
Participant under Section 6(b)(ii) that may be subject to certain restrictions
and to a risk of forfeiture.
(s) "Rule 16b-3" means Rule 16b-3, as from time to time in effect
promulgated by the SEC under Section 16 of the Exchange Act, including any
successor to such Rule.
(t) "SEC" means the U.S. Securities and Exchange Commission.
(u) "Securities Act" means the Securities Act of 1933, as amended
from time to time, and the rules and regulations promulgated thereunder.
(v) "Stock" means shares of the common stock, par value $0.01 per
share, of the Company.
3. Administration.
The Plan shall be administered by the Board. The Board may appoint a
Committee to administer all or a portion of the Plan and to make recommendations
to the Board with respect to the Plan and any Award. To the extent that the
Board appoints a Committee to administer all or a portion of the Plan,
references in the Plan to "the Board" shall be references to "the Committee."
The Board may delegate to one or more agents such administrative duties as it
may deem advisable, and the Committee or any other person to whom the Board has
delegated duties as aforesaid may employ one or more persons to render advice
with respect to any responsibility the Board or such Committee or person may
have under the Plan.
B-4
The Board shall have the authority in its discretion, subject to and not
inconsistent with the express provisions of the Plan, to administer the Plan and
to exercise all the powers and authorities either specifically granted to it
under the Plan or necessary or advisable in the administration of the Plan,
including, without limitation, the authority to: (i) grant Awards; (ii)
determine the persons to whom and the time or times at which Awards shall be
granted; (iii) determine the type and number of Awards to be granted, the number
of shares of Stock to which an Award may relate and the terms, conditions,
restrictions and performance criteria relating to any Award, including but not
limited to the effect of a Change in Control on an Award; (iv) determine
Performance Goals no later than such time as required to ensure that an
underlying Award that is intended to comply with the requirements of Section
162(m) of the Code so complies; (v) determine whether, to what extent, and under
what circumstances an Award may be settled, cancelled, forfeited, exchanged, or
surrendered; (vi) make adjustments in the terms and conditions of, and the
Performance Goals (if any) included in, Awards; (vii) construe and interpret the
Plan and any Award; (viii) prescribe, amend and rescind rules and regulations
relating to the Plan; (ix) determine the terms and provisions of the Award
Agreements (which need not be identical for each Participant); and (x) make all
other determinations deemed necessary or advisable for the administration of the
Plan. Notwithstanding any other provision of the Plan or any Award Agreement,
the Board shall not take any action that would have the effect of reducing the
exercise or purchase price of any Award, whether by means of repricing or
cancellation and regrant of the Award, without having first obtained the
approval of the Company's stockholders.
All decisions, determinations and interpretations of the Board shall be
final and binding on all persons, including but not limited to the Company, any
subsidiary of the Company, any Participant (or any person claiming any rights
under the Plan from or through any Participant) and any stockholder. No member
of the Board or Committee shall be liable for any action taken or determination
made in good faith with respect to the Plan or any Award granted hereunder.
4. Eligibility.
Awards may be granted to Persons who at the time of grant are natural
persons who are non-employee directors, employee directors, officers and other
employees, advisors or consultants of the Company, in the discretion of the
Board. In the event that the SEC provides exemptive relief to that effect, the
Board may also grant Awards to Persons who at the time of grant are former
employees of the Company. In determining the persons to whom Awards shall be
granted and the type of any Award (including the number of shares to be covered
by such Award), the Board shall take into account such factors as the Board
shall deem relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan.
The maximum number of shares of Stock reserved for the grant of Awards
under the Plan shall be 4,000,000, subject to adjustment as provided herein. All
shares of Stock reserved for the grant of Awards under the Plan may be made
subject to Options granted under the Plan; provided, however, that in the event
that the SEC issues an exemptive order with respect to the issuance of
Restricted Stock Awards under the Plan, up to 1,000,000 shares of Stock reserved
for the grant of Awards under the Plan may be made subject to Restricted Stock
Awards, subject to adjustment as provided herein. No more than 1,000,000 shares
of Stock may be made subject to Awards granted to any Participant in any year.
