RAND CAPITAL CORP
10-Ks and 10-Qs
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Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition Period from to |
Commission File Number:
814-00235
Rand Capital
Corporation
(Exact name of registrant as
specified in its charter)
|
New York
(State or Other Jurisdiction of Incorporation or organization) |
16-0961359
(IRS Employer Identification No.) |
|
|
2200 Rand Building, Buffalo, NY
(Address of Principal executive offices) |
14203
(Zip Code) |
(Registrant’s telephone number, including area code):
(716) 853-0802
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of Each Class
|
Name of Exchange on Which Registered
|
|
| Common Stock, $0.10 par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 under the
Securities
Act. Yes
o
No
þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of the registrant’s outstanding
common stock held by non-affiliates of the registrant as of
June 30, 2009 was approximately $14,554,892 based upon the
last sale price as quoted by NASDAQ Capital Market on such date.
As of March 8, 2010 there were 6,818,934 shares of the
registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Corporation’s definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 4,
2010 are incorporated by reference into certain sections of
Part III herein.
RAND
CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-K
TABLE OF CONTENTS FOR FORM 10-K
Table of Contents
| Item 1. | Business |
Corporation
Formation
Rand Capital Corporation (“Rand”) was incorporated
under the laws of New York on February 24, 1969. Beginning
in 1971, Rand operated as a publicly traded, closed-end,
diversified management company that was registered under
Section 8 of the Investment Company Act of 1940 (the
“1940 Act”). On August 16, 2001, Rand elected to
be treated as a business development company (“BDC”)
under the 1940 Act. In 2002, Rand formed a wholly-owned
subsidiary for the purpose of operating it as a small business
investment company (“SBIC”) licensed by the
U.S. Small Business Investment Administration
(“SBA”). The subsidiary received an SBA license to
operate as an SBIC in August 2002. The subsidiary, which had
been organized as a Delaware limited partnership, was converted
into a New York corporation on December 31, 2008, at which
time its operations as a licensed small business investment
company was continued by a newly formed corporation under the
name of Rand Capital SBIC, Inc. (“Rand SBIC”). The
following discussion will describe the operations of Rand, its
wholly-owned subsidiary Rand SBIC, and the predecessor
wholly-owned limited partnership (collectively, the
“Corporation”).
Throughout the Corporation’s history, its principal
business has been to make venture capital investments in small
to medium sized companies that are engaged in the exploitation
of new or unique products or services with a sustainable
competitive advantage, typically in New York and its surrounding
states. The Corporation’s principal investment objective is
to achieve long-term capital appreciation while maintaining a
current cash flow from its debenture instruments. The
Corporation invests in a mixture of debenture and equity
instruments. The debt securities most often have an equity piece
attached to the debenture in the form of stock, warrants or
options to acquire stock or the right to convert the debt
securities into stock. Rand SBIC was the primary investment
vehicle in 2007, 2008 and 2009 and it is anticipated that will
continue to be the case in 2010. Consistent with its status as a
BDC and the purposes of the regulatory framework for BDC’s
under the 1940 Act, the Corporation provides managerial
assistance, often in the form of a board of director’s
seat, to the portfolio companies in which it invests.
The Corporation operates as an internally managed investment
company whereby its officers and employees conduct its
operations under the general supervision of its Board of
Directors. It has not elected to qualify to be taxed as a
regulated investment company as defined under Subchapter M of
the Internal Revenue Code.
The Corporation’s common stock is listed on the NASDAQ
Capital Market under the symbol “Rand”.
The Corporation’s website is www.randcapital.com. The
Corporation’s annual report on
Form 10-K
and its Proxy Statement are available at the following web
address:
http://materials.proxyvote.com/752185.
In addition, the annual report on
Form 10-K,
the quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
charters for the Corporation’s committees and other reports
filed with the Securities and Exchange Commission
(“SEC”) are available through the Corporation’s
website.
Regulation
as a Business Development Company
Although the 1940 Act exempts a BDC from registration under that
Act, it contains significant limitations on the operations of
BDCs. Among other things, the 1940 Act contains prohibitions and
restrictions relating to transactions between a BDC and its
affiliates, principal underwriters and affiliates of its
affiliates or underwriters, and it requires that a majority of
the BDC’s directors be persons other than “interested
persons,” as defined under the 1940 Act. The 1940 Act also
prohibits a BDC from changing the nature of its business so as
to cease to be, or to withdraw its election as, a BDC unless so
authorized by a vote of the holders of a majority of its
outstanding voting securities. BDC’s are not required to
maintain fundamental investment policies relating to
diversification and concentration of investments within a single
industry. More specifically, in order to qualify as a BDC, a
company must:
(1) be a domestic company;
(2) have registered a class of its equity securities or
have filed a registration statement with the SEC pursuant to
Section 12 of the Securities Exchange Act of 1934;
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Table of Contents
(3) operate for the purpose of investing in the securities
of certain types of portfolio companies, namely immature or
emerging companies and businesses suffering or just recovering
from financial distress;
(4) extend significant managerial assistance to such
portfolio companies; and
(5) have a majority of “disinterested” directors
(as defined in the 1940 Act). Generally, a BDC must be primarily
engaged in the business of furnishing capital and providing
managerial expertise to companies that do not have ready access
to capital through conventional financial channels. Such
portfolio companies are termed “eligible portfolio
companies.”
An eligible portfolio company is, generally, a private domestic
operating company, or a public domestic operating company whose
securities are not listed on a national securities exchange. In
addition, any small business investment company that is licensed
by the SBA and is a wholly owned subsidiary of a BDC is an
eligible portfolio company.
The 1940 Act prohibits or restricts companies subject to the
1940 Act from investing in certain types of companies, such as
brokerage firms, insurance companies, investment banking firms
and investment companies. Moreover, the 1940 Act limits the type
of assets that BDCs may acquire to “qualifying assets”
and certain assets necessary for its operations (such as office
furniture, equipment and facilities) if, at the time of
acquisition, less than 70% of the value of the BDC’s assets
consist of qualifying assets. Qualifying assets include:
(1) securities of companies that were eligible portfolio
companies at the time the BDC acquired their securities;
(2) securities of bankrupt or insolvent companies that were
eligible at the time of the BDC’s initial acquisition of
their securities but are no longer eligible, provided that the
BDC has maintained a substantial portion of its initial
investment in those companies; (3) securities received in
exchange for or distributed in or with respect to any of the
foregoing; and (4) cash items, government securities and
high-quality short-term debt. The 1940 Act also places
restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. These
restrictions include limiting purchases to transactions not
involving a public offering and not acquiring securities from
the portfolio company or its officers, directors, or affiliates.
A BDC is permitted to invest in the securities of public
companies and other investments that are not qualifying assets,
but those kinds of investments may not exceed 30% of the
BDC’s total asset value at the time of the investment. At
December 31, 2009 the Corporation was in compliance with
this rule.
A BDC must make significant managerial assistance available to
the issuers of eligible portfolio securities in which it
invests. Making available significant managerial assistance
means, among other things, any arrangement whereby the BDC,
through its directors, officers or employees, offers to provide,
and, if accepted does provide, significant guidance and counsel
concerning the management, operations or business objectives and
policies of a portfolio company.
SBIC
Subsidiary
Since 2002, Rand has operated a wholly-owned SBIC subsidiary in
order to have access to the various forms of leverage provided
by the SBA to SBICs. Rand operates Rand SBIC, and Rand formerly
operated the limited partnership SBIC predecessor of Rand SBIC,
for the same investment purposes and with investments in the
same kinds of securities as Rand. The operations of the SBIC
predecessor were, and the operations of Rand SBIC are,
consolidated with those of Rand for both financial reporting and
tax purposes.
On May 28, 2002, Rand and the predecessor SBIC subsidiary
filed an initial Exemption Application with the SEC seeking
an order for a number of operating exemptions that the SEC has
commonly granted from certain restrictions under the 1940 Act
that would otherwise limit the operations of the wholly-owned
subsidiary. After the filing of the Exemption Application,
the Corporation had extended discussions with the staff of the
Division of Investment Management of the SEC concerning the
application. The principal substantive issue in these
discussions was the structure of the predecessor of Rand SBIC as
a limited partnership.
Rand formed the predecessor SBIC in 2002 as a limited
partnership because that was the organizational form that the
SBA strongly encouraged for all new entities seeking licenses as
SBICs. Rand organized the SBIC
2
Table of Contents
subsidiary in a manner that was consistent with the SBA’s
model limited partnership forms for licensed SBICs. In that
structure, the general partner of Rand SBIC was a limited
liability company whose managers were the principal executive
officers of Rand.
Under the rules and interpretations of the SEC applicable to
BDCs (which the subsidiary SBIC intended to become), if a BDC is
structured in limited partnership form, then it must have
general partners who serve as a board of directors, or a general
partner with very limited authority and a separate board of
directors, all of the persons who serve on the board of
directors must be natural persons, and a majority of the
directors must not be “interested persons” of the BDC.
Since the managers of the limited liability company general
partner of the SBIC subsidiary were the principal executive
officers of Rand, and since both the limited liability company
general partner and the subsidiary SBIC were wholly-owned by
Rand, Rand believed that the board of directors of Rand was the
functional equivalent of a board of directors for both the
general partner limited liability company and for the SBIC
limited partnership. Nevertheless, the staff of the Division of
Investment Management of the SEC maintained the view that if the
limited partnership subsidiary was to be operated as a limited
partnership BDC in compliance with the 1940 Act, then the
organizational documents of the limited partnership would have
to specifically provide that it would have a board of directors
consisting of natural persons, a majority of whom would not be
“interested persons.”
With the approval of the SBA, effective December 31, 2008
Rand merged the Rand SBIC limited partnership into a corporation
whose board of directors is the same as that of Rand. The SBA
formally approved the re-licensing of the new corporation as an
SBIC in February 2009. As a result of the merger, Rand SBIC is a
wholly-owned corporate subsidiary of Rand, and its board of
directors is comprised of the directors of Rand, a majority of
whom are not “interested persons” of Rand or Rand SBIC.
Following this merger, on February 26, 2009, the
Corporation filed a new Exemption Application with the SEC
seeking an order under Sections 6(c), 12(d)(1)(J), 57(c),
and 57(i) of, and
Rule 17d-1
under, the 1940 Act for exemptions from the application of
Sections 12(d)(1), 18(a), 21(b), 57(a)(1), (2), (3), and
(4), and 61(a) of the 1940 Act to certain aspects of its
operations. The application also seeks an order under
Section 12(h) of the Securities Exchange Act of
1934 Act (the “Exchange Act”) for an exemption
from separate reporting requirements for Rand SBIC under
Section 13(a) of the Exchange Act. In general, the
Corporation’s application seeks exemptions that would
permit:
| • | Rand and Rand SBIC to engage in certain related party transactions that the Corporation would otherwise be permitted to engage in as a BDC if its component parts were organized as a single corporation; | |
| • | Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset coverage requirements for senior securities on a consolidated basis; and | |
| • | Rand SBIC, as a BDC/SBIC subsidiary of Rand as a BDC, to file Exchange Act reports on a consolidated basis as part of Rand’s Exchange Act reports. |
The SEC has recently granted exemptions in response to other
companies’ applications that reflected similar issues and
factual circumstances, and Rand believes that it will receive
the exemptions it has requested for the operation of Rand SBIC
as a BDC subsidiary of Rand.
Regulation
of the SBIC Subsidiary
SBA
Lending Restrictions
The SBA licenses SBICs as part of a program designed to
stimulate the flow of private debt
and/or
equity capital to small businesses. SBICs use funds borrowed
from the SBA, together with their own capital, to provide loans
to, and make equity investments in, concerns that (a) have
a tangible net worth not in excess of $18 million and
average net income after U.S. federal income taxes for the
preceding two completed fiscal years not in excess of
$6 million, or (b) meet size standards set by the SBA
that are measured by either annual receipts or number of
employees, depending on the industry in which the concerns are
primarily engaged. The types and dollar amounts of the loans and
other investments an SBIC that is a BDC may make are limited by
the 1940 Act, the SBA Act and SBA regulations. The SBA is
authorized to examine the operations of SBICs, and an
SBIC’s ability to obtain funds from the SBA is also
governed by SBA regulations.
3
Table of Contents
In addition, at the end of each fiscal year, an SBIC must have
at least 20% (in total dollars) invested in “Smaller
Enterprises”. The SBA defines “Smaller
Enterprises” as concerns that (a) do not have a net
worth in excess of $6 million and have average net income
after U.S. federal income taxes for the preceding two years
no greater than $2 million, or (b) meet size standards
set by the SBA that are measured by either annual receipts or
number of employees, depending on the industry in which the
concerns are primarily engaged. The Corporation has maintained
compliance with this requirement since inception of the SBIC
subsidiary.
SBICs may invest directly in the equity of portfolio companies,
but they may not become a general partner of a non-incorporated
entity or otherwise become jointly or severally liable for the
general obligations of a non-incorporated entity. An SBIC may
acquire options or warrants in portfolio companies, and the
options or warrants may have redemption provisions, subject to
certain restrictions.
SBA
Leverage
The SBA raises capital to enable it to provide funds to SBICs by
guaranteeing certificates or bonds that are pooled and sold to
purchasers of the government guaranteed securities. The amount
of funds that the SBA may lend to SBICs is determined by annual
Congressional appropriations.
The Corporation paid $100,000 to the SBA to reserve $10,000,000
of approved debenture leverage as a partial prepayment of the
SBA’s nonrefundable 3% leverage fee. As of
December 31, 2008, Rand SBIC had drawn $8,100,000 in
leverage from the SBA. On September 30, 2008, the remaining
leverage commitment and $1,900,000 of approved leverage expired
when the commitment was not used by the Corporation. The
remaining unamortized prepaid leverage fee of $19,000 was
expensed in 2008. The Corporation re-applied to the SBA for the
remaining $1,900,000 in leverage in the second quarter of 2009
and received approval of its application on October 26,
2009. In the fourth quarter of 2009, the Corporation paid the
SBA a commitment fee of $19,000 to reserve the $1,900,000 in
debenture leverage, drew down $1,000,000 in leverage and paid
the related leverage fees of $24,250. The total leverage was
$9,100,000 at December 31, 2009. The remaining $900,000 in
approved leverage was drawn down in January 2010.
SBA debentures are issued with
10-year
maturities. Interest only is payable semi-annually until
maturity. Ten-year SBA debentures may be prepaid with a penalty
during the first 5 years, and then are pre-payable without
penalty. SBA debentures originated in 2009 and thereafter may be
prepaid in without penalty. Rand initially capitalized Rand SBIC
with $5 million in Regulatory Capital. The Corporation
expects to use Rand SBIC as its primary investment vehicle.
Employees
As of December 31, 2009, the Corporation had four employees.
| Item 1A. | Risk Factors |
The
Corporation is Subject to Risks Created by the Valuation of its
Portfolio Investments
There is typically no public market for equity securities of the
small privately held companies in which the Corporation invests.
Investments are valued in accordance with the Corporation’s
established valuation policy and are stated at fair value as
determined in good faith by the management of the Corporation
and submitted to the Board of Directors for approval. In the
absence of a readily ascertainable market value, the estimated
value of the Corporation’s portfolio of securities may
differ significantly, favorably or unfavorably, from the values
that would be placed on the portfolio if a ready market for the
equity securities existed. Any changes in estimated value are
recorded in the statement of operations as “Net increase
(decrease) in unrealized appreciation.”
The
Corporation’s Portfolio Investments are
Illiquid
Most of the investments of the Corporation are or will be either
equity securities or subordinated debt securities acquired
directly from small companies. The Corporation’s portfolio
of equity and debt securities is, and will usually be, subject
to restrictions on resale or otherwise has no established
trading market. The illiquidity of most of
4
Table of Contents
the Corporation’s portfolio may adversely affect the
ability of the Corporation to dispose of the securities at times
when it may be advantageous for the Corporation to liquidate
investments.
Investing
in Private Companies involves a High Degree of
Risk
The Corporation typically invests a substantial portion of its
assets in small and medium sized private companies. These
private businesses may be thinly capitalized, unproven companies
with risky technologies, may lack management depth, and may not
have attained profitability. Because of the speculative nature
and the lack of a public market for these investments, there is
significantly greater risk of loss than is the case with
traditional investment securities. The Corporation expects that
some of its venture capital investments will be a complete loss
or will be unprofitable and that some will appear to be likely
to become successful but never realize their potential. The
Corporation has been risk seeking rather than risk averse in its
approach to venture capital and other investments.
Even if the Corporation’s portfolio companies are able to
develop commercially viable products, the market for new
products and services is highly competitive and rapidly
changing. Commercial success is difficult to predict and the
marketing efforts of the portfolio companies may not be
successful.
Investing
in the Corporation’s Shares May be Inappropriate for
the Investor’s Risk Tolerance
The Corporation’s investments, in accordance with its
investment objective and principal strategies, result in a
greater than average amount of risk and volatility and may well
result in loss of principal. Its investments in portfolio
companies are highly speculative and aggressive and, therefore,
an investment in its shares may not be suitable for investors
for whom such risk is inappropriate. Neither the
Corporation’s investments nor an investment in the
Corporation is intended to constitute a balanced investment
program.
The
Corporation is Subject to Risks Created by its Regulated
Environment
The Corporation is regulated by the SBA and the SEC. Changes in
the laws or regulations that govern SBICs and BDCs could
significantly affect the Corporation’s business.
Regulations and laws may be changed periodically, and the
interpretations of the relevant regulations and laws are also
subject to change. Any change in the regulations and laws
governing the Corporation’s business could have a material
impact on its financial condition or its results of operations.
Moreover, the laws and regulations that govern BDCs and SBICs
may place conflicting demands on the manner in which the
Corporation operates, and the resolution of those conflicts may
restrict or otherwise adversely affect the operations of the
Corporation.
The
Corporation is Subject to Risks Created by Borrowing Funds from
the SBA
The Corporation’s Leverageable Capital may include large
amounts of debt securities issued through the SBA, and all of
the debentures will have fixed interest rates. Until and unless
the Corporation is able to invest substantially all of the
proceeds from debentures at annualized interest or other rates
of return that substantially exceed annualized interest rates
that Rand SBIC must pay the SBA, the Corporation’s
operating results may be adversely affected which may, in turn,
depress the market price of the Corporation’s common stock.
