UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended September 30, 2010
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from  to
 Commission File Number: 814-00235
 Rand Capital Corporation
 (Exact Name of Registrant as specified in its Charter)
 New York
(State or Other Jurisdiction of Incorporation or organization)
    
    16-0961359
(IRS Employer Identification No.)2200 Rand Building, Buffalo, NY
(Address of Principal executive offices)
    
    14203
(Zip Code)
 (716) 853-0802
(
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



RAND CAPITAL CORPORATION
TABLE OF CONTENTS FOR FORM 10-Q
 PART I.  FINANCIAL INFORMATIONItem 1. Financial Statements and Supplementary Data (Unaudited)
    
    3Condensed Consolidated Statements of Financial Position as of September
30, 2010 and December 31, 2009
    
    3Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2010 and 2009
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2010 and 2009
    
    5Condensed Consolidated Statements of Changes in Net Assets for the Three
Months and Nine Months Ended September 30, 2010 and 2009
    
    6Condensed Consolidated Schedule of Portfolio Investments as of September
30, 2010
    
    7Notes to the Consolidated Financial Statements
    
    10Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    26Item 4. Controls and Procedures
    
    26PART II  OTHER INFORMATIONItem 1.Legal Proceedings
    
    28Item 1A. Risk Factors
    
    28Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    28Item 3.Defaults upon Senior Securities
    
    28Item 4.Removed and reserved
    
    28Item 5.Other Information
    
    28Item 6.Exhibits
    
    29
  2




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##### 



PART I.
 FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements and Supplementary Data
 RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 As of September 30, 2010 and December 31, 2009
 September 30,2010
    
    
    December 31,(Unaudited)
    
    
    2009ASSETSInvestments at fair value (identified cost: 9/30/10 
$16,544,211; 12/31/09  $14,767,920)
    
    $
    21,079,929
    
    
    $
    24,296,145Cash and cash equivalents
    
    
    10,125,367
    
    
    
    9,417,236Interest receivable (net of allowance  $209,089)
    
    
    1,007,482
    
    
    
    1,192,118Other assets
    
    
    1,693,700
    
    
    
    725,872Total assets
    
    $
    33,906,478
    
    
    $
    35,631,371LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    10,000,000
    
    
    $
    9,100,000Income taxes payable
    
    
    841,652
    
    
    
    1,082,646Deferred tax liability
    
    
    376,846
    
    
    
    1,809,000Accounts payable and accrued expenses
    
    
    520,473
    
    
    
    431,233Deferred revenue
    
    
    1,258
    
    
    
    2,611Total liabilities
    
    
    11,740,229
    
    
    
    12,425,490Stockholders equity (net assets):Common stock, $.10 par; shares authorized 10,000,000; shares issued 6,863,034
    
    
    686,304
    
    
    
    686,304Capital in excess of par value
    
    
    10,581,789
    
    
    
    10,581,789Accumulated net investment (loss)
    
    
    (7,122,085
    )
    
    
    (4,961,725
    )Undistributed net realized gain on investments
    
    
    15,208,889
    
    
    
    10,897,390Net unrealized appreciation on investments
    
    
    2,858,558
    
    
    
    6,049,329Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 9/30/10  $3.25, 12/31/09  $3.40)
    
    
    22,166,249
    
    
    
    23,205,881Total liabilities and stockholders equity (net assets)
    
    $
    33,906,478
    
    
    $
    35,631,371
   3




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##### 



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Investment income:Interest from portfolio companies
    
    $
    189,915
    
    
    $
    123,912
    
    
    $
    523,921
    
    
    $
    411,435Interest from other investments
    
    
    6,770
    
    
    
    2,633
    
    
    
    15,959
    
    
    
    14,927Dividend and other investment income
    
    
    26,220
    
    
    
    166,820
    
    
    
    62,511
    
    
    
    551,091Other income
    
    
    4,525
    
    
    
    5,250
    
    
    
    11,853
    
    
    
    20,416227,430
    
    
    
    298,615
    
    
    
    614,244
    
    
    
    997,869Operating expenses:Salaries
    
    
    495,050
    
    
    
    311,500
    
    
    
    725,150
    
    
    
    535,265Employee benefits
    
    
    26,802
    
    
    
    29,408
    
    
    
    110,939
    
    
    
    95,503Directors fees
    
    
    15,750
    
    
    
    10,750
    
    
    
    73,500
    
    
    
    65,250Professional fees
    
    
    27,573
    
    
    
    47,452
    
    
    
    118,264
    
    
    
    186,471Stockholders and office operating
    
    
    24,701
    
    
    
    24,952
    
    
    
    96,625
    
    
    
    110,848Insurance
    
    
    9,656
    
    
    
    14,491
    
    
    
    29,476
    
    
    
    39,919Corporate development
    
    
    15,584
    
    
    
    13,270
    
    
    
    39,351
    
    
    
    37,645Other operating
    
    
    2,977
    
    
    
    2,904
    
    
    
    11,005
    
    
    
    7,633618,093
    
    
    
    454,727
    
    
    
    1,204,310
    
    
    
    1,078,534Interest on SBA obligations
    
    
    143,151
    
    
    
    127,007
    
    
    
    427,155
    
    
    
    370,431Bad debt expense (recovery)
    
    
    
    
    
    
    50,844
    
    
    
    (5,983
    )
    
    
    39,867Total expenses
    
    
    761,244
    
    
    
    632,578
    
    
    
