UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-20671
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2533518
---------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
8080 North Central Expressway, Dallas, Texas 75206-1857
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
214-891-8294
---------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No _____
4,351,718 shares of common stock were outstanding at October 31, 2002.
The Registrant's Registration Statement on Form N-2 was declared effective by
the Securities and Exchange Commission on May 6, 1994.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
Assets December 31, September 30,
2001 2002
Cash and cash equivalents $ 27,125,926 $ 16,776,200
Investments at fair value, cost of $35,015,807
and $32,256,368 December 31,2001 and
September 30, 2002, respectively 49,762,340 39,076,396
Interest receivable 114,539 27,805
Prepaid expenses 13,863 58,973
------------ ------------
$ 77,016,668 $ 55,939,374
============ ============
Liabilities and Net Assets
Liabilities:
Securities sold under agreements to repurchase 22,197,146 13,502,803
Accounts payable 13,472 17,635
Accounts payable - affiliate 268,542 225,953
Dividends payable 0 0
------------ ------------
22,479,160 13,746,391
------------ ------------
Net assets:
Common stock, $1 par value; authorized
20,000,000 shares; 4,561,618 issued;
4,361,618 shares outstanding 4,561,618 4,561,618
Additional paid-in-capital 37,125,714 37,125,714
Treasury stock at cost, 200,000 shares at
December 31, 2001, and at September 30, 2002 ( 1,665,220) ( 1,665,220)
Distributions in excess of net investment income ( 231,137) ( 1,224,766)
Accumulated net realized loss on securities
transactions 0 ( 3,424,393)
Net unrealized appreciation of investments 14,746,533 6,820,030
------------ ------------
Net assets, equivalent to $12.50 and $9.67
per share at December 31, 2001, and
September 30, 2002, respectively 54,537,508 42,192,983
Commitments and contingencies 0 0
------------ ------------
$ 77,016,668 $ 55,939,374
============ ============
See accompanying notes to financial statements.
2
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
September 30, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and Promissory notes (1)
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00% 05/02 $ 53,752 $ 53,752 0.13%
Convertible note (2) 8.00% 09/30/02 $ 125,000 $ 125,000 0.30%
Convertible note (2) 8.00% 09/30/02 $ 250,000 $ 250,000 0.59%
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00% 12/19/04 $ 1,316,282 $ 816,282 1.93%
EDT Learning, Inc. -
Convertible redeemable
note (2) 12.00% 03/29/12 $ 500,000 $ 500,000 1.19%
eOriginal, Inc. -
Senior Secured Notes (3) 12.00% 06/30/02 $ 1,024,683 $ 1,024,683 2.43%
Integrated Security Systems, Inc. -
Promissory notes (4) 8.00% 01/25 -
05/14/02 $ 325,000 $ 325,000 0.77%
3
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
September 30, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and Promissory notes (1)
Laserscope -
Convertible debenture (2) 8.00% 02/11/07 $ 1,500,000 $ 3,909,280 9.27%
Outsource Partners International, Inc. -
Convertible note (3) 12.00% 08/31/03 $ 100,000 $ 100,000 0.24%
Simtek Corporation -
Convertible debenture (2) 7.50% 06/28/09 $ 1,000,000 $ 1,000,000 2.37%
----------- ----------- ------
$ 6,194,717 $ 8,103,997 19.21%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Securities in a privately owned company.
(4) Securities have no provision that allows conversion into a security for
which there is a public market.
(5) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
4
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
September 30, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
CareerEngine Network, Inc. -
Convertible debenture (2) 12.00% 03/31/10 $ 250,000 $ 250,000 0.59%
----------- ----------- ------
$ 250,000 $ 250,000 0.59%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Securities in a privately owned company.
(4) Securities have no provision that allows conversion into a security for
which there is a public market.
(5) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
5
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 3,365,999 7.98%
CaminoSoft Corporation -
Common stock 1,750,000 $ 4,000,000 $ 1,749,825 4.15%
Common stock (2) 708,333 $ 875,000 $ 622,492 1.48%
Dexterity Surgical, Inc. -
Preferred stock - A (2) 500 $ 500,000 $ 0 0.00%
Preferred stock - B (2) 500 $ 500,000 $ 0 0.00%
Common stock (2) 260,000 $ 635,000 $ 0 0.00%
eOriginal, Inc. -
Series A preferred stock (3) 6,000 $ 1,500,000 $ 794,000 1.88%
Series B-1 preferred stock (3) 1,785 $ 392,700 $ 1,426,215 3.38%
Series B-3 preferred stock (3) 447 $ 107,280 $ 357,153 0.85%
Series C-1 preferred stock (3) 2,353 $ 2,000,050 $ 2,000,050 4.74%
6
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Fortune Natural Resources, Inc. -
Common stock 1,322,394 $ 545,500 $ 163,646 0.39%
Gasco Energy, Inc. -
Common stock (2) 250,000 $ 250,000 $ 130,950 0.31%
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 124,584 0.30%
Common stock - PIK (2) 95,215 $ 26,248 $ 28,641 0.07%
Series D preferred stock (2) 187,500 $ 150,000 $ 72,000 0.17%
Series F preferred stock (2) 2,714,945 $ 542,989 $ 816,655 1.94%
Series G preferred stock (2) 18,334,755 $ 3,666,951 $ 5,465,095 12.95%
JAKKS Pacific, Inc. -
Common stock 87,347 $ 521,172 $ 961,586 2.28%
Poore Brothers, Inc. -
Common stock (2) 2,016,357 $ 2,078,170 $ 4,271,456 10.12%
7
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Simtek Corporation -
Common stock (2) 1,000,000 $ 195,000 $ 150,400 0.36%
ThermoView Industries, Inc. -
Common stock 31,851 $ 415,384 $ 26,487 0.06%
Verso Technologies, Inc. -
Common stock (2) 179,375 $ 512,500 $ 48,898 0.12%
Miscellaneous securities $ 5,915 $ 580,575 1.38%
----------- ----------- ------
$20,135,758 $23,156,707 54.88%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Securities in a privately owned company.
