UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 31, 2007
| |
|
|
| 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: 001-08205
Rand Capital Corporation
(Exact Name of Registrant as specified in its Charter)
| |
|
|
| New York |
|
16-0961359 |
| (State or Other Jurisdiction of Incorporation
|
|
(IRS Employer |
| or organization)
|
|
Identification No.) |
| |
|
|
| 2200 Rand Building, Buffalo, NY
|
|
14203 |
| (Address of Principal executive offices)
|
|
(Zip Code) |
(716) 853-0802
(Registrant’s Telephone No. Including Area Code)
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 whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule
12b-2 under the Exchange Act.
Large accelerated filer
o Accelerated filer o Non-accelerated filer
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of May 7, 2007 there were 5,718,934 shares of the registrant’s common stock outstanding.
RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data
Rand Capital Corporation and Subsidiaries
Consolidated Statements of Financial Position
As of March 31, 2007 and December 31, 2006
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
|
December 31, |
|
| |
|
(Unaudited) |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments at fair value (identified cost: 3/31/07 -
$13,126,870; 12/31/06 - $14,033,789) |
|
$ |
22,852,516 |
|
|
$ |
23,649,814 |
|
Cash and cash equivalents |
|
|
4,215,573 |
|
|
|
4,299,852 |
|
Interest receivable (net of allowance: 3/31/07 - $122,000; 12/31/06 -
$122,000) |
|
|
503,861 |
|
|
|
507,242 |
|
Other assets |
|
|
1,314,801 |
|
|
|
1,007,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,886,751 |
|
|
$ |
29,463,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (NET ASSETS) |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Debentures guaranteed by the SBA |
|
$ |
8,100,000 |
|
|
$ |
8,100,000 |
|
Deferred income taxes |
|
|
3,412,000 |
|
|
|
3,808,000 |
|
Income tax payable |
|
|
8,591 |
|
|
|
410,575 |
|
Accounts payable and accrued expenses |
|
|
95,657 |
|
|
|
317,359 |
|
Deferred revenue |
|
|
40,377 |
|
|
|
45,605 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
11,656,625 |
|
|
|
12,681,539 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (net assets): |
|
|
|
|
|
|
|
|
Common stock, $.10 par — shares authorized 10,000,000;
shares issued 5,763,034 |
|
|
576,304 |
|
|
|
576,304 |
|
Capital in excess of par value |
|
|
6,973,454 |
|
|
|
6,973,454 |
|
Accumulated net investment (loss) |
|
|
(6,162,940 |
) |
|
|
(6,253,128 |
) |
Undistributed net realized gain on investments |
|
|
9,724,130 |
|
|
|
9,763,366 |
|
Net unrealized appreciation on investments |
|
|
6,166,384 |
|
|
|
5,769,615 |
|
Treasury stock, at cost, 44,100 shares |
|
|
(47,206 |
) |
|
|
(47,206 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets (per share: 3/31/07-$3.01 , 12/31/2006-$2.93) |
|
|
17,230,126 |
|
|
|
16,782,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity (net assets) |
|
$ |
28,886,751 |
|
|
$ |
29,463,944 |
|
|
|
|
|
|
|
|
See accompanying notes
Rand Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Three months |
|
| |
|
ended |
|
|
ended |
|
| |
|
March 31, 2007 |
|
|
March 31, 2006 |
|
| |
|
|
Investment income: |
|
|
|
|
|
|
|
|
Interest from portfolio companies |
|
$ |
199,717 |
|
|
$ |
172,020 |
|
Interest from other investments |
|
|
46,047 |
|
|
|
5,143 |
|
Dividend and other investment income |
|
|
229,420 |
|
|
|
13,135 |
|
Other income |
|
|
5,228 |
|
|
|
10,947 |
|
| |
|
|
|
|
|
480,412 |
|
|
|
201,245 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Salaries |
|
|
106,970 |
|
|
|
96,284 |
|
Employee benefits |
|
|
42,313 |
|
|
|
31,926 |
|
Directors’ fees |
|
|
12,250 |
|
|
|
13,500 |
|
Professional fees |
|
|
31,678 |
|
|
|
26,536 |
|
Stockholders and office operating |
|
|
32,413 |
|
|
|
26,228 |
|
Insurance |
|
|
10,920 |
|
|
|
10,920 |
|
Corporate development |
|
|
14,790 |
|
|
|
12,905 |
|
Other operating |
|
|
2,479 |
|
|
|
2,622 |
|
| |
|
|
|
|
|
253,813 |
|
|
|
220,921 |
|
Interest on SBA obligations |
|
|
125,766 |
|
|
|
106,924 |
|
| |
|
|
Total expenses |
|
|
379,579 |
|
|
|
327,845 |
|
| |
|
|
Investment gain (loss) before income taxes |
|
|
100,833 |
|
|
|
(126,600 |
) |
Current income tax expense |
|
|
98,297 |
|
|
|
5,000 |
|
Deferred income tax (benefit) expense |
|
|
(98,668 |
) |
|
|
11,089 |
|
| |
|
|
Net investment gain (loss) |
|
|
101,204 |
|
|
|
(142,689 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gain on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on sales and dispositions |
|
|
(39,236 |
) |
|
|
187,953 |
|
Unrealized appreciation (depreciation) on
investments: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
9,616,025 |
|
|
|
(342,028 |
) |
End of period |
|
|
9,725,646 |
|
|
|
(94,751 |
) |
| |
|
|
Change in unrealized appreciation
(depreciation) before income taxes |
|
|
109,621 |
|
|
|
247,277 |
|
| |
Deferred income tax expense |
|
|
40,121 |
|
|
|
98,911 |
|
| |
|
|
Net change in unrealized appreciation (depreciation) on investments |
|
|
69,500 |
|
|
|
148,366 |
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on investments |
|
|
30,264 |
|
|
|
336,319 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations |
|
$ |
131,468 |
|
|
$ |
193,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
5,718,934 |
|
|
|
5,718,934 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net increase in net assets from operations per
share |
|
$ |
0.02 |
|
|
$ |
0.03 |
|
See accompanying notes
Rand Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
March 31, 2006 |
| |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations |
|
$ |
131,468 |
|
|
$ |
193,630 |
|
Adjustments to reconcile net increase in net assets to net
cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,496 |
|
|
|
7,708 |
|
Original issue discount amortization |
|
|
(62,333 |
) |
|
|
— |
|
Increase in unrealized appreciation of investments |
|
|
(109,621 |
) |
|
|
(247,277 |
) |
Deferred tax expense (benefit) |
|
|
(58,547 |
) |
|
|
110,000 |
|
Net realized loss (gain) on portfolio investments |
|
|
39,236 |
|
|
|
(187,953 |
) |
Non-cash conversion of debenture interest |
|
|
(40,000 |
) |
|
|
