UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-20671
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2533518
---------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
8080 North Central Expressway, Dallas, Texas 75206-1857
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
214-891-8294
---------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No _____
4,351,718 shares of common stock were outstanding at November 14, 2003.
1
The Registrant's Registration Statement on Form N-2 was declared effective by
the Securities and Exchange Commission on May 6, 1994.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
December 31,2002 September 30,2003
(audited) (unaudited)
Assets
Cash and cash equivalents $10,968,001 $34,221,579
Investments at fair value, cost of
$32,918,344, and $31,557,897
at December 31, 2002 and September
30, 2003, respectively (note 7) 39,459,243 57,847,681
Interest and dividends receivable,
net of reserves 28,409 207,974
Prepaid expenses 40,068 68,852
----------- -----------
$50,495,721 $92,346,086
=========== ===========
Liabilities and Net Assets
Liabilities:
Due to broker (note 4) 9,001,163 26,942,033
Accounts payable 12,106 6,401
Accounts payable - affiliate (note 5) 223,386 1,183,322
----------- -----------
9,236,655 28,131,756
=========== ===========
Net assets:
Common stock, $1 par value; authorized
20,000,000 shares; 4,561,618 issued;
4,351,718 shares outstanding 4,561,618 4,561,618
Additional paid-in-capital 35,642,954 35,642,954
Treasury stock at cost, 209,900 shares at
December 31, 2002, and at September
30, 2003 (1,734,966) (1,734,966)
Accumulated deficit (3,751,440) (545,060)
Net unrealized appreciation of investments 6,540,900 26,289,784
Net assets, equivalent to $9.48 and $14.76 ------------ ------------
per share on the shares outstanding at
December 31, 2002, and September 30,
2003, respectively 41,259,066 64,214,330
----------- -----------
$50,495,721 $92,346,086
=========== ===========
See accompanying notes to financial statements.
3
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory Notes
Business Process Outsourcing -
Convertible debenture (1)(3) 12.00 08/31/03 $ 98,000 $ 100,001 0.16
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00 12/19/04 1,316,282 1,066,282 1.66
EDT Learning Inc. -
Convertible redeemable note (2) 12.00 03/29/12 500,000 500,000 0.78
Integrated Security Systems, Inc. -
Promissory notes (4) 8.00 09/05/03 525,000 525,000 0.82
Laserscope -
Convertible debenture (2) 8.00 02/11/07 1,300,000 12,097,800 18.84
Simtek Corporation -
Debt (2) 7.50 06/28/09 1,000,000 2,330,128 3.63
----------- ----------- -----
$ 4,739,282 $16,619,211 25.88
----------- ----------- -----
4
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes
Interpool, Inc. -
Convertible debenture (2) 9.25 12/27/22 $ 375,000 $ 375,000 0.58
----------- ----------- -----
$ 375,000 $ 375,000 0.58
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Adviser (note 7).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(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.
5
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Bentley Pharmaceuticals, Inc. -
Common stock 200,000 $ 250,000 $ 3,227,400 5.02
CaminoSoft Corp. -
Common stock 1,750,000 4,000,000 762,300 1.19
Common stock (2) 708,333 875,000 242,967 0.38
CareerEngine Network, Inc. -
Common stock (2) 125,000 250,000 19,325 0.03
eOriginal, Inc. -
Series A, preferred stock (1)(3) 10,680 4,692,207 770,383 1.20
Series B, preferred stock (1)(3) 25,646 620,329 1,849,928 2.88
Series C, preferred stock (1)(3) 28,929 699,734 2,086,741 3.25
New Series C, preferred stock (1)(3) 12,709 205,000 205,000 0.32
Fortune Natural Resources Corp. -
Common stock 1,262,394 500,500 374,931 0.58
Gasco Energy, Inc. -
Common stock 750,000 639,105 423,225 0.66
6
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Integrated Security Systems, Inc. -
Common stock (2) 24,173,966 $ 4,973,166 $ 7,903,235 12.31
Series D, preferred stock (2) 187,500 150,000 78,750 0.12
JAKKS Pacific, Inc. -
Common stock 49,847 297,421 606,493 0.94
Laserscope -
Common stock 160,000 200,000 1,861,200 2.90
Poore Brothers, Inc. -
Common stock (2) 1,686,357 1,748,170 7,557,258 11.77
Simtek Corp. -
Common stock 1,000,000 195,000 782,100 1.22
ThermoView Industries, Inc. -
Common stock 234,951 563,060 109,323 0.17
Miscellaneous Securities 165 762,989 1.19
----------- ----------- -----
$20,858,857 $29,623,548 46.13
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Adviser (note 7).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(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.