(4) Securities have no provision that allows conversion into a security for
which there is a public market.
(5) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
8
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 259,979 $ 535,168 $ 2,187,723 5.19%
Canterbury Consulting Group -
Common stock 200,000 $ 193,473 $ 79,200 0.19%
Creative Host Services -
Common stock 4,830 $ 7,921 $ 8,464 0.02%
DaisyTek International Corporation -
Common stock 20,000 $ 264,353 $ 257,400 0.61%
Dave & Buster's, Inc. -
Common stock 100,000 $ 653,259 $ 1,109,790 2.63%
The Dwyer Group, Inc. -
Common stock 675,000 $ 1,966,632 $ 2,539,350 6.02%
9
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
EDT Learning, Inc. -
Common stock 48,266 $ 27,033 $ 16,246 0.04%
I-Flow Corp -
Common stock 100,000 $ 254,038 $ 132,660 0.31%
Omnivision Technologies, Inc. -
Common stock 25,000 $ 244,532 $ 163,103 0.39%
Precis, Inc.
Common stock 93,700 $ 993,897 $ 543,592 1.29%
10
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
US Home Systems -
Common stock 110,000 $ 535,587 $ 528,164 1.25%
----------- ----------- ------
$ 5,675,893 $ 7,565,692 17.93%
----------- ----------- ------
$32,256,368 $39,076,396 92.61%
=========== =========== ======
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Securities in a privately owned company.
(4) Securities have no provision that allows conversion into a security for
which there is a public market.
(5) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
11
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
September 30, 2002
-------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
Restricted Securities Under Rule 144 $15,001,892 $18,585,901 44.05%
Unrestricted Securities $12,123,848 $14,207,821 33.67%
Other Securities (5) $ 5,130,628 $ 6,282,676 14.89%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Securities in a privately owned company.
(4) Securities have no provision that allows conversion into a security for
which there is a public market.
(5) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
12
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00% 05/02 $ 116,667 $ 150,792 0.28%
Convertible note (2) 8.00% 09/30/02 $ 125,000 $ 161,563 0.30%
Convertible note (2) 8.00% 09/30/02 $ 250,000 $ 288,125 0.53%
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00% 12/19/04 $ 1,329,577 $ 1,329,577 2.44%
Display Technologies, Inc. -
Convertible debenture (2) 8.75% 03/02/05 $ 1,750,000 $ 0 0.00%
eOriginal, Inc. -
Promissory note (4) 12.00% 06/30/02 $ 500,000 $ 500,000 0.92%
Integrated Security Systems, Inc. -
Promissory notes (5) 8.00% 01/25-
05/14/02 $ 200,000 $ 200,000 0.37%
13
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
Laserscope -
Convertible debenture (2) 8.00% 02/11/07 $ 1,500,000 $ 2,770,000 5.08%
Northwestern Steel & Wire Corp. -
Debt (3)(5) N/A N/A $ 127,500 $ 127,500 0.23%
----------- ----------- ------
$ 5,898,744 $ 5,527,557 10.14%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
14
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes (1)
CareerEngine Network, Inc. -
Convertible debenture (2) 12.00% 03/31/10 $ 250,000 $ 250,000 0.46%
Play by Play Toys & Novelties -
Convertible debenture (3) 10.50% 12/31/00 $ 2,425,748 $ 500,000 0.92%
RailAmerica, Inc. -
Convertible debenture 6.00% 07/31/04 $ 500,000 $ 715,770 1.31%
----------- ----------- ------
$ 3,175,748 $ 1,465,770 2.69%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
15
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
--------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 4,035,240 7.40%
CaminoSoft Corp. -
Common stock 1,750,000 $ 4,000,000 $ 2,858,625 5.24%
Common stock (2) 708,333 $ 875,000 $ 1,048,625 1.92%
Dexterity Surgical, Inc. -
Preferred stock - A (2) 500 $ 500,000 $ 5,769 0.01%
Preferred stock - B (2) 500 $ 500,000 $ 5,769 0.01%
Common stock (2) 260,000 $ 635,000 $ 0 0.00%
Display Technologies, Inc. -
Common stock (2) 127,604 $ 500,000 $ 0 0.00%
16
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
--------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
eOriginal, Inc. -
Series A, preferred stock (4) 6,000 $ 1,500,000 $ 4,794,000 8.79%
Series B-1, preferred stock (4) 1,785 $ 392,700 $ 1,426,215 2.62%
Series B-3, preferred stock (4) 447 $ 107,280 $ 357,153 0.65%
Series C-1, preferred stock (4) 2,353 $ 2,000,050 $ 2,000,050 3.67%
Fortune Natural Resources Corp. -
Common stock 1,322,394 $ 545,500 $ 209,467 0.38%
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 159,624 0.29%
Common stock - PIK (2) 13,463 $ 3,366 $ 5,189 0.01%
Series D, preferred stock (2) 187,500 $ 150,000 $ 92,250 0.17%
Series F, preferred stock (2) 2,714,945 $ 542,989 $ 1,046,339 1.92%
Series G, preferred stock (2) 18,334,755 $ 3,666,951 $ 7,016,215 12.86%
JAKKS Pacific, Inc. -
Common stock 87,347 $ 521,172 $ 1,638,674 3.00%
17
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
--------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Poore Brothers, Inc. -
Common stock (2) 1,931,357 $ 1,963,170 $ 4,488,689 8.23%
Simtek Corp. -
Common stock (2) 1,000,000 $ 195,000 $ 394,800 0.72%
ThermoView Industries, Inc. -
Common stock (2) 31,851 $ 415,384 $ 27,433 0.05%
Verso Technologies, Inc. -
Common stock (2) 179,375 $ 512,500 $ 219,196 0.40%
Miscellaneous Securities $ 5,915 $ 1,040,722 1.91%
----------- ----------- ------
$20,247,876 $32,870,044 60.27%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
18
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
(unaudited)
December 31, 2001
--------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 524,979 $ 1,470,478 $ 5,296,037 9.71%
Dave & Busters, Inc. -
Common stock 100,000 $ 653,259 $ 621,720 1.14%
Display Technologies, Inc. -
Common stock (2) 13,880 $ 549,741 $ 0 0.00%
Preferred stock (2) 5,000 $ 500,000 $ 0 0.00%
Dwyer Group, Inc.