(2,877 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (increase) in interest receivable |
|
|
3,381 |
|
|
|
(31,344 |
) |
(Increase) decrease in other assets |
|
|
(314,910 |
) |
|
|
30,986 |
|
Decrease in accounts payable and accrued liabilities |
|
|
(644,886 |
) |
|
|
(95,922 |
) |
Decrease in deferred revenue |
|
|
(5,228 |
) |
|
|
(3,948 |
) |
| |
|
|
Total adjustments |
|
|
(1,184,412 |
) |
|
|
(420,627 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,052,944 |
) |
|
|
(226,997 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investments originated |
|
|
— |
|
|
|
(800,000 |
) |
Proceeds from sale of portfolio investments |
|
|
— |
|
|
|
581,396 |
|
Proceeds from loan repayments |
|
|
970,015 |
|
|
|
26,544 |
|
Capital expenditures |
|
|
(1,350 |
) |
|
|
— |
|
| |
|
|
Net cash provided (used) by investing activities |
|
|
968,665 |
|
|
|
(192,060 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(84,279 |
) |
|
|
(419,057 |
) |
| |
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
4,299,852 |
|
|
|
1,209,839 |
|
| |
|
|
End of period |
|
$ |
4,215,573 |
|
|
$ |
790,782 |
|
| |
|
|
See accompanying notes
Rand Capital Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Net Assets
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Three months |
|
|
Three months |
|
| |
|
ended |
|
|
ended |
|
| |
|
March 31, 2007 |
|
|
March 31, 2006 |
|
| |
|
|
Net assets at beginning of period |
|
$ |
16,782,405 |
|
|
$ |
8,615,934 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment for uncertain
tax positions — FIN 48 |
|
|
316,253 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net investment gain (loss) |
|
|
101,204 |
|
|
|
(142,689 |
) |
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on investments |
|
|
(39,236 |
) |
|
|
187,953 |
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation
on investments |
|
|
69,500 |
|
|
|
148,366 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets |
|
|
447,721 |
|
|
|
193,630 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period |
|
$ |
17,230,126 |
|
|
$ |
8,809,564 |
|
| |
|
|
See accompanying notes
Rand Capital Corporation and Subsidiaries
Condensed Consolidated Schedule of Portfolio Investments
March 31, 2007
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Per |
| |
|
|
|
Date |
|
(c) |
|
|
|
|
|
(d) |
|
Share |
| Company and Business |
|
Type of Investment |
|
Acquired |
|
Equity |
|
Cost |
|
Value |
|
of Rand |
Adampluseve, Inc. (g)
New York, NY. Luxury sports wear company
for men and women.
www.adampluseve.com
|
|
Warrants to purchase 1,715
Series A Convertible Preferred
shares.
|
|
7/14/06
|
|
|
3 |
% |
|
$ |
68,000 |
|
|
$ |
133,341 |
|
|
|
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APF Group, Inc. (g)(h)
Mount Vernon, NY. Manufacturer of museum
quality picture frames and framed mirrors
for museums, art galleries, retail frame
shops, upscale designers and prominent
collectors.
www.apfgroup.com
|
|
$584,328 Consolidated Senior
Subordinated note at 12.74%
due June 30, 2011. Warrants
to purchase 10.2941 shares of
common stock.
|
|
7/8/04
|
|
|
6 |
% |
|
|
570,960 |
|
|
|
570,960 |
|
|
|
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carolina Skiff LLC (e)(g)
Waycross, GA. Manufacturer of fresh
water, ocean fishing and pleasure boats.
www.carolinaskiff.com
|
|
$985,000 Class A preferred
membership interest at 11%.
Redeemable January 31,
2010. 5% common
membership interest.
|
|
1/30/04
|
|
|
5 |
% |
|
|
1,000,000 |
|
|
|
1,227,000 |
|
|
|
.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Staffing
Buffalo, NY. PEO providing human resource
administration for small businesses.
www.contract-staffing.com
|
|
Preferred Stock Repurchase
Agreement through March 31,
2010 at 5%.
|
|
11/8/99
|
|
|
10 |
% |
|
|
141,400 |
|
|
|
141,400 |
|
|
|
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EmergingMed.com, Inc. (g)
New York, NY. Cancer clinical trial
matching and referral service.
www.emergingmed.com
|
|
$500,000 Senior subordinated
note at 10% due December 19,
2010.
|
|
12/19/05
|
|
|
5 |
% |
|
|
500,000 |
|
|
|
500,000 |
|
|
|
.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gemcor II, LLC (e)(g)(h)
West Seneca, NY. Designs and sells
automatic riveting machines used in the
assembly of aircraft components.
www.gemcor.com
|
|
$250,000 Subordinated note at
8% due June 28, 2010 with
warrant to purchase 6.25
membership units. 25
membership units.
|
|
6/28/04
|
|
|
31 |
% |
|
|
708,989 |
|
|
|
708,989 |
|
|
|
.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G-TEC Natural Gas Systems
Buffalo, NY. Manufactures and distributes
systems that allow natural gas to be used
as an alternative fuel to gases.
www.gas-tec.com
|
|
33.057% Class A membership
interest. 8% cumulative
dividend.
|
|
8/31/99
|
|
|
33 |
% |
|
|
400,000 |
|
|
|
198,000 |
|
|
|
.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innov-X Systems, Inc. (g)
Woburn, MA. Manufactures portable x-ray
fluorescence (XRF) analyzers used in
metals/alloy analysis.
www.innovxsys.com
|
|
2,642 Series A Convertible
Preferred stock. Warrants for
21,596 common shares.
|
|
9/27/04
|
|
|
9 |
% |
|
|
1,000,000 |
|
|
|
8,761,700 |
|
|
|
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kionix, Inc.
Ithaca, NY. Develops innovative MEMS
based technology applications.
www.kionix.com
|
|
30,241 shares Series B
preferred stock. 696,296
shares Series C preferred stock.
(g) 2,862,091 shares Series A
preferred stock. 714,285
shares Series B preferred stock.
|
|
5/17/02
|
|
|
2 |
% |
|
|
1,506,044 |
|
|
|
1,221,568 |
|
|
|
.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Monarch Machine Tool, Inc. (e)(g)(h)
Cortland, NY. Manufactures and services
vertical/horizontal machining centers.
www.monarchmt.com
|
|
$527,877 note at 12% due
January 13, 2009. $300,000
note at 12% due January 13,
2009. Warrants for 22.84
shares of common stock.
|
|
9/24/03
|
|
|
11 |
% |
|
|
651,333 |
|
|
|
651,333 |
|
|
|
.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niagara Dispensing Technologies, Inc. (g)
Tonawanda, NY. Beverage dispensing
technology development and products
manufacturer, specializing in beer
dispensing systems.
www.exactpour.com
|
|
$500,000 Senior Subordinated
note at 8% due March 7, 2011.
