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, 2010 | ||
|
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 | NASDAQ Capital Market |
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, 2010 was approximately $17,062,848 based upon the
last sale price as quoted by NASDAQ Capital Market on such date.
As of March 7, 2011 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
April 29, 2011 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 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 the newly formed corporation under the name of Rand
Capital SBIC, Inc. (“Rand SBIC”). The following
discussion describes the operations of Rand and its wholly-owned
subsidiary Rand SBIC (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 typically have an equity
component in the form of stock, warrants, options to acquire
stock or the right to convert the debt securities into stock.
Rand SBIC has been the primary investment vehicle since its
formation and it is anticipated that will continue to be the
case in 2011. 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 directors’ 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 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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(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. 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.”
(4) extend significant managerial assistance to such
portfolio companies; and
(5) have a majority of “disinterested” directors
(as defined in the 1940 Act).
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 on 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, 2010 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 extensive 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
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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
which was amended on August 5, 2009. As amended, the
exemption application seeks 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.
Although Rand SBIC is operated as if it were a BDC, it is
currently registered as an investment company under the 1940
Act. If the Corporation receives the exemptions described above,
Rand SBIC intends to promptly file an election to be regulated
as a BDC under the 1940 Act.
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
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Table of Contents
(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.
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 complied with this requirement since the
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 a total of $119,000 to the SBA to reserve
$10,000,000 of approved debenture leverage as a partial
prepayment of the SBA’s nonrefundable 3% leverage fee. When
the original SBA commitment expired on December 31, 2008,
Rand SBIC re-applied to the SBA for the remaining $1,900,000 in
leverage and received approval of its application in October
2009 and paid the SBA a commitment fee of $19,000 to reserve the
remaining $1,900,000 in debenture leverage. The Corporation drew
down $1,000,000 in leverage and paid the related leverage fees
of $24,250 during the fourth quarter of 2009 and drew down the
remaining $900,000 and paid the related leverage fees of $21,825
during the first quarter of 2010. The total leverage was
$10,000,000 at December 31, 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 without penalty. Rand initially capitalized Rand SBIC
with $5 million in Regulatory Capital. Regulatory Capital
is defined by the SBA as private capital, excluding non-cash
assets, contributed to a SBIC licensee. The Corporation expects
to use Rand SBIC as its primary investment vehicle.
Employees
As of December 31, 2010, the Corporation had four employees.
| Item 1A. | Risk Factors |
The
Corporation is Subject to Risks Created by the Valuation of its
Portfolio Investments
All of the Corporation’s portfolio investments are private
securities and are not publicly traded. There is typically no
public market for 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
4
Table of Contents
if a ready market for the 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 and has no established trading market.
The illiquidity of most of 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 likely appear 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.
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 liabilities may include large amounts of
debt securities issued through the SBA which 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 skill, diligence, and the
network of business contacts of its two senior officers, Allen
F. Grum and Daniel P. Penberthy, for the selection, structuring,
closing, monitoring and valuation of its investments. The future
success of the Corporation depends to a significant extent on
the continued service and
5
Table of Contents
coordination of its senior management. The departure of either
of its senior 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.
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’s Portfolio Has a Limited Number of Companies,
and May be Subjected to Greater Risk if Any of These Companies
Defaults
The Corporation’s portfolio investment values are
concentrated in a small number of companies and as such, it may
experience a significant loss in Net Asset Value if one or more
of these companies perform poorly or go out of business. The
unrealized or realized write down of any one of these companies
could negatively impact the Corporation’s Net Asset Value.
The
Corporation May be negatively Affected by Adverse Changes in the
General Economic Conditions of the Domestic and Global
Markets
During 2008 and portions of 2009 the global economy experienced
a recession. This economic downturn had and may continue to have
an impact on the Corporation’s portfolio companies and the
overall financial condition of the Corporation. The portfolio
companies may experience residual effects from this financial
crisis and not be able to repay their debt instruments to the
Corporation, which could have a material adverse effect on Net
Asset Value or the Corporation.
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, 2015. 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. | Removed and Reserved |
Not applicable.
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:
|
2010 Quarter ending:
|
High | Low | ||||||
|
March 31st
|
$ | 3.84 | $ | 3.20 | ||||
|
June 30th
|
$ | 3.77 | $ | 3.00 | ||||
|
September 30th
|
$ | 3.39 | $ | 2.70 | ||||
|
December 31st
|
$ | 3.80 | $ | 2.97 | ||||
|
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 | ||||
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 “Option
Plan”). The Option Plan provides for the award of options
to purchase up to 200,000 common shares to eligible employees.
In 2002, the Corporation placed the Option 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,
2010, no stock options had been awarded under the Option 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 Option
Plan while any profit sharing plan is in effect with respect to
the Corporation.
In 2002, the Corporation established a Profit Sharing Plan (the
“Plan) for its executive officers in accordance with
Section 57(n) of the 1940 Act. Under the Plan, the
Corporation accrues a profit sharing amount equal to 12% of the
net realized capital gains of its SBIC subsidiary, net of all
realized capital losses and unrealized depreciation of the SBIC
subsidiary, for the fiscal year, computed in accordance with the
Plan and the Corporation’s interpretation of the Plan. Any
profit sharing paid or accrued 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 $531,602 for estimated contributions to, or payments
made under the Plan, for the year ended December 31, 2010.
Additionally, the Corporation has accrued $53,032 in estimated
contributions to the Plan related to an escrow receivable and
this amount will be paid when the escrow is collected. The
associated benefits on these profit sharing amounts have been
accrued as of December 31, 2010. It is expected that
$531,602 of this accrual will be paid in the first quarter of
2011. During the year ended December 31, 2009, the
Corporation approved and accrued $133,013 under the Plan which
was paid during the first quarter of 2010.
7
Table of Contents
Shareholders
of Record
On March 7, 2011 the Corporation had a total of
816 shareholders, which included 115 record holders of its
common stock, and an estimated 701 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
340,947 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 21, 2011. 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.
8
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 Peer Group, assuming a base index
of $100 at the end of 2005. 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 CUMULATIVE TOTAL RETURN
ASSUMES
$100 INVESTED ON JAN. 01, 2006
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31, 2010
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 31, 2010
Comparison of cumulative total return of one or more companies,
peer groups, industry indexes
and/or
broad
markets
FISCAL
YEAR ENDING
| COMPANY/INDEX/MARKET | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||
|
Rand Capital Corporation
|
$ | 100.00 | $ | 261.19 | $ | 268.51 | $ | 261.19 | $ | 297.01 | $ | 241.04 | ||||||||||||||||||
|
NASDAQ Market Index
|
$ | 100.00 | $ | 110.25 | $ | 121.88 | $ | 73.10 | $ | 106.22 | $ | 125.36 | ||||||||||||||||||
|
Peer Group Index
|
$ | 100.00 | $ | 132.25 | $ | 94.96 | $ | 38.19 | $ | 67.87 | $ | 97.90 | ||||||||||||||||||
The peer group is comprised of the following companies:
Ameritrans Capital Corp (NasdaqCM:AMTC)
Gladstone Investment Corporation (NasdaqGS:GAIN)
Harris & Harris Group, Inc. (NasdaqGM:TINY)
Hercules Technology Growth Capital, Inc. (NasdaqGS: HTGC)
Main Street Capital Corporation (NasdaqGS: MAIN)
MCG Capital Corporation (NasdaqGS:MCGC)
Triangle Capital Corporation (NasdaqGM: TCAP)
9
Table of Contents
The Corporation selected the Peer Group on the basis of its
belief that the seven issuers in the group are closed end
investment companies that have elected to be regulated as
BDC’s and have investment objectives that are similar to
those of the Corporation, and that among publicly traded
companies that have those attributes, they are relatively
similar in size to 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.
Balance
Sheet Data as of December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Total assets
|
$ | 35,091,260 | $ | 35,631,371 | $ | 32,228,797 | $ | 32,722,151 | $ | 29,463,944 | ||||||||||
|
Total liabilities
|
$ | 12,040,442 | $ | 12,425,490 | $ | 12,001,831 | $ | 12,904,328 | $ | 12,681,539 | ||||||||||
|
Net assets
|
$ | 23,050,818 | $ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | $ | 16,782,405 | ||||||||||
|
Net asset value per outstanding share
|
$ | 3.38 | $ | 3.40 | $ | 3.54 | $ | 3.47 | $ | 2.93 | ||||||||||
|
Common stock shares outstanding
|
6,818,934 | 6,818,934 | 5,718,934 | 5,718,934 | 5,718,934 | |||||||||||||||
Operating
Data for the year ended December 31:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Investment income
|
$ | 847,283 | $ | 1,749,525 | $ | 1,757,003 | $ | 2,302,870 | $ | 1,326,962 | ||||||||||
|
Total expenses
|
$ | 2,367,911 | $ | 1,850,113 | $ | 1,721,555 | $ | 1,650,947 | $ | 1,519,184 | ||||||||||
|
Net investment (loss) gain
|
$ | (973,189 | ) | $ | (63,878 | ) | $ | 135,689 | $ | 398,703 | $ | (1,264,802 | ) | |||||||
|
Net realized gain (loss) on sales and dispositions of
investments, net of tax
|
$ | 3,222,688 | $ | 2,007,974 | — | $ | (42,045 | ) | $ | 3,456,441 | ||||||||||
|
Net (decrease) increase in unrealized appreciation, net of tax
|
$ | (2,404,562 | ) | $ | (2,683,516 | ) | $ | 273,454 | $ | 2,362,507 | $ | 5,974,832 | ||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (155,063 | ) | $ | (739,420 | ) | $ | 409,143 | $ | 2,719,165 | $ | 8,166,471 | ||||||||
10
Table of Contents
| 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”). In 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 describes 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 Rand
SBIC.
The Corporation’s primary business is making subordinated
debt, membership interest, or preferred or common stock
investments in 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
3) high potential for growth in revenue and cash flow
4) potential to realize appreciation in an equity position,
if any.
11
Table of Contents
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, including unsolicited
proposals from the public and referrals from banks, lawyers,
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 reference checks with
customers and suppliers of the portfolio company.
Following an initial investment in a portfolio company, the
Corporation may 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 may exit investments through the maturation of a
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 companies.
2010
Highlights and Outlook
The Corporation’s net asset value decreased $(0.02), or
(1%) during 2010, closing the year at $3.38 per share down from
$3.40 at December 31, 2009. At December 31, 2010, the
Corporation’s total investment portfolio was valued at
$19.4 million, which exceeds its cost basis of
$13.6 million, reflecting $5.8 million in net
unrealized appreciation.
