RAND

Rand Capital Corp. 10-Q Summary (Quarter Ended Sept 30, 2008)

Business Context and Reporting Period

Rand Capital Corporation is a publicly traded Business Development Company (BDC) and operates a wholly-owned Small Business Investment Company (SBIC) subsidiary. The filing covers the quarter and nine months ended September 30, 2008. The company invests in small to medium-sized private companies, utilizing a mix of debt and equity instruments. As of November 5, 2008, there were 5,718,934 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: Investments at fair value decreased by $929,427 (3.5%) primarily due to a net decrease in unrealized appreciation of $992,700. This was driven by significant write-downs in specific portfolio companies.
• Unrealized Losses: The company recorded a $695,000 write-down on Rocket Broadband Networks (valued at zero), a $158,700 decrease in Photonic Products Group, and a $111,000 decrease in Niagara Dispensing Technologies.
• Investment Activity: New investments totaled $689,990 (Niagara Dispensing, Associates Interactive, Mezmeriz, Rocket Broadband). Loan repayments totaled $697,434.
• Income: Total investment income increased 5.2% to $1.28 million, aided by a non-recurring $43,067 interest recognition from an Innov-X escrow and $142,411 in dividends from Innov-X preferred stock. However, interest from other investments dropped 45.5% due to lower cash balances and rates.
• Expenses: Total expenses increased slightly by 1.2% to $1.19 million. This included a $19,000 charge for the expiration of an unamortized SBA leverage fee.

Outlook, Risks, and Management Commentary

• Market Conditions: Management notes extreme volatility and liquidity strain in financial markets during Q3 2008, which may impact portfolio companies' ability to secure financing and the Corporation's ability to exit investments.
• SBA Leverage: The Corporation's SBA leverage commitment of $10 million expired on September 30, 2008. $8.1 million was drawn; the remaining $1.9 million expired. The company may reapply for this leverage in the future.
• Restructuring: Rand is in the process of reorganizing its SBIC subsidiary from a limited partnership to a corporate subsidiary to comply with SEC and SBA requirements. Conditional approval from the SBA is expected, with the merger targeted for completion by December 31, 2008.
• Liquidity: Cash and cash equivalents ($3.6 million) represent 19% of net assets. Management believes this, combined with anticipated portfolio distributions, is sufficient to fund operations for the next 6-12 months.
• Risks: Key risks include the inability to obtain necessary SEC exemptive relief, adverse economic conditions affecting portfolio valuations, and the concentration of credit risk (Innov-X, Synacor, and Gemcor represent 66% of portfolio fair value).

Investor Verification Checklist

• Verify the status of the SBA reorganization and the timeline for obtaining final SEC exemptive orders.
• Monitor the financial health of Rocket Broadband Networks, which was written down to zero, and the potential for recovery or further losses.
• Assess the impact of the expired $1.9 million SBA leverage on the company's ability to deploy capital in the current credit environment.
• Review the concentration risk in the top three holdings (Innov-X, Synacor, Gemcor) which comprise the majority of the portfolio's fair value.
• Confirm the sustainability of the $142,411 dividend income from Innov-X, which was a significant contributor to the current period's income.