Adjustable warrant for 4% of
common stock.
|
|
3/8/06
|
|
|
4 |
% |
|
|
540,000 |
|
|
|
540,000 |
|
|
|
.09 |
|
Rand Capital Corporation and Subsidiaries
Condensed Consolidated
Schedule of Portfolio Investments
March 31, 2007 (Continued)
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per |
| |
|
|
|
(b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share |
| |
|
|
|
Date |
|
(c) |
|
|
|
|
|
(d) |
|
of |
| Company and Business |
|
Type of Investment |
|
Acquired |
|
Equity |
|
Cost |
|
Value |
|
Rand |
Photonic Products Group, Inc
(OTC:PHPG.OB) (i)
Northvale, NJ. Develops and manufactures
products for laser photonics industry.
www.inrad.com
|
|
100 shares convertible Series B
preferred stock, 10% dividend.
(a) 22,000 shares common stock.
|
|
10/31/00
|
|
<1%
|
|
|
155,000 |
|
|
|
138,500 |
|
|
|
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RAMSCO (e)(g)(h)
Albany, NY. Distributor of water,
sanitary, storm sewer and specialty
construction materials to the contractor,
highway and municipal construction markets.
www.ramsco.com
|
|
$916,947.23 notes at 13% due
November 18, 2007. Warrants to
purchase 12.5% of common
shares.
|
|
11/19/02
|
|
|
13 |
% |
|
|
793,644 |
|
|
|
793,644 |
|
|
|
.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocket Broadband Networks, Inc. (g)
Rochester, NY. Communications service
provider of satellite TV, broadband
internet and VoIP digital phone targeting
multiple dwelling units.
www.rocketbroadband.com
|
|
533,827 Series A-1 Preferred
shares.
|
|
12/20/05
|
|
|
8 |
% |
|
|
400,000 |
|
|
|
400,000 |
|
|
|
.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Somerset Gas Transmission Company, LLC
Columbus, OH. Natural gas transportation
company.
www.somersetgas.com
|
|
26.5337 Units.
|
|
7/10/02
|
|
|
2 |
% |
|
|
719,097 |
|
|
|
786,748 |
|
|
|
.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Synacor Inc. (e)(g)
Buffalo, NY. Develops provisioning
platforms for aggregation and delivery of
content for broadband access providers.
www.synacor.com
|
|
200,000 shares of Series B
preferred stock. 78,186 Series
A preferred shares. 80,126
Series C preferred shares.
Warrants for 299,146 common
shares.
|
|
11/18/02
|
|
|
4 |
% |
|
|
999,478 |
|
|
|
3,818,000 |
|
|
|
.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topps Meat Company LLC (e)(g)
Elizabeth, NJ. Producer and supplier of
premium branded frozen hamburgers and
other portion controlled meat products.
www.toppsmeat.com
|
|
Preferred A and Class A common
membership interest.
|
|
4/3/03
|
|
|
3 |
% |
|
|
595,000 |
|
|
|
927,000 |
|
|
|
.16 |
|
Ultra — Scan Corporation
Amherst, NY. Biometrics application
developer of ultrasonic fingerprint
technology.
www.ultra-scan.com
|
|
536,596 common shares, 107,104
Series A-1 preferred shares.
(g) 95,284 Series A-1
preferred shares.
|
|
12/11/92
|
|
|
4 |
% |
|
|
938,164 |
|
|
|
1,203,000 |
|
|
|
.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ustec, Inc.
Victor, NY. Markets digital wiring
systems for new home construction.
www.ustecnet.com
|
|
$100,000 note at 5% due
February 1, 2007. 50,000
common shares. Warrants for
139,395 common shares.
|
|
6/26/98
|
|
<1%
|
|
|
100,500 |
|
|
|
0 |
|
|
|
.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wineisit.Com, Corp. (e)
Amherst, NY. Marketing company
specializing in customer loyalty programs
supporting the wine and spirit industry.
www.wineisit.com
|
|
$20,000 note at 12% due April
26, 2007.
(g) $500,000 Senior
Subordinated note at 10% due
December 17, 2009. $250,000
note at 10% due April 16, 2005.
Warrants to purchase 100,000
shares Class B common stock.
|
|
12/18/02
|
|
|
2 |
% |
|
|
821,918 |
|
|
|
100,000 |
|
|
|
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
Various
|
|
|
|
|
|
|
|
|
517,343 |
|
|
|
31,333 |
|
|
|
.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio investments
|
|
|
|
|
|
|
|
$ |
13,126,870 |
|
|
$ |
22,852,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rand Capital Corporation and Subsidiaries
Condensed Consolidated Schedule of Portfolio Investments
March 31, 2007 (Continued)
(Unaudited)
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 March 31, 2007 restricted securities
represented 99% of the value of the investment portfolio. Freed Maxick & Battaglia, CPA’s PC has
not examined the business descriptions of the portfolio companies.
(b) The Date Acquired column indicates the year in which the Corporation acquired its first
investment in the company or a predecessor company.
(c) The equity percentages estimate the Corporation’s ownership interest in the portfolio
investment. The estimated ownership is calculated based on the percent of outstanding voting
securities held by the Corporation or the potential percentage of voting securities held by the
Corporation upon exercise of its warrants or conversion of debentures, or other available data.
Freed Maxick & Battaglia, CPA’s, PC has not audited the equity percentages of the portfolio
companies. The symbol “<1%” indicates that the Corporation holds equity interest of less than
one percent.
(d) The Corporation has adopted the SBA’s valuation guidelines for SBIC’s which describes the
policies and procedures used in valuing investments. Under the valuation policy of the
Corporation, unrestricted securities are valued at the closing price for publicly held securities
for the last three days of the month. Restricted securities, including securities of publicly-held
companies that are subject to restrictions on resale, are valued at fair value as determined by the
Board of Directors. Fair value is considered to be the amount which the Corporation may reasonably
expect to receive for portfolio securities if it is 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 by the Board of Directors
in determining the fair value of restricted securities are the financial condition and operating
results, projected operations, and other analytical data relating to the portfolio company. 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) Income Tax Information — As of March 31, 2007, the aggregate cost of investment securities
approximated $13.1 million. Net unrealized appreciation was approximately $9.7 million of which
$11.5 million related to appreciated investment securities and $1.8 million related to depreciated
investment securities
(g) Rand Capital SBIC, L.P. investment.
(h) Reduction in cost and value reflects current principal repayment.
(i) Publicly owned company.