    1,625,482
    
    
    
    1,488,832Investment (loss) before income taxes
    
    
    (533,814
    )
    
    
    (333,963
    )
    
    
    (1,011,238
    )
    
    
    (490,963
    )Current income tax (benefit)
    
    
    (345,261
    )
    
    
    (83,987
    )
    
    
    (491,117
    )
    
    
    52,075Deferred income tax expense (benefit)
    
    
    125,298
    
    
    
    21,419
    
    
    
    103,370
    
    
    
    (170,615
    )Net investment (loss)
    
    
    (313,851
    )
    
    
    (271,395
    )
    
    
    (623,491
    )
    
    
    (372,423
    )Realized and unrealized gain (loss) on investments:Realized gain (loss) on sales and dispositions
    
    
    4,311,499
    
    
    
    (705,030
    )
    
    
    4,311,499
    
    
    
    (736,301
    )Income tax expense (benefit)
    
    
    1,536,869
    
    
    
    (244,710
    )
    
    
    1,536,869
    
    
    
    (255,859
    )Net realized gain (loss) on investments
    
    
    2,774,630
    
    
    
    (460,320
    )
    
    
    2,774,630
    
    
    
    (480,442
    )Unrealized appreciation on investments:Beginning of period
    
    
    8,785,064
    
    
    
    12,859,507
    
    
    
    9,528,226
    
    
    
    13,739,831End of period
    
    
    4,535,718
    
    
    
    14,051,907
    
    
    
    4,535,718
    
    
    
    14,051,907Change in unrealized appreciation before income taxes
    
    
    (4,249,346
    )
    
    
    1,192,400
    
    
    
    (4,992,508
    )
    
    
    312,076Deferred income tax (benefit) expense
    
    
    (1,571,940
    )
    
    
    427,291
    
    
    
    (1,801,737
    )
    
    
    104,474Net (decrease) increase in unrealized appreciation
    
    
    (2,677,406
    )
    
    
    765,109
    
    
    
    (3,190,771
    )
    
    
    207,602Net realized and unrealized gain (loss) on investments
    
    
    97,224
    
    
    
    304,789
    
    
    
    (416,141
    )
    
    
    (272,840
    )Net (decrease) increase in net assets from operations
    
    $
    (216,627
    )
    
    $
    33,394
    
    
    $
    (1,039,632
    )
    
    $
    (645,263
    )Weighted average shares outstanding
    
    
    6,818,934
    
    
    
    6,018,406
    
    
    
    6,818,934
    
    
    
    6,026,555Basic and diluted net (decrease) increase in net assets
from operations per share
    
    $
    (0.03
    )
    
    $
    0.01
    
    
    $
    (0.15
    )
    
    $
    (0.11
    )
   4




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##### 



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2010 and 2009
 (Unaudited)
 September 30,
    
    
    September 30,2010
    
    
    2009Cash flows from operating activities:Net decrease in net assets from operations
    
    $
    (1,039,632
    )
    
    $
    (645,263
    )Adjustments to reconcile net decrease in net assets
to net cash used in operating activities:Depreciation and amortization
    
    
    31,168
    
    
    
    26,736Change in interest receivable allowance
    
    
    
    
    
    
    86,272Decrease (increase) in unrealized appreciation of investments
    
    
    4,992,508
    
    
    
    (312,076
    )Deferred tax benefit
    
    
    (1,432,154
    )
    
    
    (322,000
    )Realized (gain) loss on portfolio investments
    
    
    (4,311,499
    )
    
    
    736,301Payment in kind, interest accrued
    
    
    
    
    
    
    (31,850
    )Non-cash conversion of debenture interest
    
    
    (342,897
    )
    
    
    (25,657
    )Changes in operating assets and liabilities:Decrease (increase) in interest receivable
    
    
    184,636
    
    
    
    (278,930
    )(Increase) decrease in other assets
    
    
    (14,206
    )
    
    
    118,222Increase in prepaid income taxes
    
    
    
    
    
    
    (174,331
    )Decrease in income taxes payable
    
    
    (240,994
    )
    
    
    (98,723
    )Increase in accounts payable and accrued expenses
    
    
    89,240
    
    
    
    78,066Decrease in deferred revenue
    
    
    (1,353
    )
    
    
    (16,432
    )Total adjustments
    
    
    (1,045,551
    )
    
    
    (214,402
    )Net cash used in operating activities
    
    
    (2,085,183
    )
    
    
    (859,665
    )Cash flows from investing activities:Investments originated
    
    
    (2,830,000
    )
    
    
    (1,430,309
    )Proceeds from sale of portfolio investments
    
    
    4,655,379
    
    
    
    67,448Proceeds from loan repayments
    
    
    90,606
    
    
    
    50,057Capital expenditures
    
    
    (846
    )
    
    
    Net cash provided (used)by investing activities
    
    
    1,915,139
    
    
    
    (1,312,804
    )Cash flows from financing activities:Proceeds from SBA debenture
    
    
    900,000
    
    
    
    Origination costs to SBA
    
    
    (21,825
    )
    
    
    Issuance of common stock
    
    
    
    
    
    
    3,735,642Net cash provided by financing activities
    
    
    878,175
    
    
    
    3,735,642Net increase in cash and cash equivalents
    
    
    708,131
    
    
    
    1,563,173Cash and cash equivalents:Beginning of period
    
    
    9,417,236
    
    
    