The Corporation’s common stock traded in a range that was
above and below its net asset value per share during 2010, and
traded at a premium to its net asset value during a majority of
2009. The year closed with the stock trading at $3.23, a
discount to the net asset value of $3.38.
During 2010 the Corporation recognized $847,283 in total
investment income, a decrease of ($902,242) from $1,749,525 of
investment income in 2009. The 51.6% decrease is attributable to
an 89% decrease in dividend income to $120,071 during 2010 from
$1,133,102 during 2009. The Corporation received dividends from
portfolio companies that are limited liability companies, which
as a group comprise approximately 59% of the value of the
Corporation’s portfolio at December 31, 2010.
Dividends from these portfolio companies may fluctuate from
period to period based not only on the profitability of the
portfolio company but also on the timing of distributions the
companies make.
The Corporation had several significant portfolio exits during
2010 that gave rise to realized gains. The profit sharing
expense increased due to these realized gains and contributed to
the 28% increase in total expenses in 2010. Total expenses were
$2,367,911 for the year ended December 31, 2010 and this
represents a $517,798 or 28% increase from the 2009 expense
amount of $1,850,113.
12
Table of Contents
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 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. The Corporation invests in loan
instruments, debt instruments, and equity instruments. 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 Accounting
Standards Codification (ASC) 820.
The Corporation uses several approaches to determine the fair
value of an investment. The main approaches are:
| • | Loan and debt securities are generally valued at the price the security would command in order to provide a yield to maturity equivalent to the current yield of similar debt securities. A debt instrument may be reduced in value if it is judged to be of poor quality and collection is in doubt. A debt security may also be valued based on the estimated proceeds from the sale of a portfolio company at its estimated fair value. | |
| • | Equity securities may be valued using the “market approach” or “income approach.” The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. Additionally, the Corporation adjusts valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor. The income approach employs a cash flow and discounting methodology to value an investment. |
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.
13
Table of Contents
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.
All of the Corporation’s investments at December 31,
2010 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 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.
The Corporation may receive distributions from portfolio
companies that are limited liability companies. These
distributions are classified as dividend income on the statement
of operations and are recognized when the amount can be
reasonably estimated.
Recent
Accounting Pronouncements
In January 2010 the FASB issued ASU
2010-06
“Improving Disclosures About Fair Value Measurements,”
which adds new requirements for disclosures about transfers into
and out of Level 1 and 2 and separate disclosures about
purchases, sales, issuances and settlements relating to
Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation, inputs and
valuation techniques. ASU
2010-06
is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010. Adoption of ASU
2010-06
did
not have a significant impact on the Corporation’s
financial statement disclosures.
.
14
Table of Contents
Financial
Condition
Overview:
| 12/31/10 | 12/31/09 | (Decrease) | % (Decrease) | |||||||||||||
|
Total assets
|
$ | 35,091,260 | $ | 35,631,371 | $ | (540,111 | ) | (1.5 | )% | |||||||
|
Total liabilities
|
12,040,442 | 12,425,490 | (385,048 | ) | (3.1 | )% | ||||||||||
|
Net assets
|
$ | 23,050,818 | $ | 23,205,881 | $ | (155,063 | ) | (0.7 | )% | |||||||
Net asset value per share (NAV) was $3.38 per share at
December 31, 2010 versus $3.40 per share at
December 31, 2009.
The Corporation drew down $900,000 in SBA leverage during 2010
and the total owed to the SBA at December 31, 2010 was
$10,000,000. These debentures bear a fixed interest rate and an
annual fee, averaging 4.8%, payable semi-annually. The debenture
principal is repayable in full 10 years from issuance
beginning in 2014.
During September 2009, the Corporation completed a private
offering 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 51% of net assets at
December 31, 2010 compared to 41% at December 31, 2009.
The effect of investment income, realized gains and the change
in unrealized appreciation on investments resulted in a decrease
of $764,685 in the net deferred tax liability from $1,809,000 at
December 31, 2009 to $1,044,315 at December 31, 2010.
Composition
of the Corporation’s Investment Portfolio
The Corporation’s financial condition is dependent on the
success of its portfolio holdings. It has invested substantially
all of its assets in small to medium-sized companies. The
following summarizes the Corporation’s investment portfolio
at the year-ends indicated.
| 12/31/10 | 12/31/09 | (Decrease) | % (Decrease) | |||||||||||||
|
Investments, at cost
|
$ | 13,573,041 | $ | 14,767,920 | $ | (1,194,879 | ) | (8.1 | )% | |||||||
|
Unrealized appreciation, net
|
5,791,584 | 9,528,225 | (3,736,641 | ) | (39.2 | )% | ||||||||||
|
Investments, at fair value
|
$ | 19,364,625 | $ | 24,296,145 | $ | (4,931,520 | ) | (20.3 | )% | |||||||
The Corporation’s total investments at fair value, as
estimated by management and approved by the Board of Directors,
approximated 84% of net assets at December 31, 2010 and
105% of net assets at December 31, 2009.
15
Table of Contents
The changes in investments during the year ended
December 31, 2010, at cost, are comprised of the following:
|
New Investments:
|
Amount | |||
|
Microcision LLC (Microcision)
|
$ | 850,000 | ||
|
Mid America Brick (Mid America)
|
800,000 | |||
|
Liazon Corporation (Liazon)
|
501,200 | |||
|
Rheonix, Inc. (Rheonix)
|
500,000 | |||
|
GridApp Systems, Inc. (GridApp)
|
480,000 | |||
|
Chequed.com, Inc. (Chequed)
|
250,000 | |||
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
|
225,000 | |||
|
Total of investments made during the year ended
December 31, 2010
|
3,606,200 | |||
|
Changes to Investments:
|
||||
|
EmergingMed.com, Inc (Emerging Med) interest conversion
|
216,712 | |||
|
Microcision interest conversion
|
73,472 | |||
|
Niagara Dispensing interest conversion
|
36,918 | |||
|
Mezmeriz, Inc (Mezmeriz) interest conversion
|
21,509 | |||
|
SOMS Technologies, LLC (SOMS) interest conversion
|
15,897 | |||
|
GridApp interest conversion
|
1,774 | |||
|
Total changes to investments during the year ended
December 31, 2010
|
366,282 | |||
|
Investments Repaid, Sold or Liquidated:
|
||||
|
GripApp
|
(1,577,708 | ) | ||
|
Innov-X Systems Inc (Innovex)
|
(1,250,000 | ) | ||
|
Wineisit.com Corporation (Wineisit)
|
(721,918 | ) | ||
|
Golden Goal LLC (Golden Goal)
|
(675,652 | ) | ||
|
APF Group, Inc. (APF)
|
(631,547 | ) | ||
|
Gemcor II, LLC (Gemcor)
|
(110,286 | ) | ||
|
Photonic Products Group, Inc. (Photonics)
|
(76,250 | ) | ||
|
Adam
|
(68,000 | ) | ||
|
Bioworks, Inc. (Bioworks)
|
(56,000 | ) | ||
|
Total of investments repaid, sold or liquidated during the
year ended December 31, 2010
|
(5,167,361 | ) | ||
|
Total change in investments, at cost, during the year ended
December 31, 2010
|
$ | (1,194,879 | ) | |
The Corporation’s top five portfolio companies represented
42% of total assets at December 31, 2010:
|
Fair Value at
|
% of Total Assets
|
|||||||||
|
December 31,
|
at December 31,
|
|||||||||
|
Company
|
Industry | 2010 | 2010 | |||||||
|
Gemcor
|
Manufacturing — Aerospace
Machinery |
$ | 6,113,596 | 17 | % | |||||
|
Synacor Inc. (Synacor)
|
Software | $ | 4,168,001 | 12 | % | |||||
|
Microcision
|
Manufacturing — Medical Products | $ | 1,582,282 | 5 | % | |||||
|
Carolina Skiff LLC (Carolina Skiff)
|
Manufacturing — Boats | $ | 1,500,000 | 4 | % | |||||
|
Ultra-Scan Corporation (Ultra-Scan)
|
Electronics — Hardware/Software | $ | 1,203,000 | 3 | % | |||||
16
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 | |||||||
|
Innovex
|
Manufacturing — Metals Testing Equipment | $ | 6,300,000 | 18 | % | |||||
|
Gemcor
|
Manufacturing — Aerospace Machinery | $ | 6,223,883 | 17 | % | |||||
|
Synacor
|
Software | $ | 4,168,001 | 12 | % | |||||
|
Carolina Skiff
|
Manufacturing — Boats | $ | 1,500,000 | 4 | % | |||||
|
Ultra-Scan
|
Electronics — Hardware/Software | $ | 1,203,000 | 3 | % | |||||
Below is the geographic breakdown of the Corporation’s
investments at fair value as of December 31, 2010 and 2009:
|
% of Net Asset Value at
|
% of Net Asset Value at
|
|||||||
|
Geographic Region
|
December 31, 2010 | December 31, 2009 | ||||||
|
USA – East
|
92 | % | 94 | % | ||||
|
USA – South
|
8 | % | 6 | % | ||||
| 100 | % | 100 | % | |||||
As of December 31, 2010 and 2009, the Corporation’s
investment portfolio consisted of the following investments:
|
Percentage of
|
Percentage of
|
|||||||||||||||
| Cost | Total Portfolio | Fair Value | Total Portfolio | |||||||||||||
|
December 31, 2010:
|
||||||||||||||||
|
Subordinated Debt and Promissory Notes
|
$ | 3,792,655 | 28 | % | $ | 3,345,326 | 17 | % | ||||||||
|
Convertible Debt
|
663,596 | 5 | 663,596 | 4 | ||||||||||||
|
Equity and Partnership Interests
|
9,078,590 | 67 | 15,317,503 | 79 | ||||||||||||
|
Equity Warrants
|
38,200 | — | 38,200 | 0 | ||||||||||||
|
Total
|
$ | 13,573,041 | 100 | % | $ | 19,364,625 | 100 | % | ||||||||
|
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 | % | ||||||||
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. The equity securities in the
Corporation’s 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.
17
Table of Contents
Investment income for the year ended December 31, 2010
decreased to $847,283 from $1,749,525 for the year ended
December 31, 2009. This 51.6% decrease was almost entirely
attributable to a decrease in the dividend income distributed to
the Corporation by Gemcor from $1,101,526 in 2009 to $87,880 in
2010.