Rand Capital Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
Note 1. ORGANIZATION
Rand Capital Corporation (“Rand” or “Corporation”) was incorporated under the laws of the
state of New York on February 24, 1969. Commencing in 1971, Rand operated as a publicly traded,
closed-end, diversified management company that was registered under Section 8(b) of the Investment
Company Act of 1940 (the “1940 Act”). On August 16, 2001, Rand filed an election to be treated as a
business development company (“BDC”) under the 1940 Act, which became effective on the date of
filing. A BDC is a specialized type of investment company that is primarily engaged in the business
of furnishing capital and managerial expertise to companies that do not have ready access to
capital through conventional finance channels. There was no impact on the corporate structure as a
result of the change to a BDC. Rand continues to operate as a publicly held venture capital
company, listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market under the symbol
“RAND.”
Formation of SBIC Subsidiary
On January 16, 2002, Rand formed a wholly owned subsidiary, Rand Capital SBIC, L.P., (“Rand
SBIC”) for the purpose of operating it as a small business investment company. At the same time,
Rand organized another wholly owned subsidiary, Rand Capital Management, LLC (“Rand Management”),
as a Delaware limited liability company, to act as the general partner of Rand SBIC. Rand
transferred $5 million in cash to Rand SBIC to serve as “regulatory capital” in January 2002, and
on August 16, 2002 Rand received notification that its Small Business Investment Company (SBIC)
application and license had been approved by the Small Business Administration (SBA). The approval
allows Rand SBIC to obtain loans up to two times its initial $5 million of “regulatory capital”
from the SBA for purposes of making new investments in portfolio companies.
The following discussion includes Rand, Rand SBIC and Rand Management (collectively, the
“Corporation”).
The Corporation paid $100,000 to the SBA to reserve $10,000,000 of its approved debenture
leverage. The leverage commitment expires on September 30, 2008. This fee was 1% of the face
amount of the leverage reserved under the commitment and represents a partial prepayment of the
SBA’s nonrefundable 3% leverage fee. As of March 31, 2007, Rand SBIC had drawn $8,100,000 in
leverage from the SBA.
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. Rand initially capitalized Rand SBIC with $5 million in
regulatory capital. Rand SBIC was approved to obtain SBA leverage at a 2:1 matching ratio,
resulting in a total capital pool eligible for investment of $15 million. The Corporation expects
to use Rand SBIC as its primary investment vehicle.
The Corporation formed Rand SBIC as a subsidiary for the purpose of causing it to be licensed
as a SBIC under the Small Business Investment Act of 1958 (the “SBA Act”) by the SBA, in order to
have access to various forms of leverage provided by the SBA to SBIC’s.
On May 28, 2002, the Corporation filed an Exemption Application with the SEC seeking an order
under Sections 6(c), 12(d)(1)(J), 57(c), and 57(i) of, and Rule 17d-1 under, the 1940 Act for
exemptions
from the application of Sections 2(a)(3), 2(a)(19), 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 applications seek orders that would permit:
| |
• |
|
a BDC (Rand) to operate a BDC/small business investment company (Rand SBIC) as its
wholly owned subsidiary in limited partnership form; |
| |
| |
• |
|
Rand, Rand Management and Rand SBIC to engage in certain 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; |
| |
| |
• |
|
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 reports. |
Since the filing of its original Application for Exemption, Rand has maintained discussions
with the staff of the Division of Investment Management of the SEC concerning Rand’s application.
The principal substantive issue in these discussions has been the structure of Rand SBIC as a
limited partnership. Rand SBIC must meet the requirements of the SBA for licensed SBICs, and at
the same time Rand SBIC must meet the requirements of the SEC that apply to BDCs.
Rand formed Rand 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, and Rand
formed Rand SBIC 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 is Rand Management, a limited
liability company whose managers are the principal executive officers of Rand.
Under the rules and interpretations of the SEC applicable to BDCs, 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, and all of the
persons who serve on the board of directors must be natural persons and a majority of them must not
be “interested persons” of the BDC. Since the managers of Rand Management are the principal
executive officers of Rand, and since both Rand Management and Rand SBIC are wholly owned by Rand,
Rand believes that the Board of Directors of Rand is the functional equivalent of a board of
directors for both Rand Management and Rand SBIC. Nevertheless, the staff of the Division of
Investment Management of the SEC has expressed the view that if Rand SBIC is to be operated as a
limited partnership BDC in compliance with the 1940 Act, then the organizational documents of Rand
SBIC must specifically provide that it will have a board of directors consisting of natural
persons, a majority of whom are not “interested persons.”
In discussions between Rand and the SBA, the SBA has recently indicated that if Rand SBIC is
reorganized as a corporation whose directors are directors of Rand, it will continue to permit Rand
SBIC to be licensed as an SBIC. Accordingly, Rand is currently in negotiations with the SEC and
the SBA concerning the reorganization of Rand SBIC as a wholly owned corporate subsidiary of Rand
whose board of directors will be comprised of directors of Rand, a majority of whom will not be
“interested persons” of Rand or Rand SBIC, and concerning the licensing of the new corporate
subsidiary as an SBIC. Based on the current status of these negotiations, Rand does not expect
that either the reorganization process or the subsequent operations of Rand SBIC as a corporation
will result in any material change in the operations of Rand SBIC. Once the reorganization is
completed, Rand expects to
make an appropriate amendment to its Exemption Application to the SEC, and it believes that it
will receive exemptions necessary for its operation of Rand SBIC as a BDC.
Rand operates Rand SBIC through Rand Management for the same investment purposes, and with
investments in similar kinds of securities, as Rand. Rand SBIC’s operations are consolidated with
those of Rand for both financial reporting and tax purposes.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — In Management’s opinion, the accompanying consolidated financial
statements include all adjustments necessary for a fair presentation of the consolidated financial
position, results of operations, and cash flows for the interim periods presented. Certain
information and note disclosures normally included in audited annual financial statements prepared
in accordance with United States generally accepted accounting principles (“GAAP”), have been
omitted; however, the Corporation believes that the disclosures made are adequate to make the
information presented not misleading. The interim results for the period ending March 31, 2007 are
not necessarily indicative of the results for the full year.
These statements should be read in conjunction with the consolidated financial statements and
the notes included in the Corporation’s Annual Report on Form 10-K for the year ended December 31,
2006. Information contained in this filing should also be reviewed in conjunction with the
Corporation’s related filings with the SEC during the period of time prior to the date of this
report. Those filings include, but are not limited to the following:
| |
|
|
|
|
|
|
N-30-B2/ARS
|
|
Quarterly & Annual Reports to Shareholders |
|
|
N-54A
|
|
Election to Adopt Business Development Company status |
|
|
DEF-14A
|
|
Definitive Proxy Statement submitted to shareholders |
|
|
Form 10-K
|
|
Annual Report on Form 10-K for the year ended December 31, 2006 |
|
|
Form 10-Q
|
|
Quarterly Report on Form 10-Q for the quarters ended September 30, 2006,
June 30, 2006, and March 31, 2006 |
|
|
Form N-23C-1
|
|
Reports by closed-end investment companies of purchases of their own securities |
The Corporation’s website is www.randcapital.com. The Corporation’s annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, charters for the Corporation’s
committees and other reports filed with the SEC are available through the Corporation’s website.
