Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
Mark One
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal Year Ended December 31, 2002 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 33-75758
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Exact name of Registrant as specified in its charter)
Texas 75-2533518
(State of incorporation or organizations) I.R.S. Employer Identification No.)
Suite 210, LB 59, 8080 North Central Expressway, Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214)891-8294
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
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 ( )
Indicate by check mark if disclosure by delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any statement to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b- 2 of the Act).
Yes ( ) No (X)
As of June 30, 2002 and March 14, 2003, there were 4,361,618 and 4,351,718
shares of Registrant's stock outstanding, respectively. The aggregate market
value of the stock held by non- affiliates, based on the closing price of such
stock as of June 30, 2002, and March 14, 2003, was $40,596,727 and $30,940,677,
respectively. The 301,945 and 307,185 shares of stock held by affiliates at June
30, 2002, and March 14, 2003, were valued at $3,019,451 and $2,349,964,
respectively.
Documents Incorporated by Reference: Certain portions of the Registrant's
Definitive Proxy Statement (the "Proxy Statement") for its Annual Meeting of
Shareholders to be held on May 16 2003 pursuant to Regulation 14A are
incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 27
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 29
Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . 32
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . 33
PART III
Item 10. Directors and Executive Officers of Registrant . . . . . . . . . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 34
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 34
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 34
Item 14. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 34
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PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8 K . . . . . . . . . . . . . . . . . . . . . . 35
Item 16. Principal Accountant Fees and Services . . . . . . . . . . . . . . 35
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Certification of Chief Executive Officer . . . . . . . . . . . . . . . . . . 37
Certification of Chief Financial Officer . . . . . . . . . . . . . . . . . . 39
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-1
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-2 to F-26
Exhibit 99-1
Exhibit 99-2
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Part I
Certain of the statements included below, including those regarding future
financial performance or results that are not historical facts, contain
"forward-looking" information as that term is defined in the Securities Exchange
Act of 1934, as amended. The words "expect," "believe," "anticipate," "project,"
"estimate," and similar expressions are intended to identify forward-looking
statements. The Fund cautions readers that any such statements are not
guarantees of future performance or events and that such statements involve
risks, uncertainties and assumptions, including but not limited to industry
conditions, general economic conditions, interest rates, competition, ability of
the Fund to successfully manage its growth, and other factors discussed or
included by reference in this Annual Report on Form 10-K. Should one or more of
these risks or uncertainties materialize or should the underlying assumptions
prove incorrect, those actual results and outcomes may differ materially from
those indicated in the forward-looking statements.
Item 1. Business.
GENERAL
Renaissance Capital Growth & Income Fund III, Inc., (sometimes referred to
as the "Fund" or the "Registrant") is a Texas corporation formed January 20,
1994, that has elected to operate as a Business Development Company (sometimes
referred to herein as a "Business Development Company" or a "BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act").
The investment objective of the Fund is to provide its shareholders with
current income and long-term capital appreciation by investing primarily in
privately placed securities of small public companies ("Portfolio Companies").
Renaissance Capital Group, Inc. ("Renaissance Group" or the "Investment
Adviser"), a Texas corporation, serves as the investment adviser to the Fund. In
this capacity, Renaissance Group is primarily responsible for the selection,
evaluation, structure, valuation, and administration of the Fund's investment
portfolio. Renaissance Group is a registered investment adviser under the 1940
Act and the Texas Securities Act. Its activities are subject to the supervision
of the Board of Directors of the Fund ("Board of Directors") who provide
guidance with respect to the operations of the Fund.
Generally, investments are and will continue to be in companies that have
their common stock registered for public trading under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or companies that in the opinion
of the Investment Adviser have the ability to effect a public offering within
three to five years. The Fund generally invests in privately placed preferred
stock or debentures of a Portfolio Company, which securities typically are
convertible into or exchangeable for common stock of the Portfolio Company.
While such common stock of the Portfolio Company may be publicly traded, the
common stock acquired by the Fund is often unregistered. Therefore, such
securities are restricted from distribution or sale to the public except in
compliance with certain holding periods and exemptions under the Securities Act
of 1933, as amended ( the "Securities Act"), or after registration pursuant to
5
the Securities Act. The Fund also purchases shares of small and micro cap
issuers in the secondary markets. These shares are freely tradeable and have no
restrictions on resale.
From inception through December 31, 2002, the Fund had made investments in
forty-six (46) different portfolio companies having an aggregate cost of
$69,445,007. The Fund had active investments in twenty-nine (29) portfolio
companies at December 31, 2002, and is seeking additional investment
opportunities. The Fund does not focus on particular industry segments. Instead,
the Fund makes investment decisions using a bottoms-up analysis of the potential
portfolio company, with no predetermined industry bias.
Under the provisions of the 1940 Act, a Business Development Company is
required to invest 70% or more of its funds in "eligible portfolio investments,"
defined generally as direct placements to "eligible portfolio companies" and
temporary investments in "cash items" pending other investments. Under and
pursuant to the provisions of the 1940 Act, a Business Development Company may
invest up to 30% of its funds in "Other Investments," or "non-eligible
investments," that is, investments that do not qualify as "eligible portfolio
investments." 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.
Pending investment in convertible securities of eligible Portfolio
Companies or other investments as provided under the 1940 Act, the Registrant's
funds are invested in "Short-term Investments" consisting primarily of cash or
U.S. Government and agency obligations.
At December 31, 2002, the Fund's investment assets were classified by
amount as follows:
Percentage
Classification Value Of Assets
Eligible Portfolio Investments $41,750,778 82.68%
(including cash and cash equivalents)
Other Portfolio Investments $ 8,744,942 17.32%
----------- -------
$50,495,721 100.00%
=========== =======
INVESTMENT OBJECTIVES
The investment objective of the Fund is to provide its shareholders with
both current income and long-term capital appreciation.
The Fund seeks to provide returns to shareholders through cash dividends of
net investment income and through distributions of realized gains or of
securities that have appreciated in value. At December 31, 2002, the Fund had
distributed $7.66 per share to shareholders since inception. On November 5,
2002, the Fund announced an annual distribution policy (the "Policy") of $0.40
per share with an initial quarterly cash distribution of $0.10 per share that
was paid December 12, 2002.
6
The intent of the Policy is for the Fund to make distributions of $0.10 per
share in each of the first three quarters of the year with a final distribution
in the fourth quarter equal to $0.10 per share or a greater amount sufficient to
satisfy the distribution requirements of the Internal Revenue Code. The Policy
is subject to quarterly review and approval by the Fund's Board of Directors.
According to the Policy, the distributions could be paid from interest or
dividend income, capital gains income, or as a return of capital in the event
there is insufficient income to satisfy the Policy. The distribution of $0.10
per share made in December 2002 was classified as a return of capital.
GENERAL INVESTMENT POLICIES
The Fund invests in emerging growth company securities that are generally
not available to the public and which typically require substantial financial
commitment. An emerging growth company is generally considered to have the
following attributes: (1) either a publicly held company with a relatively small
market capitalization or a privately held company; (2) an established operating
history but of a limited period so as to not have fully developed its market
potential for the products or services offered; and (3) a provider of a new or
unique product or service that allows the company an opportunity for exceptional
growth. Emerging growth companies typically require non-conventional sources of
financing because the extent and nature of the market for their products or
services is not fully known. Consequently, there is uncertainty as to the rate
and extent of growth and also uncertainty as to the capital and human resources
required to achieve the goals sought.
With respect to investments in emerging growth companies, the Fund
emphasizes investing in convertible debentures or convertible preferred stock of
publicly held companies that the Fund anticipates will be converted into common
stock and registered for public sale within three to five years after the
private placement. In addition, the Fund will invest in privately placed common
stock of publicly traded issuers which are initially restricted from trading. To
a lesser extent. the Fund may participate in bridge financings in the form of
loans or other preferred securities which are convertible into common stock of
the issuer or issued together with equity participation, or both, for companies
which the Fund anticipates will complete a stock offering or other financing
within one or more years from the date of the investment. The Fund may also make
bridge loans, either secured or unsecured, intended to carry the borrower to a
private placement or an initial public offering, or to a merger, acquisition, or
other strategic transaction.
Generally, investments in Portfolio Companies will have an initial fixed
term of seven (7) years, with no amortization of the principal amount for three
(3) years. Further, investments in Portfolio Companies will be individually
negotiated, non-registered for public trading, and will be subject to legal and
contractual investment restrictions. Accordingly, the Portfolio Investment will
generally be considered non-liquid.
The Fund has no fixed policy concerning the types of businesses or industry
groups in which it may invest or as to the amount of funds that it will invest
in any one issuer. However, the Fund will generally attempt to limit its
investment in securities of any single Portfolio Company to approximately 15% of
its net assets at the time of the investment. At December 31, 2002, none of the
Fund's portfolio companies represented 15% or more of net assets.
7
In the event the Fund elects to participate as a member of the Portfolio
Company's Board of Directors, either through advisory or full membership, the
Fund's nominee to the board will generally be selected from among the officers
of Renaissance Group. When, at the discretion of Renaissance Group, a suitable
nominee is not available from among its officers, Renaissance Group will select,
as alternate nominees, outside consultants who have prior experience as an
independent outside director of a public company.
REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
The 1940 Act was enacted to regulate investment companies. In 1980, the
1940 Act was amended by the adoption of the Small Business Investment Incentive
Act. The purpose of the amendment was to remove regulatory burdens on
professionally managed investment companies engaged in providing capital to
smaller companies. The Small Business Investment Incentive Act established a new
type of investment company specifically identified as a Business Development
Company as a way to encourage financial institutions and other major investors
to provide a new source of capital for small developing businesses.
BUSINESS DEVELOPMENT COMPANY
A BDC:
I. is a closed-end management company that generally makes 70% or more of
its investments in "Eligible Portfolio Companies" and "cash items"
pending other investment. Under the regulations established by the
Securities and Exchange Commission (the "SEC") under the 1940 Act,
only certain companies may qualify as "Eligible Portfolio Companies."