Determinations made in respect of the limitations set forth in the immediately
preceding sentence shall be made in a manner consistent with Section 162(m) of
the Code. Such shares may, in whole or in part, be authorized but unissued
shares or shares that shall have been or may be reacquired by the Company in the
open market, in private transactions or otherwise. If any shares subject to an
Award are forfeited, cancelled, exchanged or surrendered or if an Award
terminates or expires without a distribution of shares to the Participant, or if
shares of Stock are surrendered or withheld as payment of either the exercise
price of an Award and/or withholding taxes in respect of an Award, the shares of
Stock with respect to such Award shall, to the extent of any such forfeiture,
cancellation, exchange, surrender, withholding, termination or expiration, again
be available for Awards under the Plan. Upon the exercise of any Award granted
in tandem with any other Award, such related Award shall be cancelled to the
extent of the number of shares of Stock as to which the Award is exercised and,
notwithstanding the foregoing, such number of shares shall no longer be
available for Awards under the Plan.
B-5
In the event that the Board shall determine that any dividend or other
distribution (whether in the form of cash, Stock, deemed dividends or other
property), recapitalization, Stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Participants under the Plan, then the Board shall make such equitable
changes or adjustments as it deems necessary or appropriate to any or all of:
(i) the number and kind of shares of Stock or other property (including cash)
that may thereafter be issued in connection with Awards; (ii) the number and
kind of shares of Stock or other property (including cash) issued or issuable in
respect of outstanding Awards; (iii) the exercise price, grant price or purchase
price relating to any Award; provided, that, with respect to ISOs, such
adjustment shall be made in accordance with Section 424(h) of the Code; and (iv)
the Performance Goals applicable to outstanding Awards. In addition, the Board
may determine that any such equitable adjustment may be accomplished by making a
payment to the Award holder, in the form of cash or other property (including
but not limited to shares of Stock).
6. Terms of Awards.
(a) General. The term of each Award shall be for such period as may
be determined by the Board. Subject to the terms of the Plan and any applicable
Award Agreement, payments to be made by the Company upon the grant, vesting,
maturation or exercise of an Award may be made in such forms as the Board shall
determine at the date of grant or thereafter, including, without limitation,
cash, Stock or other property, and may be made in a single payment or transfer,
in installments or on a deferred basis. The Board may make rules relating to
installment or deferred payments with respect to Awards, including the rate of
interest to be credited with respect to such payments. In addition to the
foregoing, the Board may impose on any Award or the exercise thereof, at the
date of grant or thereafter, such additional terms and conditions, not
inconsistent with the provisions of the Plan, as the Board shall determine.
B-6
(b) Terms of Specified Awards. The Board is authorized to grant the
Awards described in this Section 6(b), under such terms and conditions as deemed
by the Board to be consistent with the purposes of the Plan. Such Awards may be
granted with vesting, value and/or and payment thereof contingent upon
Performance Goals. Except as otherwise set forth herein or as may be determined
by the Board, each Award granted under the Plan shall be evidenced by an Award
Agreement containing such terms and conditions applicable to such Award as the
Board shall determine at the date of grant or thereafter, including the effect,
if any, of a Change in Control on such Award.
(i) Options. The Board is authorized to grant Options to
Participants on the following terms and conditions:
(A) Type of Award. The Award Agreement evidencing the
grant of an Option under the Plan shall designate the Option
as an ISO or an NQSO.
(B) Exercise Price. The exercise price per share of
Stock purchasable under an Option shall be determined by the
Board, but in no event shall the per share exercise price of
any Option be less than the Fair Market Value of a share of
Stock on the date of grant of such Option. The exercise price
for Stock subject to an Option may be paid in cash, through a
"broker cashless exercise" procedure approved by the Board (to
the extent permitted by law) or a combination of the above, in
any case in an amount having a combined value equal to such
exercise price. An Award Agreement may provide that a
Participant may pay all or a portion of the aggregate exercise
price by having shares of Stock with a Fair Market Value on
the date of exercise equal to the aggregate exercise price
withheld by the Company.