Principles of Consolidation — The consolidated financial statements include the accounts of
Rand, Rand SBIC and Rand Management, collectively, the “Corporation.” All intercompany accounts
and transactions have been eliminated in consolidation.
Investments — Investments are stated at fair value as determined in good faith by the Board of
Directors, as described in the Notes to Consolidated Schedule of Portfolio Investments. Certain
investment valuations have been determined by the Board of Directors in the absence of readily
ascertainable fair values. The estimated valuations are not necessarily indicative of amounts
which may ultimately be realized as a result of future sales or other dispositions of securities,
and these favorable or unfavorable differences could be material.
Amounts reported as realized gains and losses are measured by the difference between the net
proceeds of sale or exchange and the cost basis of the investment without regard to unrealized
gains or losses reported in prior periods. The cost of securities that have, in the Board of
Directors’ judgment, become worthless, are written off and reported as realized losses.
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 Investments Companies.” Under these rules
interest income cannot be recognized if collection is doubtful, and a 100% reserve must be
established. The collection of interest is presumed to be in doubt when there is substantial doubt
about a portfolio company’s ability to continue as a going concern or the loan is in default more
than 120 days. Management also utilizes other qualitative and quantitative measures to determine
the value of a portfolio investment and the collectability of any accrued interest.
Original Issue Discount — Investments may create original issue discount or OID income. This
situation arises when the Corporation purchases a warrant and a note from a portfolio company
simultaneously. The transaction requires an allocation of a portion of the purchase price to the
warrant and reduces the note or debt instrument by an equal amount in the form of a note discount
or OID. The note is then reported net of the OID which, is amortized into interest income over the
life of the loan. The Corporation had one OID during the quarter ended March 31, 2007 that was
fully amortized into income during the quarter due to the fact that the underlying debt instrument
was paid in full. The OID amortized into income during the quarter was $62,333.
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 was $6,996 for the three months ended March 31, 2007, compared to $6,208 for the three
months ended March 31, 2006.
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 during the three months ended March 31,
2007 and 2006 amounted to $508,222 and $9,822, respectively. Interest paid during the three months
ended March 31, 2007 and 2006 amounted to $230,103 and $172,965, respectively. During the three
months ended March 31, 2007 and 2006, the Corporation converted $40,000 and $2,877, respectively,
of interest receivable into equity investments.
Accounting Estimates — The preparation of financial statements in conformity with GAAP
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.
Stockholders’ Equity (Net Assets) — At March 31, 2007 and December 31, 2006, 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 5% of the Corporation’s
outstanding stock on the open market through October 26, 2007. During the three month periods ended
March 31, 2007 and 2006 the Corporation did not purchase any shares for the treasury.
Stock Option Plan — In July 2001, the stockholders of the Corporation authorized the
establishment of an Employee Stock Option Plan (the “Plan”). The Plan provides for the award of
options to purchase up to 200,000 common shares to eligible employees. In 2002, the Corporation
placed the Plan on inactive status as it developed a new profit sharing plan for the Corporation’s
employees in connection with the establishment of its SBIC subsidiary. As of March 31, 2007 and
2006, no stock options had been awarded under the Plan. Because Section 57(n) of the 1940 Act
prohibits maintenance of a profit sharing plan for the officers and employees of a BDC where any
option, warrant or right is outstanding under an executive compensation plan, no options will be
granted under the Plan while any profit sharing plan is in effect with respect to the Corporation.
Uncertain Tax Positions — Effective January 1, 2007, the Corporation adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement 109” (“FIN 48”). FIN 48 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. FIN 48 also provides guidance on measurement, recognition of tax
benefits, classification, interim period accounting disclosure, and transition requirements in
accounting for uncertain tax positions.
The cumulative effect of adopting FIN 48 was to increase current taxes payable by $21,200 and
reduce deferred tax liabilities by $316,253. As of January 1, 2007 the balance of accumulated net
investment loss was decreased by $11,016, and the balance in net unrealized appreciation on
investments was increased by $327,269. Upon adoption, the liability for income taxes associated
with uncertain tax positions at January 1, 2007 was $21,200 which if recognized would impact the
Corporation’s effective tax rate. The Corporation does not expect that the amounts of unrecognized
tax positions will change significantly within the next 12 months.
It is the Corporation’s policy to include interest and penalties related to income tax
liabilities in income tax expense. There was no accrued interest or penalties recorded in the
Consolidated Balance Sheet at January 1, 2007.
The Company is currently open to audit under the statute of limitations by the Internal
Revenue Service for the years ending December 31, 2003 through 2006. The Company and its
subsidiaries state income tax returns are open to audit under the statute of limitations for the
years ended December 31, 2003 through 2006.
Item 2. 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 consolidated 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 companies 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 in Part II, Item 1A of this report, the text of 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.
Overview
The following discussion includes Rand Capital Corporation (“Rand”), Rand Capital SBIC, L.P.,
(“Rand SBIC”), and Rand Capital Management, LLC (“Rand Management”), (collectively the
“Corporation”), its financial position and results of operations.
Rand is incorporated under the laws of New York and is regulated under the 1940 Act as a
business development company (“BDC”). In addition, a wholly-owned subsidiary, Rand SBIC is
regulated as a Small Business Investment Company (“SBIC”) by the Small Business Administration
(“SBA”). The Corporation anticipates that most, if not all, of its investments in the next year
will be originated through the SBIC subsidiary.
Critical Accounting Policies
The Corporation prepares its consolidated financial statements in accordance with U.S.
generally accepted accounting principles (GAAP) which requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities. A summary of our critical accounting
policies can be found in the December 31, 2006 Form 10-K in Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
Financial Condition
Overview:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
% Increase |
| |
|
3/31/07 |
|
12/31/06 |
|
(Decrease) |
|
(Decrease) |
| |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
28,886,751 |
|
|
$ |
29,463,944 |
|
|
|
($577,193 |
) |
|
|
(2.0 |
%) |
Total liabilities |
|
|
11,656,625 |
|
|
|
12,681,539 |
|
|
|
(1,024,914 |
) |
|
|
(8.1 |
%) |
| |
|
|
Net assets |
|
$ |
17,230,126 |
|
|
$ |
16,782,405 |
|
|
$ |
447,721 |
|
|
|
2.7 |
% |
| |
|
|
The Corporation’s financial condition is dependent on the success of its portfolio holdings.