7
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
AirNet Systems, Inc. -
Common stock 9,900 $ 42,075 $ 39,204 0.06
Bentley Pharmaceuticals, Inc. -
Common stock 72,979 91,224 1,177,662 1.83
Capital Senior Living Corp. -
Common stock 57,100 146,335 245,336 0.38
Dave & Busters, Inc. -
Common stock 100,000 653,259 1,019,700 1.59
EDT Learning, Inc. -
Common stock 48,266 27,033 28,670 0.04
Flamel Technologies, SA -
Common stock 100,000 832,267 3,337,290 5.20
Franklin Covey -
Common stock 204,326 287,858 258,922 0.40
Gasco Energy, Inc. -
Common stock 250,000 250,000 141,075 0.22
I-Flow Corporation -
Common stock 100,000 254,038 1,048,410 1.63
8
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
Inet Technologies, Inc. -
Common stock 96,600 $ 530,338 $ 1,226,984 1.91
Medical Action Industries, Inc. -
Common stock 25,000 292,329 319,770 0.50
Precis, Inc. -
Common stock 200,700 1,372,417 673,569 1.05
Stonepath Group, Inc. -
Common stock (2) 200,000 270,000 429,400 0.67
US Home Systems, Inc. -
Common stock 110,000 535,587 1,283,931 2.00
Miscellaneous Securities 0 0 0.00
----------- ----------- -----
$ 5,584,760 $11,229,923 17.49
----------- ----------- -----
$31,557,899 $57,847,682 90.09
=========== =========== =====
9
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
September 30, 2003
(unaudited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Allocation of Investments -
Restricted Shares, Unrestricted
Shares, and Other Securities
Restricted Securities (2) $12,757,618 $32,600,145 50.77
Unrestricted Securities 11,959,843 18,947,495 29.51
Other Securities (5) 6,840,435 6,300,042 9.81
(1) Valued at fair value as determined by the Investment Adviser (note 7).
(2) Restricted securities - securities that are not fully registered and freely
tradable.
(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.
10
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
------------------------------------------------
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
----------- ----------- -----
11
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
------------------------------------------------
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 $ 625,000 1.51
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Adviser (note 7).
(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.
12
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
-----------------------------------------------
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 (5) 6,000 1,500,000 794,000 1.92
Series B-1, preferred stock (5) 1,785 392,700 1,426,215 3.46
Series B-3, preferred stock (5) 447 107,280 357,153 0.87
Series C-1, preferred stock (5) 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 (2) 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
13
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
-----------------------------------------------
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 $21,137,547 51.23
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Adviser (note 7).
(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.
14
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
-----------------------------------------------
Fair % of Net
Shares Cost Value Assets
Other Portfolio Investments -
Common Stock, Preferred Stock,
and Miscellaneous Securities
AirNet Systems, Inc. -
Common stock (2) 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
15
Renaissance Capital Growth & Income Fund III, Inc.
Schedules of Investments
December 31, 2003
(audited)
-----------------------------------------------
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 7).
(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.
16
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
(Unaudited)
Three Months Ended September 30,
2002 2003
---- ----
Income:
Interest ($ 10,405) $ 88,396
Dividend income 16,396 46,706
Commitment and other fees 20,000 2,423
----------- -----------
25,991 137,525
----------- -----------
Expenses (note 5):
General and administrative 84,886 71,164
Incentive fee 0 794,919
Interest expense 9,813 20,979
Legal and professional fees 28,784 21,879
Management fees 190,870 287,577
----------- -----------
314,353 1,196,518
----------- -----------
Net investment income (loss) ( 288,362) ( 1,058,993)
----------- -----------
Realized and unrealized gain (loss)
on investments:
Net unrealized appreciation
(depreciation) on investments ( 10,732,012) 11,248,447
Net realized gain on investments 0 3,974,597
----------- -----------
Net gain on investments ( 10,732,012) 15,223,044
----------- -----------
Net income ($11,020,374) $14,164,050
=========== ===========
Net income per share (note 2(e)) ($ 2.53) $ 3.25
=========== ===========
See accompanying notes to financial statements.
17
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
(Unaudited)
Nine Months Ended September 30,
2002 2003
---- ----
Income:
Interest $ 175,700 $ 435,884
Dividend income 59,635 1,207,937
Commitment and other fees 20,000 3,975
----------- -----------
255,335 1,647,796
----------- -----------
Expenses (note 5):
General and administrative 331,496 264,344
Incentive fee 0 991,179
Interest expense 54,213 59,422
Legal and professional fees 194,074 102,393
Management fees 669,183 674,456
----------- -----------
1,248,966 2,091,794
----------- -----------
Net investment income (loss) ( 993,631) ( 443,998)
----------- -----------
Realized and unrealized gain (loss)
on investments:
Net unrealized appreciation
(depreciation) on investments ( 7,926,503) 19,748,883
Net realized gain (loss) on investments ( 3,424,391) 4,955,896
----------- -----------
Net gain (loss) on investments ( 11,350,894) 24,704,779
----------- -----------
Net income (loss) ($12,344,525) $24,260,781
=========== ===========
Net income (loss) per share (note 2(e)) ($ 2.84) $ 5.57
=========== ===========
See accompanying notes to financial statements.
