##### Table of Contents



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, 2011
 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, 2011 and
December 31, 2010
    
    
    3Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 2011 and 2010
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2011 and 2010
    
    
    5Condensed Consolidated Statements of Changes in Net Assets for the Three Months and
Nine Months Ended September 30, 2011 and 2010
    
    
    6Condensed Consolidated Schedule of Portfolio Investments as of September 30, 2011
    
    
    7Notes to the Consolidated Financial Statements
    
    
    10Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART 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
    
    
    29Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



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, 2011 and December 31, 2010
 September 30,2011
    
    
    December 31,(Unaudited)
    
    
    2010ASSETSInvestments at fair value (identified cost: 9/30/11 - $12,208,977; 12/31/10 - $13,573,041)
    
    $
    21,696,992
    
    
    $
    19,364,625Cash and cash equivalents
    
    
    4,504,418
    
    
    
    11,698,653Interest receivable (net of allowance: 9/30/11 - $122,000; 12/31/10 - $158,245)
    
    
    1,319,424
    
    
    
    1,051,848Prepaid income taxes
    
    
    637,290
    
    
    
    414,745Other assets
    
    
    2,048,144
    
    
    
    2,561,389Total assets
    
    $
    30,206,268
    
    
    $
    35,091,260LIABILITIES AND STOCKHOLDERS EQUITY (NET ASSETS)Liabilities:Debentures guaranteed by the SBA
    
    $
    4,000,000
    
    
    $
    10,000,000Deferred tax liability
    
    
    2,146,611
    
    
    
    1,044,315Accounts payable and accrued expenses
    
    
    224,910
    
    
    
    990,477Deferred revenue
    
    
    
    
    
    
    5,650Total liabilities
    
    
    6,371,521
    
    
    
    12,040,442Stockholders 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
    
    
    (1,913,879
    )
    
    
    (1,648,118
    )Undistributed net realized gain on investments
    
    
    8,510,719
    
    
    
    9,833,282Net unrealized appreciation on investments
    
    
    6,017,020
    
    
    
    3,644,767Treasury stock, at cost, 44,100 shares
    
    
    (47,206
    )
    
    
    (47,206
    )Net assets (per share 9/30/11 - $3.50 , 12/31/10 - $3.38)
    
    
    23,834,747
    
    
    
    23,050,818Total liabilities and stockholders equity (net assets)
    
    $
    30,206,268
    
    
    $
    35,091,260
   3




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months and Nine Months Ended September 30, 2011 and 2010
 (Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Investment income:Interest from portfolio companies
    
    $
    170,209
    
    
    $
    189,915
    
    
    $
    549,845
    
    
    $
    523,921Interest from other investments
    
    
    8,828
    
    
    
    6,770
    
    
    
    26,909
    
    
    
    15,959Dividend and other investment income
    
    
    254,300
    
    
    
    26,220
    
    
    
    324,856
    
    
    
    62,511Other income
    
    
    7,100
    
    
    
    4,525
    
    
    
    14,680
    
    
    
    11,853440,437
    
    
    
    227,430
    
    
    
    916,290
    
    
    
    614,244Operating expenses:Salaries
    
    
    118,750
    
    
    
    495,050
    
    
    
    356,250
    
    
    
    725,150Employee benefits
    
    
    22,700
    
    
    
    26,802
    
    
    
    88,384
    
    
    
    110,939Directors fees
    
    
    12,750
    
    
    
    15,750
    
    
    
    65,250
    
    
    
    73,500Professional fees
    
    
    45,519
    
    
    
    27,573
    
    
    
    122,323
    
    
    
    118,264Stockholders and office operating
    
    
    27,104
    
    
    
    24,701
    
    
    
    101,703
    
    
    
    96,625Insurance
    
    
    7,800
    
    
    
    9,656
    
    
    
    27,646
    
    
    
    29,476Corporate development
    
    
    15,773
    
    
    
    15,584
    
    
    
    48,510
    
    
    
    39,351Other operating
    
    
    2,070
    
    
    
    2,977
    
    
    
    12,264
    
    
    
    11,005252,466
    
    
    
    618,093
    
    
    
    822,330
    
    
    
    1,204,310Interest on SBA obligations
    
    
    184,080
    
    
    
