RAND

Business Context and Reporting Period

Company: Rand Capital Corporation (Rand)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Quarter and nine months ended September 30, 2002

Business Overview: Rand is a publicly held venture capital company and Business Development Company (BDC) focused on investing in small, unseasoned companies, primarily in Upstate New York. In 2002, Rand formed a wholly-owned subsidiary, Rand Capital SBIC, L.P., which received SBA licensing in August 2002 to leverage capital for additional investments.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Assets Decline: Net assets decreased by approximately $447,000 (4.4%) from December 31, 2001, primarily due to operating losses and unrealized depreciation.
• Unrealized Losses: A significant unrealized loss write-down of approximately $690,000 occurred in the third quarter of 2002. This was driven by valuation adjustments to portfolio companies Minrad ($652,000) and ADIC ($35,000).
• Realized Gains: The nine-month period included a realized gain of approximately $938,000, largely from the sale of ADIC stock in January 2002.
• Expense Increase: Total operating expenses increased by roughly $55,000 compared to the prior nine-month period. This includes approximately $130,000 in organizational costs related to the formation and licensing of the Rand SBIC subsidiary.
• Cash Position: Cash and cash equivalents decreased by $786,393 during the nine-month period, reflecting operating cash usage and new investments totaling $1.25 million, partially offset by proceeds from investment sales.

Guidance, Outlook, and Risks

• SBIC Operations: Rand SBIC was licensed by the SBA in August 2002. It holds $5 million in regulatory capital and is eligible to borrow up to $10 million from the SBA to fund new investments. The first investment by the subsidiary was $750,000 in Kionix, Inc.
• Liquidity: Management maintains a high cash position (54% of net assets) to fund operations and new investments, as the company relies on proceeds from sales rather than investment income to cover expenses.
• Valuation Risks: 99% of the investment portfolio consists of restricted securities with no readily ascertainable market value. Valuations are determined by the Board of Directors and may differ significantly from realized amounts.
• Speculative Nature: The company invests in early-stage, unproven companies. Management notes that some investments may result in a complete loss of principal.
• Key Personnel: The company's success is heavily dependent on two senior officers, Allen F. Grum and Daniel P. Penberthy. No key man life insurance is maintained.

Investor Verification Checklist

• Valuation Methodology: Verify the Board's rationale for the $652,000 write-down on Minrad and the $35,000 adjustment on ADIC, given the lack of public market prices.
• SBIC Leverage: Monitor the timeline and terms for Rand SBIC to secure SBA debentures, as the spread between borrowing costs and investment returns will impact future profitability.
• Cash Burn Rate: Assess the sustainability of the current cash balance ($5.1M) against operating expenses (~$227k/quarter) and the need for capital deployment.
• Portfolio Concentration: Review the concentration risk in the portfolio, noting that a significant portion of value is tied to a small number of private companies (e.g., Ultra-Scan, Minrad, Kionix).
• Stock Repurchases: Note the ongoing share repurchase program (5,400 shares repurchased in Q3) and its impact on net assets per share.