18
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
(Unaudited)
Three Months Ended September 30,
2002 2003
---- ----
From operations:
Net investment income (loss) ($ 288,362) ($ 1,058,993)
Net realized gain (loss) on
investments 0 3,974,597
Increase (decrease) in unrealized
appreciation on investments ( 10,732,012) 11,248,447
----------- -----------
Net increase (decrease) in net
assets resulting from operations ( 11,020,374) 14,164,051
----------- -----------
From distributions to stockholders:
Common dividends * 0 ( 435,172)
----------- -----------
Net decrease in net assets
resulting from distributions 0 ( 435,172)
----------- -----------
Total increase (decrease) in net assets ( 11,020,374) 13,728,879
Net assets:
Beginning of period 53,213,357 50,485,451
----------- -----------
End of period $42,192,983 $64,214,330
=========== ===========
* Source of distributions not determinable at September 30, 2003; will be
characterized at year end.
See accompanying notes to financial statements.
19
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
(Unaudited)
Nine Months Ended September 30,
2002 2003
---- ----
From operations:
Net investment income (loss) ($ 993,631) ($ 443,998)
Net realized gain (loss) on
investments ( 3,424,391) 4,955,896
Increase (decrease) in unrealized
appreciation on investments ( 7,926,503) 19,748,882
------------ -----------
Net increase (decrease) in net
assets resulting from operations ( 12,344,525) 24,260,780
----------- -----------
From distributions to stockholders:
Common dividends * 0 ( 1,305,516)
----------- -----------
Net decrease in net assets
resulting from distributions 0 ( 1,305,516)
----------- -----------
Total increase (decrease) in net assets ( 12,344,525) 22,955,264
Net assets:
Beginning of period 54,537,508 41,259,066
----------- -----------
End of period $42,192,983 $64,214,330
=========== ===========
* Source of distributions not determinable at September 30, 2003; will be
characterized at year end.
See accompanying notes to financial statements.
20
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
(unaudited)
Three Months Ended September 30,
2002 2003
---- ----
Cash flows from operation activities:
Net income ($11,020,374) $14,164,050
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Net unrealized (appreciation) depreciation
on investments 10,732,012 ( 11,248,447)
Net realized (gain) loss on investments 0 ( 3,974,597)
(Increase) decrease in interest and
dividends receivable 78,431 286,082
(Increase) decrease in other receivables 0 110,381
(Increase) decrease in other assets ( 57,978) ( 65,975)
Increase (decrease) in accounts payable 2,297 ( 15,231)
Increase (decrease) in accounts payable -
affiliate ( 49,297) 838,569
Increase (decrease) in other liabilities ( 2,863,895) ( 7,549,571)
Purchase of investments ( 1,217,143) ( 1,595,640)
Proceeds from sale of investments 0 8,534,289
Repayment of debentures and notes 9,880 0
----------- -----------
Net cash provided by (used in) operating
activities ( 4,386,067) ( 516,089)
----------- -----------
Cash flows from financing activities:
Cash dividends 0 ( 435,172)
----------- -----------
Net cash used in financing activities 0 ( 435,172)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ( 4,386,067) ( 951,261)
Cash and cash equivalents at beginning of year 21,162,267 35,172,840
----------- -----------
Cash and cash equivalents at end of period $16,776,200 $34,221,579
=========== ===========
Cash paid during the year for interest $ 9,813 $ 20,979
Cash paid during the year for income/excise tax $ 0 $ 0
See accompanying notes to financial statements.
21
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
(unaudited)
Nine Months Ended September 30,
2002 2003
---- ----
Cash flows from operation activities:
Net income ($12,344,525) $24,260,780
Adjustments to reconcile net income to net
cash provided by (used in) operations:
Net unrealized (appreciation) depreciation
on investments 7,926,503 ( 19,748,884)
Net realized (gain) loss on investments 3,424,391 ( 4,955,896)
(Increase) decrease in interest and
dividends receivable 63,853 ( 179,564)
(Increase) decrease in other receivables 0 0
(Increase) decrease in other assets ( 45,110) ( 28,784)
Increase (decrease) in accounts payable 4,163 ( 5,705)
Increase (decrease) in accounts payable -
affiliate ( 42,589) 959,936
Increase (decrease) in other liabilities ( 8,694,343) 17,940,871
Purchase of investments ( 5,202,187) ( 5,271,906)
Proceeds from sale of investments 3,941,141 11,565,790
Repayment of debentures and notes 618,977 22,456
----------- -----------
Net cash provided by (used in) operating
activities ( 10,349,726) 24,559,094
----------- -----------
Cash flows from financing activities:
Cash dividends 0 ( 1,305,516)
----------- -----------
Net cash used in financing activities 0 ( 1,305,516)
----------- -----------
Net increase (decrease) in cash and cash
equivalents ( 10,349,726) 23,253,578
Cash and cash equivalents at beginning of year 27,125,926 10,968,001
----------- -----------
Cash and cash equivalents at end of period $16,776,200 $34,221,579
=========== ===========
Cash paid during the year for interest $ 54,214 $ 59,422
Cash paid during the year for income/excise tax $ 25,779 $ 1,671
See accompanying notes to financial statements.