    143,151
    
    
    
    479,199
    
    
    
    427,155Bad debt recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,983
    )Total expenses
    
    
    436,546
    
    
    
    761,244
    
    
    
    1,301,529
    
    
    
    1,625,482Investment gain (loss) before income taxes
    
    
    3,891
    
    
    
    (533,814
    )
    
    
    (385,239
    )
    
    
    (1,011,238
    )Income tax expense (benefit)
    
    
    18,809
    
    
    
    (219,963
    )
    
    
    (119,478
    )
    
    
    (387,747
    )Net investment loss
    
    
    (14,918
    )
    
    
    (313,851
    )
    
    
    (265,761
    )
    
    
    (623,491
    )Realized and unrealized gain (loss) on investments:Realized gain (loss) on sales and dispositions
    
    
    (1
    )
    
    
    4,311,499
    
    
    
    (2,074,131
    )
    
    
    4,311,499Income tax expense (benefit)
    
    
    
    
    
    
    1,536,869
    
    
    
    (751,568
    )
    
    
    1,536,869Net realized gain (loss) on investments
    
    
    (1
    )
    
    
    2,774,630
    
    
    
    (1,322,563
    )
    
    
    2,774,630Unrealized appreciation on investments:Beginning of period
    
    
    7,956,016
    
    
    
    8,785,064
    
    
    
    5,791,584
    
    
    
    9,528,226End of period
    
    
    9,488,015
    
    
    
    4,535,718
    
    
    
    9,488,015
    
    
    
    4,535,718Change in unrealized appreciation before
income taxes
    
    
    1,531,999
    
    
    
    (4,249,346
    )
    
    
    3,696,431
    
    
    
    (4,992,508
    )Deferred income tax expense (benefit)
    
    
    544,840
    
    
    
    (1,571,940
    )
    
    
    1,324,178
    
    
    
    (1,801,737
    )Net increase (decrease) in unrealized
appreciation
    
    
    987,159
    
    
    
    (2,677,406
    )
    
    
    2,372,253
    
    
    
    (3,190,771
    )Net realized and unrealized gain (loss) on investments
    
    
    987,158
    
    
    
    97,224
    
    
    
    1,049,690
    
    
    
    (416,141
    )Net increase (decrease) in net assets from operations
    
    $
    972,240
    
    
    
    ($216,627
    )
    
    $
    783,929
    
    
    
    ($1,039,632
    )Weighted average shares outstanding
    
    
    6,818,934
    
    
    
    6,818,934
    
    
    
    6,818,934
    
    
    
    6,818,934Basic and diluted net increase (decrease) in net assets from operations per
share
    
    $
    0.14
    
    
    
    ($0.03
    )
    
    $
    0.11
    
    
    
    ($0.15
    )
   4




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2011 and 2010
 (Unaudited)
 Nine months
    
    
    Nine monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2011
    
    
    2010Cash flows from operating activities:Net increase (decrease) in net assets from operations
    
    $
    783,929
    
    
    $
    (1,039,632
    )Adjustments to reconcile net increase (decrease) in
net assets to net cash used in operating activities:Depreciation and amortization
    
    
    94,744
    
    
    
    31,168Original issue discount accretion
    
    
    (37,000
    )
    
    
    Change in interest receivable allowance
    
    
    (36,245
    )
    
    
    (Increase) decrease in unrealized appreciation of
investments
    
    
    (3,696,431
    )
    
    
    4,992,508Deferred tax expense (benefit)
    
    
    1,102,296
    
    
    
    (1,432,154
    )Net realized loss (gain) on portfolio investments
    
    
    2,074,131
    
    
    
    (4,311,499
    )Non-cash conversion of debenture interest
    
    
    (72,285
    )
    
    
    (342,897
    )Changes in operating assets and liabilities:(Increase) decrease in interest receivable
    
    
    (231,331
    )
    
    
    184,636Decrease (increase) in other assets
    
    
    418,500
    
    
    
    (14,206
    )Increase in prepaid income taxes
    
    
    (222,545
    )
    
    
    Decrease in income taxes payable
    
    
    
    
    
    
    (240,994
    )(Decrease) increase in accounts payable and
accrued expenses
    
    
    (765,567
    )
    