The
Corporation is Dependent Upon Key Management Personnel for
Future Success
The Corporation is dependent on the diligence and skill of its
two senior officers, Allen F. Grum and Daniel P. Penberthy, for
the selection, structuring, closing and monitoring and valuation
of its investments. The future success of the Corporation
depends to a significant extent on the continued service and
coordination of its senior management team. The departure of
either of its executive officers could materially adversely
affect its ability to implement its business strategy. The
Corporation does not maintain key man life insurance on any of
its officers or employees.
5
Table of Contents
The
Corporation Operates in a Competitive Market for Investment
Opportunities
The Corporation faces competition in its investing activities
from many entities including other SBICs, private venture
capital funds, investment affiliates of large companies, wealthy
individuals and other domestic or foreign investors. The
competition is not limited to entities that operate in the same
geographical area as the Corporation. As a regulated BDC, the
Corporation is required to disclose quarterly and annually the
name and business description of portfolio companies and the
value of its portfolio securities. Most of its competitors are
not subject to this disclosure requirement. The
Corporation’s obligation to disclose this information could
hinder its ability to invest in certain portfolio companies.
Additionally, other regulations, current and future, may make
the Corporation less attractive as a potential investor to a
given portfolio company than a private venture capital fund.
The
Corporation May be Negatively Affected by Adverse Changes in the
General Economic Conditions of the Domestic and Global
Markets
The continued economic crisis and related turmoil in the global
financial markets has had and may continue to have an impact on
the Corporation’s portfolio companies and the overall
financial condition of the Corporation. If the current market
conditions continue to deteriorate, the Corporation may suffer
further losses on its investment portfolio, which could have a
material adverse effect on Net Asset Value.
Fluctuations
of Quarterly Results
The Corporation’s quarterly operating results could
fluctuate significantly as a result of a number of factors.
These factors include, among others, variations in and the
timing of the recognition of realized and unrealized gains or
losses, the degree to which portfolio companies encounter
competition in their markets, and general economic conditions.
As a result of these factors, results for any quarter should not
be relied upon as being indicative of performance in future
quarters.
| Item 1B. | Unresolved Staff Comments |
Not applicable
| Item 2. | Properties |
The Corporation maintains its offices at 2200 Rand Building,
Buffalo, New York 14203, where it leases approximately
1,300 square feet of office space pursuant to a lease
agreement that expires December 31, 2010. The Corporation
believes that its leased facilities are adequate to support its
current staff and expected future needs.
| Item 3. | Legal Proceedings |
None
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
6
Table of Contents
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Corporation’s common stock, par value $0.10 per share
(“Common Stock”), is traded on the NASDAQ Capital
Market (“NASDAQ”) under the symbol “RAND.”
The following table sets forth, for the periods indicated, the
range of high and low closing sales prices per share as reported
by NASDAQ:
|
2009 Quarter ending:
|
High | Low | ||||||
|
March 31st
|
$ | 4.00 | $ | 3.19 | ||||
|
June 30th
|
$ | 4.15 | $ | 2.97 | ||||
|
September 30th
|
$ | 3.95 | $ | 3.15 | ||||
|
December 31st
|
$ | 4.05 | $ | 3.54 | ||||
|
2008 Quarter ending:
|
High | Low | ||||||
|
March 31st
|
$ | 4.78 | $ | 3.55 | ||||
|
June 30th
|
$ | 4.29 | $ | 3.25 | ||||
|
September 30th
|
$ | 4.00 | $ | 3.25 | ||||
|
December 31st
|
$ | 4.00 | $ | 3.11 | ||||
Except as reported in the Corporation’s
Form 8-K
Report dated September 1, 2009, the Corporation did not
sell any securities during the period covered by this report
that were not registered under the Securities Act. The
Corporation has not paid any cash dividends in its most recent
two fiscal years, and it has no intention of paying cash
dividends in the coming fiscal year.
Profit
Sharing and Stock Option Plans
In July 2001, the stockholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the
“Plan”). The Plan provides for the award of options to
purchase up to 200,000 common shares to eligible employees. In
2002, the Corporation placed the Plan on inactive status as it
developed a new profit sharing plan for the Corporation’s
employees in connection with the establishment of its SBIC
subsidiary. As of December 31, 2009 no stock options had
been awarded under the Plan. Because Section 57(n) of the
1940 Act prohibits maintenance of a profit sharing plan for the
officers and employees of a BDC where any option, warrant or
right is outstanding under an executive compensation plan, no
options will be granted under the Plan while any profit sharing
plan is in effect with respect to the Corporation.
In 2002, the Corporation established a non-equity incentive
Profit Sharing Plan for its executive officers in accordance
with Section 57(n) of the Investment Company Act of 1940
(the “1940 Act”). Under the Profit Sharing Plan, Rand
will pay its executive officers aggregate profit sharing
payments equal to 12% of the net realized capital gains of its
SBIC subsidiary, net of all realized capital losses and
unrealized depreciation of the subsidiary, for the fiscal year,
computed in accordance with the Plan and the Corporation’s
interpretation of such policies. Any profit sharing paid cannot
exceed 20% of the Corporation’s net income, as defined. The
profit sharing payments will be split equally between
Rand’s two executive officers, who are fully vested in the
Plan. The Corporation has accrued $133,013 for estimated
contributions to, or payments made under the Plan, during the
year ended December 31, 2009. There were no contributions
to, or payments made under the Plan, for the year ended
December 31, 2008.
Shareholders
of Record
On March 8, 2010 the Corporation had a total of
824 shareholders, which included 129 record holders of its
common stock, and an estimated 695 shareholders with shares
beneficially owned in nominee name or under clearinghouse
positions of brokerage firms or banks.
Stock
Repurchase Plan
The Board of Directors has authorized the repurchase of up to
340,946 shares of the Corporation’s outstanding Common
Stock on the open market at prices that are no greater than
current net asset value through October 22, 2010. During
2003 and 2002 the Corporation purchased 44,100 shares of
its Common Stock for a total cost of $47,206. No additional
shares have been repurchased since 2003.
7
Table of Contents
Company
Performance Graph
The following graph shows a five-year comparison of cumulative
total shareholder returns for the Company’s Common Stock,
the NASDAQ Market Index, and a New Peer Group and the Old Peer
Group, assuming a base index of $100 at the end of 2003. The
cumulative total return for each annual period within the five
years presented is measured by dividing (1) the sum of
(A) the cumulative amount of dividends for the measurement
period, assuming dividend investment, and (B) the
difference between share prices at the end and at the beginning
of the measurement period by (2) the share price at the
beginning of the measurement period.
COMPARISON
OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG RAND CAPITAL CORP.,
NASDAQ MARKET INDEX AND PEER GROUP INDEXES
AMONG RAND CAPITAL CORP.,
NASDAQ MARKET INDEX AND PEER GROUP INDEXES
ASSUMES $100
INVESTED ON DECEMBER 31, 2004
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2009
COMPARISON
OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
FISCAL
YEAR ENDING
| COMPANY/INDEX/MARKET | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||||||||||
|
Rand Capital Corporation
|
$ | 100.00 | $ | 85.90 | $ | 224.36 | $ | 230.64 | $ | 224.36 | $ | 255.13 | ||||||||||||||||||
|
NASDAQ Market Index
|
$ | 100.00 | $ | 102.20 | $ | 112.68 | $ | 124.57 | $ | 74.71 | $ | 108.56 | ||||||||||||||||||
|
Old Peer Group Index
|
$ | 100.00 | $ | 93.84 | $ | 128.44 | $ | 90.43 | $ | 33.49 | $ | 54.17 | ||||||||||||||||||
|
New Peer Group Index
|
$ | 100.00 | $ | 90.92 | $ | 120.24 | $ | 86.33 | $ | 34.72 | $ | 61.71 | ||||||||||||||||||
The Old Peer Group was made up of the following securities:
Ameritrans Capital Corp (NasdaqCM:AMTC)
Equus Total Return Inc (NYSE:EQS)
Gladstone Investment CP (NasdaqGS:GAIN)
8
Table of Contents
Harris & Harris Group (NasdaqGM:TINY)
Hercules Tech Growth Cap (NasdaqGS: HTGC)
Main Street Capital Corp (NasdaqGS: MAIN)
MCG Capital Corporation (NasdaqGS:MCGC)
Patriot Capital Funding (NasdaqGS: PCAP)
Triangle Capital Corp (NasdaqGM: TCAP)
The New Peer Group is made up of the following securities:
Ameritrans Capital Corp (NasdaqCM:AMTC)
Gladstone Investment CP (NasdaqGS:GAIN)
Harris & Harris Group (NasdaqGM:TINY)
Hercules Tech Growth Cap (NasdaqGS: HTGC)
Main Street Capital Corp (NasdaqGS: MAIN)
MCG Capital Corporation (NasdaqGS:MCGC)
Triangle Capital Corp (NasdaqGM: TCAP)
The New Peer Group was selected in good faith by the Corporation
and contains seven business development companies or other funds
believed by the Corporation to be of similar size and have
similar investment objectives to those of the Corporation.
The performance graph information provided above will not be
deemed to be “soliciting material” or
“filed” with the SEC or subject to Regulations 14A or
14C, or to the liabilities of section 18 of the Securities
Exchange Act, unless in the future the Corporation specifically
requests that the information be treated as soliciting material
or specifically incorporates it by reference into any filing
under the Securities Act or the Securities Exchange Act.
| Item 6. | Selected Financial Data |
The following table provides selected consolidated financial
data of the Corporation for the periods indicated. You should
read the selected financial data set forth below in conjunction
with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
and with our consolidated financial statements and related notes
appearing elsewhere in this report.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Total assets
|
$ | 35,631,371 | $ | 32,228,797 | $ | 32,722,151 | $ | 29,463,944 | $ | 16,063,605 | ||||||||||
|
Total liabilities
|
$ | 12,425,490 | $ | 12,001,831 | $ | 12,904,328 | $ | 12,681,539 | $ | 7,447,671 | ||||||||||
|
Net assets
|
$ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | $ | 16,782,405 | $ | 8,615,934 | ||||||||||
|
Net asset value per outstanding share
|
$ | 3.40 | $ | 3.54 | $ | 3.47 | $ | 2.93 | $ | 1.51 | ||||||||||
|
Common stock shares outstanding
|
6,818,934 | 5,718,934 | 5,718,934 | 5,718,934 | 5,718,934 | |||||||||||||||
Operating
Data for the year ended December 31:
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Investment income
|
$ | 1,749,525 | $ | 1,757,003 | $ | 2,302,870 | $ | 1,326,962 | $ | 736,573 | ||||||||||
|
Total expenses
|
$ | 1,850,113 | $ | 1,721,555 | $ | 1,650,947 | $ | 1,519,184 | $ | 1,265,846 | ||||||||||
|
Net investment (loss) gain
|
$ | (63,878 | ) | $ | 135,689 | $ | 398,703 | $ | (1,264,802 | ) | $ | (175,179 | ) | |||||||
|
Net realized gain (loss) on sales and dispositions of investments
|
$ | 2,007,974 | — | $ | (42,045 | ) | $ | 3,456,441 | $ | (382,353 | ) | |||||||||
|
Net (decrease) increase in unrealized appreciation
|
$ | (2,683,516 | ) | $ | 273,454 | $ | 2,362,507 | $ | 5,974,832 | $ | 146,412 | |||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (739,420 | ) | $ | 409,143 | $ | 2,719,165 | $ | 8,166,471 | $ | (411,120 | ) | ||||||||
9
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with our financial statements and related notes included
elsewhere in this report.
Forward
Looking Statements
Statements included in this Management’s Discussion
and Analysis of Financial Condition and Results of Operations
and elsewhere in this document that do not relate to present or
historical conditions are “forward-looking statements”
within the meaning of that term in Section 27A of the
Securities Act of 1933, and in Section 21F of the
Securities Exchange Act of 1934. Additional oral or written
forward-looking statements may be made by the Corporation from
time to time, and those statements may be included in documents
that are filed with the Securities and Exchange Commission. Such
forward-looking statements involve risks and uncertainties that
could cause results or outcomes to differ materially from those
expressed in the forward-looking statements. Forward-looking
statements may include, without limitation, statements relating
to the Corporation’s plans, strategies, objectives,
expectations and intentions and are intended to be made pursuant
to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Words such as
“believes,” “forecasts,”
“intends,” “possible,” “expects,”
“estimates,” “anticipates,” or
“plans” and similar expressions are intended to
identify forward-looking statements. Among the important factors
on which such statements are based are assumptions concerning
the state of the national economy and the local markets in which
the Corporation’s portfolio companies operate, the state of
the securities markets in which the securities of the
Corporation’s portfolio company trade or could be traded,
liquidity within the national financial markets, and inflation.
Forward-looking statements are also subject to the risks and
uncertainties described under the caption “Risk
Factors” contained in Part I, Item 1A, which is
incorporated herein by reference.
There may be other factors that we have not identified
that affect the likelihood that the forward-looking statements
may prove to be accurate. Further, any forward-looking statement
speaks only as of the date it is made and, except as required by
law, we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on
which it is made or to reflect the occurrence of anticipated or
unanticipated events or circumstances. New factors emerge from
time to time that may cause our business not to develop as we
expect, and we cannot predict all of them.
Business
Overview
Rand Capital Corporation (“Rand”) was incorporated
under the law of New York on February 24, 1969. Beginning
in 1971, Rand operated as a publicly traded, closed-end,
diversified management company that was registered under
Section 8 of the Investment Company Act of 1940 (the
“1940 Act”). On August 16, 2001, Rand elected to
be treated as a business development company (“BDC”)
under the 1940 Act. In 2002, Rand formed a wholly-owned
subsidiary for the purpose of operating it as a small business
investment company (“SBIC”) licensed by the
U.S. Small Business Administration (“SBA”). The
subsidiary received an SBA license to operate as an SBIC in
August 2002. The subsidiary, which had been organized as a
Delaware limited partnership, was converted into a New York
corporation on December 31, 2008, at which time its
operations as a licensed small business investment company were
continued by a newly formed corporation under the name of Rand
Capital SBIC, Inc. (“Rand SBIC”). The following
discussion will describe the operations of Rand, its
wholly-owned subsidiary Rand SBIC, and the predecessor
wholly-owned limited partnership (collectively, the
“Corporation”).
The Corporation anticipates that most, if not all, of its
investments in the next year will be originated through the SBIC
subsidiary.
The Corporation’s primary business is making investments in
companies, usually in the form of subordinated debt, membership
interests, or preferred and common stock. The investment focus
is usually on small and medium-sized companies that meet certain
criteria, including:
1) a qualified and experienced management team
2) a new or unique product or service with a sustainable
competitive advantage
10
Table of Contents
3) high potential for growth in revenue and cash flow
4) potential to realize appreciation in an equity position,
if any.
The Corporation typically makes investments that range from
$500,000 to $1,000,000 directly in the equity of a company
through equity shares or in a debt instrument. The debt
instruments generally have a maturity of not more than five
years and usually have detachable equity warrants. Interest
revenue is either paid currently or deferred.
The Corporation’s management team identifies investment
opportunities through a network of investment referral
relationships. Investment proposals may, however, come to the
Corporation from many other sources, and may include unsolicited
proposals from the public and referrals from banks, lawyers,
financial accountants and other members of the financial
community. The Corporation believes that its reputation in the
investment community and experience provide a competitive
advantage in originating qualified new investments.
In a typical private financing, the management team of the
Corporation will review, analyze, and confirm, through due
diligence, the business plan and operations of the potential
portfolio company. Additionally, the Corporation will become
familiar with the portfolio company’s industry and
competitive landscape and may conduct additional reference
checks with customers and suppliers of the portfolio company.
Following an initial investment in a portfolio company, the
Corporation may be requested to make follow-on investments in
the portfolio company. Follow-on investments may be made to take
advantage of warrants or other preferential rights granted to
the Corporation or to increase or maintain the
Corporation’s position in a promising portfolio company.
The Corporation may also be called upon to provide an additional
investment to a portfolio company in order for that company to
fully implement its business plans, to develop a new line of
business or to recover from unexpected business problems.
Follow-on investments in a portfolio company are evaluated
individually and may be subject to regulatory restrictions.
The Corporation will exit its investments generally through the
maturation of the debt security or when a liquidity event takes
place, such as the sale, recapitalization, or initial public
offering of a portfolio company. The method and timing of the
disposition of the Corporation’s portfolio investments can
be critical to the realization of maximum total return. The
Corporation generally expects to dispose of its equity
securities through private sales of securities to other
investors or through an outright sale of the company or a
merger. The Corporation anticipates its debentures will be
repaid with interest and hopes to realize further appreciation
from the warrants or other equity type instruments it receives
in connection with the origination of the debenture. The
Corporation anticipates generating cash for new investments and
operating expenses through existing cash balances, investment
returns and interest and principal payments from its portfolio
concerns.
2009
Highlights and Outlook
The Corporation’s net asset value decreased $(0.14), or
(4%) during 2009, closing the year at $3.40 per share down from
$3.54 at December 31, 2008. At December 31, 2009, the
Corporation’s total investment portfolio was valued at
$24.3 million, which exceeds its cost basis of
$14.8 million, reflecting $9.5 million in net
unrealized appreciation.
Although the Corporation’s common stock traded in a range
that was above and below its net asset value per share during
2008, it traded at a premium to its net asset value during a
majority of 2009. The year closed with the stock trading at
$3.98 which represented a premium to the net asset value of
$3.40.
During 2009 the Corporation recognized $1,749,525 in total
investment income, a slight decrease of ($7,478) from $1,757,003
of investment income in 2008. The small (0.4%) decrease is
attributable to the decrease in interest from idle funds.
Interest from idle funds recognized during 2009 was $17,129, a
decrease of (81.1%), or ($73,531) from $90,660 of other
investment income in 2008. Although the ending cash balance at
December 31, 2009 was $9,417,236 or $6,659,583 higher than
the December 31, 2008 cash balance of $2,757,653, the cash
balance was lower for most of 2009 and only increased during the
fourth quarter of 2009 due to a $3,718,000 stock sale, a
$1,000,000 SBA leverage draw down and several portfolio exits.