Comparison
of the years ended December 31, 2010 and 2009
|
December 31,
|
December 31,
|
Increase
|
% Increase
|
|||||||||||||
| 2010 | 2009 | (Decrease) | (Decrease) | |||||||||||||
|
Interest from portfolio companies
|
$ | 688,177 | $ | 568,524 | $ | 119,653 | 21.0 | % | ||||||||
|
Interest from other investments
|
23,574 | 17,129 | 6,445 | 37.6 | % | |||||||||||
|
Dividend and other investment income
|
120,071 | 1,133,102 | (1,013,031 | ) | (89.4 | )% | ||||||||||
|
Other income
|
15,461 | 30,770 | (15,309 | ) | (49.8 | )% | ||||||||||
|
Total investment income
|
$ | 847,283 | $ | 1,749,525 | $ | (902,242 | ) | (51.6 | )% | |||||||
Interest from portfolio companies
—
The
portfolio interest income increase during 2010 is due to the
origination of new debenture instruments from Carolina Skiff,
Gemcor, and Microcision in late 2009 and 2010.
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 | |||||||||
|
Associates Interactive LLC (Associates)
|
8 | % | $ | 291,331 | 2009 | |||||||
|
G-Tec Natural Gas Systems (G-Tec)
|
8 | % | $ | 400,000 | 2004 | |||||||
|
Niagara Dispensing
|
14 | % | $ | 547,328 | 2010 | |||||||
Interest from other investments
— The
increase in interest from other investments is primarily due to
higher cash balances throughout 2010. The cash balance at
December 31, 2010 and 2009 was $11,698,653 and $9,417,236,
respectively. The higher cash balance at December 31, 2010
is due to the drawdown of SBA leverage in the first quarter of
2010 and the cash proceeds received from the exit of Innov-X
Systems, Inc. (Innovex) and GridApp Systems, Inc. (GridApp)
during 2010.
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 allocated
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, 2010
consisted of distributions from Gemcor for $87,880 and Somerset
Gas Transmission Company (Somerset) for $32,191. Dividend income
for the year ended December 31, 2009 consisted of
distributions from Gemcor for $1,101,526 and Somerset for
$31,576.
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 income associated with the amortization of financing fees
was $2,461 and $11,750 for the years ended December 31,
2010 and 2009, respectively. The annualized financing fee income
based on the existing portfolio will be approximately $1,400 for
2011 and $1,100 in 2012.
The income associated with board attendance fees was $13,000 for
the year ended December 31, 2010 and $19,000 for year ended
December 31, 2009.
18
Table of Contents
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 decrease was 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.
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 | |||||||||
|
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 most of 2009 and a decrease in
interest rates earned on idle funds. The cash balance at
December 31, 2009 and 2008 was $9,417,236 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 for the year ended December 31, 2009
consisted of distributions from Gemcor for $1,101,526 and
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
— 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. Revenue
associated with board attendance fees amounted to $19,000 for
the year ended December 31, 2009 and $14,000 for year ended
December 31, 2008.
Operating
Expenses
Comparison
of the years ended December 31, 2010 and 2009
|
December 31,
|
December 31,
|
|||||||||||||||
| 2010 | 2009 | Increase | % Increase | |||||||||||||
|
Total expenses
|
$ | 2,367,911 | $ | 1,850,113 | $ | 517,798 | 28.0 | % | ||||||||
Expenses consist primarily of interest expense on outstanding
SBA borrowings, compensation expense, and general and
administrative expenses including shareholder and office
expenses and professional fees.
19
Table of Contents
The increase in operating expenses during the year ended
December 31, 2010 is comprised primarily of an 80% or
$497,069 increase in salary expense, a 51% or $64,290 increase
in employee benefits and a 16% or $77,240 increase in interest
expense. Salary expense increased due to the accrual of $660,634
in bonus and profit sharing obligations for the year ended
December 31, 2010 versus a $177,000 bonus and profit
sharing accrual for the same period in 2009. Due to the increase
in the bonus and profit sharing obligations the employee benefit
expense also increased. SBA interest expense increased due to
the additional $1,900,000 in debenture instruments originated in
December 2009 and January 2010. These expense increases are
partly offset by the 29% or $65,553 decrease in professional
fees and the 107% or $93,072 decrease in bad debt expense.
Professional fees were higher in 2009 because the Corporation
incurred additional expense related to compliance with SEC rules
regarding the Corporation’s operating structure and
completion of a private sale of 1,100,000 of its common shares.
For the year ended December 31, 2009 the Corporation
recorded an additional allowance for uncollectible interest of
$87,089.
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 | % | ||||||||
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 were partly offset by
a $118,690 decrease in other expenses.
The Corporation established an allowance for uncollectible
interest during the year ended December 31, 2009 of
$87,089. It consisted of: APF Group, Inc for $48,276, Associates
Interactive for $36,245 and Golden Goal LLC 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 2009 because in 2008
the remaining SBA leverage commitment of $1,900,000 expired when
the commitment was not utilized, and the remaining unamortized
prepaid leverage fee of $19,000 was expensed. The Corporation
reapplied to the SBA and received 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.
Realized
Gains and Losses on Investments
Comparison
of the years ended December 31, 2010 and 2009
|
December 31,
|
December 31,
|
|||||||||||||||
| 2010 | 2009 | Change | % Increase | |||||||||||||
|
Realized gain
|
$ | 4,962,742 | $ | 3,161,913 | $ | 1,800,829 | 57.0 | % | ||||||||
During the year ended December 31, 2010, the Corporation
recognized realized gains of $4,403,984 on Innovex and
$2,719,569 on GridApp. There were also realized losses of
($721,918) on Wineisit, ($642,974) on Golden Goal, ($631,547) on
APF, ($68,000) on ADAM, ($49,830) on Bioworks, and ($46,542) on
Photonic.
The Corporation sold its investment in Innovex to Olympus NDT
Corporation on July 1, 2010 and received approximately
$5.6 million in net proceeds for its debt and equity
securities. The realized gain from the sale of $4,403,984
included $962,120 that was held in escrow and is expected to be
received in 2012.
20
Table of Contents
The Corporation exited its investment in GridApp with the sale
of the entity to BMC Software, Inc. in November 2010. The
Corporation received approximately $4.3 million in proceeds
and recognized a realized gain on the sale of $2,719,569. This
gain included $957,563 that was held in escrow and is expected
to be received in 2012. Both the Innovex and GridApp escrow
holdbacks are recorded in “Other Assets” on the
Balance Sheet.
The Corporation recognized a realized loss of ($721,918) on its
investment in Wineisit after the company reorganized during the
fourth quarter of 2010 into a new entity named Advantage 24/7
LLC (Advantage 24/7). As part of this reorganization the
Corporation obtained a controlling interest in Advantage 24/7.
The Corporation evaluated the new entity’s business and
determined that its investment has a value of $100,000.
The Adam and Golden Goal investments were written off during
2010 after each of the businesses were sold and the Corporation
recognized realized losses of ($68,000) on Adam and ($642,974)
on Golden Goal. In addition, the Corporation sold its investment
in Bioworks, Inc. and recognized a $49,830 realized loss.
The Corporation recognized a realized loss on APF Group, Inc.
(APF). APF filed for reorganization under Chapter 11
bankruptcy in September 2009.
The Corporation sold 30,500 shares of Photonic Products
Group, Inc (Photonic) stock. Photonic is a publicly traded stock
(NASDAQ symbol: PHPG.OB). The average sales price of Photonic
was $1.00/share and the cost basis of the stock was $2.50/share.
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
shares 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. 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.
Change in
Unrealized Appreciation of Investments
For
the years ended December 31, 2010 and 2009
|
December 31,
|
December 31,
|
|||||||||||
| 2010 | 2009 | Change | ||||||||||
|
Change in Unrealized Appreciation
|
$ | (3,736,642 | ) | $ | (4,211,605 | ) | $ | 474,963 | ||||
21
Table of Contents
The decrease in unrealized appreciation on investments of
$3,736,642 was due to the following valuation changes made by
the Corporation:
|
Valuation
|
||||
|
Change
|
||||
|
Portfolio Company
|
during 2010 | |||
|
Reclass Wineisit to a realized loss
|
721,918 | |||
|
Reclass Golden Goal to a realized loss
|
656,652 | |||
|
Reclass APF to a realized loss
|
631,547 | |||
|
Reclass GridApp to realized gain
|
295,935 | |||
|
Advantage 24/7
|
100,000 | |||
|
Reclass Bioworks, Inc. to a realized loss
|
56,000 | |||
|
SOMS appreciation
|
55,717 | |||
|
Reclass Photonics to a realized loss
|
45,752 | |||
|
Niagara Dispensing depreciation
|
(1,250,163 | ) | ||
|
Reclass Innovex to realized gain
|
(5,050,000 | ) | ||
|
Total Change in Unrealized Appreciation during the year ended
December 31, 2010
|
$ | (3,736,642 | ) | |
In accordance with its valuation policy, the Corporation
increased the value of its holdings in SOMS based on a
significant equity financing in June 2010 by a new,
non-strategic outside investor.
The Niagara Dispensing investment was written down by $1,250,163
during the year ended December 31, 2010 after a review by
the Corporation of Niagara Dispensing’s financials and an
analysis of the liquidation preferences of senior securities.
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.
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 | %) | ||||||
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
|
7,250 | |||
|
Adam
|
(65,341 | ) | ||
|
G-Tec Natural Gas Systems (Gtec)
|
(98,000 | ) | ||
|
Associates Interactive, LLC (Associates)
|
(293,518 | ) | ||
|
GridApp
|
(295,935 | ) | ||
|
APF
|
(324,213 | ) | ||
|
Niagara Dispensing
|
(367,951 | ) | ||
|
Golden Goal
|
(419,238 | ) | ||
|
Reclass Kionix, Inc. (Kionix) to realized gain
|
(493,959 | ) | ||
|
Innovex
|
(2,711,700 | ) | ||
|
Total Change in Unrealized Appreciation during the year ended
December 31, 2009
|
$ | (4,211,605 | ) | |
22
Table of Contents
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.
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, 2010, the net decrease
in net assets from operations was ($155,063) as compared to a
net decrease of ($739,420) in 2009 and a net increase of
$409,143 in 2008.
The net decrease in net assets from operations for the year
ended December 31, 2010 can be attributed to the net
investment loss of ($973,189) which was offset by the net
realized and unrealized gain on investments of $818,126. 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.
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, 2010, the Corporation’s total
liquidity, consisting of cash and cash equivalents, was
$11,698,653.
23
Table of Contents
Net cash used in operating activities has averaged approximately
$1,491,000 over the last three years and management anticipates
cash will continue to be utilized at similar levels. The cash
flow may fluctuate based on realized gains and the associated
income taxes paid.