(C) Term and Exercisability of Options. Options shall be
exercisable over the exercise period (which shall not exceed
ten years from the date of grant), at such times and upon such
conditions as the Board may determine, as reflected in the
Award Agreement; provided, that the Board shall have the
authority to accelerate the exercisability of any outstanding
Option at such time and under such circumstances as it, in its
sole discretion, deems appropriate. An Option may be exercised
to the extent of any or all full shares of Stock as to which
the Option has become exercisable, by giving written notice of
such exercise to the Board or its designated agent.
(D) Termination of Employment. An Option may not be
exercised unless: (1) the Participant is then a director of,
in the employ of, or providing services to the Company; and
(2) the Participant has remained continuously so employed, or
continuously maintained such relationship, since the date of
grant of the Option; provided, that the Award Agreement may
contain or be amended to contain provisions providing for the
exercisability of any Option until not later than the
expiration date of such Option.
B-7
(E) Other Provisions. Options may be subject to such
other conditions including, but not limited to, restrictions
on transferability of the shares acquired upon exercise of
such Options, as the Board may prescribe in its discretion or
as may be required by applicable law.
(ii) Restricted Stock. The Board is authorized to grant
Restricted Stock to Participants on the following terms and
conditions:
(A) Issuance and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability and other
restrictions, if any, as the Board may impose at the date of
grant or thereafter, which restrictions may lapse separately
or in combination at such times, under such circumstances, in
such installments, or otherwise, as the Board may determine.
The Board may place restrictions on Restricted Stock that
shall lapse, in whole or in part, only upon the attainment of
Performance Goals. Unless otherwise determined by the Board, a
Participant granted Restricted Stock shall have all of the
rights of a stockholder including, without limitation, the
right to vote Restricted Stock and the right to receive
dividends, including deemed dividends, thereon.
(B) Forfeiture. Upon termination of employment with or
service to the Company during the applicable restriction
period, Restricted Stock and any accrued but unpaid dividends
that are then subject to restrictions shall be forfeited;
provided, that the Board may provide, by rule or regulation or
in any Award Agreement, or may determine in any individual
case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the
event of terminations resulting from any cause, and the Board
may in other cases waive in whole or in part the forfeiture of
Restricted Stock.
(C) Certificates for Stock. Restricted Stock granted
under the Plan may be evidenced in such manner as the Board
shall determine. If certificates representing Restricted Stock
are registered in the name of the Participant, such
certificates shall bear an appropriate legend referring to the
terms, conditions and restrictions applicable to such
Restricted Stock, and the Company shall retain physical
possession of the certificate.
(D) Dividends. Dividends, including deemed dividends,
paid on Restricted Stock shall be either paid at the dividend
payment date, or deferred for payment to such date as
determined by the Board, in cash or in shares of Stock having
a Fair Market Value equal to the amount of such dividends.
Unless otherwise determined by the Board, Stock distributed in
connection with a stock split or stock dividend, and other
property distributed as a dividend, shall be subject to
restrictions and a risk of forfeiture to the same extent as
the Restricted Stock with respect to which such Stock or other
property has been distributed.
B-8
7. General Provisions.
(a) Nontransferability. Unless otherwise provided in an Award
Agreement, Awards shall not be transferable by a Participant except by will or
the laws of descent and distribution and shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative.
(b) No Right to Continued Employment. Nothing in the Plan or in any
Award, any Award Agreement or other agreement entered into pursuant hereto shall
confer upon any Participant the right to continue in the employ of, or to
continue as a director of, or to continue to provide services to, the Company or
to be entitled to any remuneration or benefits not set forth in the Plan or such
Award Agreement or other agreement or to interfere with or limit in any way the
right of the Company to terminate such Participant's employment or director or
independent contractor relationship.