To be an "Eligible Portfolio Company," the Company must satisfy the
following:
A. it must be organized under the laws of, and has its principal
place of business in, any state or states;
B. is neither an investment company as defined in Section 3 (other
than a small business investment company which is licensed by the
Small Business Administration to operate under the Small Business
Investment Act of 1958 and which is a wholly-owned subsidiary of
the business development company) nor a company which would be an
investment company except for the exclusion from the definition
of investment company in Section 3(c); and
C. satisfies one of the following:
1. it does not have any class of securities with respect to
which a member of a national securities exchange, broker, or
dealer may extend or maintain credit to or for a customer
pursuant to rules or regulations adopted by the Board of
Governors of the Federal Reserve System under Section 7 of
the Securities Exchange Act of 1934;
8
2. it is controlled by a business development company, either
alone or as part of a group acting together, and such
business development company in fact exercises a controlling
influence over the management or policies of such eligible
portfolio company and, as a result of such control, has an
affiliated person who is a director of such eligible
portfolio company;
3. it has total assets of not more than $4,000,000, and capital
and surplus (shareholders' equity less retained earnings) of
not less than $2,000,000, except that the Commission may
adjust such amounts by rule, regulation, or order to reflect
changes in one or more generally accepted indices or other
indicators for small businesses; or
4. it meets such other criteria as the Commission may, by rule,
establish as consistent with the public interest, the
protection of investors, and the purposes fairly intended by
the policy and provisions of this title.
Therefore, the Investment Adviser believes that "Eligible Portfolio
Companies" are, generally, those companies that, while being publicly held, may
not have or do not have a broad based market for their securities, or the
securities that they wish to offer are restricted from public trading until
registered. Further, while the 1940 Act allows a BDC to "control" a Portfolio
Company, it is not the general policy of the Fund to acquire a controlling
position in its Portfolio Companies. The Fund only provides managerial
assistance, and in certain circumstances seeks to limit its "control" position
by contracting for the right to have a designee of the Fund be elected to the
board of directors of the Portfolio Company, or be selected an advisory
director. While these are the Fund's general policies, the application of these
policies, of necessity, vary with each investment situation.
1940 ACT REQUIREMENTS
The BDC election exempts the Fund from some provisions of the 1940 Act.
However, except for those specific provisions, the Fund will continue to be
subject to all provisions of the 1940 Act not exempted, including the following:
1. restrictions on the Fund from changing the nature of business so as to
cease to be, or to withdraw its election as, a BDC without the
majority vote of the shares outstanding;
2. restrictions against certain transactions between the Fund and
affiliated persons;
3. restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
9
4. compliance with accounting rules and conditions as established by the
SEC, including annual audits by independent accountants;
5. compliance with fiduciary obligations imposed under the 1940 Act; and
6. requirement that the shareholders ratify the selection of the Fund's
independent public accountants and the approval of the investment
advisory agreement or similar contracts and amendments thereto.
On September 19, 1996, the Fund and the Investment Adviser filed their
Application for an order pursuant to Sections 6(c) and 57(i) of the Investment
Company Act of 1940 and Rule 17d-1 thereunder authorizing certain joint
transactions otherwise prohibited by Section 57(a)(4) of the Act requesting an
order from the SEC permitting the Fund to co-invest with companies that are
affiliated with the Investment Adviser, including Renaissance US Growth
Investment Trust PLC ("RUSGIT") and BFS US Special Opportunities Trust PLC
("BFS") (RUSGIT and BFS collectively referred to as "Adviser Affiliates"). The
order was granted on December 30, 1996.
In order for the Fund and the Adviser Affiliates (together referred to as
the "Investment Funds") to make co-investments in the same entity, the following
conditions apply:
A. the Investment Adviser will determine if the investment is eligible
for investment by the Investment Funds;
B. if eligible for co-investment, the private placement will be deemed a
co-investment opportunity and the Investment Adviser will determine an
appropriate amount that the Investment Funds should invest;
C. the Investment Adviser will distribute written information, including
the amount and terms of the proposed investment, concerning all
co-investment opportunities to the Board of Directors of the Fund. The
Fund will co-invest only if a required majority of the Fund's
Independent Directors conclude, prior to the acquisition of the
investment, that the investment should be made;
D. the Fund will not make an initial investment in a portfolio company if
any Adviser Affiliate, the Investment Adviser, or a person
controlling, controlled by, or under common control with the Adviser
is an existing investor in such issuer;
E. the terms, conditions, price, class of securities, settlement date,
and registration rights shall be the same for the Fund and the Adviser
Affiliates, except that amounts may differ between the Fund's
investment and that of an Adviser Affiliate;
F. the Fund's Independent Directors will review quarterly all information
concerning co-investment opportunities during the preceding quarter to
determine whether the conditions set forth in the application were
complied with;
10
G. the Fund will maintain the records required by section 57(f)(3) of the
Act as if each of the investments permitted under these conditions
were approved by the Fund's Independent Directors under section 57(f)
of the Act; and
H. no Independent Director of the Fund will be a director or general
partner of any Adviser Affiliate with which the Fund co-invests.
The Fund has made numerous investments with the Adviser Affiliates and
anticipates making additional investments in the future.
INVESTMENT ADVISERS ACT OF 1940 AND THE INVESTMENT ADVISORY AGREEMENT
Renaissance Group is the investment adviser to the Fund pursuant to the
Investment Advisory Agreement dated and approved by the Board of Directors on
February 15, 1994 (the "Investment Advisory Agreement"). The Investment Advisory
Agreement was amended on March 24, 1998, and the Amendment was approved by the
shareholders at the Annual Shareholders' Meeting for the Fund held on May 29,
1998. Renaissance Group is registered as an investment adviser under the
Advisers Act and is subject to the reporting and other requirements thereof. The
Advisers Act also provides restrictions on the activities of registered advisers
to protect its clients from manipulative or deceptive practices, while the
Advisers Act generally restricts performance compensation of up to 20% on
realized capital gains computed net of all realized capital losses and
unrealized capital depreciation.
The Investment Advisory Agreement provides that Renaissance Group is
entitled to receive a management fee equal to a quarterly rate of 0.4375% (1.75%
annually) of the Fund's Net Assets, as determined at the end of such quarter
with each such payment to be due as of the last day of the calendar quarter. In
addition to the quarterly management fee of 0.4375% of the fund's net assets,
Renaissance Group is entitled to receive an incentive fee (the "incentive fee")
in an amount equal to 20% of the Fund's realized capital gains in excess of
realized capital losses of the Fund after allowance for any unrealized capital
losses in excess of unrealized capital gains on the portfolio investments of the
Fund. The incentive fee is calculated, accrued, and paid on a quarterly basis.
Investment advisory agreements are further subject to the 1940 Act, which
requires that the agreement, in addition to having to be initially ratified by a
majority of the outstanding shares, shall precisely describe all compensation to
be paid, shall be approved annually by a majority vote of the Board of
Directors, may be terminated without penalty on not more than 60 days notice by
a vote of a majority of the outstanding shares, and shall terminate
automatically in the event of assignment. The Board of Directors has determined
that the Investment Advisory Agreement shall constitute the Fund's advisory
agreement and at all times be construed so as to comply with the Advisers Act
and the 1940 Act.
Renaissance Group is also an investment adviser or investment manager to
two other investment companies: RUSGIT and BFS, closed-end trusts. Both RUSGIT
and BFS are domiciled in the United Kingdom and trade on the London Stock
Exchange under the respective symbols RUG and BSOU.
11
FUND PORTFOLIO INVESTMENTS
At December 31, 2002, the Fund had active investments in the following
Portfolio Companies:
Active Link Communications, Inc. (OTC:ACVE)
Active Link Communications, Inc., through its Mobility Concepts, Inc.,
subsidiary, is a provider of wireless networking and mobile computing solutions
for the mobile workforce.
On January 30, 2002, the Company paid down the principal balance of the
convertible bridge loan by $9,320 and additionally made a principal repayment of
$9,320 on February 12, 2002.
In the second quarter of 2002, the Company continued to pay down the
principal balance of its convertible bridge loan with the Fund. In total, the
Company repaid $34,395 of principal outstanding on the convertible bridge loan
during the second quarter.
In the third quarter of 2002, the Company repaid $9,880 of principal
outstanding on the convertible bridge loan.
In December 2002, the Company's notes were renegotiated, extending the
maturity dates to September 30, 2003, and adjusting the conversion rate to $0.25
per share. Also during December the Company made principal payments totaling
$12,272, reducing the bridge loan balance to $41,480.
At December 31, 2002, the Fund owned $41,480 in 12% Convertible Promissory
Notes and $375,000 in 8% Subordinated Convertible Promissory Notes. All of the
Notes are convertible at $0.25 per share. Additionally, the Fund owned warrants
to purchase 70,000 shares of common stock at $0.80 per share having a cost basis
of zero and warrants to purchase 100,000 shares of common at $0.60 per share on
or before September 30, 2004 and having a cost basis of $2,000.
AirNet Systems, Inc. (NYSE:ANS)
AirNet Systems Inc., operates AirNet Express, an integrated national air
transportation network that provides expedited air transportation and passenger
charter services to banks, medical customers, the U.S. government, and other
time-critical small package shippers in more than 100 cities nationwide. The
AirNet airline has more than 120 aircraft, including 36 Learjets, located
strategically throughout the United States. AirNet Express flies over half a
million miles per week. AirNet's fleet departs most cities several hours after
other major package delivery companies.
In December 2002, the Fund purchased 75,000 shares of the Company's common
stock. At December 31, 2002, the Fund owned 75,000 shares of the Company's
common stock having a basis of $318,750 or $4.25 per share. These shares are
restricted pursuant to the provisions of Rule 144.
12
Bentley Pharmaceuticals, Inc. (AMEX:BNT)
Bentley Pharmaceuticals, Inc., is an international pharmaceutical company
focused on improving drugs through new drug delivery technologies and
commercializing such drugs in the U.S. and other major markets. Bentley also
manufactures and markets pharmaceutical products in Spain for the treatment of
cardiovascular, gastrointestinal, neurological, infectious and other diseases.
In the second quarter of 2002, the Fund sold 265,000 shares of Bentley
common stock in the open market realizing proceeds of $3,016,629, representing a
gain of $2,081,317. Also in the second quarter, the Fund was informed that the
options to purchase 12,012 common shares at $7.25 that had been assigned to the
Fund by Russell Cleveland had expired as a result of Mr. Cleveland's prior
resignation from the Company's Board of Directors.
At December 31, 2002 the Fund owned 659,979 shares of the Company's common
stock having a basis of $1,035,168 or $1.57 per share. The stock is freely
tradeable.