The Corporation provided approximately $4,700,000 in net cash
flow from investing activities in fiscal 2010 and approximately
$2,400,000 during fiscal year 2009 and used approximately
$925,000 of net cash from investing activities during fiscal
year 2008. 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 exit
investments over the next several years. However, significant
liquidating events within the Corporation’s investment
portfolio are difficult to project with any certainty.
The Corporation has paid $119,000 to the SBA to reserve a total
of $10,000,000 of approved 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 all of its
approved $10,000,000 of leverage as of December 31, 2010.
In order to obtain additional SBA leverage, the Corporation
would have to increase the required capital in Rand SBIC before
it could apply for approval of additional SBA leverage up to two
times the amount of the increase in required capital. The
Corporation currently has substantial liquidity consisting of
cash and cash equivalents available to fund investments, and it
does not have any immediate plans to increase the required
capital of Rand SBIC in order to obtain additional approved SBA
leverage.
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, 2010. These payments
represent scheduled principal and interest payments that are
contained in the investment documents of each portfolio company.
| Cash Receipts due by year | ||||||||||||||||||||
|
2015 and
|
||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | beyond | ||||||||||||||||
|
Scheduled Cash Receipts from Portfolio Companies
|
$ | 290,000 | $ | 2,823,000 | $ | 2,974,000 | $ | 213,000 | $ | 1,602,000 | ||||||||||
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, which affected the debt and equity markets in the
United States. The markets improved throughout 2010 but the
effects of this economic crisis lingered and the economy has yet
to fully recover. This unfavorable change in credit market
conditions 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 recent prior periods.
In the third quarter of 2009 the Corporation completed a private
placement sale of 1,100,000 of its common shares. 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, 2010, coupled with the scheduled interest and
dividend payments on its portfolio investments, will be
sufficient to meet the Corporation’s cash needs throughout
2011. The Corporation is also evaluating potential exits from
portfolio companies to increase the amount of liquidity
available for new investments, operating activities and future
SBA debenture obligations.
24
Table of Contents
Disclosure
of Contractual Obligations
The following table shows the Corporation’s contractual
obligations at December 31, 2010. 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
|
$ | 10,000,000 | $ | 0 | $ | 0 | $ | 5,400,000 | $ | 4,600,000 | ||||||||||
|
Operating Lease Obligations (Rent of office space)
|
$ | 87,600 | $ | 16,800 | $ | 34,680 | $ | 36,120 | $ | 0 | ||||||||||
|
Total
|
$ | 10,087,600 | $ | 16,800 | $ | 34,680 | $ | 5,436,120 | $ | 4,600,000 | ||||||||||
| 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 values, the estimated value of the Corporation’s
portfolio may differ significantly from the values that would be
placed on the portfolio if a ready market for the investments
existed. Any changes in valuation are recorded in the
Corporation’s consolidated statement of operations as
“Net unrealized appreciation (depreciation) 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, 2010, the Corporation did not have any
off-balance sheet investments or hedging investments.
25
| Item 8. | Financial Statements and Supplementary Data |
The following consolidated financial statements and consolidated
supplemental schedule of the Corporation and report of
Independent Registered Public Accounting Firm thereon are set
forth below:
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
| 31 | ||||
| 34 | ||||
| 35 | ||||
| 47 | ||||
| 48 |
26
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31,
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
Investments at fair value (identified cost: 2010 —
$13,573,041, 2009 — $14,767,920)
|
$ | 19,364,625 | $ | 24,296,145 | ||||
|
Cash and cash equivalents
|
11,698,653 | 9,417,236 | ||||||
|
Interest receivable (net of allowance 2010 — $158,245,
2009 — $209,089)
|
1,051,848 | 1,192,118 | ||||||
|
Prepaid income taxes
|
414,745 | — | ||||||
|
Other assets
|
2,561,389 | 725,872 | ||||||
|
Total assets
|
$ | 35,091,260 | $ | 35,631,371 | ||||
| Liabilities and Stockholders’ Equity (net assets) | ||||||||
|
Liabilities:
|
||||||||
|
Debentures guaranteed by the SBA
|
$ | 10,000,000 | $ | 9,100,000 | ||||
|
Deferred tax liability
|
1,044,315 | 1,809,000 | ||||||
|
Income taxes payable
|
— | 1,082,646 | ||||||
|
Accounts payable and accrued expenses
|
990,477 | 431,233 | ||||||
|
Deferred revenue
|
5,650 | 2,611 | ||||||
|
Total liabilities
|
12,040,442 | 12,425,490 | ||||||
|
Stockholders’ equity (net assets):
|
||||||||
|
Common stock, $.10 par; shares authorized 10,000,000;
shares issued 6,863,034
|
686,304 | 686,304 | ||||||
|
Capital in excess of par value
|
10,581,789 | 10,581,789 | ||||||
|
Accumulated net investment (loss)
|
(7,674,968 | ) | (4,961,725 | ) | ||||
|
Undistributed net realized gain on investments
|
15,860,132 | 10,897,390 | ||||||
|
Net unrealized appreciation on investments
|
3,644,767 | 6,049,329 | ||||||
|
Treasury stock, at cost, 44,100 shares
|
(47,206 | ) | (47,206 | ) | ||||
|
Net assets (per share 2010 — $3.38, 2009 —
$3.40)
|
23,050,818 | 23,205,881 | ||||||
|
Total liabilities and stockholders’ equity (net
assets)
|
$ | 35,091,260 | $ | 35,631,371 | ||||
See accompanying notes
27
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Investment income:
|
||||||||||||
|
Interest from portfolio companies
|
$ | 688,177 | $ | 568,524 | $ | 608,180 | ||||||
|
Interest from other investments
|
23,574 | 17,129 | 90,660 | |||||||||
|
Dividend and other investment income
|
120,071 | 1,133,102 | 1,027,377 | |||||||||
|
Other income
|
15,461 | 30,770 | 30,786 | |||||||||
| 847,283 | 1,749,525 | 1,757,003 | ||||||||||
|
Operating expenses:
|
||||||||||||
|
Salaries
|
1,120,834 | 623,765 | 440,337 | |||||||||
|
Employee benefits
|
190,336 | 126,046 | 121,659 | |||||||||
|
Directors’ fees
|
88,500 | 76,750 | 77,250 | |||||||||
|
Professional fees
|
161,862 | 227,415 | 248,667 | |||||||||
|
Stockholders and office operating
|
122,029 | 140,554 | 120,260 | |||||||||
|
Insurance
|
39,133 | 49,988 | 41,489 | |||||||||
|
Corporate development
|
60,849 | 55,749 | 65,042 | |||||||||
|
Other operating
|
15,636 | (34,718 | ) | 83,972 | ||||||||
| 1,799,179 | 1,265,549 | 1,198,676 | ||||||||||
|
Interest on SBA obligations
|
574,715 | 497,475 | 522,062 | |||||||||
|
Bad debt (recovery) expense
|
(5,983 | ) | 87,089 | 817 | ||||||||
|
Total expenses
|
2,367,911 | 1,850,113 | 1,721,555 | |||||||||
|
Investment (loss) gain before income taxes
|
(1,520,628 | ) | (100,588 | ) | 35,448 | |||||||
|
Income tax benefit
|
(547,439 | ) | (36,710 | ) | (100,241 | ) | ||||||
|
Net investment (loss) gain
|
(973,189 | ) | (63,878 | ) | 135,689 | |||||||
|
Realized and unrealized gain (loss) on investments:
|
||||||||||||
|
Realized gain on sales and dispositions, net
|
4,962,742 | 3,161,913 | — | |||||||||
|
Income tax expense
|
1,740,054 | 1,153,939 | — | |||||||||
|
Net realized gain on investments
|
3,222,688 | 2,007,974 | — | |||||||||
|
Unrealized appreciation on investments:
|
||||||||||||
|
Beginning of year
|
9,528,226 | 13,739,831 | 13,137,846 | |||||||||
|
End of year
|
5,791,584 | 9,528,226 | 13,739,831 | |||||||||
|
Change in unrealized appreciation before income taxes
|
(3,736,642 | ) | (4,211,605 | ) | 601,985 | |||||||
|
Deferred income tax (benefit) expense
|
(1,332,080 | ) | (1,528,089 | ) | 328,531 | |||||||
|
Net (decrease) increase in unrealized appreciation
|
(2,404,562 | ) | (2,683,516 | ) | 273,454 | |||||||
|
Net realized and unrealized gain (loss) on investments
|
818,126 | (675,542 | ) | 273,454 | ||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (155,063 | ) | $ | (739,420 | ) | $ | 409,143 | ||||
|
Weighted average shares outstanding
|
6,818,934 | 6,115,081 | 5,718,934 | |||||||||
|
Basic and diluted net (decrease) increase in net assets from
operations per share
|
$ | (0.02 | ) | $ | (0.12 | ) | $ | 0.07 | ||||
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, 2010, 2009 and 2008
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For The Years Ended December 31, 2010, 2009 and 2008
| 2010 | 2009 | 2008 | ||||||||||
|
Net assets at beginning of period
|
$ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | ||||||
|
Net investment (loss) gain
|
(973,189 | ) | (63,878 | ) | 135,689 | |||||||
|
Net realized gain on sales and dispositions of investments
|
3,222,688 | 2,007,974 | — | |||||||||
|
Net (decrease) increase in unrealized appreciation
|
(2,404,562 | ) | (2,683,516 | ) | 273,454 | |||||||
|
Net (decrease) increase in net assets from operations
|
(155,063 | ) | (739,420 | ) | 409,143 | |||||||
|
Issuance of common stock
|
— | 3,718,335 | — | |||||||||
|
Subtotal
|
— | 3,718,335 | — | |||||||||
|
Net assets at end of period
|
$ | 23,050,818 | $ | 23,205,881 | $ | 20,226,966 | ||||||
See accompanying notes.