Common stock 675,000 $ 1,966,631 $ 3,307,838 6.07%
EDT Learning, Inc. -
Common stock 31,600 $ 16,590 $ 45,988 0.08%
Precis, Inc. -
Common stock 6,200 $ 36,740 $ 74,884 0.14%
19
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
(unaudited)
December 31, 2001
--------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
RailAmerica, Inc. -
Common stock 40,000 $ 500,000 $ 493,696 0.91%
Miscellaneous Securities $ 0 $ 58,806 0.11%
----------- ----------- ------
$ 5,693,439 $ 9,898,969 18.15%
----------- ----------- ------
$35,015,807 $49,762,340 91.24%
=========== =========== ======
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
Restricted Securities Under Rule 144 $16,830,345 $19,300,331 35.39%
Unrestricted Securities $13,352,017 $19,957,563 36.59%
Other Securities (6) $ 4,833,445 $10,504,446 19.26%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
20
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
Three Months Ended September 30,
2001 2002
Income:
Interest $ 43,040 $( 10,405)
Dividend Income 104,511 16,396
Commitment and other fees 3,000 20,000
------------ ------------
150,551 25,991
------------ ------------
Expenses:
General and administrative 68,487 84,886
Incentive fee 7,571 0
Interest expense 0 9,813
Legal and professional fees 67,547 28,784
Management fees 223,529 190,870
------------ ------------
367,134 314,353
------------ ------------
Net investment income (loss) ( 216,583) ( 288,362)
------------ ------------
Realized and unrealized gain (loss)
on investments:
Net unrealized appreciation
(depreciation) on investments ( 209,694) (10,732,012)
Net realized gain (loss) on
investments 37,857 0
Net gain (loss) on investments ( 171,837) (10,732,012)
------------ ------------
Net income (loss) $( 388,420) $(11,020,374)
============ ============
Net income (loss) per share $ (0.09) $ (2.53)
============ ============
See accompanying notes to financial statements.
21
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
Nine Months Ended September 30,
2001 2002
Income:
Interest $ 357,605 $ 175,700
Dividend Income 159,903 59,635
Commitment and other fees 7,600 20,000
------------ ------------
525,108 255,335
------------ ------------
Expenses:
General and administrative 279,306 331,496
Incentive fee 919,429 0
Interest expense 0 54,213
Legal and professional fees 179,598 194,074
Management fees 672,894 669,183
------------ ------------
2,051,227 1,248,966
------------ ------------
Net investment income (loss) ( 1,526,119) ( 993,631)
------------ ------------
Realized and unrealized gain (loss)
on investments:
Net unrealized appreciation
(depreciation) on investments 5,267,049 ( 7,926,503)
Net realized gain (loss) on
investments 2,129,486 ( 3,424,391)
------------ ------------
Net gain on investments 7,396,535 (11,350,894)
------------ ------------
Net income $ 5,870,416 $(12,344,525)
============ ============
Net income (loss) per share $ 1.35 $ (2.83)
============ ============
See accompanying notes to financial statements.
22
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
Three Months Ended September 30,
2001 2002
From operations:
Net investment income $( 216,583) $( 288,362)
Net realized gain (loss) on investments 37,857 0
Increase (decrease) in unrealized
appreciation on investments ( 209,694) (10,732,012)
------------ ------------
Net increase in net assets resulting
from operations ( 388,420) (11,020,374)
------------ ------------
From distributions to stockholders:
Common dividends from net
investment income 0 0
Common dividends from realized
gains ( 2,129,486) 0
Common dividends from other
sources ( 255,788) 0
------------ ------------
Net decrease in net assets
resulting from distributions ( 2,355,274) 0
------------ ------------
From capital transactions:
Shares issued 0 0
Purchase of treasury stock 0 0
------------ ------------
Net increase (decrease) in net assets
resulting from capital contributions 0 0
Total increase in net assets ( 2,743,694) (11,020,374)
Net assets:
Beginning of period 53,604,903 53,213,357
------------ ------------
End of period $ 50,861,209 $ 42,192,983
============ ============
See accompanying notes to financial statements.
23
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
Nine Months Ended September 30,
2001 2002
From operations:
Net investment income $( 1,526,119) $( 993,631)
Net realized gain (loss) on investments 2,129,486 ( 3,424,391)
Increase (decrease) in unrealized
appreciation on investments 5,267,049 ( 7,926,503)
------------ ------------
Net increase in net assets resulting
from operations 5,870,416 (12,344,525)
------------ ------------
From distributions to stockholders:
Common dividends from net
investment income 0 0
Common dividends from realized
gains ( 2,129,486) 0
Common dividends from other
sources ( 225,788) 0
------------ ------------
Net decrease in net assets
resulting from distributions ( 2,355,274) 0
------------ ------------
From capital transactions:
Shares issued 0 0
Purchase of treasury stock 0 0
------------ ------------
Net increase (decrease) in net assets
resulting from capital contributions 0 0
------------ ------------
Total increase in net assets 3,515,142 ( 12,344,525)
Net assets:
Beginning of period 47,346,067 54,537,508
------------ ------------
End of period $ 50,861,209 $ 42,192,983
============ ============
See accompanying notes to financial statements.