Dividend income increased 10.3% or $105,725
11
Table of Contents
during 2009. Dividends from portfolio companies that are limited
liability companies can fluctuate based on the portfolio
companies’ profitability and the timing of distributions.
Critical
Accounting Policies
The Corporation prepares its financial statements in accordance
with United States generally accepted accounting principles
(GAAP), which requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities. For a
summary of all significant accounting policies, including
critical accounting policies, see Note 1 to the
consolidated financial statements in Item 8.
The increasing complexity of the business environment and
applicable authoritative accounting guidance require the
Corporation to closely monitor its accounting policies and
procedures. The Corporation has identified two critical
accounting policies that require significant judgment. The
following summary of critical accounting policies is intended to
enhance your ability to assess the Corporation’s financial
condition and results of operations and the potential volatility
due to changes in estimates.
Valuation
of Investments
The most important estimate inherent in the preparation of the
Corporation’s consolidated financial statements is the
valuation of its investments and the resulting unrealized
appreciation or depreciation.
Investments are valued at fair value as determined in good faith
by the management of the Corporation and submitted to the Board
of Directors for approval. There is no single standard for
determining fair value in good faith. As a result, determining
fair value requires that judgment be applied to the specific
facts and circumstances of each portfolio investment while
employing a consistent valuation process for each investment.
The Corporation analyzes and values each investment on a
quarterly basis, and records unrealized depreciation for an
investment that it believes has become impaired, including where
collection of a loan or realization of the recorded value of an
equity security is doubtful. Conversely, the Corporation will
record unrealized appreciation if it believes that the
underlying portfolio company has appreciated in value and,
therefore, its equity security has also appreciated in value.
These estimated fair values may differ from the values that
would have been used had a ready market for the investments
existed and these differences could be material if our
assumptions and judgments differ from results of actual
liquidation events.
In September 2006, the Financial Accounting Standards Board
(FASB) issued guidance on Fair Value Measurements. This
statement defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement was effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years.
On January 1, 2008, the Corporation adopted ASC 820
(formerly SFAS 157).
ASC 820 classifies the inputs used to measure fair value into
the following hierarchy:
Level 1:
Quoted prices in active markets
for identical assets or liabilities, used in the
Corporation’s valuation at the measurement date.
Level 2:
Quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active,
or other observable inputs other than quoted prices.
Level 3:
Unobservable and significant
inputs to determining the fair value.
Most of the Corporation’s investments are classified in
Level 3 due to their privately held restricted nature.
In the valuation process, the Corporation uses financial
information received monthly, quarterly, and annually from its
portfolio companies, which includes both audited and unaudited
financial statements, annual projections and budgets prepared by
the portfolio company and other financial and non-financial
business information supplied by the portfolio companies’
management. This information is used to determine financial
condition, performance, and valuation of the portfolio
investments. The valuation may be reduced if a company’s
performance and potential
12
Table of Contents
have significantly deteriorated. If the factors which led to the
reduction in valuation are overcome, the valuation may be
restored.
Another key factor used in valuing equity investments is recent
arms-length equity transactions with unrelated new investors
entered into by the portfolio company. Many times the terms of
these equity transactions may not be identical to the equity
transactions between the portfolio company and the Corporation,
and the impact of the discrepancy in transaction terms on the
market value of the portfolio company may be difficult or
impossible to quantify.
Any changes in estimated fair value are recorded in our
statement of operations as “Net increase (decrease) in
unrealized appreciation.”
Revenue
Recognition (Interest Income)
Interest income generally is recognized on the accrual basis
except where the investment is in default or otherwise presumed
to be in doubt. In such cases, interest is recognized at the
time of receipt. A reserve for possible losses on interest
receivable is maintained when appropriate. Certain investments
of the Corporation are structured to provide a deferred interest
period where interest is not currently due.
Rand SBIC’s interest accrual is also regulated by the
SBA’s “Accounting Standards and Financial Reporting
Requirements for Small Business Investment Companies”.
Under these rules interest income cannot be recognized if
collection is doubtful, and a 100% reserve must be established.
The collection of interest is presumed to be in doubt when there
is substantial doubt about a portfolio company’s ability to
continue as a going concern or the loan is in default more than
120 days. Management also utilizes other qualitative and
quantitative measures to determine the value of a portfolio
investment and the collectability of any accrued interest.
Recent
Accounting Pronouncements
Management does not believe that any other recently issued, but
not yet effective, accounting standards, if currently adopted,
would have a material effect on the accompanying consolidated
financial statements.
Financial
Condition
Overview:
| 12/31/09 | 12/31/08 | Increase | % Increase | |||||||||||||
|
Total assets
|
$ | 35,631,371 | $ | 32,228,797 | $ | 3,402,574 | 10.6 | % | ||||||||
|
Total liabilities
|
12,425,490 | 12,001,831 | 423,659 | 3.5 | % | |||||||||||
|
Net assets
|
$ | 23,205,881 | $ | 20,226,966 | $ | 2,978,915 | 14.7 | % | ||||||||
Net asset value per share (NAV) was $3.40 per share at
December 31, 2009 versus $3.54 per share at
December 31, 2008.
The Corporation drew down $1,000,000 in SBA leverage during the
year ended December 31, 2009 and the total owed to the SBA
at December 31, 2009 was $9,100,000. These debentures bear
a fixed interest rate and an annual fee, averaging 4.9%, payable
semi-annually. The debenture principal is repayable in full
10 years from issuance beginning in 2014.
On September 4, 2009, the Corporation completed a private
offering of an aggregate of 1,100,000 shares of its Common
Stock at $3.42 per share, which provided net cash proceeds of
approximately $3,718,000.
Cash and cash equivalents approximated 41% of net assets at
December 31, 2009 compared to 14% at December 31, 2008.
The effect of investment income, realized gains and the change
in unrealized appreciation on investments resulted in a net
decrease of ($1,681,000) in the net deferred tax liability from
$3,490,000 at December 31, 2008 to $1,809,000 at
December 31, 2009.
13
Table of Contents
Composition
of the Corporation’s Investment Portfolio
The Corporation’s financial condition is dependent on the
success of its portfolio holdings. It has invested a substantial
portion of its assets in small to medium-sized companies. The
following summarizes the Corporation’s investment portfolio
at the year-ends indicated.
|
Increase
|
% Increase
|
|||||||||||||||
| 12/31/09 | 12/31/08 | (Decrease) | (Decrease) | |||||||||||||
|
Investments, at cost
|
$ | 14,767,920 | $ | 14,386,451 | $ | 381,469 | 2.7 | % | ||||||||
|
Unrealized appreciation, net
|
9,528,225 | 13,739,831 | (4,211,606 | ) | (30.7 | )% | ||||||||||
|
Investments, at fair value
|
$ | 24,296,145 | $ | 28,126,282 | $ | (3,830,137 | ) | (13.6 | )% | |||||||
The Corporation’s total investments at fair value, as
estimated by management and approved by the Board of Directors,
approximated 105% of net assets at December 31, 2009 and
139% of net assets at December 31, 2008.
The change in investments, at cost, is comprised of the
following:
|
New Investments:
|
Amount | |||
|
Microcision LLC (Microcision)
|
$ | 650,000 | ||
|
Carolina Skiff LLC (Carolina Skiff)
|
500,000 | |||
|
Gemcor II, LLC (Gemcor)
|
500,000 | |||
|
GridApp Systems, Inc. (GridApp)
|
350,000 | |||
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
|
298,554 | |||
|
Rheonix, Inc. (Rheonix)
|
250,000 | |||
|
Innov-X Systems, Inc. (Innovex)
|
250,000 | |||
|
SOMS Technologies, LLC (SOMS)
|
75,000 | |||
|
Associates Interactive, LLC (Associates Interactive)
|
43,518 | |||
|
Golden Goal, LLC (Golden Goal)
|
38,238 | |||
|
Total of new investments made during the year ended
December 31, 2009
|
$ | 2,955,310 | ||
|
Changes to Investments:
|
||||
|
GridApp capitalized interest
|
$ | 79,267 | ||
|
SOMS capitalized interest
|
29,791 | |||
|
APF Group, Inc (APF) capitalized interest
|
24,212 | |||
|
Niagara Dispensing capitalized interest
|
11,855 | |||
|
Microcision capitalized payment in kind (PIK)
|
8,808 | |||
|
Rheonix capitalized interest
|
3,000 | |||
|
Total of changes to investments made during the year ended
December 31, 2009
|
$ | 156,933 | ||
|
Investments Repaid, Sold or Liquidated:
|
||||
|
Kionix, Inc. (Kionix)
|
$ | (1,506,043 | ) | |
|
Rocket Broadband
|
(715,000 | ) | ||
|
RAMSCO
|
(300,000 | ) | ||
|
Photonic Products Group, Inc. (Photonics)
|
(88,750 | ) | ||
|
Gemcor
|
(79,314 | ) | ||
|
EmergingMed.com, Inc. (Emerging Med)
|
(41,667 | ) | ||
|
Total of sales and investment repayments during the year
ended December 31, 2009
|
$ | (2,730,774 | ) | |
|
Total change in investment balance, at cost, during the year
ended December 31, 2009
|
$ | 381,469 | ||
14
Table of Contents
The Corporation’s top five portfolio companies represented
54% of total assets at December 31, 2009:
|
Fair Value at
|
% of Total Assets
|
|||||||||
|
December 31,
|
at December 31,
|
|||||||||
|
Company
|
Industry
|
2009 | 2009 | |||||||
|
Innov-X Systems, Inc.
|
||||||||||
|
(Innov-X)
|
Manufacturing — Metals Testing Equipment | $ | 6,300,000 | 18 | % | |||||
|
Gemcor
|
Manufacturing — Aerospace Machinery | $ | 6,223,883 | 17 | % | |||||
|
Synacor Inc. (Synacor)
|
Software | $ | 4,168,001 | 12 | % | |||||
|
Carolina Skiff LLC (Carolina Skiff)
|
Manufacturing — Boats | $ | 1,500,000 | 4 | % | |||||
|
Ultra-Scan Corporation (Ultra-Scan)
|
Electronics — Hardware/Software | $ | 1,203,000 | 3 | % | |||||
The Corporation’s top five portfolio companies represented
68% of total assets at December 31, 2008:
|
Fair Value at
|
% of Total Assets
|
|||||||||
|
December 31,
|
at December 31,
|
|||||||||
|
Company
|
Industry | 2008 | 2008 | |||||||
|
Innov-X Systems, Inc.
|
||||||||||
|
(Innov-X)
|
Manufacturing — Metals Testing Equipment | $ | 8,761,700 | 27 | % | |||||
|
Gemcor
|
Manufacturing — Aerospace Machinery | $ | 5,803,201 | 18 | % | |||||
|
Synacor Inc. (Synacor)
|
Software | $ | 4,168,001 | 13 | % | |||||
|
Kionix, Inc . (Kionix)
|
Manufacturing — Silicon Chips | $ | 2,000,000 | 6 | % | |||||
|
Ultra-Scan Corporation (Ultra-Scan)
|
Electronics — Hardware/Software | $ | 1,203,000 | 4 | % | |||||
Below is the geographic breakdown of the Corporation’s
investments, at fair value, to the net asset value as of
December 31, 2009 and 2008:
|
% of Net Asset Value at
|
% of Net Asset Value at
|
|||||||
|
Geographic Region
|
December 31, 2009 | December 31, 2008 | ||||||
|
USA – East
|
94 | % | 95 | % | ||||
|
USA – South
|
6 | % | 5 | % | ||||
| 100 | % | 100 | % | |||||
15
Table of Contents
As of December 31, 2009 and 2008, the Corporation’s
investment portfolio consisted of the following investments:
|
Percentage of
|
Percentage of
|
|||||||||||||||
| Cost | Total Portfolio | Fair Value | Total Portfolio | |||||||||||||
|
December 31, 2009
:
|
||||||||||||||||
|
Subordinated Debt and Promissory Notes
|
$ | 3,320,606 | 23 | % | $ | 1,617,141 | 7 | % | ||||||||
|
Convertible Debt
|
2,661,847 | 18 | % | 2,347,674 | 10 | % | ||||||||||
|
Equity and Partnership Interests
|
8,717,467 | 59 | % | 15,213,330 | 62 | % | ||||||||||
|
Equity Warrants
|
68,000 | — | 5,118,000 | 21 | % | |||||||||||
|
Total
|
$ | 14,767,920 | 100 | % | $ | 24,296,145 | 100 | % | ||||||||
|
December 31, 2008
:
|
||||||||||||||||
|
Subordinated Debt and Promissory Notes
|
$ | 3,240,266 | 23 | % | $ | 2,111,013 | 8 | % | ||||||||
|
Convertible Debt
|
356,667 | 2 | % | 356,667 | 1 | % | ||||||||||
|
Equity and Partnership Interests
|
10,721,519 | 75 | % | 17,763,561 | 91 | % | ||||||||||
|
Equity Warrants
|
68,000 | — | 7,895,041 | — | ||||||||||||
|
Total
|
$ | 14,386,452 | 100 | % | $ | 28,126,282 | 100 | % | ||||||||
Results
of Operations
Investment
Income
The Corporation’s investment objective is to achieve
long-term capital appreciation on its equity investments while
maintaining a current cash flow from its debenture and pass
through equity instruments. Therefore, the Corporation invests
in a mixture of debenture and equity instruments, which will
provide a current return on a portion of the investment
portfolio. The equity features contained in our investment
portfolio are structured to realize capital appreciation over
the long-term and may not generate current income in the form of
dividends or interest. In addition, the Corporation earns
interest income from investing its idle funds in money market
instruments held at high grade financial institutions.
Comparison
of the years ended December 31, 2009 and 2008
|
December 31,
|
December 31,
|
(Decrease)
|
% (Decrease)
|
|||||||||||||
| 2009 | 2008 | Increase | Increase | |||||||||||||
|
Interest from portfolio companies
|
$ | 568,524 | $ | 608,180 | $ | (39,656 | ) | (6.5 | )% | |||||||
|
Interest from other investments
|
17,129 | 90,660 | (73,531 | ) | (81.1 | )% | ||||||||||
|
Dividend and other investment income
|
1,133,102 | 1,027,377 | 105,725 | 10.3 | % | |||||||||||
|
Other income
|
30,770 | 30,786 | (16 | ) | (0.1 | )% | ||||||||||
|
Total investment income
|
$ | 1,749,525 | $ | 1,757,003 | $ | (7,478 | ) | (0.4 | )% | |||||||
Interest from portfolio companies
— The
portfolio interest income is primarily due to changes in the
composition of the portfolio. Three portfolio companies (Ramsco,
Contract Staffing, Inc. and New Monarch Machine Tool, Inc.)
repaid their debenture instruments during 2008 and 2009; two
portfolio companies (GridApp and Niagara Dispensing) converted
their debenture instrument’s into equity during 2008 and
2009, and several companies went on non-accrual status as
detailed out in the chart below. In addition, non- recurring
interest of $43,067 was recognized on the outstanding Innovex
escrow balance during the year ended December 31, 2008. The
Innovex escrow balance of $711,249 and the earned interest of
$43,067 were received in the second quarter of 2008.
16
Table of Contents
After reviewing the portfolio companies’ performance and
the circumstances surrounding the investments, the Corporation
has ceased accruing interest income on the following investment
instruments:
|
Interest
|
Investment
|
Year that Interest
|
||||||||||
|
Company
|
Rate | Cost | Accrual Ceased | |||||||||
|
APF
|
8 | % | $ | 631,547 | 2009 | |||||||
|
Associates Interactive LLC (Associates)
|
8 | % | $ | 293,518 | 2009 | |||||||
|
Golden Goal LLC
|
13 | % | $ | 675,652 | 2009 | |||||||
|
G-Tec Natural Gas Systems (G-Tec)
|
8 | % | $ | 400,000 | 2004 | |||||||
|
UStec, Inc. (Ustec)
|
5 | % | 100,000 | 2006 | ||||||||
|
WineIsIt.com (Wineisit)
|
10 | % | 801,918 | 2005 | ||||||||
Interest from other investments
— The
decrease in interest from other investments is primarily due to
lower cash balances throughout the majority of 2009 and a
decrease in interest rates earned on idle funds. The cash
balance at December 31, 2009 and 2008 was $9,417,326 and
$2,757,653, respectively. The higher cash balance at
December 31, 2009 is due to the sale of the
Corporation’s common shares during August and September of
2009, the drawdown of SBA leverage in the fourth quarter of 2009
and the cash proceeds received from the exit of Kionix, Inc. and
Ramsco, also during the fourth quarter of 2009.
Dividend and other investment income
—
Dividend income is comprised of distributions from Limited
Liability Companies (LLC’s) in which the Corporation has
invested. The Corporation’s investment agreements with
certain LLC companies require the entities to distribute funds
to the Corporation for payment of income taxes on its allocable
share of the entities’ profits. These dividends will
fluctuate based upon the profitability of the entities and the
timing of the distributions.
Dividend income for the year ended December 31, 2009
consisted of distributions from Gemcor II, LLC (Gemcor) for
$1,101,526 and Somerset Gas Transmission Company (Somerset) for
$31,576. Dividend income for the year ended December 31,
2008 consisted of distributions from Gemcor for $974,287,
Carolina Skiff for $19,838 and Somerset for $33,252.
Other income
— Other income consists of
the revenue associated with the amortization of financing fees
charged to the portfolio companies upon successful closing of
Rand SBIC financings. The SBA regulations limit the amount of
fees that can be charged to a portfolio company, and the
Corporation typically charges 1% to 3% to the portfolio
concerns. These fees are amortized ratably over the life of the
instrument associated with the fees. The unamortized fees are
carried on the balance sheet under “Deferred revenue”.
In addition, other income includes fees charged by the
Corporation to its portfolio companies for attendance at the
portfolio companies’ board meetings.
The amortization of financing fee income decreased in the
current year due to the fact that the Corporation only charged
one of its new portfolio companies financing fees in the last
three years. The annualized financing fee income based on the
existing portfolio will be approximately $2,400 in 2010 and $733
in 2011. In addition board attendance income amounted to $19,000
for the year ended December 31, 2009 and $14,000 for year
ended December 31, 2008.