29
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
For
The Years Ended December 31, 2010, 2009 and
2008
| 2010 | 2009 | 2008 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net (decrease) increase in net assets from operations
|
$ | (155,063 | ) | $ | (739,420 | ) | $ | 409,143 | ||||
|
Adjustments to reconcile net increase in net assets to net cash
used in operating activities:
|
||||||||||||
|
Depreciation and amortization
|
39,521 | 36,218 | 52,230 | |||||||||
|
Change in interest receivable allowance
|
(50,844 | ) | 86,272 | 817 | ||||||||
|
Decrease (increase) in unrealized appreciation of investments
|
3,736,642 | 4,211,605 | (601,985 | ) | ||||||||
|
Deferred tax benefit
|
(764,685 | ) | (1,681,000 | ) | (465,000 | ) | ||||||
|
Realized gain on portfolio investments, net
|
(4,962,742 | ) | (3,161,913 | ) | — | |||||||
|
Payment in kind, interest accrued
|
— | (115,334 | ) | (15,380 | ) | |||||||
|
Non-cash conversion of debenture interest
|
(366,282 | ) | (41,599 | ) | (67,235 | ) | ||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Decrease (increase) in interest receivable
|
191,114 | (264,502 | ) | (367,704 | ) | |||||||
|
(Increase) decrease in other assets
|
(63,384 | ) | 137,059 | 779,083 | ||||||||
|
(Increase) in prepaid income taxes
|
(414,745 | ) | — | — | ||||||||
|
(Decrease) increase in income taxes payable
|
(1,082,646 | ) | 983,923 | (375,742 | ) | |||||||
|
Increase (decrease) in accounts payable and accrued liabilities
|
559,244 | 138,502 | (28,479 | ) | ||||||||
|
Increase (decrease) increase in deferred revenue
|
3,039 | (17,766 | ) | (33,276 | ) | |||||||
|
Total adjustments
|
(3,175,768 | ) | 311,465 | (1,122,671 | ) | |||||||
|
Net cash used in operating activities
|
(3,330,831 | ) | (427,955 | ) | (713,528 | ) | ||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Investments originated
|
(3,606,200 | ) | (2,955,309 | ) | (1,626,657 | ) | ||||||
|
Proceeds from sale of portfolio investments
|
8,230,833 | 4,946,781 | — | |||||||||
|
Proceeds from loan repayments
|
110,286 | 420,981 | 713,465 | |||||||||
|
Capital expenditures
|
(846 | ) | — | (12,222 | ) | |||||||
|
Net cash provided by (used in) investing activities
|
4,734,073 | 2,412,453 | (925,414 | ) | ||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Issuance of common stock, net
|
— | 3,718,335 | — | |||||||||
|
Proceeds from SBA debenture
|
900,000 | 1,000,000 | — | |||||||||
|
Origination costs to SBA
|
(21,825 | ) | (43,250 | ) | — | |||||||
|
Net cash provided by financing activities
|
878,175 | 4,675,085 | — | |||||||||
|
Net increase (decrease) in cash and cash equivalents
|
2,281,417 | 6,659,583 | (1,638,942 | ) | ||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Beginning of year
|
9,417,236 | 2,757,653 | 4,396,595 | |||||||||
|
End of year
|
$ | 11,698,653 | $ | 9,417,236 | $ | 2,757,653 | ||||||
See accompanying notes
30
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2010
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
December 31, 2010
|
(b)
|
Per
|
|||||||||||||||||||||
|
Company, Geographic Location, Business
|
Date
|
(c)
|
(d)(f)
|
Share
|
||||||||||||||||||
|
Description, (Industry) and Website
|
Type of Investment | Acquired | Equity | Cost | Value | of Rand | ||||||||||||||||
| Non-Control/Non-Affiliate Investments:(j) | ||||||||||||||||||||||
|
Chequed.com, Inc.(g)
Saratoga Springs, NY. Predictive employee selection and development software. (Software) www.chequed.com |
$250,000 convertible promissory note at 8% due December 31, 2012. | 11/17/10 | 0 | % | $ | 250,000 | $ | 250,000 | $ | .04 | ||||||||||||
|
Liazon Corporation(e)(g)
Buffalo, NY. Employee benefits solution company. (Health Benefits Provider) www.liazon.com |
$500,000 secured promissory note at 8% due November 9, 2015. 120,000 Series C-1 preferred stock. | 11/9/10 | 1 | % | 501,200 | 501,200 | .07 | |||||||||||||||
|
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 |
141,125 Series A preferred shares. | 1/9/08 | 4 | % | 121,509 | 121,509 | .02 | |||||||||||||||
|
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) 694,015 Series A preferred shares. 50,593 common shares. | 10/29/09 | 4 | % | 753,000 | 889,000 | .12 | |||||||||||||||
|
Somerset Gas Transmission Company, LLC(e)
Columbus, OH. Natural gas transportation company. (Oil and Gas) www.somersetgas.com |
26.5337 units. | 7/10/02 | 3 | % | 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 | $ | 3,694,285 | $ | 6,716,458 | $ | .98 | ||||||||||||||||
| Affiliate Investments:(k) | ||||||||||||||||||||||
|
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 14%. Redeemable December 23, 2012. $500,000 subordinated promissory note at 14% due December 31, 2016. 6.0825% class A common membership interest. (i) Interest receivable $1,019,426. | 1/30/04 | 7 | % | $ | 1,500,000 | $ | 1,500,000 | $ | .22 | ||||||||||||
|
EmergingMed.com, Inc.(e)(g)
New York, NY. Cancer clinical trial matching and referral service. (Software) www.emergingmed.com |
$675,045 senior subordinated note at 8% due January 19, 2013. Warrants for 8% of common stock. | 12/19/05 | 8 | % | 675,045 | 675,045 | .10 | |||||||||||||||
|
Microcision LLC(e)(g)
Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing). www.microcision.com |
$1,500,000 subordinated promissory note at 5%, 6% deferred interest due December 31, 2013. 15% class A common membership interest. | 9/24/09 | 15 | % | 1,582,282 | 1,582,282 | .23 | |||||||||||||||
31
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31,
2010 – (Continued)
|
(b)
|
Per
|
|||||||||||||||||||||
|
Company, Geographic Location, Business
|
Date
|
(c)
|
(d)(f)
|
Share
|
||||||||||||||||||
|
Description, (Industry) and Website
|
Type of Investment | Acquired | Equity | Cost | Value | of Rand | ||||||||||||||||
|
Mid America Brick & Structural Clay Products,
LLC(g)
Mexico, MO. Manufacturer of face brick for residential and commercial construction. (Manufacturing). www.midamericabrick.com |
19.524 membership units. | 6/1/10 | 19 | % | 800,000 | 800,000 | .12 | |||||||||||||||
|
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. $25,000 senior secured note at 8% due January 31, 2011. (g) 463,691 Series A preferred stock. 518,752 Series B preferred stock. $300,000 promissory note at 6%, 8% deferred interest due July 30, 2011. $200,000 secured convertible note at 14% due February 19, 2012. Warrants for 190,561 class A common stock. Warrants for 110,672 Series B preferred stock. | 3/8/06 | 14 | % | 1,854,113 | 125,000 | .02 | |||||||||||||||
|
SOMS Technologies, LLC(g)
Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Auto Parts Developer) www.microgreenfilter.com |
4,808,224 Series B membership units. | 12/2/08 | 12 | % | 370,687 | 426,403 | .06 | |||||||||||||||
|
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 | 2 | % | 938,164 | 1,203,000 | .18 | |||||||||||||||
| Subtotal Affiliate Investments | $ | 7,720,291 | $ | 6,311,730 | $ | .93 | ||||||||||||||||
| Control Investments(l) | ||||||||||||||||||||||
|
Advantage 24/7 LLC(g)
Williamsville, NY. Marketing program for wine and spirits dealers. (Marketing Company) |
50% Membership interest. | 12/30/10 | 50 | % | $ | 100,000 | $ | 100,000 | $ | .02 | ||||||||||||
|
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 |
$500,000 subordinated promissory note at 15% due December 1, 2014. 25 membership units. Warrant to purchase 6.25 membership units. | 6/28/04 | 31 | % | 913,596 | 6,113,596 | .90 | |||||||||||||||
|
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 |
21.6% Class A membership interest. 8% cumulative dividend. | 8/31/99 | 22 | % | 400,000 | 100,000 | .01 | |||||||||||||||
| Subtotal Control Investments | $ | 1,413,596 | $ | 6,313,596 | $ | .93 | ||||||||||||||||
| Other Investments(a) | Various | $ | 744,869 | $ | 22,841 | $ | 0 | |||||||||||||||
| Total portfolio investments | $ | 13,573,041 | $ | 19,364,625 | $ | 2.84 | ||||||||||||||||
32
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF PORTFOLIO INVESTMENTS
December 31,
2010 – (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, 2010 restricted securities represented 100% of the value of the investment portfolio. Freed Maxick & Battaglia, CPAs PC has not examined the business descriptions of the portfolio companies. Individual securities with values less than <$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. Freed Maxick & Battaglia, CPAs, PC has not audited the date acquired of the portfolio companies. | |
| (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, CPAs, 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 uses Accounting Standards Codification (ASC) 820 “Fair Value Measurements” which defines fair value and establishes guidelines for measuring fair value. At December 31, 2010, ASC 820 designated all of the Corporation’s investments as “Level 3” assets due to their privately held restricted nature. 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. | |
| (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) | As of December 31, 2010, the total cost of investment securities approximated $13.6 million. Net unrealized appreciation was approximately $5.8 million, which was comprised of $8.5 million of unrealized appreciation of investment securities and $2.7 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) | Represents interest due (amounts over $50,000 net of reserves) from investment included as interest receivable on the Corporation’s Balance Sheet. | |
| (j) | Non-Control/Non-Affiliate investments are investments that are neither Control Investments nor Affiliated Investments. | |
| (k) | 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. | |
| (l) | 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, 2010, 2009, 2008, 2007
and 2006
Selected data for each share of common stock outstanding
throughout the five most current years is as follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Income from investment operations(1):
|
||||||||||||||||||||
|
Investment income
|
$ | 0.12 | $ | 0.28 | $ | 0.31 | $ | 0.40 | $ | 0.23 | ||||||||||
|
Expenses
|
0.34 | 0.30 | 0.30 | 0.29 | 0.26 | |||||||||||||||
|
Investment (loss) gain before income taxes
|
(0.22 | ) | (0.02 | ) | 0.01 | 0.11 | (0.03 | ) | ||||||||||||
|
Income tax (benefit) expense
|
(0.08 | ) | (0.01 | ) | (0.01 | ) | 0.04 | 0.19 | ||||||||||||
|
Net investment (loss)gain
|
(0.14 | ) | (0.01 | ) | 0.02 | 0.07 | (0.22 | ) | ||||||||||||
|
Issuance of common stock
|
0.00 | 0.61 | 0.00 | 0.00 | 0.00 | |||||||||||||||
|
Cumulative effect adjustments for uncertain tax
positions — ASC 740
|
0.00 | 0.00 | 0.00 | 0.06 | 0.00 | |||||||||||||||
|
Net realized and unrealized (loss) gain on investments
|
0.12 | (0.11 | ) | 0.05 | 0.41 | 1.65 | ||||||||||||||
|
Increase (decrease) in net asset value
|
(0.02 | ) | 0.49 | 0.07 | 0.54 | 1.43 | ||||||||||||||
|
Net asset value, beginning of year based on weighted average
shares
|
3.40 | 3.54 | 3.47 | 2.93 | 1.51 | |||||||||||||||
|
Net asset value, end of year based on weighted average shares
|
$ | 3.38 | $ | 4.03 | $ | 3.54 | $ | 3.47 | $ | 2.93 | ||||||||||
|
Per share market value, end of year
|
$ | 3.23 | $ | 3.98 | $ | 3.50 | $ | 3.60 | $ | 3.50 | ||||||||||
|
Total return based on market value
|
(18.84 | )% | 13.71 | % | (2.78 | )% | 2.86 | % | 161.2 | % | ||||||||||
|
Total return based on net asset value
|
(0.67 | )% | (3.74 | )% | 2.1 | % | 18.1 | % | 94.8 | % | ||||||||||
|
Supplemental data:
|
||||||||||||||||||||
|
Ratio of expenses before income taxes to average net assets
|
10.24 | % | 8.52 | % | 8.60 | % | 9.02 | % | 11.96 | % | ||||||||||
|
Ratio of expenses including taxes to average net assets
|
7.87 | % | 8.35 | % | 9.10 | % | 10.41 | % | 20.41 | % | ||||||||||
|
Ratio of net investment (loss) gain to average net assets
|
(4.21 | )% | (0.29 | )% | 0.68 | % | 2.18 | % | (9.96 | )% | ||||||||||
|
Portfolio turnover
|
16.5 | % | 11.3 | % | 6.0 | % | 8.6 | % | 18.1 | % | ||||||||||
|
Net assets end of year
|
$ | 23,050,818 | $ | 23,205,881 | $ | 20,226,966 | $ | 19,817,823 | $ | 16,782,405 | ||||||||||
|
Weighted average shares outstanding at end of year
|
6,818,934 | 6,115,081 | 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 incorporated under the law of
New York on February 24, 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”.