24
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
Three Months Ended September 30,
2001 2002
Cash flows from operating activities:
Net income $( 388,420) $(11,020,374)
Adjustments to reconcile net income to
net cash provided by (used in) operation
activities:
Net unrealized (appreciation)
depreciation on investments 209,694 10,732,012
Net realized (gain) loss on investments ( 37,857) 0
(Increase) decrease in interest receivable ( 380,026) 78,431
(Increase) decrease in other assets 1,280,613 ( 57,978)
Increase (decrease) in accounts payable 26,044 2,297
Increase (decrease) in accounts payable -
affiliate ( 1,007,586) ( 49,297)
Increase (decrease) in other liabilities 3,112,345 ( 2,863,895)
------------ ------------
Net cash provided by (used in)
operating activities 2,814,807 ( 3,178,804)
------------ ------------
Cash flows from investing activities:
Purchase of investments ( 767,149) ( 1,217,143)
Proceeds from sale of investments 2,910,196 0
Repayment of debentures and notes 41,944 9,880
------------ ------------
Net cash provided by (used in)
investing activities 2,184,991 ( 1,207,263)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of shares 0 0
Purchase of treasury shares 0 0
Cash dividends ( 2,355,274) 0
------------ ------------
Net cash used in financing activities ( 2,355,274) 0
------------ ------------
Net increase (decrease) in cash and cash
equivalents 2,644,524 ( 4,386,067)
Cash and cash equivalents at beginning of the
period 21,564,187 21,162,267
------------ ------------
Cash and cash equivalents at end of the period $ 24,208,711 $ 16,776,200
============ ============
Cash paid during the period for interest $ 0 $ 9,813
Cash paid during the period for income/excise
taxes $ 129 $ 0
Noncash investing activities: During the quarter ended September 30, 2002, the
Fund received common stock in settlement of amounts due for interest
totaling $6,740.
See accompanying notes to financial statements.
25
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
Nine Months Ended September 30,
2001 2002
Cash flows from operating activities:
Net income $ 5,870,416 $(12,344,525)
Adjustments to reconcile net income to
net cash provided by (used in) operation
activities:
Net unrealized (appreciation)
depreciation on investments ( 5,267,048) 7,926,503
Net realized (gain) loss on investments ( 2,129,486) 3,424,391
(Increase) decrease in interest receivable ( 161,956) 63,853
(Increase) decrease in other assets ( 484,118) ( 45,110)
Increase (decrease) in accounts payable 37,937 4,163
Increase (decrease) in accounts payable -
affiliate 9,827 ( 42,589)
Increase (decrease) in other liabilities 1,538,070 ( 8,694,343)
------------ ------------
Net cash provided by (used in)
operating activities ( 586,358) ( 9,707,657)
------------ ------------
Cash flows from investing activities:
Purchase of investments ( 2,155,489) ( 5,202,187)
Proceeds from sale of investments 10,969,568 3,941,141
Repayment of debentures and notes 129,724 618,977
------------ ------------
Net cash provided by (used in)
investing activities 8,943,803 ( 642,069)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of shares 0 0
Purchase of treasury shares 0 0
Cash dividends ( 2,355,274) 0
------------ ------------
Net cash used in financing activities ( 2,355,274) 0
------------ ------------
Net increase (decrease) in cash and cash
equivalents 6,002,171 (10,349,726)
Cash and cash equivalents at beginning of the
period 18,206,540 27,125,926
------------ ------------
Cash and cash equivalents at end of the period $ 24,208,711 $ 16,776,200
============ ============
Cash paid during the period for interest $ 0 $ 54,214
Cash paid during the period for income/excise
taxes $ 32,140 $ 25,779
Noncash investing activities: The Fund received common stock in settlement of
amounts due from interest and/or dividends as follows: Quarter ended March
31, 2002, $9,397; quarter ended June 30, 2002, $6,745; quarter ended
September 30, 2002, $6,740.
See accompanying notes to financial statements.
26
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
(1) Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the Fund), a Texas
corporation, was formed on January 20, 1994. The Fund offered to sell
shares in the Fund until closing of the offering on December 31, 1994. The
Prospectus of the Fund required minimum aggregate capital contributions by
shareholders of not less than $2,500,000 and allowed for maximum capital
contributions of $100,000,000. The Fund seeks to achieve current income and
capital appreciation potential by investing primarily in unregistered
equity investments and convertible issues of small and medium size
companies which are in need of capital and which Renaissance Capital Group,
Inc. (Investment Advisor) believes offers the opportunity for growth. The
Fund is a non-diversified closed-end investment company and has elected to
be treated as a business development company under the Investment Company
Act of 1940, as amended (1940 Act).
(2) Summary of Significant Accounting Policies
(a) Valuation of Investments
Portfolio investments are stated at quoted market or fair value as
determined by the Investment Advisor (note 5). The securities held by
the Fund are primarily unregistered and their value does not
necessarily represent the amounts that may be realized from their
immediate sale or disposition.
(b) Other
The Fund follows industry practice and records security transactions
on the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded as earned on the accrual basis.
(c) Cash and Cash Equivalents
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) Federal Income Taxes
The Fund has elected the special income tax treatment available to a
regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code (IRC) in order to be relieved of federal income
tax on that part of its net investment income and realized capital
gains that it pays out to its shareholders. The Fund's policy is to
27
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
comply with the requirements of the IRC including those applicable to
a RIC. Such requirements include but are not limited to certain
qualifying income tests, asset diversification tests, and distribution
of substantially all of the Fund's taxable investment income to its
shareholders. It is the intent of management to comply with all IRC
requirements as they pertain to a RIC and to distribute all of the
Fund's taxable investment income and long-term capital gains within
the defined period under the IRC to qualify as a RIC. Failure to
qualify as a RIC would subject the Fund to federal income tax as if
the Fund were an ordinary corporation, which could result in a
substantial reduction in the Fund's net assets as well as the amount
of income available for distribution to shareholders.