Comparison
of the years ended December 31, 2008 and 2007
|
December 31,
|
December 31,
|
|||||||||||||||
| 2008 | 2007 | (Decrease) | % (Decrease) | |||||||||||||
|
Interest from portfolio companies
|
$ | 608,180 | $ | 618,430 | $ | (10,250 | ) | (1.7 | )% | |||||||
|
Interest from other investments
|
90,660 | 173,664 | (83,004 | ) | (47.8 | )% | ||||||||||
|
Dividend and other investment income
|
1,027,377 | 1,469,864 | (442,487 | ) | (30.1 | )% | ||||||||||
|
Other income
|
30,786 | 40,912 | (10,126 | ) | (24.8 | )% | ||||||||||
|
Total investment income
|
$ | 1,757,003 | $ | 2,302,870 | $ | (545,867 | ) | (23.7 | )% | |||||||
Interest from portfolio companies
— The
portfolio interest income decrease is a result of several
factors. Two portfolio companies (Contract Staffing and Monarch)
repaid their debt instruments during the last twelve months of
17
Table of Contents
2008 and one portfolio company (Niagara Dispensing) converted
its debenture instrument into equity during 2008. During the
year ended December 31, 2007 the Corporation recognized
Original Issue Discount (OID) income on its Adampluseve, Inc
(Adampluseve) investment in the amount of $62,333. Adampluseve
paid off its debenture instrument early and therefore the
remaining unamortized OID was accreted into income during 2007.
OID is created when the Corporation invests in a debenture
instrument that has a warrant attached to the instrument. This
requires an allocation of a portion of the investment cost to
the warrant and reduces the debt instrument by an equal amount
in the form of a note discount or OID. The note is then reported
net of the discount and the discount is accreted into income
over the life of the debenture instrument.
These aforementioned decreases in the current year portfolio
interest income are offset by several revenue items that
increased portfolio income. The Corporation began to recognize
dividends on the Series A Convertible Preferred Stock of
Innov-X during the year ended December 31, 2008. These
dividends resulted from the re-negotiation of the preferred
stock terms and provided for an 8% cumulative deferred return
while the investment is outstanding. The amount recognized
during the year ended December 31, 2008 was $162,413. This
dividend is classified as portfolio interest income and this
revenue classification is consistent with other interest bearing
instruments in the portfolio. Interest of $43,067 was recognized
on the escrow from Innov-X during 2008. The Innov-X escrow of
$711,249 and the earned interest of $43,067 were received in the
second quarter of 2008.
After reviewing the portfolio companies’ performance and
the circumstances surrounding the investments, the Corporation
ceased accruing interest income on the following investment
instruments:
|
Interest
|
Investment
|
Year that Interest
|
||||||||||
|
Company
|
Rate | Cost | Accrual Ceased | |||||||||
|
G-Tec
|
8 | % | $ | 400,000 | 2004 | |||||||
|
Rocket Broadband
|
11.25 | % | 35,000 | 2008 | ||||||||
|
UStec
|
5 | % | 100,000 | 2006 | ||||||||
|
WineIsIt.com (Wineisit)
|
10 | % | 801,918 | 2005 | ||||||||
Interest from other investments
— The
decrease in interest income is due to lower cash balances
coupled with lower yields on these cash balances.
Dividend and other investment income
—
Dividend income for the year ended December 31, 2008
consisted of distributions from Gemcor for $974,287, Carolina
Skiff for $19,838 and Somerset for $33,252. Dividend income for
the year ended December 31, 2007 consisted of distributions
from Gemcor for $1,372,407, Carolina Skiff for $40,464, Somerset
for $36,788, Topps Meat Company LLC (Topps) for $19,524, and
Vanguard Modular Building Systems (Vanguard) for $681.
Other income
— Other income decreased
due to the fact that the Corporation had not charged the new
portfolio companies financing fees during the previous two
years. The board attendance fee income was $14,000 for the year
ended December 31, 2008 and $13,000 for year ended
December 31, 2007.
Operating
Expenses
Comparison
of the years ended December 31, 2009 and 2008
|
December 31,
|
December 31,
|
|||||||||||||||
| 2009 | 2008 | Increase | % Increase | |||||||||||||
|
Total expenses
|
$ | 1,850,113 | $ | 1,721,555 | $ | 128,558 | 7.5 | % | ||||||||
Operating expenses predominately consist of interest expense on
SBA obligations, employee compensation and benefits,
directors’ fees, shareholder related costs, office
expenses, professional fees, and expenses related to identifying
and reviewing investment opportunities.
The increase in operating expenses during the year ended
December 31, 2009 can be attributed to a 42%, or $183,428
increase in salary expense due to the accrual of $177,000 in
profit sharing and bonus obligations. In addition, the increase
in expense in 2009 can be attributed to an $86,272 increase in
bad debt expense. These expense increases are offset by an
(141%), or ($118,690) decrease in other expenses.
18
Table of Contents
The Corporation established an allowance for uncollectible
interest during the year ended December 31, 2009 of
$87,089. It consisted of: APF Group, Inc expense for $48,276,
Associates Interactive expense for $36,245 and Golden Goal LLC
expense for $2,568. The bad debt expense for the year ended
December 31, 2008 was $817 for an allowance for
uncollectible Rocket Broadband interest.
The decrease in other operating expenses is due to the fact that
for the year ended December 31, 2008, other expenses
included a write off of an escrow receivable in the amount of
$69,421 for UStec and a one-time $5,000 reorganization fee
charged by the SBA to review the corporate reorganization of
Rand SBIC from a limited partnership to a corporation. During
2009, the Corporation was able to recover $47,222 of the UStec
escrow receivable. The remaining $22,199 in escrow receivable is
reserved for at December 31, 2009.
The SBA interest expense decreased during the current year
because during 2008 the remaining SBA leverage commitment and
$1,900,000 expired when the commitment was not utilized, and the
remaining unamortized prepaid leverage fee of $19,000 was
expensed. The Corporation did re-apply to the SBA and receive
approval for the remaining $1,900,000 in leverage during 2009
and paid the commitment fee of $19,000 to the SBA to reserve the
$1,900,000 in debenture leverage. This fee was classified as a
deferred financing cost and will be amortized over the life of
the SBA debentures. It is recorded on the other assets line of
the balance sheet.
Comparison
of the years ended December 31, 2008 and 2007
|
December 31,
|
December 31,
|
|||||||||||||||
| 2008 | 2007 | Increase | % Increase | |||||||||||||
|
Total expenses
|
$ | 1,721,555 | $ | 1,650,947 | $ | 70,608 | 4.3 | % | ||||||||
The increase in operating expenses during the year ended
December 31, 2008 was attributed to an increase of 17%, or
$35,845, in professional fees. A portion of the increase in this
expense can was attributed to the escalating legal, audit and
tax costs due to the increasingly more complex regulatory
environment in which the Corporation operates. In addition, in
order to comply with the SEC rules regarding the
Corporation’s operating structure the Corporation incurred
additional legal fees associated with the corporate
reorganization of the SBIC subsidiary.
The increase was also due to the 63%, or $32,583, increase in
other operating expenses. Other operating expenses during the
year included a write off of an escrow receivable in the amount
of $69,421 for UStec. Management had deemed the collection of
this escrow receivable doubtful based on the ongoing
negotiations with UStec. Other operating expenses also included
a one-time $5,000 reorganization fee charged by the SBA to
review the corporate reorganization of Rand SBIC.
The SBA interest expense increased 4%, or $19,000, during the
year ended December 31, 2008. Total SBA interest expense
was $522,062 and $503,062 for the years ended December 31,
2008 and 2007, respectively. The Corporation had borrowed
$8,100,000 from the SBA as of December 31, 2008 at an
average borrowing rate, including surcharges, of approximately
5.9%. The interest on this debt is paid on a semi-annual basis.
Realized
Gains and Losses on Investments
Comparison
of the years ended December 31, 2009 and 2008
|
December 31,
|
December 31,
|
|||||||||||
| 2009 | 2008 | Change | ||||||||||
|
Realized Gain
|
$ | 3,161,913 | — | $ | 3,161,913 | |||||||
During the year ended December 31, 2009, the Corporation
recognized a realized gain of $3,743,214 from the sale of its
share of Kionix to Japanese chipmaker Rohm Co Ltd and a realized
gain of $155,000 from the sale of Ramsco warrants. In addition
the Corporation recognized a realized loss of ($705,030) on
Rocket Broadband Networks Inc. (Rocket Broadband) and a loss of
($31,271) on the sale of 35,500 shares of Photonic stock.
Photonic is a publicly traded stock (NASDAQ symbol: PHPG.OB).
The average sales price of Photonic was $1.66/share and the cost
basis of the stock was $2.50/share.
There were no realized gains or losses during the year ended
December 31, 2008.
19
Table of Contents
Comparison
of the years ended December 31, 2008 and 2007
|
December 31,
|
December 31,
|
|||||||||||
| 2008 | 2007 | Change | ||||||||||
|
Realized (Loss)
|
— | $ | (68,748 | ) | $ | 68,748 | ||||||
There were no realized gains or losses during the year ended
December 31, 2008.
During the year ended December 31, 2007, the Corporation
recognized a realized loss of $68,748, comprised of a gain on
the sale of Ramsco warrants for $555,000, a gain of $140,048 on
its investment in Allworx Corp. (Allworx), a loss on the Topps
investment of ($595,000), a loss of ($130,000) on Takeform, Inc.
(Takeform), a loss on UStec of ($39,236) and a minor gain of
$440 on a public security.
In the second quarter of 2007 Ramsco completed a refinancing of
its commercial debt. As part of this restructuring Ramsco was
able to pay off the outstanding debenture instrument owed to the
Corporation and repurchase half of the Corporation’s
outstanding warrants. The Corporation recognized a $555,000 gain
on the transaction.
The Corporation made an investment in the capital stock of
Allworx in the second quarter of 2007 and the portfolio company
merged with PAETEC Holding, Inc. in the fourth quarter of 2007.
In conjunction with the merger, Allworx repaid its debenture
instrument and purchased the outstanding equity held by the
Corporation for $640,048, resulting in a $140,048 realized gain.
During 2007 the Corporation recognized a realized loss of
$595,000 on its investment in Topps when the plant that produces
its frozen meat products was forced to recall its frozen
hamburger products. Topps announced in October 2007 that due to
the economic impact of the recall it would close the Elizabeth,
NJ plant and file for bankruptcy.
The Corporation reclassed its $130,000 loss in Takeform from
unrealized to realized in the fourth quarter of 2007 following
the repayment of its obligation. The portfolio company had
agreed to pay $20,000 of its $150,000 debenture instruments and
it satisfied this obligation to the Corporation.
UStec satisfied its $350,000 debenture instrument obligation by
a payment of $310,764, which gave rise to a $39,236 realized loss
Change in
Unrealized Appreciation of Investments
For
the years ended December 31, 2009 and 2008
|
December 31,
|
December 31,
|
|||||||||||||||
| 2009 | 2008 | Decrease | % Decrease | |||||||||||||
|
Change in Unrealized Appreciation
|
$ | (4,211,605 | ) | $ | 601,985 | $ | (4,813,590 | ) | (800 | )% | ||||||
20
Table of Contents
The decrease in unrealized appreciation on investments of
$4,211,605 was due to the following valuation changes made by
the Corporation:
|
Valuation
|
||||
|
Change
|
||||
|
Portfolio Company
|
during 2009 | |||
|
Reclass Rocket Broadband to a realized loss
|
$ | 715,000 | ||
|
Rheonix Inc. (Rheonix)
|
136,000 | |||
|
Photonics Products Group, Inc (Photonics)
|
7,250 | |||
|
Adampluseve
|
(65,341 | ) | ||
|
G-Tec Natural Gas Systems (Gtec)
|
(98,000 | ) | ||
|
Associates Interactive, LLC (Associates)
|
(293,518 | ) | ||
|
GridApp Systems, Inc. (GridApp)
|
(295,935 | ) | ||
|
APF Group, Inc. (APF)
|
(324,213 | ) | ||
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
|
(367,951 | ) | ||
|
Golden Goal, LLC (Golden Goal)
|
(419,238 | ) | ||
|
Reclass Kionix, Inc. (Kionix) appreciation to realized gain
|
(493,959 | ) | ||
|
Innov-X Systems, Inc. (Innovex)
|
(2,711,700 | ) | ||
|
Total Change in Unrealized Appreciation during the year ended
December 31, 2009
|
$ | (4,211,605 | ) | |
In accordance with its valuation policy, the Corporation
increased the value of its holdings in Rheonix based on a
significant equity financing in December 2009 by new
non-strategic outside investors that had a higher valuation for
this portfolio company.
The Adam, APF, Gridapp and G-Tec investments were revalued
during the year ended December 31, 2009 after the
Corporation’s management reviewed each company and
determined that the business of each of these portfolio
companies had deteriorated since the time of the original
funding. The portfolio companies remain in operation and are
developing new business strategies.
The Golden Goal investment was written down to zero due to the
weakening financial condition of the portfolio company and the
Corporation’s management’s belief that the long term
sustainability of the business is questionable.
The Associates Interactive investment was written down to zero
based on the deteriorating financial condition of the business
caused by the overall downturn in the consumer electronics
industry and retailers’ hesitancy to invest in this market
segment. The portfolio company had little cash flow and has
failed to acquire any substantial customers.
The Corporation’s investment in Niagara Dispensing was
written down by $367,951 during the year ended December 31,
2009 based on a financial analysis of Niagara Dispensing’s
most recent financing that closed in the third quarter of 2009.
The Corporation reduced the valuation of its common equity
holdings in Innovex by ($2,711,700) during 2009 due to changes
in the mergers and acquisition market for similar companies.
Innovex successfully completed a $4.5 million subordinated
debt financing with warrants led by a Massachusetts based
institutional mezzanine investor during the second quarter 2009,
and the Corporation participated in the financing round with a
$250,000 investment. This funding will allow Innovex to continue
to introduce new products, even in the current economic climate,
including a major upgrade to their handheld XRF product.
The Corporation sold 35,500 shares of Photonic stock during
the second quarter of 2009.
All of these value adjustments resulted from a review by
management using the guidance set forth by ACS 820 and the
Corporation’s established valuation policy.
21
Table of Contents
For
the years ended December 31, 2008 and 2007
|
December 31,
|
December 31,
|
|||||||||||||||
| 2008 | 2007 | Decrease | % Decrease | |||||||||||||
|
Change in Unrealized Appreciation
|
$ | 601,985 | $ | 3,521,821 | $ | (2,919,836 | ) | (82.9 | )% | |||||||
The increase in unrealized appreciation on investments of
$601,985 is due to the following valuation changes made by the
Corporation:
|
Valuation
|
||||
|
Change
|
||||
|
Portfolio Company
|
during 2008 | |||
|
Gemcor II, LLC (Gemcor)
|
$ | 1,700,000 | ||
|
Kionix
|
778,432 | |||
|
Bioworks, Inc. (Bioworks)
|
(28,000 | ) | ||
|
Wineisit
|
(100,000 | ) | ||
|
Niagara Dispensing
|
(111,000 | ) | ||
|
Photonics
|
(150,700 | ) | ||
|
Carolina Skiff LLC (Carolina Skiff)
|
(227,000 | ) | ||
|
Golden Goal
|
(237,413 | ) | ||
|
APF
|
(307,334 | ) | ||
|
Rocket Broadband
|
(715,000 | ) | ||
|
Total Change in Unrealized Appreciation during the year ended
December 31, 2008
|
$ | 601,985 | ||
The Corporation recognized appreciation on its equity investment
in Gemcor based on the improved financial condition of the
portfolio company since the Corporation made its first
investment.
Kionix was written up in accordance with ASC 820 (formerly
SFAS 157) due to overall improvement in the revenues,
customer base and the market acceptance of its products.
The Corporation’s investment in Bioworks was valued at zero
at December 31, 2008 based on an analysis of the
liquidation preferences of senior securities in the portfolio
company.
The Wineisit investment was revalued to zero during the year
ended December 31, 2008 after a review by management
indicated a further deterioration of the portfolio
company’s business. Wineisit remains in operation and is
developing a new business strategy.
The Corporation converted its debt instruments in Niagara
Dispensing to equity during the second quarter of 2008 and
revalued its investment based on the valuation of equity shares
at conversion.
Photonics is a publicly traded stock (NASDAQ symbol: PHPG.OB)
and is marked to market at the end of each quarter.
The Corporation’s investment in Carolina Skiff was written
down to cost based on a review of the company’s financials
and an overall economic downturn in the boating sector.
Rocket Broadband continued to have inadequate cash flow to
sustain its operations throughout 2008 and this resulted in the
resignation of its Chief Executive Officer during 2008. Based on
a review of the financial restructuring necessary to maintain
the portfolio company’s operations, the Corporation
recognized unrealized depreciation on the investment in Rocket
Broadband and valued its investment at zero.
The Corporation’s investment’s in Golden Goal and APF
were written down during 2008 based on a review of the
companies’ financials, their weak financial performance as
compared to plan, and an overall economic downturn in their
respective industries.
Synacor filed an
S-1
registration statement on August 2, 2007 with the SEC and
also filed an amended
S-1
in April
2008. An
S-1
is a registration document that a company files with the SEC
regarding the proposed sale of its
22
Table of Contents
securities to the public. In October 2008 Synacor withdrew its
S-1
plans
for a public offering in a notification filed with the SEC. No
valuation change has occurred with respect to the Synacor
filings, but the Corporation has previously written up its
investment in Synacor based on new investor financing.
All of these value adjustments resulted from a review by
management using the guidance set forth by ASC 820 and the
Corporation’s established valuation policy.
Net
Increase (Decrease) in Net Assets from Operations
The Corporation accounts for its operations under GAAP for
investment companies. The principal measure of its financial
performance is “net increase (decrease) in net assets from
operations” on its consolidated statements of operations.
During the year ended December 31, 2009, the net decrease
was ($739,420) as compared to a net increase in net assets from
operations of $409,143 in 2008 and $2,719,165 in 2007.
The net decrease in net assets from operations for the year
ended December 31, 2009 is due to the net investment loss
of ($63,878) coupled with the net decrease in realized and
unrealized loss on investments of ($675,542). The net increase
in net assets from operations for the year ended
December 31, 2008 was due to the net unrealized
appreciation on investments of $273,454 and the net investment
gain of $135,689. The net increase in net assets from operations
for the year ended December 31, 2007 can be attributed to
the investment gain before income taxes of $651,923 and the net
realize and unrealized gain on investments of $2,320,462. In
addition, the Corporation recognized a $316,253 increase in net
assets attributed to the cumulative effect adjustment upon
adopting the provisions of ASC 740 (formerly
FIN 48) “Accounting for Uncertainty in Income
Taxes” during 2007.