    2,757,653End of period
    
    $
    10,125,367
    
    
    $
    4,320,826
   5




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##### 



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
 For the Three Months and the Nine Months Ended September 30, 2010 and 2009
 (Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net assets at beginning of period
    
    $
    22,382,876
    
    
    $
    19,548,309
    
    
    $
    23,205,881
    
    
    $
    20,226,966Net investment loss
    
    
    (313,851
    )
    
    
    (271,395
    )
    
    
    (623,491
    )
    
    
    (372,423
    )Net realized gain (loss) on investments
    
    
    2,774,630
    
    
    
    (460,320
    )
    
    
    2,774,630
    
    
    
    (480,442
    )Change in unrealized appreciation before income taxes
    
    
    (4,249,346
    )
    
    
    1,192,400
    
    
    
    (4,992,508
    )
    
    
    312,076Deferred income tax (benefit) expense
    
    
    (1,571,940
    )
    
    
    427,291
    
    
    
    (1,801,737
    )
    
    
    104,474(Decrease) increase in unrealized appreciation
on investments (net of tax benefit)
    
    
    (2,677,406
    )
    
    
    765,109
    
    
    
    (3,190,771
    )
    
    
    207,602Net (decrease) increase in net assets from
operations
    
    
    (216,627
    )
    
    
    33,394
    
    
    
    (1,039,632
    )
    
    
    (645,263
    )Issuance of common stock
    
    
    
    
    
    
    3,735,642
    
    
    
    
    
    
    
    3,735,642Net assets at end of period
    
    $
    22,166,249
    
    
    $
    23,317,345
    
    
    $
    22,166,249
    
    
    $
    23,317,345
   6




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##### 



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
 September 30, 2010
 (Unaudited)
 (b)
    
    
    
    
    
    
    
    
    
    
    
    
    PerCompany, Geographic Location,
    
    
    
    
    
    Date
    
    
    (c)
    
    
    
    
    
    
    (d)(f)
    
    
    ShareBusiness Description, (Industry) and Website
    
    Type of Investment
    
    
    
    Acquired
    
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandNon-Control/Non-Affiliate Investments: (k)Mezmeriz, Inc. (g)Ithaca, NY. Developer of micro mirror technology that replaces silicon with carbon fibers in micro-electronic mechanical systems (MEMS) enabling efficient, wide-angle, Pico projectors to be embedded in mobile devices. (Electronics Developer) www.mezmeriz.com
    
    141,125 Series A preferred shares.
    
    
    
    
    1/9/08
    
    
    
    4
    %
    
    $
    121,509
    
    
    $
    121,509
    
    
    $
    .02Rheonix, Inc.Ithaca, NY. Developer of microfluidic testing devices including channels, pumps, reaction vessels, & diagnostic chambers, for testing of small volumes of chemicals and biological fluids. (Manufacturing) www.rheonix.com
    
    9,676 common shares. (g)694,015 Series A preferred shares.  50,593 common shares.
    
    
    
    
    10/29/09
    
    
    
    3
    %
    
    
    753,000
    
    
    
    889,000
    
    
    
    .12Somerset Gas Transmission Company, LLC (e)Columbus, OH. Natural gas transportation company. (Oil and Gas) www.somersetgas.com
    
    26.5337 units.
    
    
    
    
    7/10/02
    
    
    
    2
    %
    
    
    719,097
    
    
    
    786,748
    
    
    
    .12Synacor Inc. (g)Buffalo, NY. Develops provisioning platforms for aggregation and delivery of content and services across multiple digital devices. (Software) www.synacor.com
    
    234,558 Series A preferred shares.  600,000 Series B preferred shares.  240,378 Series C preferred shares.  897,438 common shares.
    
    
    
    
    11/18/02
    
    
    
    4
    %
    
    
    1,349,479
    
    
    
    4,168,001
    
    
    
    .61Subtotal Non-Control/Non-Affiliate Investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,943,085
    
    
    $
    5,965,258
    
    
    $
    .87Affiliate Investments: (l)Carolina Skiff LLC (e)(g)Waycross, GA. Manufacturer of fresh water, ocean fishing and pleasure boats. (Manufacturing) www.carolinaskiff.com
    
    $985,000 Class A preferred membership interest at 14%.  Redeemable December 23, 2012.  $500,000 subordinated promissory note at 14% due December 31, 2016.  6.0825% Class A common membership interest.   (j)Interest receivable $934,744.
    
    
    
    
    1/30/04
    
    
    
    7
    %
    
    $
    1,500,000
    
    
    $
    1,500,000
    
    
    $
    .22EmergingMed.com, Inc. (e)(g)New York, NY. Cancer clinical trial matching and referral service. (Software) www.emergingmed.com
    
    $675,045 senior subordinated note at 8% due January 19, 2013.  Warrants for 8% of common stock.
    
    
    
    
    12/19/05
    
    
    
    8
    %
    
    
    675,045
    
    
    
    675,045
    
    
    
    .10GridApp Systems, Inc. (g)New York, NY. Provider of database automation software that helps businesses gain control of their heterogeneous database applications through a centralized software console. (Software) www.gridapp.com
    
    1,309,375 Series A-1 preferred shares.  8% liquidating dividend.  584,480 common shares
    
    
    
    
    11/25/08
    
    
    
    14
    %
    
    
    1,577,708
    
    
    
    1,577,708
    
    
    
    .23
  7




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##### 



RAND CAPITAL CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2010 (Continued)
(Unaudited)
 (b)
    
    
    
    
    
    
    
    
    
    
    
    PerCompany, Geographic Location,
    
    
    
    Date
    
    (c)
    
    
    
    
    
    
    (d)(f)
    
    
    ShareBusiness Description, (Industry) and Website
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandMicrocision LLC (g)Philadelphia, PA. Custom manufacturer of medical and dental implants. (Manufacturing). www.microcision.com
    
    $1,500,000 subordinated promissory note at 5%, 6% deferred interest due December 31, 2013.  15% class A common membership interest.
    