22
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
(unaudited)
Periods ended September 30, 2002 and 2003
Noncash investing and financing activities:
During the quarter ended March 31, 2003, the Fund received common stock in
settlement of amounts due from interest and dividends totaling $891,417.
During the quarter ended June 30, 2003, the Fund received common stock in
settlement of amounts due from interest totaling $1,994. During the quarter
ended September 30, 2003, the Fund received common stock in settlement of
amounts due from interest totaling $498,155.
During the quarter ended March 31, 2002, the Fund received common stock in
settlement of amounts due from interest and dividends totaling $9,397.
During the quarter ended June 30, 2002, the Fund received common stock in
settlement of amounts due from interest totaling $6,745. During the quarter
ended September 30, 2002, the Fund received common stock in settlement of
amounts due from interest totaling $6,740.
See accompanying notes to financial statements.
23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
(1) Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the Fund), is a
non-diversified, closed-end fund that has elected to be treated as a
Business Development Company under the Investment Company Act of 1940, as
amended (1940 Act). The Fund, a Texas corporation, was organized in 1994
and commenced operations in 1995. 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 convertible and
equity securities of emerging growth public companies (portfolio
companies). The Fund's investment adviser is RENN Capital Group, Inc.
(Investment Adviser).
(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 7). 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 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.
24
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
(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
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. Failure
to qualify as a RIC would subject the Fund to federal income tax as if
the Fund were an ordinary corporation, which could result in a
substantial reduction in the Fund's net assets as well as the amount
of income available for distribution to shareholders.
(e) Net Income per Share
Net income per share is based on the weighted average of shares
outstanding of 4,351,718 during the period.
(f) Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
and disclosures in the financial statements. Actual results could
differ from these estimates.
(3) Reclassifications
Certain reclassifications of prior period amounts have been made in the
statement of cash flows to conform to the current period presentation.
(4) Due to Broker
The Fund conducts business with a broker for its investment activities. The
clearing and depository operations for the investment activities are
performed pursuant to agreements with this broker. Due to broker represents
a margin loan payable to the broker, which is secured by investments in
securities maintained with the broker. Cash and cash equivalents related to
the margin loan payable are held by the broker as collateral for the margin
loan. The Fund is subject to credit risk to the extent the broker is unable
25
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
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.
(5) Management and Incentive Fees
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement (the Agreement), the Investment Adviser performs certain
services, including certain management, investment advisory and
administrative services necessary for the operation of the Fund. In
addition, under the Agreement, the Investment Adviser is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Agreement, the prospectus and the
original offering document are as follows:
o The Investment Adviser receives a 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 $287,577
and $190,870 for such management fees during the quarters ended
September 30, 2003, and September 30, 2002, respectively, and $674,456
and $669,183 for the nine months ended September 30, 2003, and
September 30, 2002, respectively. Amounts payable for such fees at
September 30, 2003, and September 30, 2002, were $287,577 and
$185,405, respectively, and are included in Accounts payable -
affiliate on the statements of assets and liabilities.
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 $794,919 during the quarter ended
September 30, 2003, for such incentive fees, and $919,179 for the nine
months ended September 30, 2003. The Fund did not incur any incentive
fees for the quarter ended September 30, 2002, or for the nine months
ended September 30, 2002. Amounts payable for such fees at September
30, 2003 were $794,919, which are included in Accounts payable -
affiliate on the statements of assets and liabilities.
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 $12,493 and $19,129 during the quarters ended
September 30, 2003, and September 30, 2002, respectively, and $73,065
26
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
and $59,801 for the nine months ended September 30, 2003, and
September 30, 2002, respectively. Such reimbursements are included in
general and administrative expenses in the accompanying statements of
operations.
(6) 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) of the 1940 Act. 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.
(b) Investments.
Investments are carried in the statements of assets and liabilities as
of December 31, 2002, and September 30, 2003, 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.
Generally, the Fund may register and sell such securities at any time
with the Fund paying the costs of registration. Interest on
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.
(7) 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 as follows:
27
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
o Generally, the guiding principle for valuation is the application
of objective standards. The objective standards for determining
market prices and applying valuation methodologies will govern in
all situations except where a debt issuer is in default.
o Generally, the fair value of debt securities and preferred
securities convertible into common stock is the sum of (a) the
value of such securities without regard to the conversion
feature, and (b) the value, if any, of the conversion feature.