Liquidity
and Capital Resources
The Corporation’s principal objective is to achieve capital
appreciation. Therefore, a significant portion of the investment
portfolio is structured to maximize the potential for capital
appreciation and certain of the Corporation’s portfolio
investments may be structured to provide little or no current
yield in the form of dividends or interest payments.
As of December 31, 2009, the Corporation’s total
liquidity, consisting of cash and cash equivalents, was
$9,417,236.
Net cash used in operating activities has averaged approximately
$530,000 over the last three years and management anticipates
cash will continue to be utilized at similar levels. The cash
flow may fluctuate based on possible expenses associated with
compliance with new regulations.
The Corporation provided approximately $2,400,000 in net cash
flow from investing activities in fiscal 2009, used
approximately $925,000 during fiscal year 2008 and provided
approximately $545,000 of net cash from investing activities
during fiscal year 2007. The Corporation will generally use cash
in investing activities as it builds its portfolio utilizing its
available cash and proceeds from liquidations of portfolio
investments. The Corporation anticipates that it will continue
to make new investments and may experience a net use of cash
over the next two years. In addition, significant liquidating
events within the Corporation’s investment portfolio are
difficult to project with any certainty.
The Corporation has paid a total of $119,000 to the SBA to
reserve its approved $10,000,000 leverage. Due to the expiration
of the initial leverage commitment in 2008, the Corporation had
to pay $19,000 in 2009 to restore the remaining $1,900,000 of
approved SBA leverage. The Corporation has drawn down $9,100,000
of this leverage as of December 31, 2009. The remaining
leverage commitment of $900,000 was drawn down in January of
2010.
23
Table of Contents
The following table summarizes the cash to be received over the
next five years from portfolio companies based on contractual
obligations as of December 31, 2009. These payments
represent scheduled principal and interest payments that are
contained in the investment documents of each portfolio company.
| Cash Receipts due by year | ||||||||||||||||||||
|
2014 and
|
||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | beyond | ||||||||||||||||
|
Scheduled Cash Receipts from Portfolio Companies
|
$ | 2,837,000 | $ | 798,000 | $ | 496,000 | $ | 962,000 | $ | 1,525,000 | ||||||||||
The preceding table only includes debenture instruments and does
not include any equity investments which may provide additional
proceeds upon exit of these securities.
Throughout 2008 and 2009, the global economy experienced turmoil
and the debt and equity markets in the United States have been
affected by this crisis. If market conditions continue to
deteriorate, the Corporation may suffer losses on its investment
portfolio, which could impact cash receipts over the next couple
of years.
The unfavorable change in credit market conditions also has
created opportunities for capital providers, like the
Corporation, because small businesses are selling for lower
prices, and they are generally willing to pay higher interest
rates and to accept contractual terms that are more favorable to
the Corporation. Accordingly, for companies that continue to
have access to capital, management believes that the current
environment could provide investment opportunities on more
favorable terms than have been available in prior periods.
The Corporation completed a private placement sale of 1,100,000
of its common shares during the third quarter of 2009. The
Corporation’s Board of Directors established the pricing of
this private offering at $3.42 per share at its July 2009 Board
meeting and the Corporation received net cash proceeds of
approximately $3,718,000 from the sale.
Management expects that the cash and cash equivalents at
December 31, 2009, coupled with the scheduled interest and
dividend payments on its portfolio investments, will be
sufficient to meet the Corporation’s cash needs throughout
2010. The Corporation is also evaluating potential exits from
portfolio companies to increase the amount of liquidity
available for new investments and operating activities.
Disclosure
of Contractual Obligations
The following table shows the Corporation’s contractual
obligations at December 31, 2009. The Corporation does not
have any capital lease obligations or other long-term
liabilities reflected on its balance sheet.
| Payments due by period | ||||||||||||||||||||
|
Less than
|
1-3
|
3-5
|
More
|
|||||||||||||||||
| Total | 1 year | years | years | than 5 yrs | ||||||||||||||||
|
SBA Debentures
|
$ | 9,100,000 | $ | 0 | $ | 0 | $ | 3,500,000 | $ | 5,600,000 | ||||||||||
|
Operating Lease Obligations (Rent of office space)
|
$ | 16,440 | $ | 16,440 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
|
Total
|
$ | 9,116,440 | $ | 16,440 | $ | 0 | $ | 3,500,000 | $ | 5,600,000 | ||||||||||
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
The Corporation’s investment activities contain elements of
risk. The portion of the Corporation’s investment portfolio
consisting of equity and debt securities in private companies is
subject to valuation risk. Because there is typically no public
market for the equity and equity-linked debt securities in which
it invests, the valuation of the equity interests in the
portfolio is stated at “fair value” as determined in
good faith by the management of the Corporation and submitted to
the Board of Directors for approval. This is in accordance with
the Corporation’s investment valuation policy. (The
discussion of valuation policy contained in
“Note 1-
Summary of Significant Accounting Policies —
Investments” in the consolidated financial statements
contained in Item 8 of this report is hereby incorporated
herein by reference.) In the absence of a readily ascertainable
market value, the estimated value of the Corporation’s
portfolio may differ significantly from the values that would be
placed on the portfolio if a
24
Table of Contents
ready market for the investments existed. Any changes in
valuation are recorded in the Corporation’s consolidated
statement of operations as “Net unrealized appreciation on
investments.”
At times a portion of the Corporation’s portfolio may
include marketable securities traded in the
over-the-counter
market. In addition, there may be a portion of the
Corporation’s portfolio for which no regular trading market
exists. In order to realize the full value of a security, the
market must trade in an orderly fashion or a willing purchaser
must be available when a sale is to be made. Should an economic
or other event occur that would not allow markets to trade in an
orderly fashion, the Corporation may not be able to realize the
fair value of its marketable investments or other investments in
a timely manner.
As of December 31, 2009, the Corporation did not have any
off-balance sheet investments or hedging investments.
25
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
The following consolidated financial statements and consolidated
supplemental schedule of the Corporation and report of
independent auditors thereon are set forth below:
26
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Investments at fair value (identified cost: 2009 —
$14,767,920,
2008 — $14,386,451) |
$ | 24,296,145 | $ | 28,126,282 | ||||
|
Cash and cash equivalents
|
9,417,236 | 2,757,653 | ||||||
|
Interest receivable (net of allowance 2009 — $209,089,
2008 — $122,817)
|
1,192,118 | 1,013,888 | ||||||
|
Other assets
|
725,872 | 330,974 | ||||||
|
Total assets
|
$ | 35,631,371 | $ | 32,228,797 | ||||
| Liabilities and Stockholders’ Equity (net assets) | ||||||||
|
Liabilities:
|
||||||||
|
Debentures guaranteed by the SBA
|
$ | 9,100,000 | $ | 8,100,000 | ||||
|
Deferred tax liability
|
1,809,000 | 3,490,000 | ||||||
|
Income taxes payable
|
1,082,646 | 98,723 | ||||||
|
Accounts payable and accrued expenses
|
431,233 | 292,731 | ||||||
|
Deferred revenue
|
2,611 | 20,377 | ||||||
|
Total liabilities
|
12,425,490 | 12,001,831 | ||||||
|
Stockholders’ equity (net assets):
|
||||||||
|
Common stock, $.10 par; shares authorized 10,000,000;
shares issued (12/31/09, 6,863,034; 12/31/08 —
5,763,034)
|
686,304 | 576,304 | ||||||
|
Capital in excess of par value
|
10,581,789 | 6,973,454 | ||||||
|
Accumulated net investment (loss)
|
(4,961,725 | ) | (3,743,908 | ) | ||||
|
Undistributed net realized gain on investments
|
10,897,390 | 7,735,477 | ||||||
|
Net unrealized appreciation on investments
|
6,049,329 | 8,732,845 | ||||||
|
Treasury stock, at cost, 44,100 shares
|
(47,206 | ) | (47,206 | ) | ||||
|
Net assets (per share 2009 — $3.40, 2008 —
$3.54)
|
23,205,881 | 20,226,966 | ||||||
|
Total liabilities and stockholders’ equity (net
assets)
|
$ | 35,631,371 | $ | 32,228,797 | ||||
See accompanying notes
27
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2009, 2008 and 2007
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Investment income:
|
||||||||||||
|
Interest from portfolio companies
|
$ | 568,524 | $ | 608,180 | $ | 618,430 | ||||||
|
Interest from other investments
|
17,129 | 90,660 | 173,664 | |||||||||
|
Dividend and other investment income
|
1,133,102 | 1,027,377 | 1,469,864 | |||||||||
|
Other income
|
30,770 | 30,786 | 40,912 | |||||||||
| 1,749,525 | 1,757,003 | 2,302,870 | ||||||||||
|
Operating expenses:
|
||||||||||||
|
Salaries
|
623,765 | 440,337 | 460,917 | |||||||||
|
Employee benefits
|
126,046 | 121,659 | 112,147 | |||||||||
|
Directors’ fees
|
76,750 | 77,250 | 77,750 | |||||||||
|
Professional fees
|
227,415 | 248,667 | 212,822 | |||||||||
|
Stockholders and office operating
|
140,554 | 120,260 | 122,332 | |||||||||
|
Insurance
|
49,988 | 41,489 | 43,674 | |||||||||
|
Corporate development
|
55,749 | 65,042 | 66,854 | |||||||||
|
Other operating
|
(34,718 | ) | 83,972 | 51,389 | ||||||||
| 1,265,549 | 1,198,676 | 1,147,885 | ||||||||||
|
Interest on SBA obligations
|
497,475 | 522,062 | 503,062 | |||||||||
|
Bad debt expense
|
87,089 | 817 | — | |||||||||
|
Total expenses
|
1,850,113 | 1,721,555 | 1,650,947 | |||||||||
|
Investment (loss) gain before income taxes
|
(100,588 | ) | 35,448 | 651,923 | ||||||||
|
Income tax (benefit) expense
|
(36,710 | ) | (100,241 | ) | 253,220 | |||||||
|
Net investment (loss) gain
|
(63,878 | ) | 135,689 | 398,703 | ||||||||
|
Realized and unrealized gain (loss) on investments:
|
||||||||||||
|
Realized gain (loss) on sales and dispositions
|
3,161,913 | — | (68,748 | ) | ||||||||
|
Income tax expense (benefit)
|
1,153,939 | — | (26,703 | ) | ||||||||
|
Net realized gain (loss) on investments
|
2,007,974 | — | (42,045 | ) | ||||||||
|
Unrealized appreciation on investments:
|
||||||||||||
|
Beginning of year
|
13,739,831 | 13,137,846 | 9,616,025 | |||||||||
|
End of year
|
9,528,226 | 13,739,831 | 13,137,846 | |||||||||
|
Change in unrealized appreciation before income taxes
|
(4,211,605 | ) | 601,985 | 3,521,821 | ||||||||
|
Deferred income tax (benefit) expense
|
(1,528,089 | ) | 328,531 | 1,159,314 | ||||||||
|
Net (decrease) increase in unrealized appreciation
|
(2,683,516 | ) | 273,454 | 2,362,507 | ||||||||
|
Net realized and unrealized (loss) gain on investments
|
(675,542 | ) | 273,454 | 2,320,462 | ||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (739,420 | ) | $ | 409,143 | $ | 2,719,165 | |||||
|
Weighted average shares outstanding
|
6,115,081 | 5,718,934 | 5,718,934 | |||||||||
|
Basic and diluted net (decrease) increase in net assets from
operations per share
|
$ | (0.12 | ) | $ | 0.07 | $ | 0.48 | |||||
See accompanying notes
28
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Years Ended December 31, 2009, 2008 and 2007
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Years Ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Net assets at beginning of period
|
$ | 20,226,966 | $ | 19,817,823 | $ | 16,782,405 | ||||||
|
Net investment (loss) gain
|
(63,878 | ) | 135,689 | 398,703 | ||||||||
|
Net realized gain (loss) on sales and dispositions of investments
|
2,007,974 | — | (42,045 | ) | ||||||||
|
Net (decrease) increase in unrealized appreciation
|
(2,683,516 | ) | 273,454 | 2,362,507 | ||||||||
|
Net (decrease) increase in net assets from operations
|
(739,420 | ) | 409,143 | 2,719,165 | ||||||||
|
Issuance of common stock
|
3,718,335 | — | — | |||||||||
|
Cumulative effect adjustment for uncertain tax
positions —
ASC 740 |
— | — | 316,253 | |||||||||
|
Subtotal
|
3,718,335 | — | 316,253 | |||||||||
|
Net assets at end of period
|
$ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | ||||||
See accompanying notes.
29
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
For The
Years Ended December 31, 2009, 2008 and 2007
| 2009 | 2008 | 2007 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (739,420 | ) | $ | 409,143 | $ | 2,719,165 | |||||
|
Adjustments to reconcile net increase in net assets to net cash
used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
36,218 | 52,230 | 33,598 | |||||||||
|
Original issue discount accretion
|
— | — | (62,333 | ) | ||||||||
|
Change in interest receivable allowance
|
86,272 | 817 | — | |||||||||
|
Decrease (increase) in unrealized appreciation of investments
|
4,211,605 | (601,985 | ) | (3,521,821 | ) | |||||||
|
Deferred tax (benefit) expense
|
(1,681,000 | ) | (465,000 | ) | 484,453 | |||||||
|
Realized (gain) loss on portfolio investments
|
(3,161,913 | ) | — | 68,748 | ||||||||
|
Payment in kind, interest accrued
|
(115,334 | ) | (15,380 | ) | — | |||||||
|
Non-cash conversion of debenture interest
|
(41,599 | ) | (67,235 | ) | (50,000 | ) | ||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
(Increase) in interest receivable
|
(264,502 | ) | (367,704 | ) | (139,759 | ) | ||||||
|
Decrease (increase) in other assets
|
137,059 | 779,083 | (35,229 | ) | ||||||||
|
Increase (decrease) in income taxes payable
|
983,923 | (375,742 | ) | 63,890 | ||||||||
|
Increase (decrease) in accounts payable and accrued liabilities
|
138,502 | (28,479 | ) | (17,350 | ) | |||||||
|
(Decrease) increase in deferred revenue
|
(17,766 | ) | (33,276 | ) | 8,048 | |||||||
|
Total adjustments
|
311,465 | (1,122,671 | ) | (3,167,755 | ) | |||||||
|
Net cash used in operating activities
|
(427,955 | ) | (713,528 | ) | (448,590 | ) | ||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Investments originated
|
(2,955,309 | ) | (1,626,657 | ) | (2,165,266 | ) | ||||||
|
Proceeds from sale of portfolio investments
|
4,946,781 | — | 255,440 | |||||||||
|
Proceeds from loan repayments
|
420,981 | 713,465 | 2,456,509 | |||||||||
|
Capital expenditures
|
— | (12,222 | ) | (1,350 | ) | |||||||
|
Net cash provided by (used in) investing activities
|
2,412,453 | (925,414 | ) | 545,333 | ||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Issuance of common stock, net
|
3,718,335 | — | — | |||||||||
|
Proceeds from SBA debenture
|
1,000,000 | — | — | |||||||||
|
Origination costs to SBA
|
(43,250 | ) | — | — | ||||||||
|
Net cash provided by financing activities
|
4,675,085 | — | — | |||||||||
|
Net increase (decrease) in cash and cash equivalents
|
6,659,583 | (1,638,942 | ) | 96,743 | ||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Beginning of year
|
2,757,653 | 4,396,595 | 4,299,852 | |||||||||
|
End of year
|
$ | 9,417,236 | $ | 2,757,653 | $ | 4,396,595 | ||||||
See accompanying notes
30
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
December 31,
2009
|
(b)
|
Per
|
|||||||||||||||||||||
|
Company, Geographic Location, Business Description,
(Industry)
|
Date
|
(c)
|
(d)(f)
|
Share
|
||||||||||||||||||
|
and Website
|
Type of Investment | Acquired | Equity | Cost | Value | of Rand | ||||||||||||||||
| Non-Control/Non-Affiliate Investments: (k) | ||||||||||||||||||||||
|
Mezmeriz, Inc. (g)
Ithaca, NY. Developer of micro mirror technology that replaces silicon with carbon fibers in micro-electronic mechanical systems (MEMS) enabling efficient, wide-angle, Pico projectors to be embedded in mobile devices. (Electronics Developer) www.mezmeriz.com |
$100,000 convertible note at 9% due January 9, 2010. | 1/9/08 | — | 100,000 | 100,000 | .01 | ||||||||||||||||
|
Rheonix, Inc.