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”). In 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 BDC were continued by
a newly formed corporation, Rand Capital SBIC, Inc. (“Rand
SBIC”). As of December 31, 2010, the Corporation had
drawn down $10,000,000 on its SBA 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 at
fair value as determined in good faith by the management of the
Corporation and submitted to the Board of Directors for
approval. The Corporation invests in several types of
securities — loan instruments, debt instruments, and
equity instruments. 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 quarterly, 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 principles
(“GAAP”), and expands disclosures about fair value
measurements. On January 1, 2008, the Corporation adopted
Accounting Standards Codification (ASC) 820.
The Corporation uses several approaches to determine the fair
value of an investment. The main approaches are:
| • | Loan and debt securities are generally valued at the price the security would command in order to provide a yield to maturity equivalent to the current yield of similar debt securities. A debt instrument may be reduced in value if it is judged to be of poor quality and collection is in doubt. A debt security may also be valued based on the estimated proceeds from the sale of a portfolio company at its estimated fair value. | |
| • | Equity securities may be valued using the “market approach” or “income approach.” The market approach uses observable prices and other relevant information generated by similar market transactions. It may include the use of market multiples derived from a set of comparables to assist in pricing the investment. |
35
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| Additionally, the Corporation adjusts valuations if a subsequent significant equity financing has occurred that includes a meaningful portion of the financing by a sophisticated, unrelated new investor. The income approach employs a cash flow and discounting methodology to value an investment. |
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.
Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant
to the fair value measurement, which is not necessarily an
indication of risks associated with the investment.
Any changes in estimated fair value are recorded in our
statement of operations as “Net increase (decrease) in
unrealized appreciation.”
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 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.
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. 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 management and are approved by the Board of Directors, as
described in the Notes to Consolidated Schedule of Portfolio
Investments. Certain investment valuations have been determined
by management in the absence of readily ascertainable fair
values and approved by the Board of Directors. 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.
36
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, 2010 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 management’s judgment, become worthless are
written off and reported as realized losses when appropriate.
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 in which 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.
Revenue Recognition
– Dividend
Income – The Corporation may receive distributions
from portfolio companies that are limited liability companies
and these distributions are classified as dividend income on the
statement of operations. Dividend income is recognized on an
accrual basis when it can be reasonably estimated.
Original Issue Discount
– Investments
may include “original issue discount” or OID income.
This occurs 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 reported net of the
OID and the OID is amortized into interest income over the life
of the loan. The Corporation recorded one OID for the year ended
December 31, 2010 in the amount of $37,000. There was no
OID for the year ended December 31, 2009. The Corporation
recorded no OID income for the years ended December 31,
2010, 2009 and 2008.
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, 2010, 2009 and 2008 was $34,490, $28,410 and
$46,982, respectively. Annual amortization expense for the next
five years is estimated to average $34,500 per year.
37
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Deferred Revenue
– From time to time 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,
2010, 2009 and 2008 amounted to $2,461, $17,766, and $33,275,
respectively. Deferred revenue amortization income is estimated
to be $1,400 in 2011 and $1,100 in 2012.
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 paid (refunded) during the years ended
December 31, 2010, 2009 and 2008 amounted to $2,122,611,
($83,783) and $1,069,032, respectively. Interest paid during the
years ended December 31, 2010, 2009 and 2008 was $513,953,
$472,281 and $473,575, respectively. During 2010, 2009 and 2008,
the Corporation converted $366,282, $156,933 and $82,613,
respectively, of interest receivable and payment in kind
interest (PIK) into equity investments. During the year ended
December 31, 2010, the Corporation recorded two escrow
receivables of $957,563 and $831,420 in connection with the sale
of investments. During the year ended December 31, 2009 the
Corporation recorded one escrow receivable of $524,926, in
connection with the sale of an investment. These escrow
receivables are expected to be received in 2011 and 2012 and are
recorded in the other asset line on the consolidated financial
statements.
Concentration of Credit and Market
Risk
– The Corporation’s financial
instruments potentially subject it to concentrations of credit
risk. 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, 2010, 75% of the Corporation’s
total investment value was held in five notes and equity
securities. As of December 31, 2009, 80% of the
Corporation’s total investment value was held in five notes
and equity securities.
Income Taxes
– The Corporation has
adopted ASC 740, “Accounting for Uncertainty in Income
Taxes”. 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 Pronouncement
– In
January 2010, the FASB issued ASU
2010-06
“Improving Disclosures About Fair Value Measurements,”
which adds new requirements for disclosures about transfers into
and out of Level 1 and 2 and separate disclosures about
purchases, sales, issuances and settlements relating to
Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation, inputs and
valuation techniques. ASU
2010-06
is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010. Adoption of ASU
2010-06
did
not have a significant impact on the Corporation’s
financial statement disclosures.
38
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| Note 2. – | Investments |
At December 31, 2010 all of the Corporation’s
investments are classified in Level 3 due to their
privately held restricted nature and were categorized as follows
in the fair value hierarchy:
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
|
2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Loan investments
|
$ | 413,596 | $ | 413,596 | ||||||||||||
|
Debt investments
|
3,595,327 | 3,595,327 | ||||||||||||||
|
Equity investments
|
15,355,702 | 15,355,702 | ||||||||||||||
|
Total Venture Capital Investments
|
$ | 19,364,625 | $ | 0 | $ | 0 | $ | 19,364,625 | ||||||||
| Fair Value Measurements at Reported Date Using | ||||||||||||||||
|
Significant
|
||||||||||||||||
|
Quoted Prices in
|
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 | ||||||||||||||||
|
Loan
|
Debt
|
Equity
|
||||||||||||||
|
Description
|
Investments | Investments | Investments | Total | ||||||||||||
|
Beginning Balance, December 31, 2009, of Level 3
Assets
|
$ | 488,104 | $ | 3,487,120 | $ | 20,290,423 | $ | 24,265,647 | ||||||||
|
Realized Gains or Losses included in net change in net
assets from operations
|
||||||||||||||||
|
Adam
|
(68,000 | ) | (68,000 | ) | ||||||||||||
|
APF Products Group, Inc. (APF)
|
(631,547 | ) | (631,547 | ) | ||||||||||||
|
Bioworks Inc. (Bioworks)
|
(49,830 | ) | (49,830 | ) | ||||||||||||
|
Golden Goal LLC (Golden Goal)
|
(5,560 | ) | (637,414 | ) | (642,974 | ) | ||||||||||
|
GridApp Systems Inc. (GridApp)
|
2,719,569 | 2,719,569 | ||||||||||||||
|
Innov-X Systems Inc (Innovex)
|
4,403,984 | 4,403,984 | ||||||||||||||
|
Wineisit.com, Inc. (Wineisit)
|
(721,918 | ) | (721,918 | ) | ||||||||||||
|
Total Realized Gains and Losses
|
— | (1,359,025 | ) | 6,368,309 | 5,009,284 | |||||||||||
|
Unrealized gains or losses included in net change in net
assets from operations
|
||||||||||||||||
|
APF
|
631,547 | 631,547 | ||||||||||||||
|
Bioworks
|
56,000 | 56,000 | ||||||||||||||
|
Golden Goal
|
19,238 | 637,414 | 656,652 | |||||||||||||
|
GridApp
|
295,935 | 295,935 | ||||||||||||||
|
Innovex
|
(5,050,000 | ) | (5,050,000 | ) | ||||||||||||
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
|
(447,327 | ) | (802,835 | ) | (1,250,162 | ) | ||||||||||
|
SOMS Technologies, LLC (SOMS)
|
55,717 | 55,717 | ||||||||||||||
|
Wineisit
|
721,918 | 100,000 | 821,918 | |||||||||||||
|
Total Unrealized Gains and Losses
|
— | 925,376 | (4,707,769 | ) | (3,782,393 | ) | ||||||||||
39
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 | ||||||||||||||||
|
Loan
|
Debt
|
Equity
|
||||||||||||||
|
Description
|
Investments | Investments | Investments | Total | ||||||||||||
|
Purchases of Securities
|
||||||||||||||||
|
Chequed.com, Inc. (Chequed)
|
250,000 | 250,000 | ||||||||||||||
|