    
    89,240Decrease in deferred revenue
    
    
    (5,650
    )
    
    
    (1,353
    )Total adjustments
    
    
    (1,377,383
    )
    
    
    (1,045,551
    )Net cash used in operating activities
    
    
    (593,454
    )
    
    
    (2,085,183
    )Cash flows from investing activities:Investments originated
    
    
    (1,171,944
    )
    
    
    (2,830,000
    )Proceeds from sale of portfolio investments
    
    
    
    
    
    
    4,655,379Proceeds from loan repayments
    
    
    571,163
    
    
    
    90,606Capital expenditures
    
    
    
    
    
    
    (846
    )Net cash (used) provided by investing activities
    
    
    (600,781
    )
    
    
    1,915,139Cash flows from financing activities:Repayment of SBA debentures
    
    
    (6,000,000
    )
    
    
    Proceeds from SBA debentures
    
    
    
    
    
    
    900,000Origination costs to SBA
    
    
    
    
    
    
    (21,825
    )Net cash (used) provided by financing activities
    
    
    (6,000,000
    )
    
    
    878,175Net (decrease) increase in cash and cash equivalents
    
    
    (7,194,235
    )
    
    
    708,131Cash and cash equivalents:Beginning of period
    
    
    11,698,653
    
    
    
    9,417,236End of period
    
    $
    4,504,418
    
    
    $
    10,125,367
   5




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
 For the Three Months and the Nine Months Ended September 30, 2011 and 2010
 (Unaudited)
 Three months
    
    
    Three months
    
    
    Nine months
    
    
    Nine monthsended
    
    
    ended
    
    
    ended
    
    
    endedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2011
    
    
    2010
    
    
    2011
    
    
    2010Net assets at beginning of period
    
    $
    22,862,507
    
    
    $
    22,382,876
    
    
    $
    23,050,818
    
    
    $
    23,205,881Net investment loss
    
    
    (14,918
    )
    
    
    (313,851
    )
    
    
    (265,761
    )
    
    
    (623,491
    )Net realized (loss) gain on dispositions of investments
    
    
    (1
    )
    
    
    2,774,630
    
    
    
    (1,322,563
    )
    
    
    2,774,630Net increase(decrease) in unrealized appreciation
    
    
    987,159
    
    
    
    (2,677,406
    )
    
    
    2,372,253
    
    
    
    (3,190,771
    )Net increase (decrease) in net assets from operations
    
    
    972,240
    
    
    
    (216,627
    )
    
    
    783,929
    
    
    
    (1,039,632
    )Net assets at end of period
    
    $
    23,834,747
    
    
    $
    22,166,249
    
    
    $
    23,834,747
    
    
    $
    22,166,249
   6




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
 September 30, 2011
 (Unaudited)
 (a)
    
    
    
    (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    PerCompany, Geographic Location, Business
    
    
    
    Date
    
    (c)
    
    
    
    
    
    
    (d)(f)
    
    
    ShareDescription, (Industry) and Website
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandNon-Control/Non-Affiliate Investments: (j)Chequed.com, Inc. (g)
Saratoga Springs, NY. Predictive employee selection and development
software. (Software) www.chequed.com
    
    $500,000 convertible promissory notes at 8% due December 31, 2012.
    
    11/18/10
    
    
    0
    %
    
    $
    500,000
    
    
    $
    500,000
    
    
    $
    .07Liazon Corporation (e)(g)
Buffalo, NY.  Employee benefits solution company. (Health Benefits
Provider)
www.liazon.com
    
    120,000 Series C-1 preferred shares.  546,667 Series C-2 preferred shares.
    
    11/9/10
    
    
    4
    %
    
    
    858,199
    
    
    
    1,000,000
    
    
    
    .15Mezmeriz, 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
    
    
    4
    %
    
    
    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
    
    
    3
    %
    
    
    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
    
    
    
    5,700,000
    
    
    
    .84Subtotal Non-Control/Non-Affiliate Investments
    
    
    
    
    
    
    
    
    
    $
    4,301,284
    
    
    $
    8,997,257
    
    
    $
    1.32Affiliate Investments: (k)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.  