    9/24/09
    
    
    15
    %
    
    
    1,558,896
    
    
    
    1,558,896
    
    
    
    .23Mid America Brick (g)Mexico, MO. Manufacturer of face brick for residential and commercial construction. (Manufacturing). www.midamericabrick.com
    
    19.524 membership units.
    
    6/1/10
    
    
    19.5
    %
    
    
    800,000
    
    
    
    800,000
    
    
    
    .12Niagara Dispensing Technologies, Inc.Amherst, NY. Beverage dispensing technology development and products manufacturer, specializing in rapid pour beer dispensing systems for high volume stadium and concession operations. (Manufacturing) www.niagaradispensing.com
    
    202,081 Series B preferred stock. (g)463,691 Series A preferred stock.  518,752 Series B preferred stock.      (e)$300,000 promissory note at 6%, 8% deferred interest due July 30, 2011.  $200,000 secured convertible note at 14% due February 19, 2012. Warrants for 190,561 class A common stock.  Warrants for 110,672 Series B preferred stock.
    
    3/8/06
    
    
    14
    %
    
    
    1,829,113
    
    
    
    1,000,000
    
    
    
    .15SOMS Technologies, LLC (g)Valhalla, NY. Produces and markets the microGreen Extended Performance Oil Filter. (Auto Parts Developer) www.microgreenfilter.com
    
    4,808,224 Series B membership units.
    
    12/2/08
    
    
    11.7
    %
    
    
    370,687
    
    
    
    426,404
    
    
    
    .06Ultra  Scan CorporationAmherst, NY. Biometrics application developer of ultrasonic fingerprint technology. (Electronics Hardware/Software) www.ultra-scan.com
    
    536,596 common shares.            107,104 Series A-1 preferred shares.   (g) 95,284 Series A-1 preferred shares.
    
    12/11/92
    
    
    4
    %
    
    
    938,164
    
    
    
    1,203,000
    
    
    
    .18Subtotal Affiliate Investments
    
    
    
    
    
    
    
    
    
    $
    9,249,613
    
    
    $
    8,741,053
    
    
    $
    1.29Control Investments (m) 
Gemcor II, LLC (e)(g)(h)West Seneca, NY. Designs and sells automatic riveting machines used in the assembly of aircraft components. (Manufacturing) www.gemcor.com
    
    $500,000 subordinated promissory note at 15% due December 1, 2014.    25 membership units.  Warrant to purchase 6.25 membership units.
    
    6/28/04
    
    
    31
    %
    
    $
    933,277
    
    
    $
    6,133,277
    
    
    $
    .90G-TEC Natural Gas SystemsBuffalo, NY. Manufactures and distributes systems that allow natural gas to be used as an alternative fuel to gases. (Manufacturing) www.gas-tec.com
    
    21.6% Class A membership interest.  8% cumulative dividend.
    
    8/31/99
    
    
    21.6
    %
    
    
    400,000
    
    
    
    100,000
    
    
    
    .01Subtotal Control Investments
    
    
    
    
    
    
    
    
    
    $
    1,333,277
    
    
    $
    6,233,277
    
    
    $
    .91Other Investments (a)(i)
    
    Various
    
    
    
    
    
    
    
    $
    3,018,236
    
    
    $
    140,341
    
    
    $
    .02Total portfolio investments
    
    
    
    
    
    
    
    $
    16,544,211
    
    
    $
    21,079,929
    
    
    $
    3.09
  8




---



##### 



RAND CAPITAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2010 (Continued)
(Unaudited)
 Notes to Consolidated Schedule of Portfolio Investments
               9




---



##### 



Rand Capital Corporation and Subsidiary
 
 Notes to the Consolidated Financial Statements
 For the Nine Months Ended September 30, 2010 and 2009
 (Unaudited)
 Note 1. ORGANIZATION
   SBIC Subsidiary
      10




---



##### 




    
    Rand and Rand SBIC to engage in certain related party transactions that the
Corporation would otherwise be permitted to engage in as a BDC if its component parts
were organized as a single corporation;
 
    
    Rand, as a BDC, and Rand SBIC, as its BDC/SBIC subsidiary, to meet asset coverage
requirements for senior securities on a consolidated basis; and
 
    
    Rand SBIC, as a BDC/SBIC subsidiary of Rand as a BDC, to file Exchange Act reports
on a consolidated basis as part of Rands Exchange Act reports.
   Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation 
  11




---



##### 



N-54A
    
    Election to Adopt Business Development Company statusDEF-14A
    
    Definitive Proxy Statement submitted to shareholdersForm 10-K
    
    Annual Report on Form 10-K for the year ended December 31, 2009Form 10-Q
    
    Quarterly Report on Form 10-Q for the quarters ended June 30, 2010, March
31, 2010 and September 30, 2009Form N-23C-1
    
    Reports by closed-end investment companies of purchases of their own securities
  Principles of Consolidation
 Reclassification
 Cash and Cash Equivalents
 Revenue Recognition  Interest Income
  Deferred Debenture Costs
 SBA Leverage 
 Net Assets per Share
  12




---



##### 



Supplemental Cash Flow Information
 Accounting Estimates
 Stockholders Equity (Net Assets) 
  Profit Sharing and Stock Option Plan 
  Income Taxes 
  13




---



##### 



Concentration of Credit Risk 
 Note 3. INVESTMENTS
    14




---



##### 




    
    Market approach  The market approach uses observable prices and other
relevant information generated by similar market transactions. It may include the
use of market multiples derived from a set of comparables to assist in pricing the
investment. The Corporation adjusts valuations if a subsequent significant equity
financing has occurred that includes a meaningful portion of the financing by a
sophisticated, unrelated new investor.
 