Business Process Outsourcing (Private)
Business Process Outsourcing is a privately held business process
outsourcing firm that specializes in finance and accounting services, other
administrative functions, and high volume transaction processing services. The
Company's services are designed to empower clients with a competitive advantage
by enabling them to focus on their core activities.
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.
In the fourth quarter of 2002, the Fund received $2,000 from the Company
representing a 2% Original Issue Discount on the purchase of the promissory
note.
At December 31, 2002, the Fund owned a $100,000, 12% promissory note having
a basis of $98,000 and a one-year warrant to purchase 4,587 shares as described
above. The warrant has a zero cost basis.
CaminoSoft Corporation (OTC:CMSF)
CaminoSoft Corporation creates intelligent data storage and management
infrastructures by facilitating data storage, retrieval, protection, and
performance measurement and management.
13
At December 31, 2002 the Fund owned 2,458,333 shares of the Company's
common stock having a basis of $4,875,000, warrants to purchase 500,000 shares
of the Company's common stock at $1.00 per share on or before August 31, 2003,
and options to purchase 53,300 shares of the Company's common stock. Of the
Fund's entire position, 1,750,000 shares of common are freely tradeable whereas
the Fund's remaining shares, warrants, and options are restricted from trading
pursuant to the Securities Act. The options vested in September 2000 and are
exercisable at $3.63 per share on or before September 28, 2004. The options were
obtained by assignment from Robert C. Pearson, Vice-President of Renaissance
Capital Group, Inc., who earned the options as a member of the Company's Board
of Directors.
Canterbury Consulting Group (Nasdaq:CITID)
Canterbury provides broad-based information technology and management
consulting services and training to both commercial and government clients. The
Company's focus is to become an integral part of its clients' management and
technical infrastructure, designing and applying the best products and services
to help them achieve a competitive advantage.
During 2002, the Fund purchased 200,000 shares of the Company's common
stock in the open market for $193,473 or $0.97 per share. This represented the
Fund's entire position at December 31, 2002. All stock is freely tradeable.
Subsequent to December 31, 2002, the Company effected a one for seven
reverse split of its common stock. Post-reverse, the Fund owned 28,572 shares of
the Company's common stock having a new per-share basis of $6.77.
Capital Senior Living Corp. (NYSE:CSU)
Capital Senior Living Corporation develops and operates senior living
communities in the United States. The Company provides services such as
independent living, assisted living, skilled nursing, and home care services to
the elderly at its communities.
During the fourth quarter of 2002, the Fund purchased 44,500 shares of the
Company's common stock in the open market. At December 31, 2002, the Fund owned
44,500 shares of freely tradeable common stock having a cost basis of $110,975
or $2.49 per share.
CareerEngine Network, Inc. (AMEX:CNE)
CareerEngine Network, Inc., owns a network of category-specific career
search destinations. Its Career Solutions division is an applications service
provider that builds and maintains custom career portals for online and offline
industries and their related web sites.
At December 31, 2002 the Fund owned a $250,000, 12% convertible debenture
of the Company due May 2007 and convertible into 125,000 shares of the Company's
common stock, warrants to purchase 62,500 shares of the Company's common stock
at an exercise price of $4.00 per share, and warrants to purchase 62,500 shares
of the company's common stock at an exercise price of $6.00 per share.
14
Creative Host Services, Inc. (Nasdaq:CHST)
Creative Host Services acquires and operates food, beverage, and other
concessions at airports throughout the United States. The airport concession
business is complemented by in-flight catering contracts awarded to the Company
by major airlines at certain airports.
At December 31, 2002, the Fund owned 4,830 shares of the Company's common
stock with a cost basis of $7,921 or $1.64 per share. All stock was purchased in
the secondary market and is freely tradeable.
Daisytek International, Inc. (Nasdaq:DZTK)
Daisytek International is a global distributor of computer products, office
supplies, and accessories. Daisytek sells its products and services in the
United States, Europe, Canada, Australia, Mexico and South America, distributing
more than 25,000 products from about 500 manufacturers.
During 2002, the Fund purchased 50,000 shares of the Company's common stock
in the open market. At December 31, 2002, the Fund owned 49,600 shares of the
Company's common stock having a cost basis of $507,639 or $10.23 per share. All
stock is freely tradeable.
Dave & Busters, Inc. (NYSE:DAB)
Dave & Busters, Inc., owns and operates concept restaurants through 30 US
locations. The Company also has international license agreements for the Pacific
Rim, Canada, the Middle East, Mexico, and South Korea.
At December 31, 2002 the Fund owned 100,000 shares of the Company's common
stock having a cost basis of $653,259.
Dexterity Surgical, Inc. (OTC:DEXT)
Dexterity Surgical, Inc., is engaged in the development, manufacture, and
distribution of instruments, equipment and surgical supplies used in minimally
invasive surgery.
In the first quarter ended March 31, 2002, the Company made a principal
repayment on the Fund's convertible debentures of $5,477. In the second quarter,
the Fund learned that the 5,000 options to purchase shares at $0.75 per share
that had been assigned to the Fund by Robert C. Pearson, who earned the options
as a member of the Company's Board of Directors, expired as a result of his
resignation from the Company's Board.
Because of the Company's continuing operational and financial difficulties,
in 2002 the Fund took an additional reserve on the debentures of $250,000,
leaving the Fund with a fair valuation at December 31, 2002, of $1,066,282.
Additionally, the Fund has fully reserved all of its preferred and common stock
positions.
15
At December 31, 2002, the Fund owned $1,316,282 of the Company's 9%
Convertible Debentures, $1,000,000 of the Company's Cumulative Convertible
Preferred Stock, and 260,000 shares of the Company's common stock which are
restricted pursuant to Rule 144 of the Securities Act.
Display Technologies, Inc. (OTC:DTEK)
During the first quarter of 2002, the Fund wrote off its entire investment
in the Company recognizing a loss in the amount of $3,299,741.
Dwyer Group, Inc. (Nasdaq:DWYR)
The Dwyer Group, Inc., currently supports over 800 franchises in the United
States and Canada and approximately 200 franchises in twenty-four other
countries. The franchises deliver repair, installation and maintenance services
to both residential and commercial consumers under the concepts Mr. Rooter(R),
Rainbow International(R), Glass Doctor(R), Mr. Electric(R), Mr. Appliance(R),
and Aire Serv(R).
At December 31, 2002, the Fund owned 675,000 shares of the Company's common
stock having a cost basis of $1,966,632. All stock is freely tradeable.
EDT Learning, Inc. (AMEX:EDT)
EDT Learning, Inc., is a leading provider of custom, comprehensive
e-Learning business solutions for corporate clients seeking to train
non-technical users.
In the first quarter of 2002, the Fund made a private placement into the
Company by investing $500,000 to purchase 12% Convertible Redeemable
Subordinated Notes together with warrants to purchase 500,000 shares of the
Company's common stock. The Note bears interest at 12%, has a ten-year term, is
unsecured, and is convertible into shares of the Company's common stock at a
rate of $1.00 per share. As additional consideration for the investment, the
Fund received warrants to purchase 500,000 shares of the Company's common stock
on or before March 29, 2005, at a rate of $3.00 per share.
In the third quarter of 2002, the Fund purchased an additional 16,666
shares of the Company's common stock in the open market for $10,443.
At December 31, 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.
16
eOriginal, Inc. (Private)
eOriginal, Inc., has a patented process for creating, executing, storing
and retrieving legal documents in a completely electronic format.
Throughout 2002, the Fund made follow-on investments by advancing $639,683
to purchase Senior Secured Promissory Notes. Of this amount, $75,000 was
advanced in the first quarter, $101,183 was advanced in the second quarter,
$348,500 was advanced in the third quarter, and $115,000 was advanced in the
fourth quarter. The Notes bear interest at 12%, are secured by all intellectual
property and software owned by the Company, and came due at December 31, 2002.
At this time, the Company is in default on the Notes. In 2002, the Fund reserved
the value of the Convertible Preferred Stock by $4,000,000.
At December 31, 2002, in the Fund owned $1,139,683 of the 12% Senior
Secured Promissory Notes discussed above, 2,353 shares of the Series C-1 5%
Cumulative Convertible Preferred Stock having a cost basis of $2,000,050, 447
shares of the Series B-3 5% Cumulative Convertible Preferred Stock having a cost
basis of $107,280, 1,785 shares of the Series B-1 5% Cumulative Convertible
Preferred Stock having a cost basis of $392,700, 6,000 shares of the Company's
Series A 5% Cumulative Convertible Preferred Stock having a cost basis of
$1,500,000, and warrants to purchase 659 shares of the Company's common stock at
$169.75, which warrants have a cost basis of $165. The warrants are exercisable
on or before September 15, 2003.
Subsequent to December 31, 2002, the Company went through a tax-free
reorganization (the "Reorganization") in which all the assets of eOriginal, Inc.
were transferred to eOriginal Holdings ("Holdings"). As a result of the
Reorganization, the Fund exchanged all of its positions in eOriginal, Inc. for
the following securities of Holdings: 10,680 shares of Series A Convertible
Preferred Stock, 25,646 shares of Series B Convertible Preferred Stock, 28,929
shares of Series C Convertible Preferred Stock, and 2,302 warrants to purchase
shares of common stock of Holdings. Each series of Preferred is convertible one
for one into common stock of Holdings, and the warrants have an exercise price
of $0.01 per share. The implied value of Holdings for purposes of the
reorganization is $72.13 per share, giving Holdings an enterprise value of
$64,919,848 and causing the Fund's new total ownership in Holdings to be valued
at $4,873,079 as of the date of reorganization.
Fortune Natural Resources Corporation (OTC:FPXA)
Fortune Natural Resources Corporation is an independent public oil and gas
company whose primary focus is exploration and development of domestic oil and
gas properties located primarily in onshore and offshore areas of Louisiana and
Texas.
In the first quarter of 2002, the Fund invested $120,000 to purchase Series
B Preferred Stock of Fortune (the "Series B"). In the second quarter of 2002,
the Company redeemed the Fund's Series B Preferred stock for $121,545, of which
$120,000 represented repayment of principal and the remainder represented
payment of dividends at 10% for the term that the Series B Preferred stock was
outstanding. As consideration for the Preferred investment, the Fund received a
17
three-year warrant to purchase 36,000 shares of the Company's common stock at an
exercise price of $0.25 per share.