Ithaca, NY. Developer of microfluidic testing devices including channels, pumps, reaction vessels, & diagnostic chambers, for testing of small volumes of chemicals and biological fluids. (Manufacturing) www.rheonix.com |
9,676 common shares. (g) 268,845 Series A preferred shares. 50,593 common shares. | 10/29/09 | 2 | % | 253,000 | 389,000 | .06 | |||||||||||||||
|
Somerset Gas Transmission Company, LLC (e)
Columbus, OH. Natural gas transportation company. (Oil and Gas) www.somersetgas.com |
26.5337 units. | 7/10/02 | 2 | % | 719,097 | 786,748 | .12 | |||||||||||||||
|
Synacor Inc. (g)
Buffalo, NY. Develops provisioning platforms for aggregation and delivery of content and services across multiple digital devices. (Software) www.synacor.com |
234,558 Series A preferred shares. 600,000 Series B preferred shares. 240,378 Series C preferred shares. 897,438 common shares. | 11/18/02 | 4 | % | 1,349,479 | 4,168,001 | .61 | |||||||||||||||
|
Subtotal Non-Control/
Non-Affiliate Investments |
$ | 2,421,576 | $ | 5,443,749 | $ | 0.80 | ||||||||||||||||
| Affiliate Investments: (l) | ||||||||||||||||||||||
|
Carolina Skiff LLC (e) (g)
Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com |
$985,000 Class A preferred membership interest at 7.5%. Redeemable January 31, 2010. $500,000 subordinated promissory note at 14% due December 31, 2016. 6.0825% Class A common membership interest. (j) Interest receivable $714,519. | 1/30/04 | 6 | % | 1,500,000 | 1,500,000 | .22 | |||||||||||||||
|
EmergingMed.com, Inc. (g) (h)
New York, NY. Cancer clinical trial matching and referral service. (Software) www.emergingmed.com |
$500,000 senior subordinated note at 10% due December 19, 2010. Warrants for 7.0% of common stock. (j) Interest receivable $201,667. | 12/19/05 | 7 | % | 458,333 | 458,333 | .07 | |||||||||||||||
|
GridApp Systems, Inc. (e) (g)
New York, NY. Provider of database automation software that helps businesses gain control of their heterogeneous database applications through a centralized software console. (Software) www.gridapp.com |
$957,000 term notes at 4% simple interest, 8% deferred interest (PIK) due January 4, 2012. $6,667 convertible note at 4% due November 28, 2018. $3,000 convertible note at 4% due September 25, 2019. $50,000 demand promissory note at 14% due December 22, 2011. | 11/25/08 | 15 | % | $ | 1,095,935 | $ | 800,000 | .12 | |||||||||||||
31
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31,
2009 – (Continued)
|
(b)
|
Per
|
|||||||||||||||||||||
|
Company, Geographic Location, Business Description,
(Industry)
|
Date
|
(c)
|
(d)(f)
|
Share
|
||||||||||||||||||
|
and Website
|
Type of Investment | Acquired | Equity | Cost | Value | of Rand | ||||||||||||||||
|
Innov-X Systems, Inc. (g)
Woburn, MA. Manufactures portable x-ray fluorescence (XRF) analyzers used in metals/alloy analysis. (Manufacturing) www.innovxsys.com |
(e)$250,000 note at 11% due March 31, 2017. 2,642 Series A preferred stock. 8% cumulative dividend. Warrants for 21,924 common shares. (j) Interest receivable $242,411. | 9/27/04 | 9 | % | 1,250,000 | 6,300,000 | .92 | |||||||||||||||
|
Microcision LLC (g)
Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing) www.microcision.com |
$650,000 subordinated promissory notes at 5%, 6% deferred interest (PIK) due December 31, 2013. 7.5% class A common membership interest. | 9/24/09 | 7.5 | % | 658,808 | 658,808 | .10 | |||||||||||||||
|
Niagara Dispensing Technologies, Inc.
Amherst, NY. Beverage dispensing technology development and products manufacturer, specializing in rapid pour beer dispensing systems for high volume stadium and concession operations. (Manufacturing) www.niagaradispensing.com |
202,081 Series B preferred stock. (g) 463,691 Series A preferred stock. 518,752 Series B preferred stock. (e) $300,000 promissory note at 6%, 8% deferred interest (PIK) due July 30, 2011. Warrants for 190,561 class A common stock. | 3/8/06 | 14 | % | 1,592,193 | 1,113,242 | .17 | |||||||||||||||
|
SOMS Technologies, LLC (g)
Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Auto Parts Developer) www.microgreenfilter.com |
$250,000 secured convertible note at 10% due December 2, 2010. $75,000 secured convertible note at 10% due October 29, 2011. | 12/2/08 | — | 354,791 | 354,791 | .05 | ||||||||||||||||
|
Ultra — Scan Corporation
Amherst, NY. Biometrics application developer of ultrasonic fingerprint technology. (Electronics Hardware/Software) www.ultra-scan.com |
536,596 common shares. 107,104 Series A-1 preferred shares. (g) 95,284 Series A-1 preferred shares. | 12/11/92 | 4 | % | 938,164 | 1,203,000 | .18 | |||||||||||||||
| Subtotal Affiliate Investments | $ | 7,848,224 | $ | 12,388,174 | $ | 1.83 | ||||||||||||||||
|
Control Investments(m)
Gemcor II, LLC (e) (g) (h) West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft components. (Manufacturing) www.gemcor.com |
$250,000 subordinated note at 8% due June 28, 2010 with warrant to purchase 6.25 membership units. $500,000 subordinated promissory note at 15% due December 1, 2014. 25 membership units. | 6/28/04 | 31 | % | 1,023,884 | 6,223,883 | .91 | |||||||||||||||
|
G-TEC Natural Gas Systems
Buffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com |
28.925% Class A membership interest. 8% cumulative dividend. | 8/31/99 | 29 | % | 400,000 | 100,000 | .01 | |||||||||||||||
| Subtotal Control Investments | $ | 1,423,884 | $ | 6,323,883 | $ | 0.92 | ||||||||||||||||
| Other Investments (a) (i) | Various | $ | 3,074,236 | $ | 140,339 | .01 | ||||||||||||||||
| Total portfolio investments (f) | $ | 14,767,920 | $ | 24,296,145 | $ | 3.56 | ||||||||||||||||
32
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31,
2009 – (Continued)
Notes to
Consolidated Schedule of Portfolio Investments
| (a) | Unrestricted securities are freely marketable securities having readily available market quotations. All other securities are restricted securities, which are subject to one or more restrictions on resale and are not freely marketable. At December 31, 2009 restricted securities represented 99% of the value of the investment portfolio. Freed Maxick & Battaglia, CPA’s PC has not examined the business descriptions of the portfolio companies. Securities with an individual value <$100,000 are included in “Other Investments”. | |
| (b) | The Date Acquired column indicates the year in which the Corporation acquired its first investment in the company or a predecessor company. | |
| (c) | The equity percentages estimate the Corporation’s ownership interest in the portfolio investment. The estimated ownership is calculated based on the percent of outstanding voting securities held by the Corporation or the potential percentage of voting securities held by the Corporation upon exercise of warrants or conversion of debentures, or other available data. Freed Maxick & Battaglia, CPA’s, PC has not audited the equity percentages of the portfolio companies. The symbol “<1%” indicates that the Corporation holds an equity interest of less than one percent. | |
| (d) | The Corporation has adopted the SBA’s valuation guidelines for SBIC’s which describes the policies and procedures used in valuing investments. Under the valuation policy of the Corporation, unrestricted securities are valued at the closing price for publicly held securities for the last three days of the month. Restricted securities, including securities of publicly-held companies, are subject to restrictions on resale, and are valued at fair value as determined by the management of the Corporation and submitted to the Board of Directors for approval. Fair value is considered to be the amount which the Corporation may reasonably expect to receive for portfolio securities when sold on the valuation date. Valuations as of any particular date, however, are not necessarily indicative of amounts which may ultimately be realized as a result of future sales or other dispositions of securities and these favorable or unfavorable differences could be material. Among the factors considered in determining the fair value of restricted securities are the financial condition and operating results, projected operations, and other analytical data relating to the investment. Also considered are the market prices for unrestricted securities of the same class (if applicable) and other matters which may have an impact on the value of the portfolio company. On January 1, 2008 the Corporation adopted Accounting Standards Codification (ASC) 820 (formerly FAS No. 157) “Fair Value Measurements” which defines fair value and establishes guidelines for measuring fair value. ASC 820 designates the Corporation’s investments primarily as “Level 3” assets due to their privately held restricted nature. | |
| (e) | These investments are income producing. All other investments are non-income producing. Income producing investments have generated cash payments of interest or dividends within the last twelve months. | |
| (f) | Income Tax Information — As of December 31, 2009, the total cost of investment securities approximated $14.8 million. Net unrealized appreciation was approximately $9.5 million, which was comprised of $13.5 million of unrealized appreciation of investment securities and $4.0 million related to unrealized depreciation of investment securities | |
| (g) | Rand Capital SBIC, Inc. investment. | |
| (h) | Reduction in cost and value from previously reported balances reflects current principal repayment. | |
| (i) | Included in “Other Investments” is 30,500 shares OTC: PHPG.OB, a publicly owned company. | |
| (j) | Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Balance Sheet. | |
| (k) | Non-Control/Non-Affiliate investments are investments that are neither Control Investments or Affiliated Investments. | |
| (l) | Affiliate investments are defined by the Investment Company Act of 1940, as amended (“1940 Act”), as those Non-Control investments in companies in which between 5% and 25% of the voting securities are owned or Rand holds a Board seat. | |
| (m) | Control investments are defined by the 1940 Act as investments in companies in which more than 25% of the voting securities are owned or where greater than 50% of the board representation is maintained. |
33
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
For the
Five Years Ended December 31, 2009, 2008, 2007, 2006 and
2005
Selected data for each share of common stock outstanding
throughout the five most current years is as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Income from investment operations(1):
|
||||||||||||||||||||
|
Investment income
|
$ | 0.28 | $ | 0.31 | $ | 0.40 | $ | 0.23 | $ | 0.13 | ||||||||||
|
Expenses
|
0.30 | 0.30 | 0.29 | 0.26 | 0.22 | |||||||||||||||
|
Investment (loss) gain before income taxes
|
(0.02 | ) | 0.01 | 0.11 | (0.03 | ) | (0.09 | ) | ||||||||||||
|
Income tax (benefit) expense
|
(0.01 | ) | (0.01 | ) | 0.04 | 0.19 | (0.06 | ) | ||||||||||||
|
Net investment (loss)gain
|
(0.01 | ) | 0.02 | 0.07 | (0.22 | ) | (0.03 | ) | ||||||||||||
|
Issuance of common stock
|
0.61 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
|
Cumulative effect adjustments for uncertain tax
positions — ASC 740
|
0.00 | 0 .00 | 0.06 | 0.00 | 0.00 | |||||||||||||||
|
Net realized and unrealized (loss) gain on investments
|
(0.11 | ) | 0.05 | 0.41 | 1.65 | (0.04 | ) | |||||||||||||
|
Increase (decrease) in net asset value
|
0.49 | 0.07 | 0.54 | 1.43 | (0.07 | ) | ||||||||||||||
|
Net asset value, beginning of year based on weighted average
shares
|
3.54 | 3.47 | 2.93 | 1.51 | 1.58 | |||||||||||||||
|
Net asset value, end of year based on weighted average shares
|
$ | 4.03 | $ | 3.54 | $ | 3.47 | $ | 2.93 | $ | 1.51 | ||||||||||
|
Per share market value, end of year
|
$ | 3.98 | $ | 3.50 | $ | 3.60 | $ | 3.50 | $ | 1.34 | ||||||||||
|
Total return based on market value
|
13.71 | % | (2.78 | )% | 2.86 | % | 161.2 | % | (14.1 | )% | ||||||||||
|
Total return based on net asset value
|
(3.74 | )% | 2.1 | % | 18.1 | % | 94.8 | % | (4.6 | )% | ||||||||||
|
Supplemental data:
|
||||||||||||||||||||
|
Ratio of expenses before income taxes to average net assets
|
8.52 | % | 8.60 | % | 9.02 | % | 11.96 | % | 14.35 | % | ||||||||||
|
Ratio of expenses including taxes to average net assets
|
8.35 | % | 9.10 | % | 10.41 | % | 20.41 | % | 10.34 | % | ||||||||||
|
Ratio of net investment (loss) gain to average net assets
|
(0.29 | )% | 0.68 | % | 2.18 | % | (9.96 | )% | (1.99 | )% | ||||||||||
|
Portfolio turnover
|
11.3 | % | 6.0 | % | 8.6 | % | 18.1 | % | 21.6 | % | ||||||||||
|
Net assets end of year
|
$ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | $ | 16,782,405 | $ | 8,615,934 | ||||||||||
|
Weighted average shares outstanding at end of year
|
6,115,081 | 5,718,934 | 5,718,934 | 5,718,934 | 5,718,934 | |||||||||||||||
| (1) | Per share data are based on weighted average shares outstanding and results are rounded. |
34
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
| Note 1. – | Summary of Significant Accounting Policies |
Nature of Business
– Rand Capital
Corporation (“Rand”) was founded in 1969 and is
headquartered in Buffalo, New York. Rand’s investment
strategy is to seek capital appreciation through venture capital
investments in small, unseasoned, developing companies,
primarily in the northeastern United States.
Rand operates as a publicly-held venture capital company, listed
on the NASDAQ Capital Market under the symbol “RAND”.
Rand was incorporated under the law of New York on
February 24, 1969. Beginning in 1971, Rand operated as a
publicly traded, closed-end, diversified management company that
was registered under Section 8 of the Investment Company
Act of 1940 (the “1940 Act”). On August 16, 2001,
Rand elected to be treated as a business development company
(“BDC”) under the 1940 Act. In 2002, Rand formed a
wholly-owned subsidiary for the purpose of operating it as a
small business investment company (“SBIC”) licensed by
the U.S. Small Business Administration (“SBA”).
The subsidiary received an SBA license to operate as an SBIC in
August of 2002. The subsidiary, which had been organized as a
Delaware limited partnership, was converted into a New York
corporation on December 31, 2008, at which time its
operations as a licensed BDC were continued by a newly formed
corporation under the name of Rand Capital SBIC, Inc.
(“Rand SBIC”). As of December 31, 2009, the
Corporation had drawn down $9,100,000 on its leverage
commitments (see Note 4).
Principles of Consolidation
– The
consolidated financial statements include the accounts of Rand,
its wholly-owned subsidiary Rand SBIC, and the predecessor
wholly-owned limited partnership (collectively, the
“Corporation”). All intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
– Certain prior year
amounts have been reclassified to conform to the current year
presentation.
Investments
– Investments are
valued in accordance with the Corporation’s established
valuation policy and are stated at fair value as determined in
good faith by the management of the Corporation and submitted to
the Board of Directors for approval. There is no single standard
for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment
while employing a consistently applied valuation process for
investments. The Corporation analyzes and values each individual
investment on a quarterly basis, and records unrealized
depreciation for an investment that it believes has become
impaired, including where collection of a loan or realization of
the recorded value of an equity security is doubtful.
Conversely, the Corporation will record unrealized appreciation
if it believes that the underlying portfolio company has
appreciated in value and, therefore, its equity security has
also appreciated in value. These estimated fair values may
differ from the values that would have been used had a ready
market for the investments existed and these differences could
be material if our assumptions and judgments differ from results
of actual liquidation events.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued guidance on Fair Value Measurements.
This statement defines fair value, establishes a framework for
measuring fair value in generally accepted accounting practices
(“GAAP”), and expands disclosures about fair value
measurements. This statement was effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years.
On January 1, 2008, the Corporation adopted Accounting
Standards Codification (ASC) 820 (formerly, SFAS 157).
ASC 820 classifies the inputs used to measure these fair values
into the following hierarchy:
Level 1:
Quoted prices in active markets
for identical assets or liabilities, used in the
Corporation’s valuation at the measurement date.
Level 2:
Quoted prices for similar assets
or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active,
or other observable inputs other than quoted prices.
Level 3:
Unobservable and significant
inputs to determining the fair value
35
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Most of the Corporation’s investments are classified in
Level 3 due to their privately held restricted nature.
Assets
Measured at Fair Value on a Recurring Basis
| Fair Value Measurements at Reported Date Using | ||||||||||||||||
|
Quoted Prices in
|
Significant
|
Other Significant
|
||||||||||||||
|
Active Markets for
|
Observable
|
Unobservable
|
||||||||||||||
|
December 31,
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
|
Description
|
2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Venture Capital Investments
|
$ | 28,126,282 | $ | 112,000 | $ | 0 | $ | 28,014,282 | ||||||||
|
Quoted Prices in
|
Significant
|
Other Significant
|
||||||||||||||
|
Active Markets for
|
Observable
|
Unobservable
|
||||||||||||||
|
December 31,
|
Identical Assets
|
Inputs
|
Inputs
|
|||||||||||||
|
Description
|
2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Venture Capital Investments
|
$ | 24,296,145 | $ | 30,498 | $ | 0 | $ | 24,265,647 | ||||||||
Assets
Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)
|
Fair Value Measurements
|
||||||||
|
Using Significant
|
||||||||
|
Unobservable Inputs (Level 3)
|
||||||||
| Venture Capital Investments | ||||||||
|
Beginning Balance, December 31, 2007, of Level 3
Assets
|
$ | 26,265,790 | ||||||
|
Realized Gains or Losses included in net change in net assets
from operations
|
— | |||||||
|
Unrealized gains or losses included in net change in net assets
from operations
|
||||||||
|
APF Group, Inc
|
$ | (307,334 | ) | |||||
|
BioWorks, Inc.
|
(28,000 | ) | ||||||
|
Carolina Skiff LLC
|
(227,000 | ) | ||||||
|
Gemcor LLC
|
1,700,000 | |||||||
|
Golden Goal LLC
|
(237,413 | ) | ||||||
|
Kionix, Inc
|
778,432 | |||||||
|
Rocket Broadband Networks, Inc.
|
(715,000 | ) | ||||||
|
Niagara Dispensing Technologies, Inc
|
(111,000 | ) | ||||||
|
Wineisit.com
|
(100,000 | ) | $ | 752,685 | ||||
|
Purchases of Securities
|
||||||||
|
Associates Interactive, LLC
|
$ | 200,000 | ||||||
|
APF Group, Inc. capitalized Payment in Kind and interest
conversion
|
40,832 | |||||||
|
GripApp Systems, Inc.
|
666,667 | |||||||
|
Mezmeriz, Inc.
|
100,000 | |||||||
|
Niagara Dispensing Technologies, Inc.
|
374,990 | |||||||
|
Niagara Dispensing Technologies, Inc interest conversion
|
41,783 | |||||||
|
Rocket Broadband Networks, Inc.
|
35,000 | |||||||
|
SOMS Technologies, LLC
|
250,000 | $ | 1,709,272 | |||||
|
Repayments of Securities
|
||||||||
|
New Monarch Machine Tool, Inc.