(e) Net Income per Share
Net income per share is based on the weighted average of shares
outstanding of 4,361,618 during each period.
(f) Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions as to the valuation of
investments that affect the amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
(3) Management and Organization Fees
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement (the Agreement), the Investment Adviser performs certain
services, including certain management, investment advisory, and
administrative services necessary for the operation of the Fund. In
addition, under the Agreement the Investment Adviser is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Agreement, the Prospectus, and
the original offering document are as follows:
o The Investment Adviser receives a fee equal to 0.4375% (1.75%
annually) of the Net Assets each quarter. The Fund incurred $190,870
for such management fees for the quarter ended September 30, 2002, and
$669,183 for the nine months ended September 30, 2002. Amounts payable
for such fees at September 30, 2002, were $185,405.
28
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
o The Investment Adviser was reimbursed by the Fund for administrative
expenses paid by the Investment Adviser on behalf of the Fund. Such
reimbursements were $19,129 for the quarter ended September 30, 2002,
and $59,801 for the nine months ended September 30, 2002, and are
included in general and administrative expenses in the accompanying
statements of operations.
o The Investment Adviser is to receive an incentive fee in an amount
equal to 20% of any of the Fund's realized capital gains computed net
of all realized capital losses and cumulative unrealized depreciation
of the Fund, which fee is to be accrued and paid on a quarterly basis.
The Fund did not incur any incentive fees for the quarter ended
September 30, 2002, or for the nine months ended September 30, 2002.
(4) Eligible Portfolio Companies and Investments
(a) Eligible Portfolio Companies. The Fund invests primarily in
convertible securities and equity investments of companies that
qualify as Eligible Portfolio Companies as defined in Section 2(a)(46)
of the 1940 Act or in securities that otherwise qualify for investment
as permitted in Section 55(a)(1) through (5). Under the provisions of
the 1940 Act at least 70% of the fund's assets, as defined under the
1940 Act, must be invested in Eligible Portfolio Companies. In the
event the Fund has less than 70% of its assets in eligible portfolio
investments, then it will be prohibited from making non-eligible
investments until such time as the percentage of eligible investments
again exceeds the 70% threshold.
(b) Investments. Investments are carried in the statements of assets and
liabilities as of December 31, 2001, and September 30, 2002, at fair
value, as determined in good faith by the Investment Adviser. The
convertible debt securities held by the Fund generally have maturities
between five and seven years and are convertible into the common stock
of the issuer at a set conversion price at the discretion of the fund.
The common stock underlying these securities is generally unregistered
and thinly to moderately traded but is not otherwise restricted. The
Fund may register and sell such securities at any time with the Fund
paying the costs of registration. Interest on the convertible
securities are generally payable monthly. The convertible debt
securities generally contain embedded call options giving the issuer
the right to call the underlying issue. In these instances, the Fund
has the right of redemption or conversion. The embedded call option
will generally not vest until certain conditions are achieved by the
issuer. Such conditions may require that minimum thresholds be met
relating to underlying market prices, liquidity, and other factors.
29
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
(5) Valuation of Investments
On a quarterly basis, the Investment Adviser prepares a valuation of the
assets of the Fund subject to the approval of the Fund's Board of
Directors. The valuation principles are as follows:
o Generally, the guiding principle for valuation is application of
objective standards. The objective standards for determining market
prices and applying valuation methodologies will govern in all
situations except where a debt issuer is in default.
o Generally, the fair value of debt securities and preferred securities
convertible into common stock is the sum of (a) the value of such
securities without regard to the conversion feature, and (b) the
value, if any, of the conversion feature. The fair value of debt
securities without regard to conversion features is determined on the
basis of the terms of the debt security, the interest yield, and the
financial condition of the issuer. The fair value of preferred
securities without regard to conversion features is determined on the
basis of the terms of the preferred security, its dividend, and its
liquidation and redemption rights and absent special circumstances
will typically be equal to the lower of cost or 120% of the value of
the underlying common stock. The fair value of the conversion features
of a security, if any, are based on fair values of the derivative
securities as of the relevant date less an allowance, as appropriate,
for costs of registration, if any, and selling expenses.
o Portfolio investments for which market quotations are readily
available and which are freely transferable are valued as follows: (i)
securities traded on a securities exchange or the Nasdaq or in the
over-the-counter market are valued at the closing price on, or the
last trading day prior to, the date of valuation, and (ii) securities
traded in the over-the-counter market that do not have a closing price
on, or the last trading day prior to, the date of valuation are valued
at the average of the closing bid and ask price for the last trading
day on, or prior to, the date of valuation. Securities for which
market quotations are readily available but are restricted from free
trading in the public securities markets (such as Rule 144 stock) are
valued by discounting the closing price or the closing bid and ask
prices, as the case may be, for the last trading day on, or prior to,
the date of valuation to reflect the liquidity caused by such
restriction, but taking into consideration the existence, or lack
thereof, of any contractual right to have the securities registered
and freed from such trading restrictions.
30
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
o Because there is no independent and objective pricing authority (i.e.
a public market) for investments in privately held entities, the
latest sale of equity securities by the entity will govern the value
of the enterprise. This valuation method will cause the Fund's initial
investment in the private entity to be valued at cost. Thereafter, new
issuances of equity or equity-linked securities by a portfolio company
will be used to determine enterprise value as they will provide the
most objective and independent basis for determining the worth of the
issuer.