(i) Interest receivable $1,263,369
    
    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
    %
    
    
    675,046
    
    
    
    675,046
    
    
    
    .10
  7




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2011 (Continued)
(Unaudited)
 (a)
    
    
    
    (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    PerCompany, Geographic Location, Business
    
    
    
    Date
    
    (c)
    
    
    
    
    
    
    (d)(f)
    
    
    ShareDescription, (Industry) and Website
    
    Type of Investment
    
    Acquired
    
    Equity
    
    
    Cost
    
    
    Value
    
    
    of RandMicrocision
LLC (e)(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
    %
    
    
    1,654,565
    
    
    
    1,654,565
    
    
    
    .24Mid America Brick & Structural Clay
Products, LLC(g)
Mexico, MO. Manufacturer of face
brick for residential and commercial
construction. (Manufacturing). 

www.midamericabrick.com
    
    19.524 membership units.
    
    6/1/10
    
    
    19
    %
    
    
    800,000
    
    
    
    800,000
    
    
    
    .12SOMS Technologies, LLC (g)
Valhalla, NY. Produces and markets
the microGreen Extended Performance
Oil Filter. (Auto Parts Developer) 
www.microgreenfilter.com
    
    5,959,490 Series B membership units.
    
    12/2/08
    
    
    10
    %
    
    
    472,632
    
    
    
    528,348
    
    
    
    .08Ultra  Scan Corporation

Amherst, 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
    
    
    2
    %
    
    
    938,164
    
    
    
    1,203,000
    
    
    
    .18Subtotal Affiliate Investments
    
    
    
    
    
    
    
    
    
    $
    6,040,407
    
    
    $
    6,360,959
    
    
    $
    .94Control Investments (l)Advantage 24/7 LLC (g)
Williamsville, NY.  Marketing program for wine and spirits dealers.  (Marketing Company)
    
    50% Membership interest.
    
    12/30/10
    
    
    50
    %
    
    $
    100,000
    
    
    $
    100,000
    
    
    $
    .02Gemcor 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
    %
    
    
    842,435
    
    
    
    6,042,435
    
    
    
    .89G-TEC
Natural Gas Systems
Buffalo, 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
    
    
    22
    %
    
    
    400,000
    
    
    
    100,000
    
    
    
    .01Subtotal Control Investments
    
    
    
    
    
    
    
    
    
    $
    1,342,435
    
    
    $
    6,242,435
    
    
    $
    .92Other Investments
    
    Various
    
    
    
    
    
    
    
    $
    524,851
    
    
    $
    96,341
    
    
    $
    0Total portfolio investments
    
    
    
    
    
    
    
    $
    12,208,977
    
    
    $
    21,696,992
    
    
    $
    3.18
  8




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##### Table of Contents



RAND CAPITAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED SCHEDULE OF PORTFOLIO INVESTMENTS
September 30, 2011 (Continued)
(Unaudited)
 
 Notes to Consolidated Schedule of Portfolio Investments
              9




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##### Table of Contents



Rand Capital Corporation and Subsidiary
Notes to the Consolidated Financial Statements
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
 Note 1. ORGANIZATION
   SBIC Subsidiary
      10




---



##### Table of Contents




    
    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




---



##### Table of Contents



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, 2010Form 10-Q
    
    Quarterly Report on Form 10-Q for the quarters ended June 30, 2011, March
31, 2011, and September 30, 2010Form 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
  Revenue Recognition  Dividend Income 
 Original Issue Discount
  12




---



##### Table of Contents



Deferred Debenture Costs
 SBA Leverage 
 Net Assets per Share
 Supplemental Cash Flow Information
 Accounting Estimates
 Stockholders Equity (Net Assets) 
  Profit Sharing and Stock Option Plan 
   13




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##### Table of Contents



Income Taxes 
    Concentration of Credit and Market Risk
   Recent Accounting Pronouncements
 Subsequent Events 
  14




---



##### Table of Contents



Note 3. INVESTMENTS
    
    
    Loan and debt securities are generally valued at the price the security would
command in order to provide a yield to maturity equivalent to the current yield of
similar debt securities. A loan or debt instrument may be reduced in value if it is
judged to be of poor quality and collection is in doubt. A loan or debt security may
also be valued based on the estimated proceeds from the sale of a portfolio company
at its estimated fair value.
 