The fair value of debt securities without regard to conversion
features is determined on the basis of the terms of the debt
security, the interest yield, and the financial condition of the
issuer. The fair value of preferred securities without regard to
conversion features is determined on the basis of the terms of
the preferred security, its dividend, and its liquidation and
redemption rights and absent special circumstances will typically
be equal to the lower of cost or 120% of the value of the
underlying common stock. The fair value of the conversion
features of a security, if any, are based on fair values of the
derivative securities as of the relevant date less an allowance,
as appropriate, for costs of registration, if any, and selling
expenses.
o Portfolio investments for which market quotations are readily
available and which are freely transferable are valued as
follows: (i) securities traded on a securities exchange or the
Nasdaq or in the over-the-counter market are valued at the
closing price on, or the last trading day prior to, the date of
valuation, and (ii) securities traded in the over-the-counter
market that do not have a closing price on, or the last trading
day prior to, the date of valuation are valued at the average of
the closing bid and ask price for the last trading day on, or
prior to, the date of valuation. Securities for which market
quotations are readily available but are restricted from free
trading in the public securities markets (such as Rule 144 stock)
are valued by discounting the 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.
28
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
There can be no assurance that stated market fair values for
private equities 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
As of September 30, 2003, and December 31, 2002, the net
unrealized appreciation associated with investments held by the
Fund was $26,289,784, and $6,540,900, respectively.
(8) Restricted Securities
As indicated on the statement of investments as of September 30, 2003, and
December 31, 2002, the Fund holds investments in shares of common stock,
the sale of which is restricted. These securities have been valued by the
Investment Adviser after considering certain pertinent factors relevant to
the individual securities (note 7).
(9) Purchase of Additional Shares
In accordance with Fund guidelines, certain shareholders reinvested their
dividends in the Fund. The Fund issued no shares during the three months
and nine months ended September 30, 2003, under the dividend reinvestment
plan.
(10) Distributions to Shareholders
During the three months ended September 30, 2003, the Fund distributed
$435,172, resulting in total distributions for the nine months ended
September 30, 2003, amounting to $1,305,516. The final tax characteristics
29
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2003
of these distributions cannot be determined at this time. The Fund made no
distributions to shareholders during the three and nine months ended
September 30, 2002.
(11) Financial Highlights
Selected per share data and ratios for each share of common stock
outstanding throughout the three months ended September 30, 2002, and 2003,
are as follows:
2002 2003
---- ----
Net asset value, beginning of period $ 12.20 $ 11.60
Net investment income (loss) $( 0.07) $( 0.24)
Net realized and unrealized gain on investments $( 2.46) $ 3.50
-------- --------
Total return from investment operations $( 2.53) $ 3.26
-------- --------
Distributions: $ 0.00 $ 0.10
-------- --------
Net asset value, end of period $ 9.67 $ 14.76
======== ========
Per share market value, end of period $ 8.94 $ 11.44
Portfolio turnover rate (quarterly) 0.02% 2.96%
Quarterly return (a) -10.61% 22.35%
Ratio to average net assets (quarterly) (b):
Net investment income (loss) - 0.60% - 2.20%
Expenses, excluding incentive fees 0.66% 0.84%
Expenses, including incentive fees 0.66% 2.49%
(a) Quarterly return (not annualized) was calculated by comparing the common
stock price on the first day of the period to the common stock price on the
last day of the period.
(b) Average net assets have been computed based on quarterly valuations.
30
(10) Financial Highlights (continued)
Selected per share data and ratios for each share of common stock
outstanding throughout the nine months ended September 30, 2002, and 2003,
are as follows:
2002 2003
---- ----
Net asset value, beginning of period $ 12.50 $ 9.48
Net investment income (loss) $( 0.23) $( 0.10)
Net realized and unrealized gain on investments $( 2.60) $ 5.68
-------- --------
Total return from investment operations $( 2.83) $ 5.58
-------- --------
Distributions $ 0.00 $ 0.30
-------- --------
Net asset value, end of period $ 9.67 $ 14.76
======== ========
Per share market value, end of period $ 8.94 $ 11.44
Portfolio turnover rate (nine months) 8.75% 10.34%
Nine-month return (a) -13.30% 45.55%
Ratio to average net assets (semi-annually) (b):
Net investment income (loss) - 1.93% - 0.92%
Expenses, excluding incentive fees 2.43% 2.29%
Expenses, including incentive fees 2.43% 4.35%
(a) Nine month return (not annualized) was calculated by comparing the common
stock price on the first day of the period to the common stock price on the
last day of the period.
(b) Average net assets have been computed based on quarterly valuations.
31
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Material Changes in Portfolio Investments
The following portfolio transactions are noted for the quarter ended
September 30, 2003:
Active Link Communications, Inc. (OTC:ACVE) In the third quarter of 2003,
the Fund wrote off its entire investment in the Company realizing a
tax loss in the amount of $396,023.