There can be no assurance that stated market rates for private equity
valuations will stay constant, or that future equity raises will value
the portfolio company at levels equal to or greater than the prior
equity financing for the issuer. As a result, the Fund's valuation of
a privately held portfolio company may be subject to downward
adjustment that would directly impact the Fund's net asset value and
which could result in a substantial reduction in the fund's net
assets.
o Where a portfolio company is in default on a debt instrument held by
the Fund, and no market exists for that instrument, then the fair
value for the investment is determined on the basis of appraisal
procedures established in good faith by the Investment Adviser. This
type of fair value determination is based upon numerous factors such
as the portfolio company's earnings and net worth, market prices for
comparative investments (similar securities in the market place), the
terms of the Fund's investment, and a detailed assessment of the
portfolio company's future financial perspective. In the event of
unsuccessful operations by a portfolio company, the appraisal may be
based upon a net realizable value when that investment is liquidated.
As of December 31, 2001, and September 30, 2002, the net unrealized
appreciation associated with investments held by the Fund was
$14,746,533, and $6,820,030 respectively.
(6) Restricted Securities
As indicated on the statement of investments as of September 30, 2002, the
Fund holds investments in shares of common stock, the sale of which is
restricted. These securities have been valued by the Investment Adviser
after considering certain pertinent factors relevant to the individual
securities (note 5).
(7) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by
$1,500,000 in cash held by the broker and are included in cash and cash
equivalents and investments on the statement of assets and liabilities as
of September 30, 2002.
31
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
(8) Financial Highlights
Selected per share data and ratios for each share of common stock
outstanding throughout the three months ended September 30, 2001 and 2002,
are as follows:
2001 2002
Net asset value, beginning of period $ 12.29 $ 12.20
Net investment income (loss) $( 0.05) $( 0.07)
Net realized and unrealized gain on investments $( 0.04) $( 2.46)
------- -------
Total return from investment operations $( 0.09) $( 2.53)
Distributions to shareholders $( 0.54) $ 0.00
------- -------
Net asset value, end of period $ 11.66 $ 9.67
======= =======
Per share market value, end of period $ 10.99 $ 8.94
Portfolio turnover rate (quarterly) 1.31% 0.02%
Quarterly return (a) 4.67% -10.61%
Ratio to average net assets (quarterly) (b):
Net investment income (loss) -0.42% -0.60%
Expenses, excluding incentive fees 0.69% 0.66%
Expenses, including incentive fees 0.70% 0.66%
(a) Quarterly return (not annualized) was calculated by comparing the common
stock price on the first day of the period to the common stock price on the
last day of the period, in accordance with AICPA guidelines.
(b) Average net assets have been computed based on quarterly valuations.
32
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2002
Selected per share data and ratios for each share of common stock
outstanding throughout the nine months ended September 30, 2001 and 2002,
are as follows:
2001 2002
Net asset value, beginning of period $ 10.86 $ 12.50
Net investment income (loss) $( 0.35) $( 0.23)
Net realized and unrealized gain on investments $ 1.69 $( 2.60)
------- -------
Total return from investment operations $ 1.34 $( 2.83)
Distributions to shareholders $( 0.54) $ 0.00
------- -------
Net asset value, end of period $ 11.66 $ 9.67
======= =======
Per share market value, end of period $ 10.99 $ 8.94
Portfolio turnover rate (nine months) 4.38% 8.75%
Nine month return (a) 22.11% -13.30%
Ratio to average net assets (nine months) (b):
Net investment income (loss) -3.06% -1.93%
Expenses, excluding incentive fees 2.27% 2.43%
Expenses, including incentive fees 4.11% 2.43%
(a) Nine month return (not annualized) was calculated by comparing the common
stock price on the first day of the period to the common stock price on the
last day of the period, in accordance with AICPA guidelines.
(b) Average net assets have been computed based on quarterly valuations.
33
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Material Changes in Portfolio Investments
The following portfolio transactions are noted for the quarter ended
September 30, 2002 (portfolio companies are herein referred to as the
"Company"):
Active Link Communications, Inc. (OTC:ACVE) In the third quarter of 2002,
the Company repaid $9,880 of principal outstanding on the convertible
bridge loan, and at September 30, 2002, the Company had $53,752 remaining
on the loan.
Canterbury Consulting Group (NASDAQ:CITI) In the third quarter of 2002, the
Fund purchased 97,000 shares of the Company's common stock in the open
market for $94,962 or $0.98 per share. At September 30, 2002, the fund
owned 200,000 shares of CITI common stock having a basis of $193,473 or
$0.97 per share. All stock is freely tradeable.
Creative Host Services, Inc. (NASDAQ:CHST) In the third quarter of 2002,
the Fund purchased 4,830 shares of the Company's common shares in the open
market for $7,921 or $1.64 per share. This is a new investment for the
fund. All stock is freely tradeable.
Creative Host Services acquires and operates food, beverage, and other
concessions at airports throughout the United States. The Company focuses
on non-core markets. The airport concession business is complemented by
inflight catering contracts awarded to the Company by major airlines at
certain airports.
EDT Learning, Inc. (ASE:EDT) In the third quarter of 2002, the Fund
purchased an additional 16,666 shares of the Company's common stock in the
open market. At September 30, 2002, the Fund owned a total of 48,266 shares
of freely tradeable common stock having a basis of $27,033. In addition,
the Fund owned a $500,000 12% Convertible Subordinated Note and three-year
warrants to purchase 500,000 shares of the Company's common stock at an
exercise price of $3.00.
eOriginal, Inc. (Private) In the third quarter of 2002, the Fund made three
follow-on investments in the Company by advancing $348,500 to purchase
Senior Secured Promissory Notes of eOriginal. The notes bear interest at
12%, payable at maturity on December 31, 2002, and are secured by all
intellectual property and software owned by the Company. The maturity dates
of the other Senior Secured Promissory Notes were also extended to December
31, 2002. Also during the third quarter of 2002, the Fund reserved the
value of the Series A Convertible Preferred stock to $794,000.
34
Gasco Energy, Inc. (OTC:GASE) During the third quarter of 2002, the Fund
purchased 250,000 shares of the Company's common stock in a private
placement at a cost of $250,000. This is a new investment for the Fund.