EmergingMed.com, Inc. (Emerging Med)
|
216,712 | 216,712 | ||||||||||||||
|
GridApp
|
481,774 | 481,774 | ||||||||||||||
|
Liazon Corporation (Liazon)
|
463,000 | 38,200 | 501,200 | |||||||||||||
|
Mezmeriz, Inc. (Mezmeriz)
|
21,509 | 21,509 | ||||||||||||||
|
Microcision LLC (Microcision)
|
923,472 | 923,472 | ||||||||||||||
|
Mid America Brick (Mid America)
|
800,000 | 800,000 | ||||||||||||||
|
Niagara Dispensing
|
261,918 | 261,918 | ||||||||||||||
|
Rheonix, Inc. (Rheonix)
|
500,000 | 500,000 | ||||||||||||||
|
SOMS
|
15,897 | 15,897 | ||||||||||||||
|
Total Purchases of Securities
|
— | 2,130,999 | 1,841,483 | 3,972,482 | ||||||||||||
|
Repayments of Securities
|
||||||||||||||||
|
Bioworks
|
(6,170 | ) | (6,170 | ) | ||||||||||||
|
Gemcor II, LLC (Gemcor)
|
(74,508 | ) | (35,778 | ) | (110,286 | ) | ||||||||||
|
Golden Goal
|
(32,678 | ) | (32,678 | ) | ||||||||||||
|
GridApp
|
(4,297,277 | ) | (4,297,277 | ) | ||||||||||||
|
Innovex
|
(250,000 | ) | (5,403,984 | ) | (5,653,984 | ) | ||||||||||
|
Total Repayments of Securities
|
(74,508 | ) | (318,456 | ) | (9,707,431 | ) | (10,100,395 | ) | ||||||||
|
Transfers within Level 3
|
(1,270,687 | ) | 1,270,687 | — | ||||||||||||
|
Transfers in or out of Level 3
|
— | — | — | — | ||||||||||||
|
Ending Balance, December 31, 2010, of Level 3
Assets
|
$ | 413,596 | $ | 3,595,327 | $ | 15,355,702 | $ | 19,364,625 | ||||||||
|
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 and reported within the net realized and unrealized gains
or losses on investments in the Condensed Consolidated Statement
of Operations
|
$ | (3,736,642 | ) | |
|
Amount of realized gains and losses included in changes in net
assets from operations for the period above reported within the
net realized and unrealized gains or losses on investments in
the Condensed Consolidated Statement of Operations
|
4,962,742 | |||
|
Change in unrealized gains or losses relating to assets still
held at reporting date
|
$ | 1,226,100 | ||
40
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 | ||||||||
|
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
|
$ | 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
|
||||||||
|
Adam
|
$ | (65,341 | ) | |||||
|
APF
|
$ | (324,213 | ) | |||||
|
Associates Interactive
|
$ | (293,518 | ) | |||||
|
Golden Goal
|
$ | (419,238 | ) | |||||
|
GridApp
|
$ | (295,935 | ) | |||||
|
G-Tec
|
$ | (98,000 | ) | |||||
|
Innovex
|
$ | (2,711,700 | ) | |||||
|
Kionix
|
$ | (493,959 | ) | |||||
|
Niagara Dispensing
|
$ | (367,951 | ) | |||||
|
Rheonix
|
$ | 136,000 | ||||||
|
Rocket Broadband realized loss
|
$ | 715,000 | $ | (4,218,855 | ) | |||
|
Purchases of Securities
|
||||||||
|
Associates
|
$ | 43,517 | ||||||
|
APF
|
$ | 24,212 | ||||||
|
Carolina Skiff
|
$ | 500,000 | ||||||
|
Gemcor
|
$ | 500,000 | ||||||
|
Golden Goal
|
$ | 38,238 | ||||||
|
GridApp
|
$ | 429,267 | ||||||
|
Innovex
|
$ | 250,000 | ||||||
|
Microcision
|
$ | 658,808 | ||||||
|
Niagara Dispensing
|
$ | 310,408 | ||||||
|
Rheonix
|
$ | 253,000 | ||||||
|
SOMS
|
$ | 104,790 | $ | 3,112,240 | ||||
|
Repayments of Securities
|
||||||||
|
EmergingMed
|
$ | (41,667 | ) | |||||
|
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: | ||||||||
|
Net 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 | ) | |||||
41
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| Note 3. – | Other Assets |
At December 31, 2010 and 2009 other assets was comprised of
the following:
| 2010 | 2009 | |||||||
|
Escrow receivable from GripApp Systems, Inc.
|
$ | 957,563 | — | |||||
|
Escrow receivable from Innov-X Systems, Inc.
|
831,420 | — | ||||||
|
Escrow receivable from Kionix, Inc.
|
524,926 | $ | 524,926 | |||||
|
Deferred debenture costs
|
174,621 | 187,286 | ||||||
|
Escrow receivable from USTec
|
— | 22,199 | ||||||
|
Property, plant and equipment (net)
|
3,609 | 7,794 | ||||||
|
Prepaid expense
|
— | 4,374 | ||||||
|
Operating receivables
|
69,250 | 1,492 | ||||||
|
Reserve for uncollectible USTec escrow
|
— | (22,199 | ) | |||||
|
Total other assets
|
$ | 2,561,389 | $ | 725,872 | ||||
In 2010 the Corporation sold its investment in Innov-X Systems,
Inc. and GridApp Systems, Inc and a portion of the sales
proceeds were held in escrow. Both of these escrow amounts are
expected to be released in 2012.
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 and 2012.
In 2007 the Corporation sold a portion of its shares in UStec. A
portion of the escrow was received during 2009 and 2010. The
remaining $16,216 was written off during the year ended
December 31, 2010.
| Note 4. – | 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 assets and (liabilities) at December 31, 2010
and 2009 are approximately as follows:
| 2010 | 2009 | |||||||
|
Operations
|
$ | 975,000 | $ | 1,502,000 | ||||
|
Investments
|
(2,147,000 | ) | (3,479,000 | ) | ||||
|
Tax credit carryforwards
|
128,000 | 168,000 | ||||||
|
Deferred tax liability, net
|
$ | (1,044,000 | ) | $ | (1,809,000 | ) | ||
The Company assesses annually the recoverability of its deferred
tax assets 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 2010 and 2009.
42
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The components of income tax expense (benefit) reported in the
statements of operations are as follows for the years ended
December 31:
| 2010 | 2009 | 2008 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 588,654 | $ | 1,200,502 | $ | 677,635 | ||||||
|
State
|
36,566 | 69,638 | (5,345 | ) | ||||||||
| 625,220 | 1,270,140 | 672,290 | ||||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(755,713 | ) | (1,528,770 | ) | (427,692 | ) | ||||||
|
State
|
(8,972 | ) | (152,230 | ) | (16,308 | ) | ||||||
| (764,685 | ) | (1,681,000 | ) | (444,000 | ) | |||||||
|
Total
|
$ | (139,465 | ) | $ | (410,860 | ) | $ | 228,290 | ||||
A reconciliation of the expense (benefit) for income taxes at
the federal statutory rate to the expense reported is as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Net investment gain and realized gain before income tax expense
|
$ | (294,528 | ) | $ | (1,150,280 | ) | $ | 648,757 | ||||
|
Expected tax expense at statutory rate
|
$ | (100,140 | ) | $ | (391,095 | ) | $ | 241,577 | ||||
|
State – net of federal effect
|
18,213 | (54,511 | ) | 15,016 | ||||||||
|
Pass-through benefit from Portfolio Investment
|
(37,214 | ) | (44,052 | ) | (42,500 | ) | ||||||
|
Non-deductible restructuring costs
|
— | 43,439 | — | |||||||||
|
Realized losses
|
(16,857 | ) | — | — | ||||||||
|
Other
|
(3,467 | ) | 35,359 | 14,197 | ||||||||
|
Total
|
$ | (139,465 | ) | $ | (410,860 | ) | $ | 228,290 | ||||
At December 31, 2010 and 2009 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 $193,594
and $219,513 at December 31, 2010 and 2009. The QETC credit
carryforward does not have an expiration date.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follow:
|
Balance at December 31, 2007
|
8,500 | |||
|
Increases for positions taken in prior year
|
21,000 | |||
|
Balance at December 31, 2008
|
29,500 | |||
|
Increases for positions taken in prior year
|
66,000 | |||
|
Balance at December 31, 2009
|
$ | 95,500 | ||
|
Decreases for settlements with taxing authorities
|
23,000 | |||
|
Balance at December 31, 2010
|
$ | 72,500 | ||
There was an adjustment to the liability recorded for uncertain
tax positions in the year ended December 31, 2010. The New
York State Department of Revenue completed an audit of the
Corporation’s New York corporate income tax returns in the
second quarter of 2010 for the years ended December 31,
2005 through 2007. The liability
43
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
recorded for uncertain tax positions was reduced accordingly.
The Corporation does not expect that the amounts of uncertain
tax positions will change significantly within the next
12 months.
The Corporation is currently open to audit under the statute of
limitations by the Internal Revenue Service for the years ending
December 31, 2007 through 2010. In general, the
Corporation’s state income tax returns are open to audit
under the statute of limitations for the years ended
December 31, 2006 through 2010.
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 $0, $6,300 and $4,800 for the years ended December 31,
2010, 2009 and 2008, respectively.
| Note 5. – | 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 2003 and 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 unused leverage commitment of $1,900,000
expired on September 30, 2008 and the related unamortized
prepaid leverage fee of $19,000 was expensed during 2008. The
Corporation re-applied to the SBA for the unused $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. At December 31, 2010 and 2009, Rand
SBIC had debentures payable to and guaranteed by the SBA
totaling $10,000,000 and $9,100,000, respectively and has
utilized its entire $10,000,000 commitment from the SBA. The
debenture terms require semiannual payments of interest at
annual interest rates ranging from 4.108% to 5.535%, plus an
annual charge that ranged from .285% to .887% during the year
ended December 31, 2010. The debentures have fixed interest
rates and a 10 year maturity date. The debentures
outstanding at December 31, 2010 will mature as follows:
|
Maturity Date
|
Leverage | |||
|
2014
|
$ | 3,500,000 | ||
|
2015
|
1,900,000 | |||
|
2016
|
2,700,000 | |||
|
2020
|
1,900,000 | |||
|
Total Outstanding
|
$ | 10,000,000 | ||
| Note 6. – | Stockholders’ Equity (Net Assets) |
At December 31, 2010 and 2009, 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 21, 2011 at prices
that are no greater than current net asset value.