Airnet Systems, Inc. (NYSE:ANS) During the third quarter of 2003, the Fund
sold 40,100 shares of Airnet common stock in the open market realizing
proceeds of $172,585, representing a gain of $2,161. At September 30,
2003, the Fund had 9,900 shares of ANS remaining having a basis of
$42,075, or $4.25 per share.
Bentley Pharmaceuticals, Inc. (AMEX:BNT) In the third quarter of 2003, the
Fund sold 200,000 shares of common stock in the open market realizing
proceeds of $2,723,911, representing a gain of $2,448,552. At
September 30, 2003, the Fund owned 272,979 shares of Bentley common
stock with a basis of $341,224 or $1.25 per share.
Canterbury Consulting Group, Inc. (NASDAQ:CITI) In the third quarter of
2003, the Fund exited its position in the Company by selling 18,521
shares of Canterbury common stock in the open market realizing
proceeds of $12,594, representing a loss of $112,822.
CNE Group, Inc. (AMEX:CNE) During the third quarter of 2003, the Company
exchanged its outstanding debenture for 125,000 shares of the
Company's common stock. At September 30, 2003, the Fund owned 125,000
shares of the Company's common stock with a basis of $250,000 or $2.00
per share and warrants to purchase 62,500 shares of the Company's
common stock with an exercise price of $6.00 per share.
Dexterity Surgical, Inc. (OTC:DEXT) In the third quarter of 2003, the Fund
sold 500 shares of Series A Preferred Stock, 500 shares of Series B
Preferred Stock, and 260,000 shares of the Company's common stock for
a total of $0.50, representing a loss of $1,634,999.50. At September
30, 2003, the Fund owned $1,316,282 of the Company's 9% Convertible
Debentures.
The Dwyer Group, Inc. (NASDAQ:DWYR) In the third quarter of 2003, the Fund
sold all of its remaining 575,000 shares of Dwyer common stock in the
open market realizing proceeds of $3,759,132, representing a gain of
$2,131,662.
eOriginal, Inc. (Private) During the third quarter of 2003, the Fund made a
follow-on investment in eOriginal by purchasing 12,709 shares of the
Company's Series C Convertible Preferred Stock for $205,000. In
32
addition to these shares, at September 30, 2003, the Fund owned 10,680
shares Series A Convertible Preferred stock having a basis of
$4,692,207; 25,646 shares Series B Convertible Preferred Stock with a
basis of $620,329; 28,929 shares Series C Convertible Preferred Stock
with a basis of $699,734; and 2,302 warrants to purchase shares of
common stock of the Company having a basis of $165. Each series of
Preferred of the Company is convertible one for one into common stock
of eOriginal Holdings, and the warrants have an exercise price of
$0.01 per share.
Franklin Covey Co. (NYSE:FC) During the quarter ended September 30, 2003,
the Fund purchased a total of 204,326 shares of the Company's common
stock in the open market for $$287,858 or $1.41 per share. This is a
new investment for the Fund.
Franklin Covey is a global leader in effectiveness training,
productivity tools, and assessment services for organizations and
individuals.
GascoEnergy, Inc. (OTC:GASE) In the quarter ended September 30, 2003, the
Fund purchased an additional 580,000 shares of the Company's common
stock in the open market for $539,400, a cost of $0.93 per share. At
September 30, 2003, the Fund owned a total of 750,000 common shares
having a basis of $639,105, or $0.85 per share purchased in the open
market and 250,000 shares at $1.00 per share that were purchased in a
private placement.
Integrated Security Systems, Inc. (OTC:IZZI) In the third quarter of 2003,
the Fund received common stock of the Company as payment in kind for
interest on 8% Promissory Notes owned by the Fund. In total, the Fund
received 74,844 shares of IZZI having an imputed cost of $10,466, a
rate of $0.14 per share, as payment in kind for interest on the notes.
The Fund also received 2,438,445 shares of common stock of the Company
as payment in kind for dividends on the Series F and G preferred
stock, an imputed cost of $487,689, a rate of $0.20 per share. In
addition, the Fund converted the Series F and G preferred stock into
21,049,750 shares of the Company's common stock, an imputed cost of
$4,209,940, a rate of $0.20 per share.
At September 30, 2003, the Fund owned the following: $525,000 in 8%
Promissory Notes with no conversion feature; 24,173,966 shares of the
Company's common stock with a basis of $4,973,166, or $0.21 per share;
$150,000 in Series D Preferred convertible into common at a rate of
$0.80 per share; 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 2,625,000 shares of the
Company's common stock at $0.20 per share with term dates ranging from
September 2006 to June 2008; and options to purchase 41,034 shares of
the Company's common stock having strike prices ranging between $0.21
and $0.49 per share and term dates ranging from May 2006 to August
2007.
Subsequent to September 30, 2003, a warrant to purchase 312,500 shares
of the Company's common stock at $0.80 per share was allowed to
expire.
33
PooreBrothers, Inc. (Nasdaq:SNAK) During the third quarter of 2003, the
Fund sold 330,000 shares of the Company's common stock realizing
proceeds of $1,392,534, representing a gain of $1,062,534. At
September 30, 2003, the Fund owned 1,686,357 shares of the Company's
common stock having a basis of $1,748,170 or $1.04 per share and three
tranches of options to purchase a total of 20,210 shares, having
exercise prices ranging from $1.31 per share to $3.60 per share.
ThermoView Industries, Inc. (AMEX:THV) During the quarter ended September
30, 2003, the Fund purchased an additional 100,000 shares of the
Company's common stock in the open market for $$65,228 or $0.65 per
share. At September 30, 2003, the Fund owned a total of 234,951 shares
of ThermoView common stock having a cost of $563,060 or $2.40 per
share.
Results of Operations for the Three Months Ended September 30, 2003
For the quarter ended September 30, 2003, the Fund had a net investment
loss of ($1,058,993) compared to a net investment loss of ($288,362) in the
third quarter of 2002. This increase in net loss resulted from increased
expenses offset slightly by increased income in the third quarter of 2003
compared to the same period of 2002. Interest income increased from a
negative ($10,405) for the third quarter of 2002 to $88,396 for the same
period in 2003, an increase of 949.55%. Dividend income increased 184.86%
to $46,706 in the quarter ended September 30, 2003, from $16,396 for the
same quarter in 2002. In the third quarter of 2003, the Fund accrued $2,423
in income from commitment and other fees, compared to $20,000 in the third
quarter 2002, a decrease of 87.89%.
General and administrative expenses decreased 16.17% from $84,886 in the
third quarter of 2002 to $71,164 in the third quarter 2003. Interest
expense increased from $9,813 for the quarter ended September 30, 2002, to
$20,979 for the same period in 2003, an increase of 113.79%. Legal and
professional expenses decreased 23.99% from $28,784 in the third quarter of
2002 to $21,879 for the same quarter in 2003. Management fees increased
from $190,870 in the quarter ended September 30, 2002, to $287,577 for the
same period in 2003, an increase of 50.67%, and incentive fees increased to
$794,919 for the third quarter of 2003 compared to no incentive fees
incurred in the third quarter of 2002.
Net income for the third quarter of 2003 was $14,164,050 compared to a net
loss of ($11,020,374) for the same period of 2002. This increase was
primarily due to an increase from net unrealized depreciation on
investments from ($10,732,012) in the third quarter of 2002 to net
unrealized appreciation on investments in the amount of $11,248,447 in the
third quarter of 2003. In addition, the fund realized net realized gains on
investments in the amount of $3,974,597 in the third quarter of 2003
compared to no realized gains or losses in the same period of 2002. The
realized gains in the third quarter of 2003 include $473,533 in bankruptcy
proceeds from two companies formerly in the Fund's portfolio.
34
Results of Operations for the Nine months Ended September 30, 2003
For the nine months ended September 30, 2003, the Fund experienced a net
investment loss in the amount of ($443,998), compared to a net investment
loss in the amount of ($993,631) for the same nine-month period in 2002.
Interest income increased from $175,700 for the nine months ended September
30, 2002, to $435,884 for the same period of 2003, an increase of 148.08%.
Dividend income for the nine-month period ended September 30, 2003, was
$1,207,937 versus $59,635 for the same period in 2002. Other income
decreased 80.13% to $3,975 in the nine months ended September 30, 2003,
compared to $20,000 in the same period of 2002.
General and administrative expenses decreased from $331,496 in the nine
months ended September 30, 2002, to $264,344 for the same period in 2003.
Legal and professional expenses also decreased from $194,074 in 2002 to
$102,393 for the nine months ended September 30, 2003. Interest expense
increased only 9.61% from $54,213 for the nine- month period ending
September 30, 2002, to $59,422 for the same period in 2003. Management fees
were relatively constant with $669,183 for the nine months ended September
30, 2002, compared to $674,456 for the same period in 2003; and incentive
fees increased from zero in 2002 to $991,179 for the nine months ended
September 30, 2003.
Net income for the first nine months of 2003 was $24,260,781, compared to a
net loss in the amount of ($12,344,525) for the same period of 2002. In
addition to the increases in income and decreases in expenses discussed
previously, this increase was driven by an increase from net unrealized
depreciation on investments of ($7,926,503) in the first nine months of
2002 to net unrealized appreciation on investments of $19,748,883 for the
same time period in 2003. In addition, in the first nine months of 2003,
the Fund realized net gains on investments in the amount of $4,955,896,
compared to a net realized loss on investments of ($3,424,391) in the same
period of 2002.
Liquidity and Capital Resources
For the three months ended September 30, 2003, net assets increased 27.19%
from $50,485,451at June 30, 2003, to $64,214,330, or $14.76 per share, at
September 30, 2003. This increase is primarily attributable to an increase
in the net unrealized appreciation of investments from $15,041,337 at June
30, 2003, to $26,289,784 at September 30, 2003, combined with a decrease in
the accumulated deficit from ($3,025,492) at June 30, 2003, to ($545,060)
at September 30, 2003.
At the end of the third quarter of 2003, the Fund had net cash and cash
equivalents of $7,279,546 versus net cash and cash equivalents of $681,236
at June 30, 2003, primarily due to an accumulation of cash from proceeds
from sales of investments, combined with a smaller margin balance.
Receivables, including interest, dividends, and brokerage, decreased from
$604,436 at June 30 to $207,974 at September 30, 2003, due to accrued
35
dividend and interest amounts that were paid during the quarter. Prepaid
expenses increased from $2,877 at June 30, 2003 to $68,852 at September 30,
2003, due to the payment of insurance.
Accounts payable decreased 70.41% from $21,632 at June 30, 2003, to $6,401
at September 30, 2003. Accounts payable to affiliate increased from
$344,753 at June 30, 2003, to $1,183,322 at September 30, 2003, reflecting
an increase in management fee due to higher portfolio values in the third
quarter and the increase in incentive fees accrued as a result of higher
net gains on the sale of investments.
Pending investment in portfolio investments, funds are invested in
temporary cash accounts and in government securities. Government securities
used as cash equivalents will typically consist of U. S. Treasury
securities or other U. S. Government and Agency obligations having slightly
higher yields and maturity dates of three months or less. These investments
qualify for investment as permitted in Section 55(a)(1) through (5) of the
1940 Act.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Fund is subject to financial market risks, including changes in market
interest rates as well as changes in marketable equity security prices. The
Fund does not use derivative financial instruments to mitigate any of these
risks. The return on the Fund's investments is generally not affected by
foreign currency fluctuations.
A majority 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.
A lesser percentage 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 changes in interest rates could impact the Fund's
yield on future investments in debt instruments. In addition, changes in
market interest rates are not typically a significant factor in the Fund's
determination of fair value of its debt instruments, as it is generally
assumed they will be held to maturity, and their fair values are determined
on the basis of the terms of the particular instrument and the financial
condition of the issuer.
A small percentage 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.
36
ITEM 4: DISCLOSURES AND PROCEDURES
As required by SEC Rule 13a-15 promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act), within 90 days prior to the
filing date of this report, the Fund carried out an evaluation of the
effectiveness of the design and operation of the Fund's disclosure controls
and procedures. This evaluation was carried out under the supervision and
with the participation of the Fund's management, including the Fund's
President and Chief Executive Officer and the Fund's Chief Financial
Officer. Based upon that evaluation, the Fund's President and Chief
Executive Officer and the Fund's Chief Financial Officer concluded that the
Fund's disclosure controls and procedures are effective. Subsequent to the
date the Fund carried out its evaluation, there have been no significant
changes in the Fund's internal controls or in other factors which could
significantly affect internal controls. Disclosure controls and procedures
are controls and other procedures that are designed to ensure that
information required to be disclosed in Fund reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Fund reports filed under the Exchange Act is accumulated and communicated
to management, including the Fund's Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
37
PART II
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31-1 Certification of Russell Cleveland, President and CEO
31-2 Certification of Barbe Butschek, Chief Financial Officer
32-1 Certification of Russell Cleveland, President and CEO
32-2 Certification of Barbe Butschek, Chief Financial Officer
(b) Reports on Form 8-K
None
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Fund
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
November 14, 2003 /S/ Russell Cleveland
Russell Cleveland, President and CEO
(Principal Executive Officer)
November 14, 2003 /S/ Barbe Butschek
Barbe Butschek, Chief Financial Officer
(Principal Financial Officer)
39
EXHIBIT 31-1
CERTIFICATION
I, Russell Cleveland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant is made known to us by others, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
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
1
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
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Russell Cleveland
Russell Cleveland
President and CEO
November 14, 2003
2
EXHIBIT 31-2
CERTIFICATION
I, Barbe Butschek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital
Growth & Income Fund III, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant is made known to us by others, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
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
1
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
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Barbe Butschek
Barbe Butschek
Chief Financial Officer
November 14, 2003
2
EXHIBIT 32-1
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. section 1350, the undersigned officer of Renaissance
Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to
such officer's knowledge, that theFund's Quarterly Report on Form 10-Q for the
period ended September 30, 2003 (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 theFund.
Dated: November 14, 2003 /S/ Russell Cleveland
Russell Cleveland
President & CEO
1
EXHIBIT 32-2
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. section 1350, the undersigned officer of Renaissance
Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to
such officer's knowledge, that theFund's Quarterly Report on Form 10-Q for the
period ended September 30, 2003 (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 theFund.
Dated: November 14, 2003 /S/ Barbe Butschek
Barbe Butschek
Chief Financial Officer
2