    
    Income approach  The income approach employs a cash flow and
discounting methodology to value an investment.
  Level 1: Quoted prices in active markets for identical assets or liabilities, used in the
Corporations valuation at the measurement date.
 Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices
for identical or similar assets or liabilities in markets that are not active, or other
observable inputs other than quoted prices.Level 3: Unobservable and significant inputs to determining the fair value
  Assets Measured at Fair Value on a Recurring Basis
 Fair Value Measurements at Reported Date UsingQuoted Prices in
    
    
    Significant
    
    
    Other SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loan investments
    
    $
    433,277
    
    
    
    
    
    
    
    
    
    
    $
    433,277Debt investments
    
    
    3,300,269
    
    
    
    
    
    
    
    
    
    
    
    3,300,269Equity investments
    
    
    17,346,383
    
    
    $
    30,500
    
    
    
    
    
    
    
    17,315,883Total Venture
Capital Investments
    
    $
    21,079,929
    
    
    $
    30,500
    
    
    $
    0
    
    
    $
    21,049,429
 Quoted Prices in
    
    
    Significant
    
    
    Other SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Venture Capital
Investments
    
    $
    24,296,145
    
    
    $
    30,498
    
    
    $
    0
    
    
    $
    24,265,647
  15




---



##### 



Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
 Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Venture Capital InvestmentsLoan
    
    
    Debt
    
    
    EquityDescription
    
    Investments
    
    
    Investments
    
    
    Investments
    
    
    TotalBeginning Balance, December 31, 2009, of Level 3 Assets
    
    $
    488,104
    
    
    $
    3,487,120
    
    
    $
    20,290,423
    
    
    $
    24,265,647Realized Gains or Losses included in net change in net
assets from operationsBioworks Inc. (Bioworks)
    
    
    
    
    
    
    
    
    
    
    (49,830
    )
    
    
    (49,830
    )Innov-X Systems Inc (Innovex)
    
    
    
    
    
    
    
    
    
    
    4,361,329
    
    
    
    4,361,329Unrealized gains or losses included in net change in net
assets from operationsBioworks
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    56,000GridApp Systems Inc. (GridApp)
    
    
    
    
    
    
    
    
    
    
    295,935
    
    
    
    295,935Innovex
    
    
    
    
    
    
    
    
    
    
    (5,050,000
    )
    
    
    (5,050,000
    )Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    
    
    
    
    
    
    
    
    
    (350,162
    )
    
    
    (350,162
    )SOMS Technologies, LLC (SOMS)
    
    
    
    
    
    
    
    
    
    
    55,717
    
    
    
    55,717Purchases of SecuritiesEmergingMed.com, Inc. (Emerging Med)
    
    
    
    
    
    
    216,712
    
    
    
    
    
    
    
    216,712GridApp
    
    
    
    
    
    
    
    
    
    
    481,774
    
    
    
    481,774Mezmeriz, Inc. (Mezmeriz)
    
    
    
    
    
    
    
    
    
    
    21,509
    
    
    
    21,509Microcision LLC (Microcision)
    
    
    
    
    
    
    900,087
    
    
    
    
    
    
    
    900,087Mid America Brick (Mid America)
    
    
    
    
    
    
    
    
    
    
    800,000
    
    
    
    800,000Niagara Dispensing
    
    
    
    
    
    
    236,919
    
    
    
    
    
    
    
    236,919Rheonix, Inc. (Rheonix)
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    500,000SOMS
    
    
    
    
    
    
    15,897
    
    
    
    
    
    
    
    15,897Repayments of SecuritiesBioworks
    
    
    
    
    
    
    
    
    
    
    (6,170
    )
    
    
    (6,170
    )Gemcor II, LLC (Gemcor)
    
    
    (54,827
    )
    
    
    (35,779
    )
    
    
    
    
    
    
    (90,606
    )Innovex
    
    
    
    
    
    
    (250,000
    )
    
    
    (5,361,329
    )
    
    
    (5,611,329
    )Transfers within Level 3
    
    
    
    
    
    
    (1,270,687
    )
    
    
    1,270,687
    
    
    
    Transfers in or out of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending Balance, September 30, 2010, of Level 3 Assets
    
    $
    433,277
    
    
    $
    3,300,269
    
    
    $
    17,315,883
    
    
    $
    21,049,429
 The amount of total gains or losses for the period included in earnings (or changes in net assets)
attributable to the change in unrealized gains or losses relating to assets still held
at the reporting date.
    
