Proposed Transaction Represents Approximately
41% Discount to Company’s Own Stated Net Asset Value
Rand Shareholders Would Receive 69% Greater
Return by Liquidating Company’s Assets
Transaction Would Transfer Over $7.8 Million in
Wealth from Current Rand Shareholders to Owners of East Asset
Management
Proposed Special Dividend Would Further Dilute
Current Shareholders and Potentially Result in Out-of-Pocket Tax
Expenses
User-Friendly Phone Book, LLC (“User-Friendly”), the
largest shareholder of Rand Capital Corporation (“Rand” or
the “Company”) (NASDAQ:RAND) owning 1,455,993 shares or
23.0% of the Company, today announced that it had filed its
definitive proxy and an open letter to fellow shareholders urging
them to vote AGAINST the proposed transaction with East
Asset Management, LLC (“East”) using the WHITE proxy card at
the special meeting of shareholders scheduled to take place on May
16, 2019 (the “Special Meeting”).
As presented in the letter, the transaction proposed by Rand
management would sell a majority of the Company at a grossly
inadequate price relative to the Company’s net asset value
(“NAV”), transferring control and over $7.8 million in
wealth from Rand shareholders to the owners of East immediately
upon closing of the transaction. Further, if the Board proceeds
with the Transaction and declares the proposed special dividend, it
will cost current shareholders even more, both in terms of dilution
and potential out-of-pocket tax expenses.
Bruce Howard, Chief Executive Officer of User-Friendly Phone
Book, said, “Rand Capital’s proposed take-over by East Asset
Management is a brazen attempt to take millions of dollars of value
and control away from Rand’s current shareholders. It’s absurd to
sell a majority of the Company at a 41% discount to its net asset
value. In the end, this transaction only benefits the owners of
East Asset Management and the Company’s management team. For these
reasons, I believe Rand shareholders must vote against the
transaction by using the WHITE proxy card and withholding their
vote at the upcoming Special Meeting.”
User-Friendly strongly believes Rand shareholders should not be
asked to give up control of their Company at a significant, 41%
discount to its NAV. It urges fellow shareholders to vote AGAINST
all proposals on the WHITE proxy card and to discard any card they
have received from the Company.
The full text of the letter to Rand shareholders is included
below:
May 6, 2019
Dear Fellow Rand Capital Corporation Shareholder:
YOUR INVESTMENT IN
RAND CAPITAL IS AT RISK!
Please find enclosed our proxy materials and WHITE proxy
card related to Rand Capital Corporation’s (“Rand” or the
“Company”) special meeting of shareholders scheduled to take place
on May 16, 2019 (the “Special Meeting”). We own 1,455,993 of Rand’s
shares, or over 23%, and are Rand’s largest shareholder. We are
leading an initiative to stop Rand from giving away control the
Company in the proposed transaction with East Asset Management, LLC
(“East”) for far too little money.
If the Board proceeds with the East transaction and declares the
proposed dividend (the “Special Dividend”), it will COST YOU MONEY and ownership, as we
describe below. The cash limitation on the Special Dividend could
require you to pay your resulting tax with YOUR OWN money. The Special Dividend also
will further dilute your ownership in Rand.
RAND IS ASKING YOU TO GIVE UP CONTROL OF
YOUR COMPANY FOR NO PREMIUM
We are extremely disappointed that Rand’s board of directors
(the “Board”) has chosen to move forward with such a transaction
and we urge you to VOTE AGAINST
all of the proposals to be voted upon at the Special Meeting
because we believe the transaction is bad for shareholders for the
following reasons:
INADEQUATE PRICE:
East’s $3.00 per share acquisition price represents an
approximately 41% discount to the Company’s stated net asset value
(NAV) of $5.06 per share as of March 31, 2019. This is in spite of
the fact that East will gain a controlling interest, for which
acquirers typically must pay a premium.
GREATER RETURN UPON
LIQUIDATION: put another way, Rand shareholders would
receive an approximately 69% greater return, relative to East’s
$3.00 per share acquisition price, if Rand simply sold off its
assets for their NAV of $5.06 per share, as recent transactions by
the Company prove can be done.
SUBSTANTIAL DILUTION:
current shareholders’ investment in Rand will be diluted by
approximately 24% as a result of the East transaction, reducing the
NAV per share by $1.24 to $3.82 per share. At the same time, East
will see the NAV of their investment increase 82 cents per share,
or 27%. This significant transfer of wealth from current
shareholders to East has been approved by Rand management.