It has invested a substantial portion of its assets in small to medium sized private companies. The
following summarizes the Corporation’s investment portfolio at the period-ends indicated.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
% Increase |
| |
|
3/31/07 |
|
12/31/06 |
|
(Decrease) |
|
(Decrease) |
| |
|
|
|
|
|
|
|
|
|
|
|
Investments, at cost |
|
$ |
13,126,870 |
|
|
$ |
14,033,789 |
|
|
|
($906,919 |
) |
|
|
(6.5 |
%) |
Unrealized appreciation, net |
|
|
9,725,646 |
|
|
|
9,616,025 |
|
|
|
109,621 |
|
|
|
1.1 |
% |
| |
|
|
Investments at fair value |
|
$ |
22,852,516 |
|
|
$ |
23,649,814 |
|
|
|
($797,298 |
) |
|
|
(3.4 |
%) |
| |
|
|
The change in investments, at cost, is comprised of the following:
| |
|
|
|
|
| Changes to investments: |
|
Amount |
|
Adampluseve, Inc. (Adampluseve) warrant amortization |
|
$ |
62,333 |
|
Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
interest conversion |
|
|
40,000 |
|
|
|
|
|
Total of changes in investments during
the three months ended March 31, 2007 |
|
$ |
102,333 |
|
|
|
|
|
|
|
|
|
|
Sales/Investment Repayments |
|
|
|
|
Adampluseve |
|
|
(561,000 |
) |
UStec, Inc. (UStec) |
|
|
(350,000 |
) |
New Monarch Machine Tool, Inc. (Monarch) |
|
|
(41,330 |
) |
Ramsco |
|
|
(25,784 |
) |
APF Group, Inc. (APF) |
|
|
(15,528 |
) |
Gemcor II, LLC (Gemcor) |
|
|
(13,944 |
) |
Takeform |
|
|
(1,666 |
) |
|
|
|
|
Total of sales or investment repayments
during the three months ended March 31, 2007 |
|
|
(1,009,252 |
) |
|
|
|
|
|
|
|
|
|
Total change in investment balance, at cost
during the three months ended March 31, 2007 |
|
|
($906,919 |
) |
|
|
|
|
Net asset value per share (NAV) was $3.01/share at March 31, 2007 versus $2.93/share at
December 31, 2006.
The Corporation’s total investments at fair value, whose fair value have been estimated by the
Board of Directors, approximated 133% of net assets at March 31, 2007 and 141% of net assets at
December 31, 2006.
Cash and cash equivalents approximated 25% of net assets at March 31, 2007 compared to 26% at
December 31, 2006.
Results of Operations
Investment Income
The Corporation’s investment objective is to achieve long-term capital appreciation on its
equity investments while maintaining a current cash flow from its debenture and pass through equity
instruments. Therefore, the Corporation invests in a mixture of debenture and equity instruments,
which will provide a current return on a portion of the investment portfolio. The equity features
contained in our investment portfolio are structured to realize capital appreciation over the
long-term and may not generate current income in the form of dividends or interest. In addition,
the Corporation earns interest income from investing its idle funds in money market instruments.
Comparison of the three months ended March 31, 2007 to the three months ended March 31, 2006
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
% Increase |
| |
|
March 31, 2007 |
|
March 31, 2006 |
|
(Decrease) |
|
(Decrease) |
| |
|
|
Interest from portfolio companies |
|
$ |
199,717 |
|
|
$ |
172,020 |
|
|
$ |
27,697 |
|
|
|
16.1 |
% |
Interest from other investments |
|
|
46,047 |
|
|
|
5,143 |
|
|
|
40,904 |
|
|
|
795.3 |
% |
Dividend and other investment income |
|
|
229,420 |
|
|
|
13,135 |
|
|
|
216,285 |
|
|
|
1,646.6 |
% |
Other income |
|
|
5,228 |
|
|
|
10,947 |
|
|
|
(5,719 |
) |
|
|
(52.2 |
%) |
| |
|
|
Total investment income |
|
$ |
480,412 |
|
|
$ |
201,245 |
|
|
$ |
279,167 |
|
|
|
138.7 |
% |
| |
|
|
Interest from portfolio companies — Portfolio interest income increased $27,697 or
16.1% during the three months ended March 31, 2007 as compared to the same period in the prior
year. This increase is attributable to the fact that Adampluseve paid off its debenture instrument
early and therefore the remaining $62,333 in unamortized Original Issue Discount (OID) was accreted
into income. OID income is created when the Corporation invests in a debenture instrument that has
a warrant attached to the instrument. This transaction requires an allocation of a portion of the
investment price to the warrant and reduces the debt instrument by an equal amount in the form of a
note discount or OID. The note is then reported net of the discount and the discount is accreted
into income over the life of the debenture instrument.
The increase attributed to OID income was offset by a decrease in portfolio interest revenue
due to the fact that four debenture instruments (Concentrix Corporation (Concentrix), Innov-X
Systems, Inc.(Innov-X), UStec and Synacor Inc (Synacor)) that contributed to portfolio interest
income in the first quarter of 2006 were either repaid or converted into equity instruments during
the last three quarters of 2006 and the first quarter of 2007 thereby reducing portfolio interest
income during the first quarter of 2007.
After reviewing the portfolio companies’ performance and the circumstances surrounding the
investments the Corporation has ceased accruing interest income on the following investment
instruments:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Investment |
|
Year that Interest |
| Company |
|
Interest Rate |
|
Cost |
|
Accrual Ceased |
| |
Contract Staffing |
|
|
5 |
% |
|
$ |
141,400 |
|
|
|
2006 |
|
G-Tec |
|
|
8 |
% |
|
|
400,000 |
|
|
|
2004 |
|
UStec |
|
|
5 |
% |
|
|
100,000 |
|
|
|
2006 |
|
WineIsIt.com |
|
|
10 |
% |
|
|
821,918 |
|
|
|
2005 |
|
Interest from other investments — The increase in interest income is primarily due to
higher yields on idle cash balances and the fact that the cash balance is approximately $3,425,000
higher at March 31, 2007 than at March 31, 2006.
Dividend and other investment income — Dividend income is comprised of distributions from
Limited Liability Companies (LLC’s) that the Corporation has invested in. The Corporation’s
investment agreements with certain LLC’s require the entities to distribute funds to the
Corporation for payment of income taxes on its allocable share of the entities’ profits. These
dividends will fluctuate based upon the profitability of the entities and the timing of the
distributions. Dividend income for the three months ended March 31, 2007 consisted of distributions
from Gemcor II, LLC (Gemcor) for $204,051, Topps Meat Company LLC (Topps) for $12,545 and Carolina
Skiff LLC (Carolina Skiff) for $12,824. Dividend income for the three months ended March 31, 2006
consisted of distributions from Topps for $5,302 and Gemcor for $7,833.