In the fourth quarter of 2002, the Fund sold 60,000 shares of the Company's
common stock in the open market at an average price of $0.05 per share, netting
proceeds of $3,151 and resulting in a loss of $41,849.
At December 31, 2002, the Fund owned 1,262,394 shares of the Company's
common stock, warrants to purchase 100,000 shares of common stock at $1.50 per
share on or before March 2003, warrants to purchase 100,000 shares of common
stock at $2.25 on or before March 2003, and warrants to purchase 36,000 shares
of the Company's common stock at $0.25 on or before May 19, 2005. All positions
are registered and freely tradeable.
Gasco Energy, Inc. (OTC:GASE)
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.
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.
At December 31, 2002, the Fund owned 250,000 shares of the Company's common
stock with a basis of $250,000. These shares are restricted, but may be sold
pursuant to the prospectus delivery requirements of a "shelf" registration filed
by the Company.
I-Flow Corporation (Nasdaq:IFLO)
I-Flow Corporation designs, develops, and markets technically advanced drug
delivery systems that provide life enhancing, cost-effective solutions for pain
management and infusion therapy. The Company's products are used primarily in
the home, hospital, and physician office.
Throughout 2002, the Fund purchased 100,000 shares of the Company's common
stock in the open market for $254,038, or $2.54 per share.
At December 31, 2002, the Fund owned 100,000 shares of common stock. All
stock is freely tradeable.
Inet Technologies (Nasdaq:INTI)
Inet Technologies is a global provider of communications software solutions
that enable carriers to more effectively design, deploy, diagnose, monitor, and
manage communications networks that carry signaling information used to control
and deliver communications sessions and services. the solutions also address
certain fundamental business needs of communications carriers, such as improved
billing, targeted sales and marketing, fraud prevention, and enhanced routing.
18
During 2002, the Fund purchased 75,000 shares of the Company's common stock
in the open market. At December 31, 2002, the Fund owned 75,000 shares having a
basis of $367,434 or $4.90 per share. All shares are freely tradeable.
Subsequent to December 31, 2002, the fund purchased an additional 21,600
shares of the Company's common stock in the open market for $162,904.
Integrated Security Systems, Inc. (OTC:IZZI)
Integrated Security Systems, Inc., is a holding company which designs,
develops, manufactures, sells and services commercial security and traffic
control devices. In addition, the Company sells fully integrated turnkey
security systems that control and monitor access to governmental, commercial and
industrial sites.
In the first quarter of 2002, the Fund invested $50,000 to purchase a
120-day promissory note bearing interest at 8% and secured by all the assets of
the Company and its subsidiaries. As additional consideration for the
investment, the Fund received 250,000 warrants to purchase the Company's common
stock at $0.20 per share.
Also in the first quarter, the Fund received 31,190 of the Company's common
stock as payment in kind for dividend and interest payments that were accrued
and payable. The total basis of these shares is $9,397. In total, 10,634 shares
were received as payment in kind of Series D preferred stock dividends owed and
outstanding. These shares have a basis of $3,403, or $0.32 per share. The
remaining 20,556 shares were received as payment in kind for interest
obligations on debt instruments that were owed and outstanding. The basis for
these shares is $5,994, or $0.29 per share.
In the second quarter of 2002, the Fund received 23,782 shares of the
Company's common stock as payment in kind for dividends on the Fund's Series D
Convertible Preferred stock. These shares were paid to the Fund at an average
rate of $0.28 per share.
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.
In the fourth quarter of 2002, the Fund received 9,472 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
$0.216 per share.
On November 17, 2002, warrants to purchase 12,500 shares of common stock at
$1.75 per share expired. These expired warrants had a cost basis of $3,750.
19
Also during the fourth quarter, the Fund received options to purchase
33,965 at exercise prices ranging from $0.27 to $0.49 per share and having
expiration dates between May 10, 2006 and August 22, 2007. These options were
granted to the Fund as a result of Russell Cleveland's service on the Company's
Board of Directors.
At December 31, 2002, the Fund owned the following: $325,000 in 8%
Promissory Notes with no conversion feature; $542,989 of Series F Preferred
convertible into the Company's common stock at a rate of $0.20 per share;
$3,666,951 of Series G Preferred convertible into common at a rate of $0.20 per
share; $150,000 of Series D Preferred convertible into common at a rate of $0.80
per share; 406,728 shares of common stock having a basis of $219,265; warrants
to purchase 364,299 shares of the Company's common stock at $0.549 per share on
or before March 8, 2004; warrants to purchase 312,500 shares of the Company's
common stock at $0.80 per share on or before October 2, 2003; warrants to
purchase 125,000 shares of the Company's common stock at $1.00 per share on or
before October 11, 2004; warrants to purchase 1,625,000 shares of the Company's
common stock at $0.20 per share with term dates ranging from September 2006 to
September 2007; and options to purchase 33,965 shares of common stock having
strike prices ranging between $0.27 and $0.49 per share and term dates ranging
from May 2006 to August 2007.
Subsequent to December 31, 2002, the Fund received 89,920 shares of common
stock from the Company as payment in kind for interest and dividend obligations
on debt and preferred stock instruments held by the Fund. The cost basis of
these shares of $18,859. In total, 52,109 shares having a basis of $8,761 were
received for interest obligations and 37,811 shares having a basis of $10,098
were received for dividend obligations. Also subsequent to December 31, 2002,
the Fund received five-year options to purchase 7,069 shares of common stock at
$0.21 per share as a result of Mr. Cleveland's position on the Company's Board
of Directors.
Interpool, Inc. (NYSE:IPX)
Interpool is one of the world's leading suppliers of equipment and services
to the transportation industry. It is the largest lessor of intermodal container
chassis and a world-leading lessor of cargo containers used in international
trade. Interpool operates from more than 240 locations throughout the world.
In the fourth quarter of 2002, the Fund purchased $375,000 of 9.25%
Convertible Redeemable, Subordinated Debentures in a rights offering by the
Company. The Debentures are convertible at $25 per share and mature December 27,
2022.
JAKKS Pacific, Inc. (Nasdaq:JAKK)
JAKKS Pacific, Inc., is a multi-brand toy company that designs, develops,
produces and markets toys and related products under various brand names in
multiple product categories.
In 2002, the Fund sold 27,500 shares of the Company's common stock in the
open market at $13.96 per share, netting proceeds of $383,861 and representing a
gain of $219,777.
20
At December 31, 2002, the Fund owned 59,847 shares of common stock having a
basis of $357,088. All shares are freely tradeable.
Laserscope (Nasdaq:LSCP)
Laserscope designs, manufactures, sells, and services on a worldwide basis
an advanced line of medical laser systems and related energy delivery devices
for the office, outpatient surgical center, and hospital markets.
On June 21, 2002, Robert C. Pearson became a member of the Company's Board
of Directors and was granted options to purchase common shares of the Company's
stock. The Fund received through assignment from Mr. Pearson the following
options: 10,000 shares vesting January 1, 2003, and expiring June 21, 2010;
10,000 shares vesting January 1, 2004, and expiring June 21, 2011; and 10,000
shares vesting January 1, 2005, and expiring June 21, 2012. All options have an
exercise price of $4.19.
At December 31, 2002 the Fund owned $1,500,000 in 8% Convertible Debentures
of the Company having a conversion rate of $1.25 per share and options to
purchase 30,000 common shares at $4.19.
Northwestern Steel and Wire Corp. (Bankruptcy)
Northwestern Steel & Wire Corp is liquidating its steel operation in
bankruptcy. The Company was formerly a mini-mill producer of structural steel
components.
In the second quarter of 2002, the Fund wrote off its investment in this
Company resulting in a net realized loss to the Fund of $127,500.
Omnivision Technologies, Inc. (Nasdaq:OVTI)
Omnivision Technologies designs, develops, and markets integrated single
chip semiconductor imaging devices for various applications in computing,
communications, and consumer electronics.
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 or $9.78 per
share.
In the fourth quarter of 2002, the Fund sold its entire position in the
Company's common stock in the open market for $467,321 or $18.69 per share,
realizing a gain of $222,789.
Play By Play Toys & Novelties, Inc. (OTC:PBYP)
Play By Play Toys & Novelties, Inc., formerly designed, developed,
marketed, and distributed stuffed toys, sculpted toy pillows, and other products
based upon licenses for children's entertainment characters and corporate
trademarks. The Company is liquidating in bankruptcy.
21
In the second quarter of 2002, the Fund received $422,767 in proceeds from
the Company's liquidation. Following the application of these proceeds, the Fund
wrote off its remaining investment in Play by Play resulting in a net realized
loss to the Fund of $2,002,981.
Poore Brothers, Inc. (Nasdaq:SNAK)
With facilities in Indiana and Arizona, Poore Brothers is a marketer and
manufacturer of "Intensely Different"(TM) salted snack foods under a variety of
owned or licensed brands, including T.G.I. Friday's(TM), Poore Brothers(R),
Bob's Texas Style(R), Boulder Potato Company(TM), and Tato Skins(R).
In the second quarter of 2002, the Fund exercised warrants to purchase
85,000 shares of the Company's common stock for a total of $115,000, or an
average of $1.35 per share. Also in the second quarter of 2002, options to
purchase 15,000 common shares at $3.0625 were allowed to expire without
exercise.
At December 31, 2002, the Fund owned 2,016,357 shares of the Company's
common stock having a cost of $2,078,170 and three tranches of options to
purchase a total of 18,650 shares, having exercise prices ranging from $1.31 per
share to $1.50 per share.
Precis, Inc. (Nasdaq:PCIS)
Precis is a national membership marketing company that provides membership
programs to a variety of industries including: healthcare, retail, banking,
consumer finance and member based associations. Its leading program, Care
Entree, is marketed as a membership based healthcare savings program designed to
significantly reduce out-of-pocket medical expenses at affordable rates to the
consumer while helping the medical community receive accelerated payment for
their services.
Throughout 2002, the Fund purchased 94,500 shares of the Company's common
stock in the open market for $988,306, a cost of $10.46 per share.
At December 31, 2002, the Fund owned a total of 100,700 shares of the
Company's common stock having a basis of $1,025,047 or $10.18 per share. The
Fund's stock in the Company is freely tradeable.