(c) Taxes. The Company is authorized to withhold from any Award
granted, any payment relating to an Award under the Plan, including from a
distribution of Stock, or any other payment to a Participant, amounts of
withholding and other taxes due in connection with any transaction involving an
Award, and to take such other action as the Board may deem advisable to enable
the Company and Participants to satisfy obligations for the payment of
withholding taxes and other tax obligations relating to any Award. This
authority shall include authority to withhold or receive Stock or other property
and to make cash payments in respect thereof in satisfaction of a Participant's
tax obligations. The Board may provide in the Award Agreement that in the event
that a Participant is required to pay any amount to be withheld in connection
with the issuance of shares of Stock in settlement or exercise of an Award, the
Participant may satisfy such obligation (in whole or in part) by electing to
have the Company withhold a portion of the shares of Stock to be received upon
settlement or exercise of such Award that is equal to the minimum amount
required to be withheld.
(d) Stockholder Approval; Amendment and Termination.
(i) The Plan shall take effect upon its adoption by the Board
but the Plan (and any grants of Awards made prior to the stockholder
approval mentioned herein) shall be subject to the requisite approval of
the stockholders of the Company.
(ii) The Board may at any time and from time to time alter,
amend, suspend or terminate the Plan in whole or in part; provided,
however, that unless otherwise determined by the Board, an amendment that
requires stockholder approval in order for the Plan to continue to comply
with Section 162(m) or any other law, regulation or stock exchange
requirement shall not be effective unless approved by the requisite vote
of stockholders. The Board may at any time and from time to time alter,
amend, suspend or terminate an outstanding Award in whole or in part;
provided, that in the event an outstanding Option is to be terminated
pursuant to this clause (ii), the Option holder may be given sufficient
notice of such termination to permit the exercise of the then-vested
portion of such Option prior to such Award termination.
B-9
(e) Expiration of Plan. Unless earlier terminated by the Board
pursuant to the provisions of the Plan, the Plan shall expire on the tenth
anniversary of the Effective Date. No Awards shall be granted under the Plan
after such expiration date. Without prejudice to the authority of the Board
under Section 7(d)(ii), the expiration of the Plan shall not affect adversely
any of the rights of any Participant, without such Participant's consent, under
any Award theretofore granted.
(f) Deferrals. The Board shall have the authority to establish such
procedures and programs that it deems appropriate to provide Participants with
the ability to defer receipt of cash, Stock or other property payable with
respect to Awards granted under the Plan.
(g) No Rights to Awards; No Stockholder Rights. No Participant shall
have any claim to be granted any Award under the Plan. There is no obligation
for uniformity of treatment among Participants. Except as provided specifically
herein, a Participant or a transferee of an Award shall have no rights as a
stockholder with respect to any shares covered by the Award until the date of
the issuance of a stock certificate to him for such shares.
(h) Unfunded Status of Awards. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award shall give any such Participant any rights that are
greater than those of a general creditor of the Company.
(i) No Fractional Shares. No fractional shares of Stock shall be
issued or delivered pursuant to the Plan or any Award. The Board shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Regulations and Other Approvals.
(i) The obligation of the Company to sell or deliver Stock
with respect to any Award granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal
and state securities laws, and the obtaining of all such approvals by
governmental agencies as may be deemed necessary or appropriate by the
Board.
(ii) Notwithstanding any other provision of the Plan or any
Award Agreement, no Award shall be granted to any Participant or become
vested or exercisable, be exercised or settled, to the extent such grant,
vesting, exercise or other settlement of such Award would cause the
Company to not be in compliance with the applicable provisions of the
Investment Company Act of 1940. It is acknowledged that as of the
Effective Date various provisions permissible under the Plan may require,
prior to their implementation, an exemptive order from the SEC after
taking into account any exemptive relief received by the Company.
B-10
(iii) Each Award is subject to the requirement that, if at any
time the Board determines, in its absolute discretion, that the listing,
registration or qualification of Stock issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or
the consent or approval of any governmental regulatory body is necessary
or desirable as a condition of, or in connection with, the grant of an
Award or the issuance of Stock, no such Award shall be granted or payment
made or Stock issued, in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of
any conditions not acceptable to the Board.