    
    Equity securities may be valued using the market approach or income 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. Additionally, 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. The income approach employs a cash flow and discounting
methodology to value an investment.
         15




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##### Table of Contents



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
    
    2011
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loan investments
    
    $
    342,435
    
    
    
    
    
    
    
    
    
    
    $
    342,435Debt investments
    
    
    3,403,111
    
    
    
    
    
    
    
    
    
    
    
    3,403,111Equity investments
    
    
    17,951,446
    
    
    
    
    
    
    
    
    
    
    
    17,951,446Total Venture Capital Investments
    
    $
    21,696,992
    
    
    $
    0
    
    
    $
    0
    
    
    $
    21,696,992
 Fair Value Measurements at Reported Date UsingQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Loan investments
    
    $
    413,597
    
    
    
    
    
    
    
    
    
    
    $
    413,597Debt investments
    
    
    3,595,326
    
    
    
    
    
    
    
    
    
    
    
    3,595,326Equity investments
    
    
    15,355,702
    
    
    
    
    
    
    
    
    
    
    
    15,355,702Total Venture Capital Investments
    
    $
    19,364,625
    
    
    $
    0
    
    
    $
    0
    
    
    $
    19,364,625
  16




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##### Table of Contents



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, 2010,
of Level 3 Assets
    
    $
    413,597
    
    
    $
    3,595,326
    
    
    $
    15,355,702
    
    
    $
    19,364,625Realized Gains or Losses included in
net change in net assets from
operationsAssociates Interactive (Associates)
    
    
    
    
    
    
    
    
    
    
    (293,518
    )
    
    
    (293,518
    )Niagara Dispensing Technologies, Inc.
(Niagara Dispensing)
    
    
    
    
    
    
    (498,828
    )
    
    
    (1,281,785
    )
    
    
    (1,780,613
    )Total Realized Losses
    
    
    
    
    
    
    (498,828
    )
    
    
    (1,575,303
    )
    
    
    (2,074,131
    )Unrealized gains or losses included in
net change in net assets from
operationsAssociates
    
    
    
    
    
    
    
    
    
    
    293,518
    
    
    
    293,518Liazon Corporation (Liazon)
    
    
    
    
    
    
    
    
    
    
    141,801
    
    
    
    141,801Niagara Dispensing
    
    
    
    
    
    
    447,328
    
    
    
    1,281,785
    
    
    
    1,729,113Synacor, Inc. (Synacor)
    
    
    
    
    
    
    
    
    
    
    1,531,999
    
    
    
    1,531,999Total Unrealized Gains and Losses
    
    
    
    
    
    
    447,328
    
    
    
    3,249,103
    
    
    
    3,696,431Purchases of Securities/Changes to
Securities/Non-cash conversionsChequed.com, Inc. (Chequed)
    
    
    
    
    
    
    250,000
    
    
    
    
    
    
    
    250,000Microcision LLC (Microcision)
    
    
    
    
    
    
    72,285
    
    
    
    
    
    
    
    72,285Liazon
    
    
    
    
    
    
    37,000
    
    
    
    819,999
    
    
    
    856,999SOMS Technologies, LLC
    
    
    
    
    
    
    
    
    
    
    101,945
    
    
    
    101,945Total Purchases/Changes to Securities
and Non- Cash conversions
    
    
    
    
    
    
    359,285
    
    
    
    921,944
    
    
    
    1,281,229Repayments of SecuritiesGemcor II, LLC (Gemcor)
    
    
    (71,162
    )
    
    
    
    
    
    
    
    
    
    
    (71,162
    )Liazon
    
    
    
    
    
    
    (500,000
    )
    
    
    
    
    
    
    (500,000
    )Total Repayments of Securities
    
    
    (71,162
    )
    
    
    (500,000
    )
    
    
    
    
    
    
    (571,162
    )Transfers within Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfers in or out of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending Balance, September 30, 2011, of
Level 3 Assets
    
    $
    342,435
    
    
    $
    3,403,111
    
    
    $
    17,951,446
    
    
    $
    21,696,992
 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 and
reported within the net realized and unrealized gains or losses on investments in the
Condensed Consolidated Statement of Operations
    
    $
    3,696,431Amount of realized losses included in changes in net assets from operations for the
period reported above within the net realized and unrealized gains or losses on investments in the
Condensed Consolidated Statement of Operations
    