RailAmerica, Inc. (NYSE:RRA)
RailAmerica, Inc., is a short line and regional railroad operator, with a
presence in the United States, Canada, Australia, and the Republic of Chile.
In the first quarter of 2002, the Fund sold its entire position in
RailAmerica and realized proceeds of $924,513, resulting in a loss of $75,487.
22
Simtek Corporation (OTC:SRAM)
Simtek Corporation is a fabless semiconductor company, supplying innovative
products to a worldwide marketplace. The Company has design and manufacturing
expertise in a variety of technologies, including high performance non-volatile
memory, application specific integrated circuits, and data communications.
In June 2002, the Fund made a follow-on investment in the Company by
purchasing $1,000,000 of 7.5% Convertible Debentures. The debentures accrue
interest quarterly, are due June 28, 2009, and are convertible into shares of
the Company's common stock at a rate of $0.312 per share. The debentures contain
the Fund's standard anti-dilution provisions and also entitle the Fund to
certain registration rights.
At December 31, 2002, in addition to the Convertible Debenture discussed
above, the Fund owned 1,000,000 shares of common stock having a cost of
$195,000. The common shares are restricted pursuant to the provisions of Rule
144.
ThermoView Industries, Inc. (AMEX:THV)
ThermoView Industries, Inc., is a national company that designs,
manufactures, markets, and installs high-quality replacement windows and doors
as part of a full-service array of home improvements for residential homeowners.
During the fourth quarter of 2002, the Fund purchased 103,100 shares of the
Company's common stock in the open market for a total of $82,448 or $0.80 per
share.
At December 31, 2002, the Fund owned 134,951 shares of ThermoView common
stock having a cost of $497,832. All shares are freely tradeable.
US Home Systems (Nasdaq:USHS)
US Home Systems is engaged in the manufacture, design, sale, and
installation of quality specialty home improvement products with specific
emphasis on kitchen and bath improvements, and also provides consumer financing
services to the home improvement and remodeling industry. The Company's home
improvement product lines include replacement kitchen cabinetry, kitchen cabinet
refacing and counter top products utilized in kitchen remodeling, bathroom
refacing and related products utilized in bathroom remodeling, and replacement
windows. The Company provides through its wholly owned subsidiary, First
Consumer Credit, Inc., consumer financing to the home improvement and remodeling
industry.
In the second quarter of 2002, the Fund purchased 110,000 shares of the
Company's common stock in the open market. At December 31, 2002, the Fund owned
110,000 shares of the Company's common stock having a basis of $535,587 or $4.87
per share. All stock is freely tradeable.
23
Verso Technologies, Inc. (Nasdaq:VRSO)
Verso Technologies provides integrated switching and solutions for
communications service providers who want to develop IP-based services with
scalability and quality of service. Verso's unique, end-to-end capabilities
enable customers to leverage existing investments by ensuring carrier-to-carrier
interoperability and rich billing features. Verso's complete VoIP migration
solutions include state of the art hardware and software, OSS integration, the
industry's most widely used applications and technical training and support.
In the fourth quarter of 2002, the Fund sold 179,375 shares of the
Company's common stock for $112,052, realizing a loss of $400,448.
At December 31, 2002, the Fund owned 179,375 warrants to purchase 179,375
shares of Verso common stock at $5.71 per share. These warrants have a zero cost
basis.
VALUATION OF INVESTMENTS
On a quarterly basis, Renaissance Group prepares a valuation of the assets
of the Fund subject to the approval of the Board of Directors. The valuation
principles are described below.
Generally, the guiding principle for valuation is application of objective
standards. The objective standards for determining market prices and applying
valuation methodologies govern in all situations except where a debt issuer is
in default.
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 as of the relevant date less an allowance, as
appropriate, for costs of registration, if any, and selling expenses.
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 value
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.
24
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 governs the value of the enterprise. This valuation method
causes 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.
Where a portfolio company is in default on a debt instrument held by the
Fund, and no market exists for that instrument, 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 prospects. In the event of unsuccessful
operations by a portfolio company, the appraisal may be based upon an estimated
net realizable value when that investment is liquidated.
COMPETITION FOR INVESTMENTS
The Fund has significant competition for investment proposals. Competitive
sources for growth capital for the industry include insurance companies, banks,
equipment leasing firms, investment bankers, venture capital and private equity
funds, money managers, hedge funds, and private investors. Many of these sources
have substantially greater financial resources than is contemplated will be
available to the Fund. Therefore, the Fund will have to compete for investment
opportunities based on its ability to respond to the needs of the prospective
company and its willingness to provide management assistance. In some instances,
the Fund's requirements as to provision of management assistance will cause it
to be non-competitive.
PERSONNEL
The Fund has no direct employees, but instead has contracted Renaissance
Group pursuant to the Investment Advisory Agreement to provide all management
and operating activities. Renaissance Group currently has eight employees who
are engaged in performing the duties and functions required by the Fund. At the
present time, a substantial portion of Renaissance Group's staff time is devoted
to activities of the Fund. However, because of the diversity of skills required,
the Fund cannot afford to employ all these persons solely for its own needs, and
therefore, these employees are not engaged solely in activities of the Fund.
No accurate data or estimate is available as to the percentage of time,
individually or as a group, that will be devoted to the affairs of the Fund.
Initially, and while the Fund's assets are in the process of being invested, a
majority of the staff time of Renaissance Group is employed in functions and
activities of the Fund. Thereafter, the officers and employees have and will
devote such time as is required, in their sole discretion, for the conduct of
business, including the provision of management services to Portfolio Companies.
25
OTHER INVESTMENT FUNDS
Renaissance Group currently serves as the Investment Manager to Renaissance
US Growth Investment Trust PLC ("RUSGIT"). RUSGIT is a public limited company
registered in the United Kingdom and listed on the London Stock Exchange, which
invests in privately placed convertible securities issued by companies similar
to the investments of the Fund. RUSGIT will invest pari-passu with the Fund on
all relevant terms, except that amounts may differ. In 1996, RUSGIT raised net
capital of approximately $30,789,000.
Renaissance Group also serves as the Investment Adviser to BFS US Special
Opportunities Trust PLC ("BFS") and is specifically responsible for managing the
Growth Portfolio for BFS ("BFS Growth"). BFS is a public limited company
registered in the United Kingdom and listed on the London Stock Exchange. BFS
Growth invests in publicly traded equities, fixed-income and convertible
securities of publicly traded issuers, and also invests in privately placed
convertible instruments issued by companies similar to the investments of the
Fund. For privately placed investments, BFS Growth will invest on a pari- passu
basis with the Fund as to all relevant terms of the investment, except that
amounts invested may differ. In 2001, BFS raised net investment capital of
approximately $140,711,000, of which $83,555,000 was allocated to BFS Growth.
In addition, Renaissance Group may, from time to time, provide investment
advisory services, management consulting services and investment banking
services to other clients. The determination regarding the existence of conflict
of interest between these affiliated investment funds and the Registrant, and
the resolution of any such conflict, vests in the discretion of the Board of
Directors, subject to the requirements and resolution of the 1940 Act.
Item 2. Properties
The Fund's business activities are conducted from the offices of
Renaissance Group, which offices are currently leased until July 31, 2005 in a
multi-story general office building in Dallas, Texas. The use of such office
facilities, including office furniture, phone services, computer equipment, and
files are provided by Renaissance Group at its expense pursuant to the
Investment Advisory Agreement.
Item 3. Legal Proceedings
There are no legal proceedings currently pending with regard to the Fund.
Item 4. Submission of Matters to a Vote of Security Holders
None.
26
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
TRADING
The Fund's common stock is traded on the Nasdaq National Market System
("NMS") under the trading symbol RENN and reported on Bloomberg.
The following table sets forth, for the periods indicated, the high and low
prices for the Common Stock as quoted on the NMS.
High Low
Year ended December 31, 2001
First quarter $11.00 $ 8.81
Second quarter $11.00 $ 8.75
Third quarter $11.00 $ 9.85
Fourth quarter $11.45 $10.03
Year ended December 31, 2002
First quarter $10.93 $10.25
Second quarter $11.95 $ 9.96
Third quarter $10.00 $ 8.94
Fourth quarter $ 8.59 $ 6.75
NUMBER OF HOLDERS
As of December 31, 2002, there were approximately 618 record holders of
common stock. This total does not include shareholders with shares held under
beneficial ownership in nominee name or within clearinghouse positions of
brokerage firms or banks.
DIVIDEND POLICY AND REGULATED INVESTMENT COMPANY STATUS
The investment objective of the Fund is current income and long term
capital appreciation. The Fund intends to elect the special income tax treatment
available to a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code (the "Code") 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 shareholders. If a RIC meets certain diversification and
distribution requirements under the Code, it qualifies for pass-through tax
treatment. The Fund would be unable to qualify for pass-through tax treatment if
it were unable to comply with these requirements. 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 both the Fund's
net assets and the amount of income available for distributions to shareholders.
Since the Fund was in an offering phase for all of 1994, no dividends were
paid; however, the Fund paid shareholders a dividend on April 25, 1995
27
representing their pro rata portion of income earned by the Fund in 1994. For
the period from April 25, 1995 to December 31, 1999, the Fund paid out income
dividends on a quarterly basis. Income dividends have not been paid since that
time due to the absence of net investment income. The Fund did pay capital gains
dividends in both 2000 and 2001. A return of capital of $0.10 per share was made
in December 2002 pursuant to the Fund's annual dividend distribution policy,
which was announced in November 2002 (see Item 1. Business. INVESTMENT
OBJECTIVES). Since inception, the Fund has distributed a total of $7.66 per
share as of December 31, 2002. The payment dates and amounts of cash dividends
per share since January 1, 2000, are as follows:
Payment Date Cash Distribution Type of Distribution
June 9, 2000 $1.54 Capital Gain
August 16, 2001 $0.54 Capital Gain
December 12, 2002 $0.10 Tax Return of Capital
Item 6. Selected Financial Data.
The following selected financial data for the period from January 1, 1998,
through December 31, 2002, is derived from the Fund's audited Financial
Statements and should be read in conjunction with the Fund's Financial
Statements and Notes thereto and "Management's discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 of this Annual
Report on Form 10-K.