Gasco Energy is an oil and gas company whose focus is exploration and
development of domestic natural gas properties located primarily in the
rocky Mountain regions of Colorado and Wyoming.
I-Flow Corporation (NASDAQ:IFLO) In the third quarter of 2002, the Fund
purchased an additional 35,480 shares of the Company's common stock in the
open market. At September 30, 2002, the Fund owned 100,000 shares of common
stock having a basis of $254,038, or $2.54 per share. All stock is freely
tradeable.
Integrated Security Systems, Inc. (OTC:IZZI) In the third quarter of 2002,
the Fund received 26,780 shares of the Company's common stock as payment in
kind for interest due to the Fund on promissory notes. These shares were
paid to the Fund at an average rate of $0.25 per share.
Also in the third quarter, the Fund purchased a $75,000, 8%, one-year note
and, as part of the consideration for the loan, received five-year warrants
to purchase 375,000 shares of the Company's common stock at $0.20 per
share. In conjunction with this purchase, the Fund agreed to extend the due
dates of the existing promissory notes to September 4, 2003.
Omnivision Technologies, Inc. (NASDAQ:OVTI) In the third quarter of 2002,
the Fund purchased 25,000 shares of the Company's common stock in the open
market at a cost of $244,532. This is a new investment for the Fund.
Omnivision Technologies provides integrated single chip semiconductor
imaging devices. The Company designs, develops, and markets semiconductor
imaging devices for various applications in computing, communications, and
consumer electronics.
Outsource Partners International, Inc. (Private) In the third quarter of
2002, the Fund purchased a $100,000, 12% promissory note maturing August
31, 2003, and a one-year warrant to purchase 4,587 shares of the common
stock of Business Process Outsourcing ("BPO"), the parent of the Company.
The promissory note is convertible into common shares of BPO at a rate
equal to 85% of the price paid by investors in the Company's or BPO's next
round of permanent financing (the "Financing"), and will entitle the Fund
to hold the same class of securities as those issued in the Financing. The
warrants are exercisable at a rate equal to 100% of the price paid by
investors in the Financing, but if the Company does not complete the
Financing by August 31, 2003, then the exercise price shall be $4.36 per
share. This is a new investment for the Fund.
Business Process Outsourcing is a privately held business process
outsourcing firm that specializes in finance and accounting services,
providing innovative business solutions that is designed to empower clients
with a competitive advantage, enabling them to focus on their core
activities.
35
Results of Operations for the Quarter Ended September 30, 2002:
For the quarter ended September 30, 2002, the Fund had a net
investment loss of ($288,362) compared to a net investment loss of
($216,583) in the third quarter of 2001. Most of the difference came from
reduced investment income. Interest income decreased from $43,040 in the
third quarter of 2001 to ($10,405) in the third quarter of 2002. This
decrease was caused by the Fund's reserve of previously accrued but unpaid
interest. Dividend income decreased from $104,511 in the third quarter of
2001 to $16,396 in the same period of 2002 primarily as a result of the
Fund's more concentrated position in common stock rather than in
yield-bearing instruments. Other investment income increased from $3,000 in
third quarter of 2001 to $20,000 in the third quarter of 2002 as a result
of loan closing fees received. The reduction in investment income was
partially offset by an overall reduction in investment expenses for the
third quarter of 2002. Although General and administrative expenses rose
23.9% from $68,487 to 84,886, Legal and professional fees decreased 57.4%
from $67,547 in the third quarter of 2001 to $28,784 in the same period of
2002. Additionally, management fees decreased 14.6% from $223,529 in the
third quarter of 2001 to $190,870 in the third quarter of 2002 due to lower
portfolio values primarily resulting from overall market decline coupled
with reserves taken on portfolio investment valuations. No incentive fees
were incurred by the Fund in the current year third quarter versus $7,571
in incentive fees incurred in the third quarter of 2001. During the third
quarter of 2002, the Fund incurred interest expense in the amount of
$9,813, compared to no interest expense for the same period of 2001. Net
income in the third quarter of 2002 was ($11,020,374) compared to a net
loss of ($388,420) for the third quarter of 2001. This increase in the net
loss was due primarily to a decrease in the net unrealized appreciation of
investments of ($10,732,012) resulting from reserves taken on portfolio
valuations combined with a declining market.
For the nine months ended September 30, 2002, the Fund incurred a net
investment loss of ($993,631) versus ($1,526,119) for the same period of
2001. The reduction in net investment loss was driven primarily by lower
expenses as a result of no net realized gains being taken on investments
and no accruals of incentive fees so far in 2002. For the first nine months
of 2001, incentive fees of $919,429 were incurred by the Fund due to the
realization of gains on sales of portfolio investments. For the first nine
months of 2002, general and administrative expenses increased 18.7% to
$331,496, and legal and professional fees rose from $179,598 in the first
nine months of 2001 to $194,074 for the first nine months of 2002.
Management fees for the first nine months of 2002 were slightly lower than
in the same period of 2001 due to lower valuations for portfolio
investments over the period. In addition, the Fund incurred $9,813 in
interest expense during the third quarter of 2002 compared to no interest
expense for the same period of 2001. For the first three quarters of 2002,
the Fund realized a net loss of ($12,344,525), reflecting a net loss on
investments of ($11,350,894) comprised of the realization of losses on
portfolio investments of ($3,424,391) and a decrease in net unrealized
appreciation of investments of ($7,926,503). In the first nine months of
2001, the Fund's net income was $5,870,416 due primarily to net unrealized
appreciation on investments of $5,267,049 and net realized gains of
$2,129,486.
36
Liquidity and Capital Resources
For the three months ended September 30, 2002, net assets decreased by
($11,020,374) giving the fund net assets of $42,192,983 at September 30,
2002, or $9.67 per share. The reduction in net assets is due to the net
investment loss of ($288,362), lower valuations of portfolio investments of
($10,732,012) resulting from a general decline in market values, and
reserves taken on portfolio investments.