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 financing.
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. Upon the prepayment of a loan or debt
security, any unamortized closing fees are recorded as income. 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 company board meetings.
Other income decreased slightly due to the fact that the Corporation only charged two
portfolio companies closing fees in 2006. The annualized financing fee income based on the existing
portfolio will be approximately $21,000 annually in 2007 and less than $10,000 annually thereafter.
Operating Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2007 |
|
March 31, 2006 |
|
Increase |
|
% Increase |
Total Expenses |
|
$ |
379,579 |
|
|
$ |
327,845 |
|
|
$ |
51,734 |
|
|
|
16 |
% |
Operating expenses predominately consist of interest expense on SBA obligations, employee
compensation and benefits, directors’ fees, shareholder related costs, office expenses,
professional fees, and expenses related to identifying and reviewing investment opportunities.
The increase in operating expenses during the three months ended March 31, 2007 can be
attributed to the 18% or $18,842 increase in SBA interest expense. The Corporation has borrowed
$8,100,000 from the SBA as of March 31, 2007 at an average borrowing rate, including surcharges, of
approximately 5.9%. The Corporation expects that interest costs will continue to increase in 2007
and beyond as it continues to draw down SBA leverage up to the maximum approved leverage of $10
million. The Corporation anticipates that the remaining SBA leverage of $1,900,000 will be drawn
down in 2008. This interest is paid on a semi-annual basis.
In addition, salaries expense increased 11% or $10,686 from $96,284 for the three months ended
March 31, 2006 to $106,970 for the three months ended March 31, 2007. Benefit expense also
increased by 33% or $10,387 from $31,926 for the three months ended March 31, 2006 to $42,313 for
the three months ended March 31, 2007. These increases are due to salary increases and increases
in benefit rates. Professional fees were $31,678 and $26,536 for the three months ended March 31,
2007 and 2006, respectively. This increase of 19% or $5,142 can be attributed to the growth of the
Corporation’s investment portfolio and the proposed restructuring of the corporate structure to
comply with certain SBA regulations that were discussed in Note 1 “Organization”. The Corporation
expects legal fees to continue to increase until the reorganization is finalized in 2007.
Net Realized Gains and Losses on Investments
During the three months ended March 31, 2007, the Corporation recognized a net realized loss
of ($39,236) as UStec satisfied its $350,000 debenture instrument obligation by a payment in the
amount of $310,764. During the three months ended March 31 2006, the Corporation recognized a net
realized gain of $187,953 on its sale of 290,000 shares of Minrad International Inc. (Minrad). The
average sales price of Minrad was $2.05/share and the basis of the stock was $1.36/share. The
Corporation incurred $14,500 in broker transaction fees that were netted against the realized gain
Net Change in Unrealized Appreciation (Depreciation) of Investments
The Corporation recorded a net increase in unrealized appreciation on investments of $109,621
during the three months ended March 31, 2007, as compared to an increase of $247,277 during the
three months ended March 31, 2006. The increase in unrealized appreciation on investments of
$109,621 is due to the following valuation changes made by the Corporation:
| |
|
|
|
|
| |
|
March 31, |
|
| |
|
2007 |
|
Adampluseve warrants |
|
$ |
65,341 |
|
Reclass UStec to realized loss |
|
|
39,000 |
|
Photonics valuation to market |
|
|
5,280 |
|
|
|
|
|
Total increase in net unrealized appreciation
during the three months ended March 31, 2007 |
|
$ |
109,621 |
|
|
|
|
|
The Corporation recognized appreciation on its remaining equity investment in Adampluseve. The
portfolio company participated in a round of financing in January 2007 that caused them to pay off
the Corporation’s debenture instrument prior to the maturity date. The Corporation still holds
warrants in Adampluseve and they were adjusted based on the pricing of this recent round of
financing.
Photonics is a publicly traded stock (Nasdaq symbol: PHPG.OB) and is marked to market at the
end of each quarter.
The Corporation recorded a net decrease in unrealized depreciation on investments of $247,277
during the three months ended March 31, 2006. The decrease in unrealized depreciation on
investments of $247,277 is due to the following valuation changes made by the Corporation:
| |
|
|
|
|
| |
|
March 31, |
|
| |
|
2006 |
|
Minrad valuation to market |
|
$ |
329,453 |
|
Photonics valuation to market |
|
|
2,880 |
|
Reclass Minrad unrealized gain to realized gain
on shares sold |
|
|
(85,056 |
) |
|
|
|
|
Total decrease in net unrealized depreciation
during the three months ended March 31, 2006 |
|
$ |
247,277 |
|
|
|
|
|
As a result of the stock sale, the Corporation recognized appreciation of $329,453 on its
387,981 remaining shares of Minrad.
All of these value adjustments are consistent with the Corporation’s established valuation
policy.
Net Increase 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 in net assets from operations” on its
consolidated statements of operations. For the three months ended March 31, 2007, the net increase
in net assets from operations was $131,468 as compared to a net increase in net assets from
operations of $193,630 for the same three month period in 2006. The increase for the period ending
March 31, 2007 is attributed to an increase in net investment gain of $101,204 which is due to
improved investment income from the Corporation’s portfolio investments.
Liquidity and Capital Resources
The Corporation’s investment objective is to achieve long-term capital appreciation on its
equity investments while maintaining a current cash flow from its debenture and pass through equity
instruments. Therefore, the Corporation invests in a mixture of debenture and equity instruments,
which provide a current return on a portion of the investment portfolio. The equity features
contained in our investment portfolio are structured to realize capital appreciation over the
long-term and may not necessarily generate current income in the form of dividends or interest.
As of March 31, 2007, the Corporation’s total liquidity, consisting of cash and cash
equivalents, was $4,215,573.
As of March 31, 2007 the Corporation had paid $100,000 to the SBA to reserve its approved
$10,000,000 leverage. This leverage commitment expires on September 30, 2008. The Corporation has
drawn down $8,100,000 of this leverage as of March 31, 2007. These SBA borrowings will have balloon
maturities beginning in 2014. Management expects that it will not be necessary to draw down the
SBA leverage for the remainder of 2007, and that the large cash balance will be adequate to fund
new investments and operating activities. The Corporation anticipates that the remaining
$1,900,000 in SBA leverage will be drawn down in fiscal year 2008 prior to the expiration of the
commitment and will be available to fund operations and new investments.
Management believes that the cash and cash equivalents at March 31, 2007, coupled with the
anticipated additional SBIC leverage draw downs and interest and dividend payments on its portfolio
investments, will provide the Corporation with the liquidity necessary to fund operations and new
investments over the next twelve months. The Corporation expects its cash flow related to its
investing activities will continue to fluctuate based on its success in originating investments and
its ability to realize gains on liquidation of investments.