2002 2001 2000 1999 1998
Gross income (loss),
including realized
gain (loss) $( 3,051,938) $2,676,702 $ 9,750,577 $12,768,575 $ 5,956,344
Net unrealized
appreciation
(depreciation)
on investments ( 8,205,633) 9,365,167 ( 1,507,015) 4,465,591 ( 1,222,151)
Net income (loss) (12,773,524) 9,546,715 5,032,203 13,535,928 2,794,004
Net income (loss)
per share (2.93) 2.19 1.18 3.27 0.66
Total assets 50,495,721 77,016,668 64,077,600 46,725,122 42,322,725
Net assets 41,259,066 54,537,508 47 346,067 45,934,306 41,475,701
Net assets Per Share 9.48 12.50 10.86 11.09 10.01
28
Selected Per Share Data
2002 2001 2000 1999 1998
Investment Income 0.09 0.14 0.40 0.42 0.67
Operating Expenses (0.33) (0.54) (0.75) (0.89) (0.46)
Interest Expense (0.01) (0.03) (0.00) (0.00) (0.00)
Net Investment
Income (Loss) (0.26) (0.43) (0.36) (0.48) 0.21
Tax return of capital (0.10) (0.00) (0.03) (0.08) (0.30)
Distributions from
net capital gains (0.00) (0.54) (1.47) (2.11) (0.68)
Net realized gain
(loss) on
investments (0.79) 0.47 1.89 2.67 0.74
Net increase
(decrease)
in unrealized
appreciation
of investments (1.89) 2.14 (0.35) 1.08 (0.29)
Increase (decrease)
in net asset
value (3.05) 1.64 (0.32) 1.08 (0.32)
Capital stock
transactions (0.01) 0.00 0.09 0.00 0.08
Net Asset Value:
Beginning of year 12.50 10.86 11.09 10.01 10.25
End of year $ 9.48 $12.50 $10.86 $11.09 $10.01
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The purpose of the Fund is to provide growth capital to small- and
medium-sized public companies whose ability to service the securities is
sufficient to provide a quarterly return to the shareholders and whose growth
potential is sufficient to provide opportunity for above-average capital
appreciation.
SOURCES OF OPERATING INCOME
The major source of operating income for the Fund is investment income,
either in the form of interest on debentures, dividends on stock, or interest on
securities held pending investment in Portfolio Companies. However, the Fund
also generates income through capital gains. Further, the Fund in some cases
receives due diligence, commitment, and closing fees, as well as other similar
types of revenue. Director's compensation received by Renaissance Group (or its
personnel) for services to a Portfolio Company is paid to the account of the
Fund.
29
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2002, the Fund invested $3,270,526 in
twelve (12) new portfolio investments and invested an additional $3,605,834 in
follow-on investments to eight (8) portfolio companies. Distributions made to
investors in 2002 amounted to $435,171 or $0.10 per share, which was a return of
capital. During 2002, gains were realized from the sale of securities of Bentley
Pharmaceuticals, Inc., JAKKS Pacific, Inc., and OmniVision Technologies, Inc.,
offset by realized losses taken on investments in Daisytek, Display
Technologies, Fortune Natural Resources Corp., Northwestern Steel & Wire, Play
By Play Toys & Novelties, RailAmerica, and Verso Technologies. Net loss for 2002
was ($12,773,524) due to unrealized depreciation on portfolio investments. The
net cash used in operating activities was ($14,345,832). The Fund issued no new
shares for the dividend reinvestment plan, as dividend reinvestment shares were
purchased in the open market. At December 31, 2002, the Fund had approximately
$1.7 million in cash and cash equivalents net of all liabilities. Renaissance
Group believes that current cash levels are sufficient to pay expenses as they
come due and also to make a limited amount of follow-on investments if
necessary.
The majority of the Fund's investments in Portfolio Companies are
individually negotiated, non-registered for public trading, and are subject to
legal and contractual investment restrictions. Accordingly, the Portfolio
Investments are generally considered non-liquid. This lack of liquidity
primarily affects the ability to make new investments and distributions to
shareholders.
From time to time, funds are deposited in margin accounts and invested in
government securities. Government securities used as cash equivalents 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.
30
RESULTS OF OPERATIONS
2002 Compared to 2001
During the year ended December 31, 2002, the Fund made additional portfolio
investments aggregating $6,851,707 compared to $3,509,674 in 2001. The Fund
realized proceeds from the sale of investments in the amount of $4,911,282
compared to $10,364,052 in 2001. The Fund's realized net loss of ($12,773,524)
is due to a combination of a net investment loss of ($1,138,298), net unrealized
depreciation on investments of ($8,205,633), and net realized loss on
investments of ($3,429,593).
Interest income decreased 34.14% for the year in comparison to 2001
primarily due to the conversion of debt positions into equity. In addition,
reserves were taken on interest accruals for some of the Fund's investments.
Dividend income decreased 63.86% from $195,453 in 2001 to $70,640 in 2002 due
primarily to smaller custodial cash balances earning dividends and decreased
dividends declared and paid by portfolio investments. Commitment and other fee
income increased from $3,100 in 2001 to $28,442 in 2002 primarily as a result of
increased loan closing fees.
General and administrative expenses, including interest expense and legal
fees, but excluding incentive and management fees, decreased 1.17% from $662,872
in 2001 to $655,119. No incentive fee was incurred in 2002 compared to an
incentive fee expense of $919,429 in 2001 because there were no net realized
capital gains achieved on investments during 2002. Management fees decreased
from $912,544 in 2001 to $860,834 in 2002, a decrease of 5.67% due to lower
portfolio values during 2002. Net investment loss decreased 39.24% to
($1,138,298) in 2002 down from ($1,873,288) in 2001 due primarily to the absence
of an incentive fee in 2002, combined with the decrease in interest expense,
legal fees, and management fees, partially offset by the increase in general and
administrative expenses.
Net income decreased from $9,546,715 in 2001 to a net loss of ($12,773,524)
in 2002. In 2001, the Fund had realized gains of $2,054,836 compared to a net
realized loss on investments of ($3,429,593) in 2002. Likewise, the Fund
experienced net unrealized appreciation on investments in 2001 of $9,365,167
compared to the 2002 net unrealized depreciation on investments in the amount of
($8,205,633).
2001 Compared to 2000
During the year ended December 31, 2001, the Fund realized proceeds from
the sale of investments $10,364,052 compared to $10,366,539 in 2000. The Fund
expended $3,509,674 in 2001 for the purchase of investments compared to
purchases of $7,838,711 in 2000. The Fund's net income of $9,546,715 for 2001 is
due primarily to a net unrealized appreciation on investments of $9,365,167 and
a net realized gain on investments of $2,054,836.
Interest income decreased 71.19% for the year in comparison to 2000
primarily because many of the Fund's debt positions were converted to equity
positions. Dividend income in 2001 increased 70.77% from $114,455 in 2000 to
$195,453 in 2001 due primarily to the previously described conversion from debt
to equity positions and a change in the custodial arrangements whereby short-
31
term treasury funds now earn a dividend rather than interest. Commitment and
other fee income decreased from $112,375 in 2000 to $3,100 in 2001due to fewer
investments being originated together with a reduction in outside directors fees
and advisory fees as a result of the Fund's officers holding fewer outside board
positions.
General and administrative expenses decreased 2.65% from $422,554 in 2000
to $411,348 in 2001. Incentive fees decreased 42.93% from $1,611,135 in 2000 to
$919,429 in 2001 due to lower net realized gains achieved on investments
throughout 2001. Management fees decreased 13.62% to $912,544 due to a lower net
asset value throughout the year. Net investment loss for 2001 increased to
($1,873,288) in 2001, compared to ($1,516,461) for 2000, an increase of 23.53%,
due primarily to lower interest income as a result of converting debt positions
to equity, offset somewhat by reduced expense levels.
Net income for 2001 was $9,546,715, an increase of 89.71% over $5,032,203
in 2000. In 2000, realized gains were $8,055,679 in comparison to realized gains
for 2001 of $2,054,836. Realized gains decreased in 2001 from 2000 due to higher
levels of realized losses taken on portfolio investments. In addition, the
Fund's net unrealized appreciation on investments in 2001 was $9,365,167 in
comparison to a net unrealized depreciation on investments for 2000 of
($1,507,015) due to higher market values for Fund holdings.
Item 7A. 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.
Approximately 48% of the Fund's net assets consists of common stocks and
warrants and options 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.
Approximately 36% of the Fund's net assets consists of fixed rate
convertible debentures and other debt instruments as well as convertible
preferred securities. 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.
Approximately 11% of the Fund's net assets consists of equity investments
in private companies. The Fund would anticipate no impact on these 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.
32
Item 8. Financial Statements and Supplementary Data.
For the Index to Financial Statements, see "Financial Statements" on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
33
Part III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file its definitive Proxy Statement
(the "Proxy Statement") for its Annual Meeting of Shareholders to be held on May
16, 2003, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of Registrant.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 14. 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.
34
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8 K.
DOCUMENTS FILED AS PART OF THIS FORM 10K
Financial Statements:
The financial statements filed as part of this report are listed in "Index
to Financial Statements" on page F-1 hereof.
Financial Schedules:
There are no schedules presented since none are applicable.
REPORTS ON FORM 8K
None.
EXHIBITS
99-1 Certification of Russell Cleveland, President and CEO
99-2 Certification of Barbe Butschek, Chief Financial Officer
Item 16. Principal Accountant Fees and Services.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
35
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
Date: March 24, 2003
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
By: /S/ Russell Cleveland
Russell Cleveland, Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Fund in the
capacities and on the date indicated Signatures.
Signature Capacity in Which Signed Date
/S/ Russell Cleveland
Russell Cleveland Chairman, President and Director March 20, 2003
/S/ Barbe Butschek Secretary and Treasurer March 20, 2003
Barbe Butschek
/S/ Ernest C. Hill
Ernest C. Hill Director March 20, 2003
/S/ Peter Collins
Peter Collins Director March 20, 2003
/S/ Edward O. Boshell, Jr.
Edward O. Boshell, Jr. Director March 20, 2003
/S/ Charles C. Pierce, Jr.