    
    (2,074,131
    )Change in unrealized gains or losses relating to assets still held at reporting date
    
    $
    1,622,300
  17




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##### Table of Contents



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
    
    
    
    4,361,329Total Realized Gains
    
    
    
    
    
    
    
    
    
    
    4,311,499
    
    
    
    4,311,499Unrealized 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
    )Photonics Products Group, Inc. (Photonics)
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2SOMS Technologies, LLC (SOMS)
    
    
    
    
    
    
    
    
    
    
    55,717
    
    
    
    55,717Total Unrealized Gains and Losses
    
    
    
    
    
    
    
    
    
    
    (4,992,508
    )
    
    
    (4,992,508
    )Purchases of Securities/Changes to
Securities/Non-cash conversionsEmergingMed.com, Inc. (Emerging Med)
    
    
    
    
    
    
    216,712
    
    
    
    
    
    
    
    216,712GridApp
    
    
    
    
    
    
    
    
    
    
    481,772
    
    
    
    481,772Mezmeriz, 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
    
    
    
    
    
    
    
    15,897Total Purchases/Changes to
Securities and Non- Cash
conversions
    
    
    
    
    
    
    1,369,615
    
    
    
    1,803,281
    
    
    
    3,172,896Repayments 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
    )Total Repayments of Securities
    
    
    (54,827
    )
    
    
    (285,779
    )
    
    
    (5,367,499
    )
    
    
    (5,708,105
    )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
    )
  18




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##### Table of Contents



Note 4. FINANCIAL HIGHLIGHTS
  Nine months ended
    
    
    Year endedSeptember 30, 2011
    
    
    December 31,(Unaudited)
    
    
    2010Income from investment operations (1):Investment income
    
    $
    0.13
    
    
    $
    0.12Expenses
    
    
    0.19
    
    
    
    0.34Investment loss before income taxes
    
    
    (0.06
    )
    
    
    (0.22
    )Income tax benefit
    
    
    (0.02
    )
    
    
    (0.08
    )Net investment loss
    
    
    (0.04
    )
    
    
    (0.14
    )Net realized and unrealized gain on investments
    
    
    0.16
    
    
    
    0.12Increase (decrease) in net asset value
    
    
    0.12
    
    
    
    (0.02
    )Net asset value, beginning of period, based on weighted average
shares
    
    
    3.38
    
    
    
    3.40Net asset value, end of period, based on weighted average shares
    
    $
    3.50
    
    
    $
    3.38Per share market price, end of period
    
    $
    2.80
    
    
    $
    3.23Total return based on market value
    
    
    (13.31
    )%
    
    
    (18.84
    %)Total return based on net asset value
    
    
    3.40
    %
    
    
    (0.67
    )%Supplemental data:Ratio of expenses before income taxes to average net assets
    
    
    5.55
    %
    
    
    10.24
    %Ratio of expenses including taxes to average net assets
    
    
    5.04
    %
    
    
    7.87
    %Ratio of net investment loss to average net assets
    
    
    (1.13
    )%
    
    
    (4.21
    )%Portfolio turnover
    
    
    6.2
    %
    
    
    16.5
    %Net assets, end of period
    
    $
    23,834,747
    
    
    $
    23,050,818Weighted average shares outstanding, end of period
    
    
    6,818,934
    
    
    
    6,818,934
 (1)
    
    Per share data are based on weighted average shares outstanding and the results are rounded   19




---



##### Table of Contents



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
     20




---



##### Table of Contents



Business Developments
   Critical Accounting Policies
   21




---



##### Table of Contents



Financial Condition
  (Decrease)
    
    
    % (Decrease)9/30/11
    
    
    12/31/10
    
    
    Increase
    
    
    IncreaseTotal assets
    
    $
    30,206,268
    
    
    $
    35,091,260
    
    
    $
    (4,884,992
    )
    
    
    (13.9
    %)Total liabilities
    
    
    6,371,521
    
    
    
    12,040,442
    
    
    
    (5,668,921
    )
    
    
    (47.1
    %)Net assets
    
    $
    23,834,747
    
    
    $
    23,050,818
    
    
    $
    783,929
    
    
    