    $
    (4,992,508
    )Gains and losses (realized and unrealized) included in net decrease in net assets from operations
for the period above are reported as follows:Net Gain (Loss) on sales and dispositions
    
    
    4,311,499Change in unrealized gains or losses relating to assets still held at reporting date
    
    $
    (681,009
    )
  16




---



##### 



Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
 Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Venture Capital InvestmentsBeginning Balance, December 31, 2008, of Level 3 Assets
    
    
    
    
    
    $
    28,014,282Realized Gains or Losses included in net change in net assets from operationsRocket Broadband
    
    
    
    
    
    $
    (705,030
    )Unrealized gains or losses included in net change in net assets from operations
    
    
    
    
    
    
    Associates Interactive, LLC (Associates)
    
    
    (293,518
    )APF Group, Inc. (APF)
    
    
    (324,213
    )Adampluseve, Inc.(Adampluseve)
    
    
    (65,341
    )Golden Goal LLC (Golden Goal)
    
    
    (400,000
    )G-TEC Natural Gas Systems (G-Tec)
    
    
    (98,000
    )Innov-X Systems, Inc. (Innovex)
    
    
    (2,711,700
    )Kionix, Inc. (Kionix)
    
    
    3,637,000Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    
    (168,702
    )Rocket Broadband realized loss
    
    
    715,000
    
    
    $
    290,526Purchases of SecuritiesAssociates
    
    
    43,518APF
    
    
    24,212Golden Goal
    
    
    38,238GridApp Systems Inc. (GridApp)
    
    
    331,850Innovex
    
    
    250,000Microcision LLC (Microcision)
    
    
    500,000Niagara Dispensing
    
    
    300,000
    
    
    $
    1,487,818Repayments of SecuritiesGemcor II, LLC (Gemcor)
    
    
    (50,058
    )Rocket Broadband
    
    
    (9,970
    )
    
    $
    (60,028
    )Transfers in or out of Level 3
    
    
    
    
    
    
    Ending Balance, September 30, 2009, of Level 3 Assets
    
    
    
    
    
    $
    29,027,568The amount of total gains or losses for the period included in changes
in net assets attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date.
    
    
    
    
    
    $
    290,526Gains and losses (realized and unrealized) included in Net decrease
in net assets from operations for the period above are reported as follows:Net Gain (Loss) on Sales and Dispositions
    
    
    
    
    
    $
    (705,030
    )Change in unrealized gains or losses relating to assets still
held at reporting date
    
    
    
    
    
    $
    (414,504
    )
  17




---



##### 



Note 4. FINANCIAL HIGHLIGHTS
  Nine months ended
    
    
    Year endedSeptember 30, 2010
    
    
    December 31,(Unaudited)
    
    
    2009Income from investment operations (1):Investment income
    
    $
    0.09
    
    
    $
    0.28Expenses
    
    
    0.24
    
    
    
    0.30Investment (loss) before income taxes
    
    
    (0.15
    )
    
    
    (0.02
    )Income tax (benefit)
    
    
    (0.06
    )
    
    
    (0.01
    )Net investment (loss)
    
    
    (0.09
    )
    
    
    (0.01
    )Issuance of common stock
    
    
    
    
    
    
    0.61Net realized and unrealized (loss) on investments
    
    
    (0.06
    )
    
    
    (0.11
    )(Decrease) increase in net asset value
    
    
    (0.15
    )
    
    
    0.49Net asset value, beginning of period, based on weighted average
shares
    
    
    3.40
    
    
    
    3.54Net asset value, end of period, based on weighted average shares
    
    $
    3.25
    
    
    $
    4.03Per share market price, end of period
    
    $
    3.38
    
    
    $
    3.98Total return based on market value
    
    
    (15.08
    )%
    
    
    13.71
    %Total return based on net asset value
    
    
    (4.48
    )%
    
    
    (3.74
    )%Supplemental data:Ratio of expenses before income taxes to average net assets
    
    
    7.17
    %
    
    
    8.52
    %Ratio of expenses including taxes to average net assets
    
    
    5.46
    %
    
    
    8.35
    %Ratio of net investment loss to average net assets
    
    
    (2.75
    )%
    
    
    (0.29
    )%Portfolio turnover
    
    
    12.5
    %
    
    
    11.3
    %Net assets, end of period
    
    $
    22,166,249
    
    
    $
    23,205,881Weighted average shares outstanding, end of period
    
    
    6,818,934
    
    
    
    6,115,081
 (1)
    
    Per share data are based on weighted average shares outstanding and the results are
rounded   18




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  FORWARD LOOKING STATEMENTS
 Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this document that do not relate to present or historical
conditions are forward-looking statements within the meaning of that term in Section 27A of the
Securities Act of 1933, and in Section 21F of the Securities Exchange Act of 1934. Additional oral
or written forward-looking statements may be made by the Corporation from time to time and those
statements may be included in documents that are filed with the Securities and Exchange Commission.
Such forward-looking statements involve risks and uncertainties that could cause results or
outcomes to differ materially from those expressed in the forward-looking statements.
Forward-looking statements may include, without limitation, statements relating to the
Corporations plans, strategies, objectives, expectations and intentions and are intended to be
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Words such as believes, forecasts, intends, possible, expects, estimates,
anticipates, or plans and similar expressions are intended to identify forward-looking
statements. Among the important factors on which such statements are based are assumptions
concerning the state of the national economy and the local markets in which the Corporations
portfolio companies operate, the state of the securities markets in which the securities of the
Corporations portfolio companies trade or could be traded, liquidity within the national financial
markets, and inflation. Forward-looking statements are also subject to the risks and uncertainties
described in Part II, Item 1A of this report, the text of which is incorporated herein by
reference.
 There may be other factors that we have not identified that affect the likelihood that the
forward-looking statements may prove to be accurate. Further, any forward-looking statement speaks
only as of the date it is made and, except as required by law, we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which it is made
or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors
emerge from time to time that may cause our business not to develop as we expect, and we cannot
predict all of them.
 Overview
    19