Charles C. Pierce, Jr. Director March 20, 2003
36
CERTIFICATION
I, Russell Cleveland, certify that:
1. I have reviewed this annual report on Form 10-K of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
37
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
March 20, 2003
38
CERTIFICATION
I, Barbe Butschek, certify that:
1. I have reviewed this annual report on Form 10-K of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
39
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
March 20, 2003
40
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors F-2
Statements of Assets and Liabilities
December 31, 2002 and 2001 F-3
Schedules of Investments
December 31, 2002 and 2001 F-4 through F-15
Statements of Operations
Years ended December 31, 2002, 2001, and 2000 F-16
Statements of Changes in Net Assets
Years ended December 31, 2002, 2001, and 2000 F-17
Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000 F-18 through F-19
Notes to Financial Statements F-20 through F-26
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
Renaissance Capital Growth & Income Fund III, Inc.:
We have audited the accompanying statements of assets and liabilities of
Renaissance Capital Growth & Income Fund III, Inc., including the schedules of
investments, as of December 31, 2002 and 2001, and the related statements of
operations, changes in net assets, and cash flows for the years ended December
31, 2002, 2001, and 2000. These financial statements are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 2002, by
correspondence with the custodian and broker. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renaissance Capital Growth &
Income Fund III, Inc. as of December 31, 2002 and 2001, and the results of its
operations, changes in its net assets, and its cash flows for the years ended
December 31, 2002, 2001, and 2000, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
February 25, 2003
F-2
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
December 31, 2002 and 2001
Assets 2002 2001
Cash and cash equivalents $10,968,001 $27,125,926
Investments at fair value,
cost of $32,918,344 and
$35,015,807 in 2002 and
2001, respectively (Note 5) 39,459,243 49,762,340
Interest receivable, net of reserves 28,409 114,539
Prepaid expenses 40,069 13,863
----------- -----------
$50,495,721 $77,016,668
=========== ===========
Liabilities and Net Assets
Liabilities:
Due to broker (Note 3) 9,001,163 22,197,146
Accounts payable 12,106 13,472
Accounts payable - affiliate (Note 4) 223,386 268,542
----------- -----------
9,236,655 22,479,160
Commitments and contingencies
Net assets:
Common stock, $1 par value; authorized
20,000,000 shares; 4,561,618 issued;
4,351,718 shares outstanding at December 31,
2002, 4,361,618 shares outstanding at
December 31, 2001 4,561,618 4,561,618
Additional paid-in-capital 35,642,954 37,125,714
Treasury stock at cost, 209,900 shares at
December 31, 2002, and 200,000 shares
at December 31, 2001 ( 1,734,966) ( 1,665,220)
Distributable earnings ( 3,715,440) ( 231,137)
Net unrealized appreciation of investments 6,540,900 14,746,533
------------ -----------
Net assets, equivalent to $9.48
and $12.50 per share at December
31, 2002 and 2001, respectively 41,259,066 54,537,508
------------ ------------
$50,495,721 $77,016,668
=========== ===========
See accompanying notes.
F-3
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2002 and 2001
2002
---------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00 09/30/03 $ 41,480 $ 41,789 0.10
Convertible note (2) 8.00 09/30/03 125,000 126,000 0.31
Convertible note (2) 8.00 09/30/03 250,000 252,000 0.61
Business Process Outsourcing -
Convertible debenture (1)(3) 12.00 08/31/03 98,000 100,000 0.24
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00 12/19/04 1,316,282 1,066,282 2.58
EDT Learning, Inc. -
Convertible redeemable note (2) 12.00 03/29/12 500,000 500,000 1.21
eOriginal, Inc. -
Promissory note (3) 12.00 12/31/02 1,139,683 1,139,683 2.76
Integrated Security Systems, Inc. -
Promissory notes (4) 8.00 09/05/03 325,000 325,000 0.79
Laserscope -
Convertible debenture (2) 8.00 02/11/07 1,500,000 5,026,000 12.18
Simtek Corporation -
Convertible debenture (2) 7.50 06/28/09 1,000,000 1,000,000 2.42
----------- ----------- ------
$ 6,295,445 $ 9,576,754 23.21%
----------- ----------- ------
F-4
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
CareerEngine Network, Inc. -
Convertible debenture (2) 12.00 03/31/10 $ 250,000 $ 250,000 0.61
Interpool, Inc. -
Convertible debenture (2) 9.25 12/27/22 375,000 375,000 0.91
----------- ----------- ------
$ 625,000 $ 675,000 1.51%
(1) Valued at fair value as determined by the Investment Adviser (Note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradeable.
(3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for
which there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
F-5
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 3,187,800 7.73
CaminoSoft Corp. -
Common stock 1,750,000 4,000,000 1,559,250 3.78
Common stock (2) 708,333 875,000 549,250 1.33
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 (1) 6,000 1,500,000 794,000 1.92
Series B-1, preferred stock (1) 1,785 392,700 1,426,215 3.46
Series B-3, preferred stock (1) 447 107,280 357,153 0.87
Series C-1, preferred stock (1) 2,353 2,000,050 2,000,050 4.85
Fortune Natural Resources Corp. -
Common stock 1,262,394 500,500 81,235 0.20
Gasco Energy, Inc. -
Common stock 250,000 250,000 112,150 0.27
Integrated Security Systems, Inc. -
Common stock 393,259 215,899 93,438 0.23
Common stock - PIK (2) 104,787 28,319 23,640 0.06
Series D, preferred stock (2) 187,500 150,000 54,000 0.13
Series F, preferred stock (2) 2,714,945 542,989 612,492 1.48
Series G, preferred stock (2) 18,334,755 3,666,951 4,086,321 9.90
F-6
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
JAKKS Pacific, Inc. -
Common stock 59,847 $ 357,088 $ 798,078 1.93
Poore Brothers, Inc. -
Common stock (2) 2,016,357 2,078,170 4,669,485 11.32
Simtek Corp. -
Common stock (2) 1,000,000 195,000 150,400 0.36
ThermoView Industries, Inc. -
Common stock 134,951 497,832 120,241 0.29
Miscellaneous Securities 2,165 462,349 1.12
----------- ----------- ------
$19,494,943 $21,103,733 51.15%
(1) Valued at fair value as determined by the Investment Adviser (Note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradeable. (3) Securities in a privately owned company.
(4) Securities that have no provision allowing conversion into a security for
which there is a public market.
(5) Included Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
F-7
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
AirNet Systems, Inc. -
Common stock 75,000 $ 318,750 $ 296,860 0.72
Bentley Pharmaceuticals, Inc. -
Common stock 259,979 535,168 2,071,902 5.02
Canterbury Consulting Group, Inc. -
Common stock 200,000 193,473 51,480 0.12
Capital Senior Living Corp -
Common stock 44,500 110,975 112,340 0.27
Creative Host Services, Inc. -
Common stock 4,830 7,921 9,085 0.02
Daisytek International, Inc. -
Common stock 49,600 507,639 389,395 0.94
Dave & Busters, Inc. -
Common stock 100,000 653,259 856,350 2.08
Dwyer Group, Inc. -
Common stock 675,000 1,966,632 2,559,397 6.20
EDT Learning, Inc. -
Common stock 48,266 27,033 14,335 0.03
I-Flow Corporation -
Common stock 100,000 254,038 154,440 0.37
F-8
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2002
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Inet Technologies, Inc. -
Common stock 75,000 $ 367,434 $ 452,925 1.10
Precis, Inc. -
Common stock 100,700 1,025,047 550,305 1.33
US Home Systems, Inc. -
Common stock 110,000 535,587 601,128 1.46
Miscellaneous Securities 0 0 0.00
$ 6,502,956 $ 8,119,942 19.68%
----------- ----------- ------
$32,918,344 $39,459,243 95.64%
=========== =========== ======
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
Restricted Securities (2) $15,097,941 $19,191,669 46.52%
Unrestricted Securities $12,255,525 $13,663,124 33.12%
Other Securities (5) $ 5,564,878 $ 6,604,450 16.01%
(1) Valued at fair value as determined by the Investment Adviser (Note 6).
(2) Restricted securities - securities that are not fully registered and freely
tradeable. (3) Securities in a privately owned company.
(4) Securities that have no provision allowing 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.
F-9
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2001
---------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
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)(4) 8.75 03/02/05 1,750,000 0 0.00
eOriginal, Inc. -
Promissory note (1) 12.00 06/30/02 500,000 500,000 0.92
Integrated Security Systems, Inc. -
Promissory notes (2) 8.00 01/25 -
05/14/02 200,000 200,000 0.37
Laserscope -
Convertible debenture (2) 8.00 02/11/07 1,500,000 2,770,000 5.08
Northwestern Steel & Wire Corp. -
Debt (3) 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 Adviser (Note 6).
(2) Restricted securities under Rule 144 (Note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are
delinquent as of December 31, 2001.
F-10
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2001
---------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
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)(4) 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 Adviser (Note 6).
(2) Restricted securities under Rule 144 (Note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are
delinquent as of December 31, 2001.
F-11
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2001
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
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
eOriginal, Inc. -
Series A, preferred stock (1) 6,000 1,500,000 4,794,000 8.79
Series B-1, preferred stock (1) 1,785 392,700 1,426,215 2.62
Series B-3, preferred stock (1) 447 107,280 357,153 0.65
Series C-1, preferred stock (1) 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
F-12
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2001
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
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
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 Adviser (Note 6).
(2) Restricted securities under Rule 144 (Note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are
delinquent as of December 31, 2001.
F-13
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
2001
2001
---------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
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
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
=========== =========== =====
F-14
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments (continued)
December 31, 2002 and 2001
Allocation of Investments -
Restricted Shares, Unrestricted
Shares, and Other Securities
Restricted Securities Under Rule 144 $17,030,345 $19,500,331 35.76
Unrestricted Securities 13,352,018 19,957,562 36.59
Other Securities (5) 4,633,444 10,304,447 18.89
(1) Valued at fair value as determined by the Investment Adviser (Note 6).
(2) Restricted securities under Rule 144 (Note 7).
(3) Company is liquidating in bankruptcy.
(4) Interest payments under the terms of the convertible debentures are
delinquent as of December 31, 2001. (5) Includes Miscellaneous Securities,
securities of privately owned companies; and securities for which there is
no market.
(5) Includes Miscellaneous Securities, securities of privately owned companies;
and securities for which there is no market.