POTENTIAL TAX
CONSEQUENCES: there is no assurance that Rand
will declare the Special Dividend (or any cash dividends going
forward), and if it does declare the Special Dividend, the Special
Dividend may not include sufficient cash to provide shareholders
with the ability to fully satisfy the resulting tax obligation.
CONFLICTS OF
INTEREST: the Adviser’s fee structure under the
proposed Investment Management Agreement misaligns the interests of
the Adviser and the Company’s shareholders.
QUESTIONABLE
VALUATIONS: there is no credible support that the
value of the assets to be contributed by East (the “Contributed
Assets”), which comprise 52.4% of the aggregate consideration to be
received by Rand, have been accurately measured.
Please remember, you are not getting paid
anything for your shares if the transaction is approved, but you
will be selling control of the Company.
INADEQUATE PRICE
The acquisition price of $3.00 per share represents an
approximately 41% discount to Rand’s NAV of $5.06 per share as of
March 31, 2019. In a transaction where East will be acquiring a
controlling interest, we believe Rand should be commanding a
premium for its shares, not giving
them away for a 41% discount!
In the Definitive Proxy Statement filed by Rand on April 18,
2019 (the “Proxy Statement”), Rand management has taken great pains
to argue that it is receiving income-producing assets at an
acceptable price, but ignores the question on which we are actually
voting: control of Rand AND fair
compensation to its shareholders.
If the proposed transaction is approved, East will own
approximately 57% of Rand, with its stake possibly to increase with
any dividend that is declared in the future. As of March 31, 2019,
Rand’s NAV per share increased to $5.06 per share. The $3.00 per
share purchase price that East will be paying for its controlling
stake in your company is now an approximately 41% discount to
Rand’s most recently reported NAV per share!
User-Friendly believes that East is providing extremely
inadequate financial consideration to you and all shareholders in
return for depriving us of the benefit of this increase in Rand’s
NAV and stripping away control for inadequate compensation.
GREATER RETURN UPON LIQUIDATION
Simply liquidating Rand’s portfolio would net shareholders an
approximately 69% larger return than the proposed transaction with
East.
As of March 31, 2019, the fair value of Rand’s total assets was
$32.5 million with net assets of $32.0 million. By simply
undertaking an orderly and methodical liquidation of Rand’s asset
portfolio, Rand shareholders would receive approximately $5.06 per
share, which represents $2.06 or 69% more than the $3.00 per share
offered by the proposed transaction with East.
Management contends that a liquidation would require selling the
portfolio at an approximate 41% discount to its fair value.
However, this premise is not supported by Rand’s own results
reported in its Quarterly Report on Form 10-Q filed on May 2, 2019.
For example, Rand reports that it received a 6% premium relative to carrying value from the
realization of its investment in eHealth Global Technologies,
Inc!
Even if proceeds from an orderly liquidation of assets only
yielded 75% of their fair value, equating to $3.80 per share,
current shareholders would still receive 80 cents per share or 27%
more than the East acquisition price.
We believe empirical evidence supports
our view that Rand could liquidate its portfolio for a premium to
fair value, and not at a 41% discount, as is being proposed in the
transaction with East. We believe the competent execution of an
orderly liquidation would yield well in excess of $3.00 per share
to Rand shareholders.
While the Proxy Statement and management’s other public
statements claim that the Company’s asset portfolio has a
“liquidation value” of less than $3.00 per share, this statement is
based on Rand’s assets “being sold immediately or over a relatively
short period of time.”1 This fire sale approach is yet another
example of management’s poor judgment in our view.
SUBSTANTIAL DILUTION
We do not believe that the proposed transaction adequately
compensates Rand or its shareholders for the significant dilution
that will occur as a result of the proposed transaction with
East.
If the proposed transaction is approved, East will own
approximately 57% of the Company’s outstanding shares of common
stock. Given that the 8,333,333.33 shares of common stock will be
issued at a price below the Company’s per share NAV, shareholders will suffer substantial dilution
immediately upon consummation of the proposed transaction, and will
receive inadequate compensation for such dilution in our
view.
Immediately upon the consummation of
the proposed transaction, Rand’s NAV per share will drop to $3.82
per share, a $1.24 per share decline! Because
shareholders are not being cashed out of their investments,
shareholders will now hold a diluted investment that has been
significantly impaired.