44
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Summary of change in equity accounts:
|
Accumulated
|
Undistributed
|
|||||||||||
|
Net
|
Net Realized
|
Net Unrealized
|
||||||||||
|
Investment
|
Gain
|
on Appreciation
|
||||||||||
| Loss | Investments | on Investments | ||||||||||
|
Balance, December 31, 2008
|
$ | (3,743,908 | ) | $ | 7,735,477 | $ | 8,732,845 | |||||
|
Net increase (decrease) 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 | |||||
|
Net (decrease) increase in net assets from operations
|
(2,713,243 | ) | 4,962,742 | (2,404,562 | ) | |||||||
|
Balance, December 31, 2010
|
$ | (7,674,968 | ) | $ | 15,860,132 | $ | 3,644,767 | |||||
| Note 7. – | Stock Option Plans |
In 2001 the stockholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the “Option
Plan”). The Option Plan provides for the award of options
to purchase up to 200,000 common shares to eligible employees.
In 2002 the Corporation placed the Option 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,
2010, 2009 and 2008, no stock options had been awarded under the
Option 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 Option Plan while any profit sharing
plan is in effect with respect to the Corporation (See
Note 8).
| Note 8. – | Employee Benefit Plans |
The Corporation has a defined contribution 401(k) Plan (the
“401K Plan”). The 401K Plan provides a base
contribution of 1% for eligible employees and also provides up
to 5% matching contributions. The 401K Plan expense was $36,143,
$25,743, and $27,158 during the years ended December 31,
2010, 2009 and 2008, respectively.
In 2002 the Corporation established a Profit Sharing Plan (the
“Plan”) for its executive officers in accordance with
Section 57(n) of the 1940 Act. Under the Plan, the
Corporation 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 SBIC subsidiary, for the fiscal
year, computed in accordance with the Plan and the
Corporation’s interpretation of the Plan. Any profit
sharing paid or accrued cannot exceed 20% of the
Corporation’s net income, as defined. The profit sharing
payments will be split equally between the Corporation’s
two executive officers, who are fully vested in the Plan. The
Corporation has accrued $531,602 for estimated contributions to,
or payments made under the Plan, for the year ended
December 31, 2010. Additionally, the Corporation has
accrued $53,032 in estimated contributions to the Plan related
to an escrow receivable and this amount will be paid when the
escrow is collected. The associated benefits on the profit
sharing have been accrued at December 31, 2010. It is
expected that $531,602 of this accrual will be paid in the first
quarter of 2011. During the year ended December 31, 2009,
the Corporation approved and accrued $133,013 under the Plan
which was paid during the first quarter of 2010. The amounts
approved do not exceed the defined limits. There were no
contributions to, or payments made, under the Plan, for the year
ended December 31, 2008.
| Note 9. – | 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
45
Table of Contents
RAND
CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
accrued health benefits under this agreement at
December 31, 2010 and 2009 were $35,722 and $43,040,
respectively.
The Corporation has a lease for office space which expires in
December 2015. Rent expense under this operating lease for the
years ended December 31, 2010, 2009 and 2008 was $15,950,
$18,490 and $16,698. The future operating lease obligations for
the next five years are approximately $16,800, $17,160,$17,520,
$17,880 and $18,240.
|
|
Quarterly Operations and Earnings Data – Unaudited |
|
4th
|
3rd
|
2nd
|
1st
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2010
|
||||||||||||||||
|
Investment income
|
$ | 233,039 | $ | 227,430 | $ | 198,428 | $ | 188,386 | ||||||||
|
Net increase (decrease) in net assets from operations
|
884,569 | (216,627 | ) | (143,740 | ) | (679,265 | ) | |||||||||
|
Basic and diluted net increase (decrease) in net assets from
operations per share
|
0.13 | (0.03 | ) | (0.02 | ) | (0.10 | ) | |||||||||
|
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 | ) | |||||||||
|
|
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:
| 2010 | 2009 | 2008 | ||||||||||
|
Balance at beginning of year
|
($ | 209,089 | ) | $ | (122,817 | ) | $ | (122,000 | ) | |||
|
Provision for losses
|
— | (87,089 | ) | (817 | ) | |||||||
|
Write offs/Recoveries
|
50,844 | 817 | — | |||||||||
|
Balance at end of year
|
($ | 158,245 | ) | $ | (209,089 | ) | $ | (122,817 | ) | |||
46
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, 2010
SCHEDULE OF CONSOLIDATED CHANGES IN INVESTMENTS AT
COST AND REALIZED GAIN
For the Year Ended December 31, 2010
|
Cost
|
||||||||
|
Increase
|
Realized
|
|||||||
| (Decrease) | Gain (Loss) | |||||||
|
New and additions to previous investments
|
||||||||
|
Microcision LLC
|
$ | 923,472 | ||||||
|
Mid America Brick & Structural Clay Products, LLC
|
800,000 | |||||||
|
Liazon Corporation
|
501,200 | |||||||
|
Rheonix, Inc
|
500,000 | |||||||
|
GridApp Systems, Inc.
|
481,774 | |||||||
|
Niagara Dispensing Technologies, Inc.
|
261,918 | |||||||
|
Chequed.com, Inc.
|
250,000 | |||||||
|
EmergingMed.com, Inc.
|
216,712 | |||||||
|
Mezmeriz, Inc.
|
21,509 | |||||||
|
SOMS Technologies, LLC
|
15,897 | |||||||
| 3,972,482 | ||||||||
|
Investments repaid, sold or liquidated
|
||||||||
|
GridApp repayment
|
(1,577,708 | ) | $ | 2,719,569 | ||||
|
Innov-X Systems, Inc. repayment
|
(1,250,000 | ) | 4,403,984 | |||||
|
Wineisit.com realized loss
|
(721,918 | ) | (721,918 | ) | ||||
|
Golden Goal, LLC realized loss
|
(675,652 | ) | (642,974 | ) | ||||
|
APF Group, Inc. realized loss
|
(631,547 | ) | (631,547 | ) | ||||
|
Gemcor LLC repayment
|
(110,286 | ) | — | |||||
|
Photonic Products Group, Inc. sale
|
(76,250 | ) | (46,542 | ) | ||||
|
Adam realized loss
|
(68,000 | ) | (68,000 | ) | ||||
|
Bioworks, Inc. sale
|
(56,000 | ) | (49,830 | ) | ||||
| (5,167,361 | ) | $ | 4,962,742 | |||||
|
Net change in investments
|
$ | (1,194,879 | ) | $ | 4,962,742 | |||
47
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Rand Capital Corporation and Subsidiaries
We have audited the accompanying consolidated statements of
financial position of Rand Capital Corporation and Subsidiaries
(the “Corporation”) as of December 31, 2010 and
2009, including the consolidated schedule of portfolio
investments as of December 31, 2010, and the related
consolidated statements of operations, cash flows and changes in
net assets for each of the three years in the period ended
December 31, 2010, and the selected per share data and
ratios for each of the five years in the period then ended.
These consolidated financial statements and the selected per
share data and ratios are the responsibility of the
Corporation’s management. Our responsibility is to express
an opinion on these consolidated financial statements and
selected per share data and ratios based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
selected per share data and ratios are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included examination or confirmation of securities
owned as of December 31, 2010 and 2009. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and
selected per share data and ratios referred to above present
fairly, in all material respects, the financial position of the
Corporation as of December 31, 2010 and 2009, the results
of their operations, their cash flows and the changes in their
net assets for each of the three years in the period ended
December 31, 2010, and the selected per share data and
ratios for each of the five years in the period then ended, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1, the investment securities included
in the consolidated financial statements valued at $19,364,625
(84% of net assets) and $24,296,145 (105% of net assets) as of
December 31, 2010 and 2009, respectively, include
securities valued at $19,364,625 and $24,265,647, respectively,
whose fair values have been estimated by management in the
absence of readily ascertainable market value. The fair value
estimates are then approved by the Board of Directors. We have
reviewed the procedures used by management in preparing the
valuations of investment securities and have inspected the
underlying documentation, and in the circumstances we believe
the procedures are reasonable and the documentation appropriate.
Those estimated values may differ from the values that would
have been used had a ready market for the investments existed.
Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole.
The supplementary schedule of consolidated changes in
investments at cost and realized loss for the year ended
December 31, 2010 is presented for purposes of additional
analysis and is not a required part of the basic consolidated
financial statements. The supplemental schedule is the
responsibility of Corporation’s management. Such schedule
has been subjected to the auditing procedures applied in the
audits of the basic consolidated financial statements and, in
our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as
a whole.
/s/ Freed
Maxick & Battaglia, CPAs, PC
Buffalo, New York
March 14, 2011
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | 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, 2010. 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 its assessment,
management believes that, as of December 31, 2010, 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 April 29,
2011, to be filed under Regulation 14A (the “2011
Proxy Statement”).
The Corporation has adopted a written 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 are available, free of charge, in the
Governance section of the Corporation’s website located at
www.randcapital.com.
49
Table of Contents
| Item 11. | Executive Compensation |
Information in response to this Item is incorporated herein by
reference to the information provided in the Corporation’s
2011 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
2011 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 2011
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 2011 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, 2010
and 2009
Statements of Operations for the three years in the period ended
December 31, 2010
Statements of Changes in Net Assets for the three years in the
period ended December 31, 2010
Statements of Cash Flows for the three years in the period ended
December 31, 2010
Schedule of Portfolio Investments as of December 31, 2010
Schedules of Selected Per Share Data and Ratios for the five
years in the period ended December 31, 2010
Notes to the Consolidated Financial Statements
Supplemental Schedule of Consolidated Changes in Investments at
Cost and Realized Gain for the year ended December 31, 2010
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 11 to the
consolidated financial statements.
50
Table of Contents
| (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. |
| (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.* | |
| (10.2) | 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. | |
| (10.3) | 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. | |
| (10.4) | 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. | |
| (10.5) | 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. |
51
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 14, 2011
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 14, 2011 | ||||
| (ii) Principal Accounting & Financial Officer: | ||||||
|
/s/
Daniel
P. Penberthy
|
Treasurer | March 14, 2011 | ||||
| (iii) Directors: | ||||||
|
/s/
Allen
F. Grum
|
Director | March 14, 2011 | ||||
|
/s/
Erland
E. Kailbourne
|
Director | March 14, 2011 | ||||
|
/s/
Ross
B. Kenzie
|
Director | March 14, 2011 | ||||
|
/s/
Reginald
B. Newman II
|
Director | March 14, 2011 | ||||
|
/s/
Jayne
K. Rand
|
Director | March 14, 2011 | ||||
|
/s/
Robert
M. Zak
|
Director | March 14, 2011 | ||||
52
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Removed and ReservedPart 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. InvestmentsNote 3. Other AssetsNote 4. Income TaxesNote 5. Sba Debenture ObligationsNote 6. Stockholders Equity (net Assets)Note 7. Stock Option PlansNote 8. Employee Benefit PlansNote 9. Commitments and ContingenciesNote 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. Controls and ProceduresItem 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