F-15
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
Income:
Interest $ 278,573 $ 423,002 $ 1,468,068
Dividends 70,640 195,453 114,455
Commitment and other fees 28,442 3,100 112,375
------------ ------------ ------------
377,655 621,555 1,694,898
------------ ------------ ------------
Expenses (Note 4):
General and administrative 484,121 411,348 422,554
Incentive fee - 919,429 1,611,135
Interest expense 61,071 123,199 -
Legal expense 109,927 128,323 121,187
Management fees 860,834 912,544 1,056,483
------------ ------------ ------------
1,515,953 2,494,843 3,211,359
------------ ------------ ------------
Net investment loss ( 1,138,298) ( 1,873,288) ( 1,516,461)
------------ ------------ ------------
Realized and unrealized gain (loss)
on investments:
Net change in unrealized
appreciation (depreciation)
on investments ( 8,205,633) 9,365,167 ( 1,507,015)
Net realized gain (loss) on
investments ( 3,429,593) 2,054,836 8,055,679
------------ ------------ ------------
Net gain (loss) on
investments ( 11,635,226) 11,420,003 6,548,664
------------ ------------ ------------
Net income (loss) ($12,773,524) $ 9,546,715 $ 5,032,203
============ ============ ============
Net income (loss) per
share (Note 2(e)) ($ 2.93) $ 2.19 $ 1.18
============= ============ ============
See accompanying notes.
F-16
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Changes in Net Assets
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
From operations:
Net investment loss $( 1,138,298) $( 1,873,288) $( 1,516,461)
Net realized gain (loss)
on investments ( 3,429,593) 2,054,836 8,055,679
Increase (decrease) in
unrealized appreciation
on investments ( 8,205,633) 9,365,167 ( 1,507,015)
------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
operations (12,773,524) 9,546,715 5,032,203
----------- ---------- -----------
From distributions to stockholders:
Common dividends from net
investment income - - ( 140,900)
Common dividends from
realized gains ( 2,355,274) ( 6,239,230)
Tax return of capital ( 435,172) - -
------------ ------------ ------------
Net decrease in net assets
resulting from
distributions ( 435,172) ( 2,355,274) ( 6,380,130)
------------ ------------ -----------
From capital transactions:
Shares issued - - 2,759,688
Purchase of treasury stock ( 69,746) - -
------------ ----------- -----------
Net increase (decrease) in
net assets resulting
from capital transactions ( 69,746) - 2,759,688
------------ ----------- -----------
Total increase (decrease)
in net assets (13,278,442) 7,191,441 1,411,761
Net assets:
Beginning of year 54,537,508 47,346,067 45,934,306
----------- ----------- -----------
End of year $41,259,066 $54,537,508 $47,346,067
=========== =========== ===========
See accompanying notes.
F-17
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
Cash flows from operating activities:
Net income (loss) $(12,773,524) $ 9,546,715 $ 5,032,203
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Net change in unrealized
(appreciation) depreci-
ation on investments 8,205,633 ( 9,365,167) 1,507,015
Net realized gain (loss)
on investments 3,429,593 ( 2,054,836) ( 8,055,679)
(Increase) decrease in
interest receivable 61,177 349,571 ( 239,827)
(Increase) decrease in
other assets ( 26,206) 25,949 28,685
Increase (decrease) in
accounts payable ( 1,366) ( 610) ( 97,626)
Increase (decrease) in
accounts payable -
affiliate ( 45,156) 33,115 22,037
Increase (decrease) in
due to broker (13,195,983) 5,715,122 16,482,024
----------- ---------- -----------
Net cash provided by
(used in) operating
activities (14,345,832) 4,249,859 14,678,832
----------- ----------- -----------
Cash flows from investing activities:
Purchase of investments ( 6,851,707) ( 3,509,674) ( 7,838,711)
Proceeds from sale of
investments 4,911,282 10,364,052 10,366,539
Repayment of debentures 633,250 170,423 -
----------- ----------- -----------
Net cash provided by
(used in) investing
activities ( 1,307,175) 7,024,801 2,527,828
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of shares - - 2,759,688
Purchase of treasury shares ( 69,746) - -
Cash distributions ( 435,172) ( 2,355,274) ( 6,845,848)
----------- ----------- ------------
Net cash used in financing
activities ( 504,918) ( 2,355,274) ( 4,086,160)
----------- ----------- ------------
F-18
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Cash Flows (continued)
Years ended December 31, 2002 2001 and 2000
2002 2001 2000
Net increase (decrease) in cash
and cash equivalents (16,157,925) 8,919,386 13,120,500
Cash and cash equivalents at
beginning of the year 27,125,926 18,206,540 5,086,040
------------ ------------ ------------
Cash and cash equivalents at
end of the year $ 10,968,001 $ 27,125,926 $ 18,206,540
============ ============ ============
Cash paid during the year for
interest $ 61,071 $ 123,199 -
Cash paid during the year for
income/excise taxes $ 1,671 $ 23,068 $ 24,297
Noncash investing and financing activities:
During 2002, the Fund received common stock in settlement of amounts due
from interest totaling $18,148 and from dividends totaling $6,805.
During 2001, the Fund received common stock in settlement of amounts due
from dividends totaling $3,366.
During 2000, the Fund received common stock in settlement of amounts due
from interest totaling $3,500 and received common stock in prepayment of
interest totaling $135,000. The Fund also received common stock totaling
$42,000 as a commitment fee.
See accompanying notes.
F-19
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 2002, 2001, and 2000
(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 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 Adviser) 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 Adviser (Note 6). 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
"regulated investment companies" ("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
comply with the requirements of the IRC that are applicable to
regulated investment companies. Such requirements include, but are not
F-20
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
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 number of shares
outstanding of 4,359,748 during 2002, 4,361,618 during 2001, and
4,253,475 during 2000.
(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 effect the amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
(3) Due to Broker
The Fund conducts business with one prime broker for its investment
activities. The clearing and depository operations for the investment
activities are performed pursuant to agreements with this prime broker. Due
to broker represents a margin loan payable to the prime broker, which is
secured by investments in securities maintained with the prime broker. Cash
and cash equivalents related to the margin loan payable are held by the
prime broker. The Fund is subject to credit risk to the extent the prime
broker is unable to deliver cash balances or securities, or clear security
transactions on the Fund's behalf. The Investment Adviser actively monitors
the Fund's exposure to the broker and believes the likelihood of loss under
those circumstances is remote.
(4) Management and Incentive Fees and Reimbursement
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
F-21
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
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 management fee equal to a quarterly
rate of 0.4375% (1.75% annually) of the Fund's Net Assets, as
determined at the end of such quarter with each such payment to be due
as of the last day of the calendar quarter. The Fund incurred
$860,834, $912,544, and $1,056,483 for 2002, 2001, and 2000,
respectively, for such management fees. Amounts payable for such fees
at December 31, 2002, 2001 were $191,651 and $239,650, respectively.
o The Investment Adviser receives an incentive fee in an amount equal to
20% of the Fund's realized capital gains in excess of realized capital
losses of the Fund after allowance for any unrealized capital losses
in excess of unrealized capital gains on the portfolio investments of
the Fund. The incentive fee is calculated, accrued, and paid on a
quarterly basis. The Fund incurred $0, $919,429 and $1,611,135 during
the years ended 2002, 2001, and 2000, respectively, for such incentive
fees.
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 $83,443, $117,894, and $101,929, for 2002, 2001,
and 2000, respectively, and are included in general and administrative
expenses in the accompanying statements of operations.
(5) 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 invested 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.
F-22
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
(b) Investments.
Investments are carried in the statements of assets and liabilities as
of December 31, 2002, and December 31, 2001, 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.
(6) 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 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.
F-23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
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 value 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.
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 governs the value of
the enterprise. This valuation method causes 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, 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 prospects. In the event of
unsuccessful operations by a portfolio company, the appraisal may be
based upon an estimated net realizable value when that investment is
liquidated.
F-24
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
As of December 31, 2002, and December 31, 2001, the net unrealized
appreciation associated with investments held by the Fund was
$6,540,900, and $14,746,533 respectively. For 2002, the Fund had gross
unrealized gains of $13,970,011 and gross unrealized losses of
($7,429,111) for book and federal income tax purposes. For 2001, the
Fund had gross unrealized gains of $23,730,567 and gross unrealized
losses of ($8,984,034) for book and federal income tax purposes.
(7) Restricted Securities
As indicated on the schedule of investments as of December 31, 2002, and
December 31, 2001, 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 6).
(8) Purchase of Additional Shares
In accordance with Fund guidelines, certain shareholders reinvested their
dividends in the Fund, purchasing 218,676 Fund shares issued directly by
the Fund in 2000. The Fund issued no shares in 2002 or 2001 under the
dividend reinvestment plan.
(9) Distributions to Shareholders
The tax character of distributions paid by the Fund was as follows:
2002 -- Tax return of capital $ 435,172
2001 -- Capital gain dividends $2,355,274
There were no undistributed earnings on a federal tax basis at the end of
both 2002 and 2001. The capital loss carryover of $3,429,593 will expire in
2010. The tax cost of securities is identical to the book cost.
F-25
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
(10) Financial Highlights
Selected per share data and ratios for each share of common stock
outstanding throughout the year ended December 31, 2002, and December 31,
2001 are as follows:
2002 2001
Net asset value, beginning of year $ 12.50 $ 10.86
Net investment loss ( .26) ( .43)
Net realized and unrealized gain (loss)
on investments ( 2.66) 2.61
------- ------
Total return from investment
operations ( 2.92) 2.18
Distributions:
From net capital gains 0 ( .54)
Tax return of capital ( .10) 0
------- -------
Net asset value, end of year $ 9.48 $ 12.50
Per share market value, end of year $ 7.86 $ 10.31
Portfolio turnover rate 12.13% 6.72%
Annual return (a) (23.76%) 14.56%
Ratio to average net assets (b):
Net investment loss ( 2.31%) ( 3.69%)
Expenses, excluding incentive fees 3.07% 3.10%
Expenses, including incentive fees 3.07% 4.91%
(a) Annual return was calculated by comparing the common stock price on
the first day of the year to the common stock price on the last day of
the year.
(b) Average net assets have been computed based on quarterly valuations.
F-26
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
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 Annual Report on Form 10-K for the
year ended December 31, 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: March 20, 2003 /S/ Russell Cleveland
Russell Cleveland
President & CEO
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
December 31, 2002, 2001, and 2000
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 Annual Report on Form 10-K for the
year ended December 31, 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: March 20, 2003 /S/ Barbe Butschek
Barbe Butschek
Chief Financial Officer