To make matters worse, Rand has stated that management, the
Board and East intend to receive their portion of the Special
Dividend in additional shares of common stock. Rand attempts to
characterize this noncommittal intention as a charitable gesture on
management’s and East’s part, stating that it is a “strong
indication of our confidence in the future of Rand and has the
effect of increasing the amount of cash available to all other
shareholders.”2 However, we see it as an
additional means by which East will dilute current shareholders and
increase its ownership at shareholders’ expense.
Further, because the Company has structured the Special Dividend
to occur after the consummation of the proposed transaction, East
will be entitled to 57% of the Special Dividend, as well as its
proportional share of any future dividends. Therefore, if East elects to receive payment of the
Special Dividend in additional stock, East’s ownership will
increase further and if they take it in cash, it will reduce East’s
actual cash contribution in the transaction to a meager $9
million!
POTENTIAL TAX CONSEQUENCES
The distribution of the Special Dividend, if declared, will
be taxable to shareholders and you may have to pay more tax out of
your pocket than the cash you receive in the dividend.
In connection with Rand’s plan to elect to be taxed as a
Regulated Investment Company (“RIC”), Rand currently intends to
declare a Special Dividend equal to approximately $22.0 million.
While there is significant uncertainty as to whether the Special
Dividend will be declared, if it is declared, the Special Dividend
is taxable to Rand shareholders as a dividend, whether you elect to
receive your portion in cash or stock. The 20% cap on cash that
Rand agreed to makes this even worse for you.
As an illustrative example, a Rand shareholder who receives $100
worth of the Special Dividend, whether in cash or stock, could be
obligated to pay approximately $33 in federal and state taxes on
the Special Dividend.34 However, the cap limits the amount of cash
you could receive in the Special Dividend to only $20, leaving you
$13 short, meaning that you would have to go into your own
pocket to pay the tax!
QUESTIONABLE VALUATIONS
The assets being contributed by East (the “Contributed
Assets”) comprise 52.4% of the aggregate consideration to be
received in the proposed transaction. Rand provides no assurances
that the value of these assets have been accurately assessed, while
East has strong incentives to over-value the Contributed
Assets.
The substantial majority of the Contributed Assets are debt
instruments (e.g. promissory notes, term loans, term notes, etc.)
with interest rates ranging from 12% to 12.5%, which we believe are indicative of high levels of
risk. There is no information in the Proxy Statement to
suggest Rand management attempted to maximize the value of the
assets to be received, or to negotiate more favorable values
attributable to the Contributed Assets. This lack of negotiation is
reflected in the fact that each high-risk debt instrument is valued
at face value, meaning Rand obtained no risk discount.
We believe the absence of a detailed
explanation as to the process by which the Contributed Assets were
valued and the lack of an independent appraisal in light of East’s
incentive to over-value the Contributed Assets is an abrogation of
management’s responsibilities to Rand shareholders.
CONFLICTS OF INTEREST
The Investment Management Agreement raises conflict of
interests concerns and the Adviser has no experience advising
Business Development Companies.
We believe that the proposed Investment Management Agreement to
be entered into by the Company with the Adviser presents real
conflicts of interest that misalign the Adviser’s and the Company’s
interests. The Proxy Statement itself
warns Rand shareholders of these conflicts:
“After the Closing, the Incentive Fee payable to the Adviser may create an
incentive for the Adviser to make investments on [Rand’s] behalf
that are risky or more speculative than would be the case in the
absence of such a compensation arrangement.”
“Unlike the Base Management Fee, the Income
Based Fee is payable only if the hurdle rate is achieved. Because
the portfolio earns investment income on gross assets while the
hurdle rate is based on net assets, and because the use of leverage
increases gross assets without any corresponding increase in net
asset, the Adviser may be incentivized to
incur leverage to grow the portfolio, which will tend to enhance
returns where [Rand’s] portfolio has positive returns and increase
the chances that such hurdle rate is achieved.” 5
[emphasis ours]
In addition, the Income Based Fee and the Capital Gains Fee
payable to East will further dilute current shareholders’ ability
to participate in any upside return Rand may earn, as East would be entitled to 20% of any pre-incentive
fee net investment income and 20% of any net realized capital
gains. The benefits of any appreciating portfolio assets
will accrue to the Adviser, a separate entity that could sell
itself, siphoning away any accrued value
from Rand shareholders.
Supposedly, the externalization of Rand’s management to the
Adviser is beneficial to Rand and its shareholders due to the
wealth of “expertise” the Adviser possesses. However, the Adviser has no experience acting as an investment
advisor to a Business Development Company.6
If Rand’s current management is incapable of leveraging its own
expertise for Rand’s benefit, the decision to include two of the
existing Rand executives on the Investment Committee (40% of the
total five-person Investment Committee) is a confounding one.