Item 3. 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 equity-linked 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 Board of Directors in
accordance with the Corporation’s investment valuation policy. (The discussion of valuation policy
contained in Item 1 “Financial Statements” and Supplementary Data in the “Notes to Consolidated
Schedule of Portfolio Investments” and is hereby incorporated herein by reference.) In the absence
of a readily ascertainable market value, the estimated value of the Corporation’s portfolio may
differ significantly from the values that would be placed on the portfolio if a ready market for
the investments existed. Any changes in valuation are recorded in the Corporation’s consolidated
Statement of Operations as “Net change in unrealized appreciation (depreciation).”
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 the 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 March 31, 2007 the Corporation did not have any off-balance sheet investments or hedging
investments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of
our principal executive officer and principal financial officer, has evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive
officer and principal financial officer have concluded that as of such date, our disclosure
controls and procedures were designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable SEC rules and forms and were effective.
Changes in Internal Control Over Financial Reporting. There have been no significant
changes in our internal control identified in connection with the evaluation required by paragraph
(d) of Rule 13a-15 or materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
The Corporation is Subject to Risks Created by the Valuation of its Portfolio Investments
There is typically no public market for equity securities of the small privately held
companies in which the Corporation invests. As a result, the valuations of the equity securities in
the Corporation’s portfolio are stated at fair value as determined by the good faith estimate of
the Corporation’s Board of Directors in accordance with the established SBA valuation policy. In
the absence of a readily ascertainable market value, the estimated value of the Corporation’s
portfolio of securities may differ significantly, favorably or unfavorably, from the values that
would be placed on the portfolio if a ready market for the equity securities existed. Any changes
in estimated net asset value are recorded in the statement of operations as “Net change in
unrealized appreciation (depreciation).”
The Corporation’s Portfolio Investments are Illiquid
Most of the investments of the Corporation are or will be either equity securities acquired
directly from small companies or below investment grade subordinated debt securities. The
Corporation’s portfolio of equity securities is, and will usually be, subject to restrictions on
resale or otherwise have no established trading market. The illiquidity of most of the
Corporation’s portfolio may adversely affect the ability of the Corporation to dispose of such
securities at times when it may be advantageous for the Corporation to liquidate such 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 and may lack management depth and have not attained profitability. Because
of the speculative nature and the lack of a public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment securities. The
Corporation expects that some of its venture capital investments will be a complete loss or will be
unprofitable and that some will appear to be likely to become successful but never realize their
potential. The Corporation has been risk seeking rather than risk averse in its approach to venture
capital and other investments. Neither the Corporation’s investments nor an investment in the
Corporation is intended to constitute a balanced investment program.
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 far above average amount of risk and volatility and may well result in loss
of principal. The Corporation’s 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.
The Corporation is Subject to Risks Created by its Regulated Environment
The Corporation is regulated by the SBA and the SEC. Changes in the laws or regulations that
govern SBICs and BDCs could significantly affect the Corporation’s business. Regulations and laws
may be changed periodically, and the interpretations of the relevant regulations and laws are also
subject to change. Any change in the regulations and laws governing the Corporation’s business
could have a material impact on its financial condition or its results of operations.
The Corporation is Subject to Risks Created by Borrowing Funds from the SBA
The Corporation’s Leverageable Capital may include large amounts of debt securities issued
through the SBA, and all of the debentures will have fixed interest rates. Until and unless the
Corporation is able to invest substantially all of the proceeds from debentures at annualized
interest or other rates of return that substantially exceed annualized interest rates that Rand
SBIC must pay the SBA, the Corporation’s operating results may be adversely affected which may, in
turn, depress the market price of the Corporation’s common stock.
The Corporation is Dependent Upon Key Management Personnel for Future Success
The Corporation is dependent for the selection, structuring, closing and monitoring of its
investments on the diligence and skill of its two senior officers, Allen F. Grum and Daniel P.
Penberthy. The future success of the Corporation depends to a significant extent on the continued
service and coordination of its senior officers. 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 SBIC’s, 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.
Fluctuations of Quarterly Results
The Corporation’s quarterly operating results could fluctuate 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 one quarter should not be relied upon as being indicative of performance in future quarters
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
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(a) |
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Exhibits |
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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. |
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(3)(i) |
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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. |
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(3)(ii) |
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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. |
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(4) |
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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. |
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(10.1) |
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Employee Stock Option Plan — incorporated by reference to Appendix B to
the Corporation’s definitive Proxy Statement filed on June 1, 2002.* |
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(10.3) |
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Agreement of Limited Partnership for Rand Capital SBIC, L.P. —
incorporated by reference to Exhibit 10.3 to the Corporation’s Form 10-K
filed for the year ended December 31, 2001. |
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(10.4) |
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Certificate of Limited Partnership of Rand Capital SBIC, L.P. —
incorporated by reference to Exhibit 10.4 to the Corporation’s Form 10-K
filed for the year ended December 31, 2001. |
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(10.5) |
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Limited Liability Corporation Agreement of Rand Capital Management, LLC
— incorporated by reference to Exhibit 10.5 to the Corporation’s Form
10-K Report filed for the year ended December 31, 2001. |
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(10.6) |
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Certificate of Formation of Rand Capital Management, LLC— incorporated
by reference to Exhibit 10.6 to the Corporation’s Form 10-K Report filed
for the year ended December 31, 2001. |
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(10.7) |
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N/A |
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(10.8) |
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Profit Sharing Plan — incorporated by reference to Exhibit 10.8 to the
Corporation’s Form 10-K Report filed for the year ended December 31,
2002.* |
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(21) |
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Subsidiaries of the Corporation — incorporated by
reference to Exhibit 21 to the Corporation’s Form 10-K Report filed for
the year ended December 31, 2001. |
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(31.1) |
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Certification of the Chief Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended, filed herewith |
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(31.2) |
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Certification of Chief Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended, filed herewith |
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(32.1) |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
— Rand Capital Corporation — filed herewith |
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(32.2) |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
— Rand Capital SBIC, L.P. — filed herewith |
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Management contract or compensatory plan. |
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-Q to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: May 10, 2007
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RAND CAPITAL CORPORATION |
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By:
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/s/ Allen F. Grum
Allen F. Grum, President
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By:
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/s/ Daniel P. Penberthy
Daniel P. Penberthy, Treasurer
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RAND CAPITAL SBIC, L.P. |
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By: RAND CAPITAL MANAGEMENT LLC
General Partner |
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By: RAND CAPITAL CORPORATION
Member |
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By:
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/s/ Allen F. Grum
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Allen F. Grum, President |
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By:
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/s/ Daniel P. Penberthy
Daniel P. Penberthy, Treasurer
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