|
$ | (520,147 | ) | |||||
|
Contract Staffing
|
(131,065 | ) | ||||||
|
Gemcor II, LLC
|
(62,253 | ) | $ | (713,465 | ) | |||
|
Transfers in or out of Level 3
|
— | |||||||
|
Ending Balance, December 31, 2008, of Level 3
Assets
|
$ | 28,014,282 | ||||||
|
Realized Gains or Losses included in net change in net assets
from operations
|
||||||||
|
Kionix, Inc. (Kionix)
|
$ | 3,743,245 | ||||||
|
Rocket Broadband
|
$ | (705,030 | ) | |||||
|
Ramsco
|
$ | 155,000 | $ | 3,193,215 | ||||
|
Unrealized gains or losses included in net change in net assets
from operations
|
||||||||
|
Adampluseve, Inc. (Adampluseve)
|
$ | (65,341 | ) | |||||
|
APF Group, Inc. (APF)
|
$ | (324,213 | ) | |||||
|
Associates Interactive, LLC (Associates)
|
$ | (293,518 | ) | |||||
|
Golden Goal LLC (Golden Goal)
|
$ | (419,238 | ) | |||||
|
GridApp Systems, Inc. (Gripapp)
|
$ | (295,935 | ) | |||||
36
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
Fair Value Measurements
|
||||||||
|
Using Significant
|
||||||||
|
Unobservable Inputs (Level 3)
|
||||||||
| Venture Capital Investments | ||||||||
|
G-TEC Natural Gas Systems (G-Tec)
|
$ | (98,000 | ) | |||||
|
Innov-X Systems, Inc. (Innovex)
|
$ | (2,711,700 | ) | |||||
|
Kionix, Inc. (Kionix)
|
$ | (493,959 | ) | |||||
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
|
$ | (367,951 | ) | |||||
|
Rheonix, Inc. (Rheonix)
|
$ | 136,000 | ||||||
|
Rocket Broadband realized loss
|
$ | 715,000 | $ | (4,218,855 | ) | |||
|
Purchases of Securities
|
||||||||
|
Associates
|
$ | 43,517 | ||||||
|
APF
|
$ | 24,212 | ||||||
|
Carolina Skiff LLC (Carolina Skiff)
|
$ | 500,000 | ||||||
|
Gemcor II, LLC (Gemcor)
|
$ | 500,000 | ||||||
|
Golden Goal
|
$ | 38,238 | ||||||
|
GridApp Systems Inc. (GridApp)
|
$ | 429,267 | ||||||
|
Innovex
|
$ | 250,000 | ||||||
|
Microcision LLC (Microcision)
|
$ | 658,808 | ||||||
|
Niagara Dispensing
|
$ | 310,408 | ||||||
|
Rheonix, Inc. (Rheonix)
|
$ | 253,000 | ||||||
|
SOMS Technologies, LLC (Soms)
|
$ | 104,790 | $ | 3,112,240 | ||||
|
Repayments of Securities
|
||||||||
|
EmergingMed.com, Inc.
|
$ | (41,667 | ) | |||||
|
Gemcor II, LLC (Gemcor)
|
$ | (79,314 | ) | |||||
|
Kionix
|
$ | (5,249,284 | ) | |||||
|
RAMSCO (Ramsco)
|
$ | (455,000 | ) | |||||
|
Rocket Broadband
|
$ | (9,970 | ) | $ | (5,835,235 | ) | ||
|
Transfers in or out of Level 3
|
— | |||||||
|
Ending Balance, December 31, 2009, of Level 3
Assets
|
$ | 24,265,647 | ||||||
|
The amount of total gains or losses for the period included
in changes in net assets attributable to the change in
unrealized gains or losses relating to assets still held at the
reporting date
|
$ | (4,439,896 | ) | |||||
|
Gains and losses (realized and unrealized) included in net
decrease in net assets from operations for the period above are
reported as follows:
|
||||||||
|
Gain (Loss) on Sales and Dispositions
|
$ | 3,193,215 | ||||||
|
Change in unrealized gains or losses relating to assets still
held at reporting date
|
$ | (1,246,681 | ) | |||||
In the valuation process, the Corporation uses financial
information received from its portfolio companies, which
includes both audited and unaudited financial statements, annual
projections and budgets prepared by the portfolio company and
other financial and non-financial business information supplied
by the portfolio companies’ management. This information is
used to determine financial condition, performance, and
valuation of the portfolio investments. The valuation may be
reduced if a company’s performance and potential have
significantly deteriorated. If the factors which led to the
reduction in valuation are overcome, the valuation may be
restored.
Another key factor used in valuing equity investments is recent
arms-length equity transactions with unrelated new investors
entered into by the portfolio company that the Corporation
utilizes to form a basis for its underlying value. Many times
the terms of these equity transactions may not be identical to
the equity transactions between the portfolio company and the
Corporation, and the impact of the discrepancy in transaction
terms on the market value of the portfolio company may be
difficult or impossible to quantify.
Any changes in estimated fair value are recorded in our
statement of operations as “Net increase (decrease) in
unrealized appreciation.”
Investments are stated at fair value as determined in good faith
by the Board of Directors, as described in the Notes to
Consolidated Schedule of Portfolio Investments. Certain
investment valuations have been determined by the Board of
Directors in the absence of readily ascertainable fair values.
The estimated valuations are not necessarily indicative of
amounts which may ultimately be realized as a result of future
sales or other dispositions of securities, and these favorable
or unfavorable differences could be material.
37
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Certain investment agreements require the portfolio companies to
meet compliance covenants. These covenants are generally of a
non-financial nature related to reporting to investors, but may
include certain financial requirements for interest and
principal repayments. At December 31, 2009 certain of
Rand’s portfolio investments were in violation of their
loan covenants. Management of the Corporation is pursuing
compliance and has considered this in determining the carrying
value of the investment and may waive such defaults in certain
circumstance.
Realized Gain or Loss and Unrealized Appreciation or
Depreciation of Investments
– Amounts reported
as realized gains and losses are measured by the difference
between the proceeds from the sale or exchange and the cost
basis of the investment without regard to unrealized gains or
losses recorded in prior periods. The cost of securities that
have, in the Board of Directors’ judgment, become
worthless, are written off and reported as realized losses.
Unrealized appreciation or depreciation reflects the difference
between the valuation of the investments and the cost basis of
the investments.
Investment Classification
– In
accordance with the provisions of the Investment Company Act of
1940 (1940 Act), the Corporation classifies its investments by
level of control. In the 1940 Act “Control
Investments” are investments in those companies that the
Corporation is deemed to “Control”. The Corporation is
deemed to control a portfolio company if it owns more than 25%
of the voting securities of the company or has greater than 50%
representation on the company’s board. “Affiliate
Investments” are those non-control companies that the
Corporation owns between 5% and 25% of the voting securities.
“Non-Control/Non-Affiliate Investments” are those
companies that are neither Control Investments nor Affiliate
Investments.
Cash and Cash Equivalents
– Temporary
cash investments having a maturity of three months or less when
purchased are considered to be cash equivalents.
Revenue Recognition
– Interest Income -
Interest income generally is recognized on the accrual basis
except where the investment is in default or otherwise presumed
to be in doubt. In such cases, interest is recognized at the
time of receipt. A reserve for possible losses on interest
receivable is maintained when appropriate.
The Rand SBIC interest accrual is also regulated by the
SBA’s “Accounting Standards and Financial Reporting
Requirements for Small Business Investment Companies.”
Under these rules interest income cannot be recognized if
collection is doubtful, and a 100% reserve must be established.
The collection of interest is presumed to be in doubt when there
is substantial doubt about a portfolio company’s ability to
continue as a going concern or the loan is in default more than
120 days. Management also utilizes other qualitative and
quantitative measures to determine the value of a portfolio
investment and the collectability of any accrued interest.
Original Issue Discount
– Investments
may create “original issue discount” or OID income.
This situation arises when the Corporation purchases a warrant
and a note from a portfolio company simultaneously, which
requires an allocation of a portion of the purchase price to the
warrant and reduces the note or debt instrument by an equal
amount in the form of a note discount or OID. The note is then
reported net of the OID and the OID is amortized into interest
income over the life of the loan. The Corporation recorded OID
income of $0, $0, and $62,333 during the years ended
December 31, 2009, 2008 and 2007, respectively.
Deferred Debenture Costs
– SBA debenture
origination and commitment costs, which are included in other
assets, will be amortized ratably over the terms of the SBA
debentures. Amortization expense during the years ended
December 31, 2009, 2008 and 2007 was $28,410, $46,982 and
$27,982, respectively. Annual amortization expense for the next
five years is estimated to average $32,000 per year.
Deferred Revenue
– The Corporation
charges application and closing fees in connection with its
investments. These fees are deferred and amortized into income
over the life of the debt or equity investment. Deferred fees
amortized into income for the years ended December 31,
2009, 2008 and 2007 amounted to $17,766, $33,275 and $29,366,
respectively. Deferred revenue amortization income is estimated
to be $2,378 in 2010 and $733 in 2011.
38
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Net Assets Per Share
– Net assets per
share are based on the number of shares of common stock
outstanding. There are no common stock equivalents.
Supplemental Cash Flow Information
–
Income taxes (refunded) paid during the years ended
December 31, 2009, 2008 and 2007 amounted to ($83,783),
$1,069,032 and $845,429, respectively. Interest paid during the
years ended December 31, 2009, 2008 and 2007 was $472,281,
$473,575, and $468,184, respectively. During 2009, 2008 and
2007, the Corporation converted $156,933, $82,613, and $50,000,
respectively, of interest receivable and payment in kind
interest (PIK) into equity investments. During the year ended
December 31, 2009, the Corporation recorded an escrow
receivable totaling $524,926, in connection with the sale of an
investment and during 2007 the Corporation recorded two escrow
receivables totaling $209,469 and $711,249 in connection with
the sale of the investments.
Concentration of Credit and Market
Risk
– The Corporation’s financial
instruments potentially subject it to concentrations of credit.
Cash is invested with banks in amounts which, at times, exceed
insurable limits. Management does not anticipate non-performance
by the banks.
As of December 31, 2009, 80% of the Corporation’s
total investment value was held in five notes and equity
securities. As of December 31, 2008, 78% of the
Corporation’s total investment value was held in five notes
and equity securities.
Income Taxes
– The Corporation adopted
ASC 740 (formerly, FIN 48), “Accounting for
Uncertainty in Income Taxes”, on January 1, 2007. ASC
740 clarifies the accounting and disclosure for uncertain tax
positions by requiring that a tax position meet a “more
likely than not threshold” for the benefit of the tax
position to be recognized in the financial statements. A tax
position that fails to meet the more likely than not recognition
threshold will result in either a reduction of a current or
deferred tax asset or receivable, or the recording of a current
or deferred tax liability. ASC 740 also provides guidance on
measurement, recognition of tax benefits, classification,
interim period accounting disclosure, and transition
requirements in accounting for uncertain tax positions.
Accounting Estimates
– The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Recent
Accounting Pronouncements
The FASB Accounting Standards Codification (ASC) and the
Hierarchy of Generally Accepted Accounting Principles
(Codification) –
The Codification is the
source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants including the Company.
On the effective date of this Statement, the Codification
superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting
literature not included in the Codification is
non-authoritative. Since the Codification was effective for
financial statements issued for interim and annual periods
ending after September 15, 2009, the Company revised its
references to Statement of Financial Accounting Standards to
refer to the Codification as its source for GAAP.
Subsequent Events
– ASC 855 establishes
the principles and requirements for evaluating and reporting
subsequent events, including the period subject to evaluation
for subsequent events, the circumstances requiring recognition
of subsequent events in the financial statements, and the
required disclosures. This section of the Codification was
effective for interim and annual periods ending after
June 15, 2009, which was June 30, 2009 for the
Corporation.
39
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Fair Value Measurements and Disclosure
–
ASU
2010-06
affects all entities that are required to make disclosures about
recurring and non recurring fair value measurements under FASB
ASC Topic 820, originally issued as FASB Statement No. 157,
Fair Value Measurements. This ASU requires certain new
disclosures and clarifies two existing disclosure requirements.
The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements. Those disclosures
are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years.
| Note 2. – | Other Assets |
At December 31, 2009 and 2008 other assets was comprised of
the following:
| 2009 | 2008 | |||||||
|
Escrow receivable from Kionix, Inc.
|
$ | 524,926 | — | |||||
|
Deferred debenture costs
|
187,286 | $ | 172,446 | |||||
|
Escrow receivable from Allworx
|
— | 140,048 | ||||||
|
Escrow receivable from USTec
|
22,199 | 69,421 | ||||||
|
Property, plant and equipment (net)
|
7,794 | 15,604 | ||||||
|
Prepaid expense
|
4,374 | — | ||||||
|
Operating receivables
|
1,492 | 2,876 | ||||||
|
Reserve for uncollectible USTec escrow
|
(22,199 | ) | (69,421 | ) | ||||
|
Total other assets
|
$ | 725,872 | $ | 330,974 | ||||
In 2009 the Corporation sold its equity interest in Kionix,
Inc.. A portion of the proceeds were held in escrow and is
expected to be released in 2011.
In 2007 the Corporation sold its equity in Allworx. A portion of
the proceeds were held in escrow and this amount was received in
2009.
In 2007 the Corporation sold a portion of its shares in UStec. A
portion of the proceeds were held in escrow and were scheduled
to be released in 2008. A portion of the escrow was received
during 2009. There are ongoing discussions with UStec about the
collection of the remaining escrow receivable and a reserve has
been established against the receivable.
| Note 3. – | Income Taxes |
Deferred tax assets and liabilities are recorded for temporary
differences between the financial statement and tax bases of
assets and liabilities using the tax rate expected to be in
effect when the taxes are actually paid or recovered.
The tax effect of the major temporary differences and
carryforwards that give rise to the Corporation’s net
deferred tax liabilities at December 31, 2009 and 2008 are
approximately as follows:
| 2009 | 2008 | |||||||
|
Operations
|
$ | 1,502,000 | $ | 1,349,000 | ||||
|
Investments
|
(3,479,000 | ) | (5,007,000 | ) | ||||
|
Tax credit carryforwards
|
168,000 | 168,000 | ||||||
|
Deferred tax liability, net
|
$ | (1,809,000 | ) | $ | (3,490,000 | ) | ||
40
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RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Company assesses annually the recoverability of its deferred
tax asset to determine if a valuation allowance is necessary. In
performing this assessment, it considers estimated future
taxable income and ongoing tax planning strategies. No allowance
was deemed necessary for 2009 and 2008.
The components of income tax expense (benefit) reported in the
statements of operations are as follows for the years ended
December 31:
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 1,200,502 | $ | 677,635 | $ | 837,752 | ||||||
|
State
|
69,638 | (5,345 | ) | 63,759 | ||||||||
| 1,270,140 | 672,290 | 901,511 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(1,528,770 | ) | (427,692 | ) | 472,266 | |||||||
|
State
|
(152,230 | ) | (16,308 | ) | 12,054 | |||||||
| (1,681,000 | ) | (444,000 | ) | 484,320 | ||||||||
|
Total
|
$ | (410,860 | ) | $ | 228,290 | $ | 1,385,831 | |||||
A reconciliation of the expense (benefit) for income taxes at
the federal statutory rate to the expense reported is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Net investment gain and realized gain before income tax expense
|
$ | (1,150,280 | ) | $ | 648,757 | $ | 4,104,996 | |||||
|
Expected tax expense at statutory rate
|
$ | (391,095 | ) | $ | 241,577 | $ | 1,395,699 | |||||
|
State – net of federal effect
|
(54,511 | ) | 15,016 | 87,430 | ||||||||
|
Pass-through benefit from Portfolio Investment
|
(44,052 | ) | (42,500 | ) | — | |||||||
|
Non-deductible restructuring costs
|
43,439 | — | — | |||||||||
|
Other
|
35,359 | 14,197 | (97,298 | ) | ||||||||
|
Total
|
$ | (410,860 | ) | $ | 228,290 | $ | 1,385,831 | |||||
At December 31, 2009 and 2008 the Corporation no longer had
any federal net operating loss carryforwards, state net
operating loss carryforwards or capital loss carryforwards. For
state tax purposes the Corporation had a Qualified Emerging
Technology Company (QETC) tax credit carryforward of $255,381 at
December 31, 2009 and 2008. The QETC credit carryforward
does not have an expiration date.
The Corporation adopted ASC 740 (formerly FIN 48),
Accounting for Uncertainty in Income Taxes, on January 1,
2007. The cumulative effect of adopting ASC 740 was to increase
current taxes payable by $21,200 and reduce deferred tax
liabilities by $316,253. As of January 1, 2007 the balance
of accumulated net investment loss was decreased by $11,016, and
the balance in net unrealized appreciation on investments was
increased by $327,269. Upon adoption, the liability for income
taxes associated with uncertain tax positions at January 1,
2007 was $21,200 which, if recognized, would impact the
Corporation’s effective tax rate. The Corporation does not
expect that the amounts of unrecognized tax positions will
change significantly within the next 12 months.
41
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follow:
|
Balance at January 1, 2007 – adoption of ASC 740
|
$ | (295,053 | ) | |
|
Increases for positions taken in current year
|
316,253 | |||
|
Increases for positions taken in prior year
|
— | |||
|
Decreases in positions taken in prior year
|
(12,700 | ) | ||
|
Decreases for settlements with taxing authorities
|
— | |||
|
Decrease for lapses in the applicable statute of limitations
|
— | |||
|
Balance at December 31, 2007
|
8,500 | |||
|
Increases for positions taken in current year
|
— | |||
|
Increases for positions taken in prior year
|
21,000 | |||
|
Decreases in positions taken in prior year
|
— | |||
|
Decreases for settlements with taxing authorities
|
— | |||
|
Decrease for lapses in the applicable statute of limitations
|
— | |||
|
Balance at December 31, 2008
|
29,500 | |||
|
Increases for positions taken in current year
|
||||
|
Increases for positions taken in prior year
|
66,000 | |||
|
Decreases in positions taken in prior year
|
— | |||
|
Decreases for settlements with taxing authorities
|
— | |||
|
Decrease for lapses in the applicable statute of limitations
|
— | |||
|
Balance at December 31, 2009
|
$ | 95,500 | ||
It is the Corporation’s policy to include interest and
penalties related to income tax liabilities in income tax
expense on the Statement of Operations. The amounts recognized
for interest and penalties related to unrecognized tax benefits
was $6,300, $4,800 and $0 for the years ended December 31,
2009, 2008 and 2007, respectively.