We do not believe instituting a completely
new investment advisory process, which alters the investment
philosophy of the Company, simultaneously inserting an
inexperienced Adviser to oversee it all, while removing most of the
liability of the Adviser, is a prudent course of action for
Rand.
****
As outlined above, our opinion is clear that the proposed
transaction gives away control of the Company without getting paid
adequately, shareholders are not being compensated adequately and
the East transaction is not in the best interests of shareholders
and should not be approved at the Special Meeting. We are
disappointed that Rand’s management and Board have chosen to move
forward with such an inadequate transaction. It appears to us that
the Board abrogated its duty to Rand’s shareholders by agreeing to
a deal that is favorable to East at the expense of the current
shareholders.
DON’T GIVE UP CONTROL OF RAND FOR NO
CONSIDERATION PLEASE VOTE “AGAINST”
ALL PROPOSALS ON THE ENCLOSED WHITE PROXY CARD TODAY.DISCARD
ANY CARD YOU RECEIVE FROM RAND.
EVEN IF YOU HAVE ALREADY VOTED ON THE PROXY
CARD SENT TO YOU BY RAND, YOU CAN STILL CHANGE YOUR VOTE USING THE
ENCLOSED WHITE PROXY CARD. ONLY
YOUR LATEST DATED PROXY CARD WILL COUNT.
WE NEED YOU TO VOTE “AGAINST” EACH PROPOSAL TO BE VOTED UPON AT THE
SPECIAL MEETING TO PROTECT YOUR INVESTMENT.
In order to cast your vote “AGAINST” all proposals, you can simply
complete the enclosed WHITE card and return it as
instructed.
We appreciate your support, and if you need assistance or have
any questions, please call our proxy solicitor, MacKenzie Partners,
Inc., toll-free at (800) 322-2885 or
(212) 929-5500 or by email to
proxy@mackenziepartners.com.
Sincerely,/s/Bruce HowardChief Executive OfficerUser-Friendly
Phone Book, LLC
CERTAIN INFORMATION CONCERNING THE PARTICIPANT
User-Friendly Phone Book, LLC (“User-Friendly”) is the sole
participant in this solicitation. User-Friendly has filed a
definitive proxy statement with the Securities and Exchange
Commission (“SEC”) consisting of a proxy statement and accompanying
WHITE proxy card to be used to solicit proxies to vote against the
proposed transaction with East Asset Management, LLC at the Special
Meeting of Stockholders of Rand Capital Corporation (the “Company”)
scheduled to be held on May 16, 2019.
USER-FRIENDLY STRONGLY ADVISES ALL STOCKHOLDERS OF THE
COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS
THEY BECOME AVAILABLE BECAUSE THEY CONTAIN IMPORTANT INFORMATION.
SUCH PROXY MATERIALS ARE AVAILABLE AT NO CHARGE ON THE SEC’S WEB
SITE AT HTTP://WWW.SEC.GOV. IN ADDITION,
USER-FRIENDLY WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT
CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO
USER-FRIENDLY’S PROXY SOLICITOR, MACKENZIE PARTNERS, INC.,
TOLL-FREE AT (800) 322-2885 or (212) 929-5500.
As of the date hereof, User-Friendly owns 1,455,993 shares of
common stock of the Company, representing approximately 23.0% of
the issued and outstanding shares of the Company.
About User-Friendly Phone Book
Operating since 1999, User Friendly Media boasts a portfolio of
print, digital and mobile marketing solutions for small business.
The company’s product suite includes 35 print directories, User
Friendly Apps, a mobile app builder, User Friendly Mobile ads, a
platform for serving locally-targeted mobile ad impressions and
GoLocal247.com, one of the fastest growing local business directory
websites in the country.
1 Page 3 of Appendix F of Proxy Statement. 2 See Additional
Definitive Proxy Soliciting Materials filed by Rand on April 18,
2019. 3 Based on assumed tax rates of 23.8% Federal Tax and 8.82%
New York State tax. 4 This assumes an individual New York State
resident in the highest applicable tax bracket, whose shares were
held for more than one year and as a capital asset, and the Special
Dividend was qualified dividend income. 5 Page 27 of Proxy
Statement. 6 Page 25 of Proxy Statement.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190506005385/en/
Investor Contact:Paul Schulman / David WhisselMacKenzie
Partners212-929-5500Media Contact:Dan Gagnier / Jeffrey
MathewsGagnier Communications646-569-5897
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