    3.4
    %
  (Decrease)
    
    
    % (Decrease)9/30/11
    
    
    12/31/10
    
    
    Increase
    
    
    IncreaseInvestments, at cost
    
    $
    12,208,977
    
    
    $
    13,573,041
    
    
    $
    (1,364,064
    )
    
    
    (10.0
    %)Unrealized appreciation, net
    
    
    9,488,015
    
    
    
    5,791,584
    
    
    
    3,696,431
    
    
    
    63.8
    %Investments at fair value
    
    $
    21,696,992
    
    
    $
    19,364,625
    
    
    $
    2,332,367
    
    
    
    12.0
    %
  AmountNew InvestmentsLiazon Corporation (Liazon)
    
    $
    819,999Chequed.com, Inc (Chequed)
    
    
    250,000SOMS Technologies, LLC (SOMS)
    
    
    101,945Total of new investments during the nine months ended
September 30, 2011
    
    $
    1,171,944Changes to Investments:Microcision LLC (Microcision) interest conversion
    
    $
    72,285Liazon note accretion
    
    
    37,000Total of changes to investments during the nine months ended
September 30, 2011
    
    $
    109,285Investment Repaid/Sold or Liquidated:Niagara Dispensing Technologies, Inc. (Niagara Dispensing)
    
    $
    (1,780,613
    )Liazon
    
    
    (500,000
    )Associates Interactive (Associates)
    
    
    (293,518
    )Gemcor II, LLC (Gemcor)
    
    
    (71,162
    )Total of investments repaid, sold or liquidated during
the nine months ended September 30, 2011
    
    $
    (2,645,293
    )Total change in investments, at cost,
during the nine months ended September 30, 2011
    
    $
    (1,364,064
    )
    22




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##### Table of Contents



Results of Operations
 Investment Income
  Comparison of the nine months ended September 30, 2011 to the nine months ended September 30,
2010
 September 30,
    
    
    September 30,2011
    
    
    2010
    
    
    Increase
    
    
    % IncreaseInterest from portfolio companies
    
    $
    549,845
    
    
    $
    523,921
    
    
    $
    25,924
    
    
    
    4.9
    %Interest from other investments
    
    
    26,909
    
    
    
    15,959
    
    
    
    10,950
    
    
    
    68.6
    %Dividend and other investment
income
    
    
    324,856
    
    
    
    62,511
    
    
    
    262,345
    
    
    
    419.7
    %Other income
    
    
    14,680
    
    
    
    11,853
    
    
    
    2,827
    
    
    
    23.9
    %Total investment income
    
    $
    916,290
    
    
    $
    614,244
    
    
    $
    302,046
    
    
    
    49.2
    %
 Interest from portfolio companies
  Interest
    
    
    Investment
    
    
    Year that InterestCompany
    
    Rate
    
    
    Cost
    
    
    Accrual CeasedG-Tec Natural Gas Systems (G-Tec)
    
    
    8
    %
    
    $
    400,000
    
    
    
    2004
 Interest from other investments
  23




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##### Table of Contents



Dividend and other investment income
  Other income
   Operating Expenses
 Comparison of the nine months ended September 30, 2011 to the nine months ended September 30,
2010
 September 30, 2011
    
    
    September 30, 2010
    
    
    Decrease
    
    
    % DecreaseTotal Expenses
    
    $
    1,301,529
    
    
    $
    1,625,482
    
    
    $
    (323,953
    )
    
    
    (19.9
    %)
    24




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##### Table of Contents



Net Realized Gains and Losses on Investments
    Net Change in Unrealized Appreciation of Investments
   September 30,2011Reclass Niagara Dispensing to realized loss
    
    $
    1,729,112Synacor, Inc. (Synacor)
    
    
    1,531,999Reclass Associates to a realized loss
    
    
    293,519Liazon
    
    
    141,801Total change in net unrealized appreciation
during the nine months ended September 30, 2011
    
    $
    3,696,431
    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
    )
  25




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Net Increase (Decrease) in Net Assets from Operations
  Liquidity and Capital Resources
      26




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Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting.
   27




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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




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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.*(10.2
    )
    
    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.(10.3
    )
    
    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.(10.4
    )
    
    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.(10.5
    )
    
    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.*(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