---



##### 



Business Developments
  Critical Accounting Policies
   20




---



##### 



Financial Condition
  9/30/10
    
    
    12/31/09
    
    
    Decrease
    
    
    % DecreaseTotal assets
    
    $
    33,906,478
    
    
    $
    35,631,371
    
    
    $
    (1,724,893
    )
    
    
    (4.8
    %)Total liabilities
    
    
    11,740,229
    
    
    
    12,425,490
    
    
    
    (685,261
    )
    
    
    (5.5
    %)Net assets
    
    $
    22,166,249
    
    
    $
    23,205,881
    
    
    $
    (1,039,632
    )
    
    
    (4.5
    %)
  Increase
    
    
    % Increase9/30/10
    
    
    12/31/09
    
    
    (Decrease)
    
    
    (Decrease)Investments, at cost
    
    $
    16,544,211
    
    
    $
    14,767,920
    
    
    $
    1,776,291
    
    
    
    12.0
    %Unrealized appreciation, net
    
    
    4,535,718
    
    
    
    9,528,225
    
    
    
    (4,992,507
    )
    
    
    (52.4
    %)Investments at fair value
    
    $
    21,079,929
    
    
    $
    24,296,145
    
    
    $
    (3,216,216
    )
    
    
    (13.2
    %)
  Investments:
    
    AmountMicrocision LLC (Microcision)
    
    $
    850,000Mid America Brick (Mid America)
    
    
    800,000Rheonix, Inc. (Rheonix)
    
    
    500,000GridApp Systems, Inc. (GridApp)
    
    
    480,000Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    
    200,000Total of investments made during the nine months
ended September 30, 2010
    
    $
    2,830,000Changes to Investments:EmergingMed.com, Inc (Emerging Med) interest conversion
    
    $
    216,712Microcision interest conversion
    
    
    50,087Niagara Dispensing interest conversion
    
    
    36,918Mezmeriz, Inc (Mezmeriz) interest conversion
    
    
    21,509SOMS Technologies, LLC (SOMS) interest conversion
    
    
    15,897GridApp interest conversion
    
    
    1,774Total of changes to investments made during the nine months
ended September 30, 2010
    
    $
    342,897Investment Repayments:Innov-X Systems Inc (Innovex)
    
    $
    (1,250,000
    )Gemcor II, LLC (Gemcor)
    
    
    (90,606
    )Bioworks, Inc.
    
    
    (56,000
    )Total of investment repayments during the nine months
ended September 30, 2010
    
    $
    (1,396,606
    )Total change in investments, at cost,
during the nine months ended September 30, 2010
    
    $
    1,776,291
   21




---



##### 



Results of Operations
 Investment Income
  Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009
 September 30,
    
    
    September 30,
    
    
    Increase
    
    
    % Increase2010
    
    
    2009
    
    
    (Decrease)
    
    
    (Decrease)Interest from portfolio companies
    
    $
    523,921
    
    
    $
    411,435
    
    
    $
    112,486
    
    
    
    27.3
    %Interest from other investments
    
    
    15,959
    
    
    
    14,927
    
    
    
    1,032
    
    
    
    6.9
    %Dividend and other investment income
    
    
    62,511
    
    
    
    551,091
    
    
    
    (488,580
    )
    
    
    (88.7
    %)Other income
    
    
    11,853
    
    
    
    20,416
    
    
    
    (8,563
    )
    
    
    (41.9
    )%Total investment income
    
    $
    614,244
    
    
    $
    997,869
    
    
    $
    (383,625
    )
    
    
    (38.4
    %)
 Interest from portfolio companies
  Interest
    
    
    Investment
    
    
    Year that InterestCompany
    
    Rate
    
    
    Cost
    
    
    Accrual CeasedAPF Group, Inc. (APF)
    
    
    8
    %
    
    $
    631,547
    
    
    
    2009Associates Interactive LLC (Associates)
    
    
    8
    %
    
    
    293,518
    
    
    
    2009Golden Goal LLC (Golden Goal)
    
    
    13
    %
    
    
    675,652
    
    
    
    2009G-Tec Natural Gas Systems (G-Tec)
    
    
    8
    %
    
    
    400,000
    
    
    
    2004WineIsIt.com (Wineisit)
    
    
    10
    %
    
    
    801,918
    
    
    
    2005
 Interest from other investments
 Dividend and other investment income
  22




---



##### 



Other income
   Operating Expenses
 Comparison of the nine months ended September 30, 2010 to the nine months ended September 30, 2009
 September 30, 2010
    
    
    September 30, 2009
    
    
    Increase
    
    
    % IncreaseTotal Expenses
    
    $
    1,625,482
    
    
    $
    1,488,832
    
    
    $
    136,650
    
    
    
    9.2
    %
   Net Realized Gains and Losses on Investments
   23




---



##### 



Net Change in Unrealized Appreciation of Investments
   September 30,2010GridApp Systems, Inc.
    
    $
    295,935Bioworks, Inc.
    