At the end of the third quarter of 2002, the Fund had net cash and
cash equivalents of $3,273,397 versus net cash and cash equivalents of
$4,795,570 at June 30, 2002, a 31.7% decrease. The decrease in cash and
cash equivalents results primarily from follow-on investments in existing
portfolio companies and investments in new portfolio companies. The Fund's
interest receivable decreased 75.4% from $112,974 at June 30, 2002, to
$27,805 at September 30, 2002, whereas prepaid expenses increased from $995
at June 30, 2002 to $58,973 at September 30, 2002.
Pending investment in portfolio investments, funds are invested in
temporary cash accounts and in government securities. Government securities
used as cash equivalents will typically consist of U. S. Treasury
securities or other U. S. Government and Agency obligations having slightly
higher yields and maturity dates of three months or less. These investments
qualify for investment as permitted in Section 55(a)(1) through (5) of the
1940 Act.
Critical Accounting Policies and Judgments
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and
require management's most difficult, complex, or subjective judgments. The
Fund's critical accounting policies are those applicable to the valuation
of investments discussed below.
Valuation of Portfolio Investments. The Fund invests primarily in
convertible securities and equity investments of public companies, although
the Fund also may make investments in private companies. These investments
may be subject to restrictions on resale, illiquid, and without an
established trading market. Therefore, on a quarterly basis, the Investment
Adviser prepares a valuation of the assets of the Fund subject to approval
of the Fund's Board of Directors. Generally, the guiding principle for
valuation of any investment is application of objective standards. The
types of investments made by the Fund and the specific policies used in
valuation of the Fund's portfolio are discussed thoroughly in the footnotes
to the financial statements found in Part I, Item 1 of this report,
specifically in Notes 4, 5, and 6.
37
Disclosure Regarding Forward-Looking Statements
Information contained in this Form 10-Q may contain "forward-looking
statements" which can be identified by the use of forward-looking
terminology including but not necessarily limited to "may," "will,"
"expect," "intend," "anticipate," "estimate," or "continue" or the negative
thereof or other variations or similar words or phrases. The matters
described in "Critical Accounting Policies and Judgments," "Quantitative
and Qualitative Disclosure About Market Risk," and certain other factors
noted throughout this Form 10-Q constitute cautionary statements
identifying important factors with respect to any such forward-looking
statements, including certain risks and uncertainties, that could cause
actual results to differ materially from those in such forward-looking
statements.
Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of those
assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be
incorrect. In light of these and other uncertainties, the inclusion of a
projection or forward-looking statement in this Form 10-Q should not be
regarded as a representation by us that our plans and objectives will be
achieved. No undue reliance should be placed on such forward- looking
statements, which apply only as of the date of this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Fund is subject to financial market risks, including changes in market
interest rates as well as changes in marketable equity security prices. The Fund
does not use derivative financial instruments to mitigate any of these risks.
The return on the Fund's investments is generally not affected by foreign
currency fluctuations.
A good portion of the Fund's investment in portfolio securities consists of
fixed rate convertible debentures and other debt instruments. Since these
instruments are generally priced at a fixed rate, changes in market interest
rates do not directly impact interest income, although they could impact the
Fund's yield on future investments in debt instruments. In addition, changes in
market interest rates are not typically a significant factor in the Fund's
determination of fair value of its debt instruments, as it is generally assumed
they will be held to maturity, and their fair values are determined on the basis
of the terms of the particular instrument and the financial condition of the
issuer.
A portion of the Fund's portfolio consists of equity investments in private
companies. The Fund would anticipate no impact on this investment from modest
changes in public market equity prices. However, should significant changes in
market prices occur, there could be a longer-term effect on valuations of
private companies which could affect the carrying value and the amount and
timing of proceeds realized on these investments.
38
A portion of the Fund's investment portfolio also consists of common stocks
and warrants to purchase common stock in publicly traded companies. These
investments are directly exposed to equity price risk, in that a percentage
change in these equity prices would result in a similar percentage change in the
fair value of these securities.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Fund's President and
Chief Executive Officer along with the Fund's Chief Financial Officer evaluated
the effectiveness of the design and operation of the Fund's disclosure controls
and procedures pursuant to Exchange Act Rule 13a- 14(c). Based upon that
evaluation, the Fund's President and Chief Executive Officer along with the
Fund's Chief Financial Officer concluded that the Fund's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Fund required to be included in the Fund's periodic SEC filings.
There have been no significant changes in the Fund's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date of their evaluation.
39
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99-1 Certification of Russell Cleveland, President and CEO
99-2 Certification of Barbe Butschek, Chief Financial Officer
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Fund
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
November 12, 2002
___________________/S/_______________________________
Russell Cleveland, President and CEO
(Principal Executive Officer)
November 12, 2002
__________________/S/________________________________
Barbe Butschek, Chief Financial Officer
(Principal Financial Officer)
40
CERTIFICATION
I, Russell Cleveland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed to the
registrant's auditors and to the audit committee of the registrant's board
of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
41
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Russell Cleveland
Russell Cleveland
President and CEO
November 5, 2002
42
CERTIFICATION
I, Barbe Butschek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statements of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us by
others, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed to the
registrant's auditors and to the audit committee of the registrant's board
of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to record,
process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
43
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Barbe Butschek
Barbe Butschek
Chief Financial Officer
November 5, 2002
44
EXHIBIT 99-1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of Renaissance
Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to
such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 (the "Report"), fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: November 5, 2002 /S/ Russell Cleveland
Russell Cleveland
President & CEO
EXHIBIT 99-2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of Renaissance
Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to
such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 (the "Report"), fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: November 5, 2002 /S/ Barbe Butschek
Barbe Butschek
Chief Financial Officer