RAND

Rand Capital Corp. 10-Q Summary (Quarter Ended June 30, 2003)

Business Context and Reporting Period

Rand Capital Corporation (RAND) is a publicly traded Business Development Company (BDC) and venture capital firm focused on investing in early-stage and start-up private companies. The company operates through its wholly-owned subsidiary, Rand Capital SBIC, L.P., which is licensed by the Small Business Administration (SBA) but has not yet drawn on SBA leverage. This report covers the three and six months ended June 30, 2003.

Key Financial Metrics

Portfolio Composition: Total investments at fair value were $6,705,629, representing approximately 71% of net assets. Approximately 98% of the portfolio consists of investments in private businesses.

Material Changes vs. Prior Period

• Operating Performance: The net decrease in net assets from operations improved significantly compared to the prior year ($125,628 loss vs. $19,065 loss), primarily due to the absence of one-time organizational costs ($116,110) and a large deferred tax expense ($211,644) recorded in the 2002 period.
• Investment Income: Income increased 79% year-over-year, driven largely by accrued interest on a $900,000 convertible note from Somerset Gas Transmission, LLC, which began accruing at 14% after maturity in January 2003.
• Portfolio Activity: New investments included $259,000 in Topps Meat Company, LLC, $150,000 additional in RAMSCO, and $200,000 in UStec, Inc. Conversely, the valuation of UStec common shares was reduced by $25,000 following a lower valuation round by a third-party investor.
• Liquidity: Cash balances decreased by approximately $958,634 during the six-month period due to new portfolio investments and operating cash usage.

Outlook, Risks, and Management Commentary

• Liquidity Strategy: Management maintains cash reserves to fund operations for the next 12 months. However, significant new investment opportunities may require drawing on SBA leverage, which has not yet been utilized.
• Valuation Risks: The company relies on fair value estimates for private holdings. Management noted that estimated values may differ materially from amounts realized upon sale. Specific unrealized depreciation was noted in ADIC ($25,755), UStec ($25,000), and American Tactile ($5,000).
• Key Risks: The filing highlights high speculation risks inherent in early-stage private companies, illiquidity of portfolio securities, and dependence on key management personnel (Allen F. Grum and Daniel P. Penberthy).
• Tax Status: The company is taxed as a corporation and holds a federal net operating loss carry-forward of approximately $530,000 expiring in 2019.

Investor Verification Checklist

• SBA Leverage Status: Verify if Rand SBIC has drawn any funds from the SBA since the filing date, as this impacts leverage and interest expense.
• Somerset Gas Transmission: Confirm the status of the $900,000 convertible note and whether the company has successfully obtained third-party financing as projected.
• Portfolio Valuations: Review the specific valuation methodologies used for UStec and other private holdings, given the recent downward adjustment in UStec's value.
• Treasury Stock Repurchases: Monitor ongoing share repurchases, as the company repurchased 18,200 shares in the first half of 2003 and continued buying through August 2003.
• Unfiled Tax Returns: Note that multi-state tax filings for 2000 and 2001 related to Vanguard Modular Building Systems are pending and expected to be completed within six months of the filing.