    
    56,000SOMS
    
    
    55,717Photonics Products Group, Inc (Photonics)
    
    
    2Niagara Dispensing
    
    
    (350,162
    )Innov-X Systems, Inc. (Innovex)
    
    
    (5,050,000
    )Total change in net unrealized appreciation
during the nine months ended September 30, 2010
    
    $
    (4,992,508
    )
       September 30,2009Kionix, Inc. (Kionix)
    
    $
    3,637,000Reclass Rocket Broadband to a realized loss
    
    
    715,000Photonic Products Group, Inc (Photonic)
    
    
    21,550Innovex
    
    
    (2,711,700
    )Golden Goal
    
    
    (400,000
    )APF Group, Inc. (APF)
    
    
    (324,213
    )Associates Interactive
    
    
    (293,518
    )Niagara Dispensing
    
    
    (168,702
    )G-TEC Natural Gas Systems (G-Tec)
    
    
    (98,000
    )Adampluseve, Inc. (Adampluseve)
    
    
    (65,341
    )Total change in net unrealized appreciation
during the nine months ended September 30, 2009
    
    $
    312,076
  24




---



##### 



Net Decrease in Net Assets from Operations
   25




---



##### 



Liquidity and Capital Resources
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4. Controls and Procedures
 Management report on Internal Control Over Financial Reporting
   26




---



##### 



Changes in Internal Control over Financial Reporting.
   27




---



##### 



PART II.
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Fluctuations of Quarterly Results
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Removed and Reserved
 
 Item 5. Other Information
   28




---



##### 



Item 6. Exhibits
 (a) Exhibits
  (3
    )(i)
    
    Certificate of Incorporation of the Corporation, incorporated by
reference to Exhibit (a) (1) of Form N-2 filed with the Securities
Exchange Commission on April 22, 1997.(3
    )(ii)
    
    By-laws of the Corporation incorporated by reference to Exhibit (b) of
Form N-2 filed with the Securities Exchange Commission on April 22, 1997.(4
    )
    
    Specimen certificate of common stock certificate,
incorporated by reference to Exhibit (b) of Form N-2 filed with the
Securities Exchange Commission on April 22, 1997.(10.1
    )
    
    Employee Stock Option Plan  incorporated by reference to Appendix B to
the Corporations definitive Proxy Statement filed on June 1, 2002.*(10.3
    )
    
    Agreement of Limited Partnership for Rand Capital SBIC, L.P. 
incorporated by reference to Exhibit 10.3 to the Corporations Form 10-K
filed for the year ended December 31, 2001.(10.4
    )
    
    Certificate of Formation of Rand Capital SBIC, L.P.  incorporated by
reference to Exhibit 10.4 to the Corporations Form10-K filed for the year
ended December 31, 2001(10.5
    )
    
    Limited Liability Corporation Agreement of Rand Capital Management, LLC
 incorporated by reference to Exhibit 10.5 to the Corporations Form
10-K Report filed for the year ended December 31, 2001.(10.6
    )
    
    Certificate of Formation of Rand Capital Management, LLC incorporated
by reference to Exhibit 10.6 to the Corporations Form 10-K Report filed
for the year ended December 31, 2001.(10.7
    )
    
    Certificate of Incorporation of Rand Merger Corporation as filed by the
NY Department of State on 12/18/08  incorporated by reference to
Exhibit 1(a) to Registration Statement No. 811-22276 on Form N-5 of Rand
Capital SBIC, Inc. filed with the SEC on 2/6/09.(10.8
    )
    
    By-laws of Rand Capital SBIC, Inc.  incorporated by reference to
Exhibit 2 to Registration Statement No. 811-22276 on Form N-5 of Rand
Capital SBIC, Inc. filed with the SEC on 2/6/09.(10.9
    )
    
    Certificate of Merger of Rand Capital SBIC, L.P. and Rand Capital
Management, LLC into Rand Merger Corporation, as filed by the NY
Department of State on 12/18/08  incorporated by reference to Exhibit
1(b) to Registration Statement No. 811-22276 on Form N-5 of Rand Capital
SBIC, Inc. filed with the SEC on 2/6/09.(10.10
    )
    
    Rand Capital Corporation Amended and Restated Profit Sharing Plan
applicable to Rand Capital SBIC, Inc.  incorporated by reference to
Exhibit 7 to Registration Statement No. 811-22276 on Form N-5 of Rand
Capital SBIC, Inc. filed with the SEC on 2/6/09.*(10.11
    )
    
    Form of Subscription Agreement used by Rand Capital Corporation in
connection with a private offering of 1,100,000 shares of common stock
that was completed on September 4, 2009  incorporated by reference to
Exhibit 99.1 to the Corporations Form 8-K report filed on August 13,
2009.(31.1
    )
    
    Certification of the Chief Executive Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended, filed herewith(31.2
    )
    
    Certification of Chief Financial Officer Pursuant to Rules
13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as
amended, filed herewith(32.1
    )
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Rand Capital Corporation  furnished herewith(32.2
    )
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 Rand Capital SBIC, Inc.  furnished herewith
 *
    
    Management contract or compensatory plan.  29




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##### 



Signatures
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
  RAND CAPITAL CORPORATIONBy:
    /s/ Allen F. GrumAllen F. Grum, PresidentBy:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, TreasurerRAND CAPITAL SBIC, INC.By:
    /s/ Allen F. GrumAllen F. Grum, PresidentBy:
    /s/ Daniel P. PenberthyDaniel P. Penberthy, Treasurer  30