RAND

Rand Capital Corp. 10-Q Summary: Quarter Ended March 31, 2003

Business Context and Reporting Period

Rand Capital Corporation (Rand) is a publicly traded Business Development Company (BDC) and venture capital firm headquartered in Buffalo, New York. The company focuses on capital appreciation through investments in small, unseasoned companies, primarily in Upstate New York. It operates through a wholly-owned subsidiary, Rand Capital SBIC, L.P., which is licensed by the Small Business Administration (SBA) but had not drawn any leverage as of the reporting date. This report covers the three-month period ended March 31, 2003.

Key Financial Metrics

Portfolio Composition: Total portfolio investments at fair value were $6,398,077, representing approximately 67% of net assets. Approximately 99% of the portfolio consists of investments in private businesses.

Material Changes vs. Prior Period

• Operating Performance: The company reported a net decrease in net assets of $88,014 for Q1 2003, compared to a net increase of $47,360 in Q1 2002. The prior year's increase was driven by a $947,889 realized gain from the sale of ADIC stock, which did not occur in the current period.
• Expense Reduction: Total expenses decreased by approximately $70,000 year-over-year, primarily due to the absence of $67,594 in organizational costs related to the SBA application incurred in Q1 2002.
• Investment Activity: The company made new portfolio investments totaling $350,000 in Q1 2003, including $200,000 in UStec, Inc. and $150,000 in RAMSCO. Conversely, there were no proceeds from the sale of portfolio investments in Q1 2003.
• Valuation Adjustments: Unrealized depreciation increased by $28,110, largely due to a $25,000 devaluation of UStec common shares following a new financing round by an unrelated investor.
• Liquidity: Cash and cash equivalents decreased by $590,770 during the quarter, driven by operating cash outflows and new investment purchases.

Outlook, Risks, and Management Commentary

Management Commentary: Management notes that the decrease in net assets is attributable to operating losses and the repurchase of 12,600 treasury shares. The company maintains that its cash position ($2.5 million) is sufficient to fund operations for the next 12 months, though future investment opportunities may require drawing on SBA leverage.

Risks and Contingencies:

• Speculative Nature: The company emphasizes that investing in its stock is highly speculative, with a significant portion of assets in early-stage, thinly capitalized private companies.
• Illiquidity: Approximately 99% of the portfolio is restricted and not freely marketable, creating significant liquidity risk.
• Valuation Risk: Portfolio valuations are determined by the Board of Directors in the absence of public markets and may differ significantly from realizable values.
• Regulatory Environment: As a BDC and SBIC, the company faces specific regulatory constraints and disclosure requirements that may hinder investment flexibility compared to private competitors.
• Key Personnel: The company is heavily dependent on two senior officers, Allen F. Grum and Daniel P. Penberthy, with no key man life insurance in place.

Investor Verification Checklist

• Portfolio Valuation: Verify the methodology used to value the UStec investment, which was written down by $25,000 following a new financing round.
• SBA Leverage Status: Confirm whether Rand SBIC has drawn any leverage from the SBA since the filing date, as this impacts capital deployment capacity.
• Treasury Stock Repurchases: Review the extent of share repurchases (12,600 shares in Q1, plus 3,000 in April/May) and their impact on Net Assets Per Share.
• Income Dependency: Assess the sustainability of operating expenses given the reliance on investment sales rather than current yield to fund operations.
• Tax Position: Review the $162,000 deferred tax asset and the $455,000 net operating loss carryforward expiring in 2019.