(iv) In the event that the disposition of Stock acquired
pursuant to the Plan is not covered by a then-current registration
statement under the Securities Act and is not otherwise exempt from such
registration, such Stock shall be restricted against transfer to the
extent required by the Securities Act or regulations thereunder, and the
Board may require a Participant receiving Stock pursuant to the Plan, as a
condition precedent to receipt of such Stock, to represent to the Company
in writing that the Stock acquired by such Participant is acquired for
investment only and not with a view to distribution.
(v) The Board may require a Participant receiving Stock
pursuant to the Plan, as a condition precedent to receipt of such Stock,
to enter into a stockholder agreement or "lock-up" agreement in such form
as the Board shall determine is necessary or desirable to further the
Company's interests.
(k) Governing Law. The Plan and all determinations made and actions
taken pursuant hereto shall be governed by the laws of the State of New York
without giving effect to the conflict of laws principles thereof.
B-11
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Sign, Date and Return the
Proxy Card Promptly Using [ x ]
the Enclosed Envelope. Votes must be indicated
(x) in Black or Blue ink.
1. Election of Directors
FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ] *EXCEPTIONS [ ]
listed below for all nominees listed
below
Nominees: DR. C. WAYNE BARDIN, DR. PHILLIP A. BAUMAN, G. MORGAN BROWNE,
DUGALD A. FLETCHER, CHARLES E. HARRIS, DR. KELLY S. KIRKPATRICK,
MARK A. PARSELLS, LORI D. PRESSMAN, CHARLES E. RAMSEY,
JAMES E. ROBERTS.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
mark the "Exceptions" box and write that nominee's name in the space
provided below.)
*Exceptions_____________________________________________________________________
FOR AGAINST ABSTAIN
2 [ ] [ ] [ ]
3 [ ] [ ] [ ]
4 [ ] [ ] [ ]
5 [ ] [ ] [ ]
2 To ratify, confirm and approve the Audit Committee's selection of
PricewaterhouseCoopers LLP as the independent registered public accountant for
the fiscal year ending December 31, 2006.
3 To approve a proposal to authorize the Company to offer long-term rights,
including warrants and options, to purchase common stock at an exercise price
that will not be less than the greater of the market value or net asset value
per share at the time of issuance of the rights.
4 To approve the Company's Equity Incentive Plan.
5 To amend our Certificate of Incorporation to increase the number of authorized
shares of common stock from 30,000,000 to 45,000,000.
At their discretion, the Proxies are authorized to vote upon such other
business, including adjournment, as may properly come before the meeting or any
adjournment or adjournments thereof.
SCAN LINE
Please sign exactly as name appears to the left. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporation name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
----------------------------------------- ------------------------------
Date Share Owner sign here Co-Owner sign here
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HARRIS & HARRIS GROUP, INC.
111 West 57th Street
New York, NY 10019
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
-----------------------------------------------------------
The undersigned hereby appoints CHARLES E. HARRIS and MARY P. BRADY and each of
them, with full power of substitution, proxies to vote at the annual meeting of
shareholders to be held on May 4, 2006 or an adjournment thereof, to represent
and to vote all the shares of common stock of Harris & Harris Group, Inc. that
the undersigned is entitled to vote with all powers the undersigned would have
if personally present, on the following matters as designated on the reverse
side and in their discretion with respect to such other business as may properly
come before the meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" all the nominees listed in item 1
and "FOR" items 2, 3, 4 and 5.
When properly executed, this proxy will be voted as specified and in accordance
with the accompanying proxy statement. If no instruction is indicated, this
proxy will be voted "FOR" items 1, 2, 3, 4 and 5.
(Continued and to be dated and signed
on the reverse side.)
To change your address,
please mark this box. [ ]
To include any comments, HARRIS & HARRIS GROUP, INC.
please mark this box. [ ] P.O. BOX 11469
NEW YORK, N.Y. 10203-0469