The Corporation is currently open to audit under the statute of
limitations by the Internal Revenue Service for the years ending
December 31, 2006 through 2009. The Corporation’s
state income tax returns are open to audit under the statute of
limitations for the years ended December 31, 2005 through
2009. The New York State Department of Revenue informed the
Corporation that they are auditing the Corporation’s New
York corporate income tax returns for the years ended
December 31, 2005 through 2007. The Corporation expects
this audit to be completed during the year ending
December 31, 2010. All anticipated adjustments have been
recorded as an ASC 740 liability at December 31, 2009.
| Note 4. – | SBA Debenture Obligations |
Rand SBIC paid a non-refundable commitment fee of $100,000 to
the SBA to reserve $10,000,000 of approved SBA Guaranteed
Debenture leverage in July 2003 and August 2004. The fee
represents 1% of the face amount of the leverage reserved under
the commitment and was a partial prepayment of the SBA’s
nonrefundable 3% leverage draw fees. The remaining leverage
commitment of $1,900,000 expired on September 30, 2008 and
the remaining unamortized prepaid leverage fee of $19,000 was
expensed during 2008. The Corporation re-applied to the SBA for
the remaining $1,900,000 in leverage during 2009 and received
approval of its application during 2009. In the fourth quarter
of 2009, the Corporation paid the SBA a commitment fee of
$19,000 to reserve the $1,900,000 in debenture leverage. As of
December 31, 2009 and 2008, Rand SBIC had debentures
payable to and guaranteed by the SBA totaling $9,100,000 and
$8,100,000 against the SBA $10,000,000 total commitment. The
debenture terms require semiannual payments of interest at
annual interest rates ranging from 0.645% to 5.535%, plus an
annual charge that ranged from .285% to .887% during the year
ended December 31, 2009. The $1,000,000 of debentures
originated in
42
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2009 will have their fixed interest rate and 10 year
maturity date determined in March 2010. The debentures
outstanding at December 31, 2009 will mature from 2014 to
2020. See Note 9 for SBA leverage draw downs made
subsequent to year end.
| Note 5. – | Stockholders’ Equity (Net Assets) |
At December 31, 2009 and 2008, there were
500,000 shares of $10.00 par value preferred stock
authorized and unissued.
The Board of Directors has authorized the repurchase of up to
340,946 shares of the Corporation’s outstanding common
stock on the open market through October 22, 2010 at prices
that are no greater than current net asset value.
Summary of change in equity accounts:
|
Accumulated
|
Undistributed
|
|||||||||||
|
Net
|
Net Realized
|
Net Unrealized
|
||||||||||
|
Investment
|
Gain (Loss) on
|
Appreciation
|
||||||||||
| Loss | Investments | on Investments | ||||||||||
|
Balance, December 31, 2007
|
$ | (3,940,409 | ) | $ | 7,796,289 | $ | 8,459,391 | |||||
|
Net increase (decrease) in net assets from operations
|
196,501 | (60,812 | ) | 273,454 | ||||||||
|
Balance, December 31, 2008
|
$ | (3,743,908 | ) | $ | 7,735,477 | $ | 8,732,845 | |||||
|
Net (decrease) increase in net assets from operations
|
(1,217,817 | ) | 3,161,913 | (2,683,516 | ) | |||||||
|
Balance, December 31, 2009
|
$ | (4,961,725 | ) | $ | 10,897,390 | $ | 6,049,329 | |||||
| Note 6. – | Stock Option Plans |
In July 2001, the stockholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the
“Plan”). The Plan provides for the award of options to
purchase up to 200,000 common shares to eligible employees. In
2002, the Corporation placed the Plan on inactive status as it
developed a new profit sharing plan for the Corporation’s
employees in connection with the establishment of its SBIC
subsidiary. As of December 31, 2009, 2008 and 2007, no
stock options had been awarded under the Plan. Because
Section 57(n) of the Investment Company Act of 1940 (the
“1940 Act”) prohibits maintenance of a profit sharing
plan for the officers and employees of a BDC where any option,
warrant or right is outstanding under an executive compensation
plan, no options will be granted under the Plan while any profit
sharing plan is in effect with respect to the Corporation (See
Note 7).
| Note 7. – | Employee Benefit Plans |
The Corporation has a defined contribution 401(k) Plan. The Plan
provides a base contribution of 1% for eligible employees and
also provides up to 5% matching contributions. Plan expense was
$25,743, $27,158 and $29,882 during the years ended
December 31, 2009, 2008 and 2007, respectively.
In 2002, the Corporation established a Profit Sharing Plan for
its executive officers in accordance with Section 57(n) of
the 1940 Act. Under the Profit Sharing Plan, Rand will pay its
executive officers aggregate profit sharing payments equal to
12% of the net realized capital gains of its SBIC subsidiary,
net of all realized capital losses and unrealized depreciation
of the subsidiary, for the fiscal year, computed in accordance
with the Plan and the Corporation’s interpretation of such
policies. Any profit sharing paid cannot exceed 20% of the
Corporation’s net income, as defined. The profit sharing
payments will be split equally between Rand’s two executive
officers, who are fully vested in the Plan. The Corporation has
accrued $133,013 for estimated contributions to, or payments
made under the Plan, during the year ended December 31,
2009 and this amount does not exceed the defined limits.
43
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
There were no contributions to, or payments made under the Plan,
for the year ended December 31, 2008 or December 31,
2007.
| Note 8. – | Commitments and Contingencies |
The Corporation has an agreement which provides health benefits
for the spouse of a former officer of the Corporation. Remaining
payments projected to be paid to the surviving spouse have been
fully accrued. Total accrued health benefits under this
agreement at December 31, 2009 and 2008 were $43,040 and
$51,122, respectively.
The Corporation has a lease for office space which expires in
December 2010. Rent expense under this operating lease for the
years ended December 31, 2009, 2008 and 2007 was $18,490,
$16,698 and $16,320 per year. The future operating lease
obligation for the next year is approximately $17,500.
| Note 9. – | Subsequent Events |
The Corporation has evaluated subsequent events for recognition
and disclosure in the consolidated financial statements for the
year ended December 31, 2009. Events are evaluated based on
whether they represent information existing as of
December 31, 2009, which require recognition in the
consolidated financial statements or new events occurring after
December 31, 2009, which do not require recognition, but
require disclosure if the event is significant to the
consolidated financial statements. These financial statements
have not been updated for events occurring after March 18,
2010, which is the date these financial statements were issued.
Subsequent to the year ended December 31, 2009, the
Corporation made four investments in four portfolio companies
totaling $1,025,000. In addition, the Corporation drew down its
remaining SBA leverage of $900,000.
|
|
Quarterly Operations and Earnings Data – Unaudited |
|
4th
|
3rd
|
2nd
|
1st
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2009
|
||||||||||||||||
|
Investment income
|
$ | 751,656 | $ | 298,615 | $ | 320,995 | $ | 378,259 | ||||||||
|
Net increase (decrease) in net assets from operations
|
(94,157 | ) | 33,394 | (657,418 | ) | (21,239 | ) | |||||||||
|
Basic and diluted net increase (decrease) in net assets from
operations per share
|
(0.01 | ) | 0.00 | (0.11 | ) | (0.00 | ) | |||||||||
|
2008
|
||||||||||||||||
|
Investment income
|
$ | 472,327 | $ | 424,043 | $ | 482,268 | $ | 378,365 | ||||||||
|
Net increase (decrease) in net assets from operations
|
855,573 | (337,383 | ) | (17,231 | ) | (91,816 | ) | |||||||||
|
Basic and diluted net increase (decrease) in net assets from
operations per share
|
0.15 | (0.06 | ) | (0.00 | ) | (0.02 | ) | |||||||||
44
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
Allowance for Doubtful Accounts |
The Corporation maintains an allowance for doubtful accounts for
estimated uncollectible interest payments due from portfolio
investments. The allowance for doubtful accounts is based on a
review of the overall condition of the receivable balances and a
review of past due amounts. Changes in the allowance for
doubtful accounts consist of the following:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance at beginning of year
|
($ | 122,817 | ) | $ | (122,000 | ) | $ | (122,000 | ) | |||
|
Provision for losses
|
(87,089 | ) | (817 | ) | — | |||||||
|
Recoveries/Sales
|
817 | — | — | |||||||||
|
Balance at end of year
|
($ | 209,089 | ) | $ | (122,817 | ) | $ | (122,000 | ) | |||
45
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED GAIN
For the Year Ended December 31, 2009
SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED GAIN
For the Year Ended December 31, 2009
|
Cost
|
||||||||
|
Increase
|
Realized
|
|||||||
| (Decrease) | Gain (Loss) | |||||||
|
New and additions to previous investments
|
||||||||
|
Microcision LLC
|
$ | 658,808 | ||||||
|
Carolina Skiff LLC
|
500,000 | |||||||
|
Gemcor II, LLC
|
500,000 | |||||||
|
GridApp Systems, Inc.
|
429,267 | |||||||
|
Niagara Dispensing Technologies, Inc.
|
310,408 | |||||||
|
Rheonix, Inc.
|
253,000 | |||||||
|
Innov-X Systems, Inc.
|
250,000 | |||||||
|
SOMS Technologies, LLC
|
104,791 | |||||||
|
Associates Interactive, LLC
|
43,518 | |||||||
|
Golden Goal, LLC
|
38,238 | |||||||
|
APF Group, Inc
|
24,212 | |||||||
| 3,112,242 | ||||||||
|
Investments repaid, sold or liquidated
|
||||||||
|
Kionix, Inc. repayment
|
(1,506,042 | ) | $ | 3,743,215 | ||||
|
Rocket Broadband Networks, Inc. realized loss
|
(715,000 | ) | (705,030 | ) | ||||
|
Ramsco repayment
|
(300,000 | ) | 155,000 | |||||
|
Photonic Products Group, Inc. sale
|
(88,750 | ) | (31,272 | ) | ||||
|
Gemcor LLC repayment
|
(79,314 | ) | — | |||||
|
EmergingMed.com, Inc. repayment
|
(41,667 | ) | — | |||||
| (2,730,773 | ) | $ | 3,161,913 | |||||
|
Net change in investments
|
$ | 381,469 | $ | 3,161,913 | ||||
46
Table of Contents
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
|
|
Controls and Procedures |
Management report on Internal Control Over Financial
Reporting.
The management of the Corporation is
responsible for establishing and maintaining adequate internal
control over financial reporting. The Corporation’s
internal control system is a process designed to provide
reasonable assurance to the Corporation’s management and
board of directors regarding the preparation and fair
presentation of published financial statements.
Our internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally
accepted accounting principles and that receipts and
expenditures are being made only in accordance with
authorizations of management and the directors of the
Corporation; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use
or disposition of the Corporation’s assets that could have
a material effect on our financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s
internal control over financial reporting as of
December 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on our assessment management
believes that, as of December 31, 2009, the
Corporation’s internal control over financial reporting is
effective based on those criteria.
This annual report does not include an attestation report of the
Corporation’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the company’s
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the company
to provide only management’s report in this annual report.
Changes in Internal Control over Financial
Reporting.
There have been no significant changes
in our internal control or in other factors that could
significantly affect those controls subsequent to our
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
| Item 9B. | Other Information |
None
| Item 10. | Directors, Executive Officers, and Corporate Governance |
Information in response to this Item is incorporated herein by
reference to the information under the headings
“PROPOSAL 1 – ELECTION OF DIRECTORS”,
“COMMITTEES AND MEETING DATA,” and
“Section 16(a) Beneficial Ownership Compliance”
provided in the Corporation’s definitive Proxy Statement
for its Annual Meeting of Shareholders to be held May 4,
2010, to be filed under Regulation 14A (the “2010
Proxy Statement”).
The Corporation has adopted a written code of ethics and officer
Code of Ethics that applies to our principal executive officer,
principal financial officer, and vice president of finance, and
a Business Ethics Policy applicable to the Corporation’s
directors, officers and employees. The Corporation’s Code
of Ethics and Business Ethics Policy
48
Table of Contents
are available, free of charge, in the Governance section of the
Corporation’s website located at www.randcapital.com.
| Item 11. | Executive Compensation |
Information in response to this Item is incorporated herein by
reference to the information provided in the Corporation’s
2010 Proxy Statement under the headings “COMPENSATION
DISCUSSION AND ANALYSIS” and “DIRECTOR
COMPENSATION.”
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information in response to this Item is incorporated herein by
reference to the information provided in the Corporation’s
2010 Proxy Statement under the heading “BENEFICIAL
OWNERSHIP OF SHARES.”
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
Information in response to this Item is incorporated herein by
reference to the information in the Corporation’s 2010
Proxy Statement under the heading “DIRECTOR
INDEPENDENCE.”
| Item 14. | Principal Accountant Fees and Services |
Information concerning the Corporation’s independent
auditors, the audit committee’s pre-approval policy for
audit services and our principal accountant fees and services is
contained in the Corporation’s 2010 Proxy Statement under
the heading “INDEPENDENT ACCOUNTANT FEES”.
| Item 15. | Exhibits, Financial Statement Schedules |
(a) The following documents are filed as part of this
report and included in Item 8:
(1) CONSOLIDATED FINANCIAL STATEMENTS
Statements of Financial Position as of December 31, 2009
and 2008
Statements of Operations for the three years in the period ended
December 31, 2009
Statements of Changes in Net Assets for the three years in the
period ended December 31, 2009
Statements of Cash Flows for the three years in the period ended
December 31, 2009
Schedule of Portfolio Investments as of December 31, 2009
Schedules of Selected Per Share Data and Ratios for the five
years in the period ended December 31, 2009
Notes to the Consolidated Financial Statements
Supplemental Schedule of Consolidated Changes in Investments at
Cost and Realized Gain for the year ended December 31, 2009
Report of Independent Registered Public Accounting Firm
(2) FINANCIAL STATEMENT SCHEDULES
The required financial statement Schedule II –
Valuation and Qualifying Accounts has been omitted because the
information required is included in the note 10 to the
consolidated financial statements.
| (b) | The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934. |
49
Table of Contents
| (3)(i) | Certificate of Incorporation of the Corporation, incorporated by reference to Exhibit (a)(1) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. |
| (3)(ii) | By-laws of the Corporation incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. |
| (4) | Specimen certificate of common stock certificate, incorporated by reference to Exhibit (b) of Form N-2 filed with the Securities Exchange Commission on April 22, 1997. |
| (10.1) | Employee Stock Option Plan – incorporated by reference Appendix B to the Corporation’s definitive Proxy Statement filed on June 1, 2002.* | |
| (10.3) | Agreement of Limited Partnership for Rand Capital SBIC, L.P. – incorporated by reference to Exhibit 10.3 to the Corporation’s Form 10-K filed for the year ended December 31, 2001. | |
| (10.4) | Certificate of Formation of Rand Capital SBIC, L.P. – incorporated by reference to Exhibit 10.3 to the Corporation’s Form 10-K filed for the year ended December 31, 2001. | |
| (10.5) | Limited Liability Corporation Agreement of Rand Capital Management, LLC - incorporated by reference to Exhibit 10.3 to the Corporation’s Form 10-K filed for the year ended December 31, 2001. | |
| (10.6) | Certificate of Formation of Rand Capital Management, LLC – incorporated by reference to Exhibit 10.3 to the Corporation’s Form 10-K filed for the year ended December 31, 2001. | |
| (10.7) | Certificate of Incorporation of Rand Merger Corporation as filed by the NY Department of State on 12/18/08 – incorporated by reference to Exhibit 1(a) to Registration Statement No. 811-22276 on Form N-5 of Rand Capital SBIC, Inc. filed with the SEC on 2/6/09. | |
| (10.8) | By-laws of Rand Capital SBIC, Inc. – incorporated by reference to Exhibit 2 to Registration Statement No. 811-22276 on Form N-5 of Rand Capital SBIC, Inc. filed with the SEC on 2/6/09. | |
| (10.9) | Certificate of Merger of Rand Capital SBIC, L.P. and Rand Capital Management, LLC into Rand Merger Corporation, as filed by the NY Department of State on 12/18/08 – incorporated by reference to Exhibit 1(b) to Registration Statement No. 811-22276 on Form N-5 of Rand Capital SBIC, Inc. filed with the SEC on 2/6/09. |
| (10.10) | Rand Capital Corporation Amended and Restated Profit Sharing Plan applicable to Rand Capital SBIC, Inc. – incorporated by reference to Exhibit 7 to Registration Statement No. 811-22276 on Form N-5 of Rand Capital SBIC, Inc. filed with the SEC on 2/6/09.* |
| (31.1) | Certification of Principal Executive Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended-filed herewith | |
| (31.2) | Certification of Principal Financial Officer Pursuant to Rules 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended – filed herewith | |
| (32.1) | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Rand Capital Corporation – furnished herewith | |
| (32.2) | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Rand Capital SBIC, Inc. – furnished herewith |
| * | Management contract or compensatory plan. |
50
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
Securities Exchange Act of 1934, the registrant has duly caused
this Report on
Form 10-K
to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: March 18, 2010
RAND CAPITAL CORPORATION
| By: |
/s/
Allen
F. Grum
|
Allen F. Grum, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report on
Form 10-K
has been signed below by the following persons on behalf of the
Corporation in the capacities and on the date indicated.
|
Signature
|
Title
|
|||||
| (i) Principal Executive Officer: | ||||||
|
/s/
Allen
F. Grum
|
President | March 18, 2010 | ||||
| (ii) Principal Accounting & Financial Officer: | ||||||
|
/s/
Daniel
P. Penberthy
|
Treasurer | March 18, 2010 | ||||
| (iii) Directors: | ||||||
|
/s/
Allen
F. Grum
|
Director | March 18, 2010 | ||||
|
/s/
Erland
E. Kailbourne
|
Director | March 18, 2010 | ||||
|
/s/
Ross
B. Kenzie
|
Director | March 18, 2010 | ||||
|
/s/
Willis
S. McLeese
|
Director | March 18, 2010 | ||||
|
/s/
Reginald
B. Newman II
|
Director | March 18, 2010 | ||||
|
/s/
Jayne
K. Rand
|
Director | March 18, 2010 | ||||
|
/s/
Robert
M. Zak
|
Director | March 18, 2010 | ||||
51
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Summary Of Significant Accounting PoliciesNote 2. Other AssetsNote 3. Income TaxesNote 4. Sba Debenture ObligationsNote 5. Stockholders Equity (net Assets)Note 6. Stock Option PlansNote 7. Employee Benefit PlansNote 8. Commitments and ContingenciesNote 9. Subsequent EventsNote 10. Quarterly Operations and Earnings Data UnauditedNote 10Note 11. Allowance For Doubtful AccountsNote 11Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9a(t)Item 9B. Other InformationPart IIIItem 10. Directors, Executive Officers, and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules