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 March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-20671
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2533518
---------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
8080 North Central Expressway, Dallas, Texas 75206-1857
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
214-891-8294
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(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 _____ 4,361,618 shares of
common stock were outstanding at April 19, 2002.
The Registrant's Registration Statement on Form N-2 was declared effective by
the Securities and Exchange Commission on May 6, 1994.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
(Unaudited)
Assets December 31,2001 March 31,2002
Cash and cash equivalents $27,125,926 $24,917,818
Investments at fair value, cost of $35,015,807
and $32,093,757 December 31,2001 and
March 31, 2002, respectively 49,762,340 51,631,322
Interest receivable 114,539 70,276
Prepaid expenses 13,863 7,465
----------- -----------
$77,016,668 $76,626,881
=========== ===========
Liabilities and Net Assets
Liabilities:
Securities sold under agreements to repurchase 22,197,146 20,698,688
Accounts payable 13,472 33,576
Accounts payable - affiliate 268,542 257,711
Dividends payable - -
---------- ----------
22,479,160 20,989,975
---------- ----------
Net assets:
Common stock, $1 par value; authorized
20,000,000 shares; 4,561,618 issued;
4,361,618 shares outstanding 4,561,618 4,561,618
Additional paid-in-capital 37,125,714 37,125,714
Treasury stock at cost, 200,000 shares at
December 31, 2001, and at March 31, 2002 (1,665,220) (1,665,220)
Distributions in excess of net investment income (231,137) (547,542)
Accumulated net realized loss on securities
transactions - (3,375,228)
Net unrealized appreciation of investments 14,746,533 19,537,564
---------- ----------
Net assets, equivalent to $12.50 and $12.76
per share at December 31, 2001
March 31, 2002, respectively 54,537,508 55,636,906
Commitments and contingencies - -
---------- ----------
$77,016,668 $76,626,881
=========== ===========
See accompanying notes to financial statements.
2
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
March 31, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00% 05/02 $ 98,027 $ 98,027 0.18%
Convertible note (2) 8.00% 09/30/02 $ 125,000 $ 125,000 0.22%
Convertible note (2) 8.00% 09/30/02 $ 250,000 $ 250,000 0.45%
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00% 12/19/04 $ 1,316,282 $ 816,282 1.47%
EDT Learning, Inc. -
Convertible redeemable note 12.00% 03/29/12 $ 500,000 $ 500,000 0.90%
eOriginal, Inc. -
Senior Secured Notes (4) 12.00% 06/30/02 $ 575,000 $ 575,000 1.03%
Integrated Security Systems, Inc. -
Promissory notes (5) 8.00% 01/25 -
05/14/02 $ 250,000 $ 250,000 0.45%
3
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
March 31, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Laserscope -
Convertible debenture (2) 8.00% 02/11/07 $ 1,500,000 $ 4,992,160 8.97%
Northwestern Steel & Wire Corporation -
Debt (3)(5) N/A N/A $ 127,500 $ 127,500 0.23%
----------- ----------- -----
$ 4,741,809 $ 7,733,969 13.90%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
4
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
March 31, 2002
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
CareerEngine Network, Inc. -
Convertible debenture (2) 12.00% 03/31/10 $ 250,000 $ 250,000 0.45%
Play by Play Toys & Novelties -
Convertible debenture (3) 8.00% 12/31/00 $ 2,425,747 $ 500,000 0.90%
----------- ----------- -----
$ 2,675,747 $ 750,000 1.35%
---------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
5
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
March 31, 2002
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 4,019,400 7.22%
CaminoSoft Corporation -
Common stock 1,750,000 $ 4,000,000 $ 2,252,250 4.05%
Common stock (2) 708,333 $ 875,000 $ 815,583 1.47%
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 (4) 6,000 $ 1,500,000 $ 4,794,000 8.62%
Series B-1 preferred stock (4) 1,785 $ 392,700 $ 1,426,215 2.56%
Series B-3 preferred stock (4) 447 $ 107,280 $ 357,153 0.64%
Series C-1 preferred stock (4) 2,353 $ 2,000,050 $ 2,000,050 3.59%
6
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
March 31, 2002
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Fortune Natural Resources, Inc. -
Common stock 1,322,394 $ 545,500 $ 615,310 1.11%
Preferred stock (5) 120,000 $ 120,000 $ 120,000 0.22%
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 175,197 0.31%
Common stock - PIK (2) 44,653 $ 12,763 $ 18,888 0.03%
Series D preferred stock (2) 187,500 $ 150,000 $ 101,250 0.18%
Series F preferred stock (2) 2,714,945 $ 542,989 $ 1,148,421 2.06%
Series G preferred stock (2) 18,334,755 $ 3,666,951 $ 7,705,602 13.85%
JAKKS Pacific, Inc. -
Common stock 87,347 $ 521,172 $ 1,971,596 3.54%
Poore Brothers, Inc. -
Common stock (2) 1,931,357 $ 1,963,170 $ 4,397,915 7.90%
7
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
March 31, 2002
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Simtek Corporation -
Common stock (2) 1,000,000 $ 195,000 $ 357,200 0.64%
ThermoView Industries, Inc. -
Common stock (2) 31,851 $ 415,384 $ 32,794 0.06%
Verso Technologies, Inc. -
Common stock (2) 179,375 $ 512,500 $ 204,021 0.37%
Miscellaneous securities $ 5,915 $ 917,961 1.65%
----------- ----------- -----
$19,877,273 $33,430,806 60.45%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
8
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
March 31, 2002
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 524,979 $ 1,470,478 $ 5,275,251 9.48%
DaisyTek International Corporation -
Common stock 10,000 $ 136,918 $ 157,509 0.28%
Dave & Buster's, Inc. -
Common stock 100,000 $ 653,259 $ 1,026,630 1.85%
The Dwyer Group, Inc. -
Common stock 675,000 $ 1,966,632 $ 2,639,587 4.74%
EDT Learning, Inc. -
Common stock 31,600 $ 16,590 $ 31,597 0.06%
I-Flow Corporation -
Common stock 17,500 $ 57,719 $ 52,668 0.09%
9
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
March 31, 2002
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Precis, Inc.
Common stock 46,200 $ 497,333 $ 533,305 0.96%
----------- ----------- -----
$ 4,798,929 $ 9,716,547 17.46%
----------- ----------- ------
$32,093,758 $51,631,322 92.80%
=========== =========== ======
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
Restricted Securities Under Rule 144 $13,508,066 $21,313,143 38.31%
Unrestricted Securities $13,507,247 $19,750,300 35.50%
Other Securities (6) $5,078,445 $10,567,879 18.99%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
10
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Eligible Portfolio Investments -
Convertible Debentures and
Promissory notes (1)
Active Link Communications, Inc. -
Convertible bridge note (2) 12.00% 05/02 $ 116,667 $ 150,792 0.28%
Convertible note (2) 8.00% 09/30/02 $ 125,000 $ 161,563 0.30%
Convertible note (2) 8.00% 09/30/02 $ 250,000 $ 288,125 0.53%
Dexterity Surgical, Inc. -
Convertible debenture (2) 9.00% 12/19/04 $ 1,329,577 $ 1,329,577 2.44%
Display Technologies, Inc. -
Convertible debenture (2) 8.75% 03/02/05 $ 1,750,000 $ 0 0.00%
eOriginal, Inc. -
Promissory note (4) 12.00% 06/30/02 $ 500,000 $ 500,000 0.92%
Integrated Security Systems, Inc. -
Promissory notes (5) 8.00% 01/25-
05/14/02 $ 200,000 $ 200,000 0.37%
11
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Laserscope -
Convertible debenture (2) 8.00% 02/11/07 $ 1,500,000 $ 2,770,000 5.08%
Northwestern Steel & Wire Corp. -
Debt (3)(5) N/A N/A $ 127,500 $ 127,500 0.23%
----------- ----------- ------
$ 5,898,744 $ 5,527,557 10.14%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
12
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments
(unaudited)
December 31, 2001
-------------------------------------------------
Interest Due Fair % of
Rate Date Cost Value Net
Assets
Other Portfolio Investments -
Convertible Debentures and
Promissory Notes (1)
CareerEngine Network, Inc. -
Convertible debenture (2) 12.00% 03/31/10 $ 250,000 $ 250,000 0.46%
Play by Play Toys & Novelties -
Convertible debenture (3) 10.50% 12/31/00 $ 2,425,748 $ 500,000 0.92%
RailAmerica, Inc. -
Convertible debenture 6.00% 07/31/04 $ 500,000 $ 715,770 1.31%
----------- ----------- ------
$ 3,175,748 $ 1,465,770 2.69%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
13
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Eligible Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 4,035,240 7.40%
CaminoSoft Corp. -
Common stock 1,750,000 $ 4,000,000 $ 2,858,625 5.24%
Common stock (2) 708,333 $ 875,000 $ 1,048,625 1.92%
Dexterity Surgical, Inc. -
Preferred stock - A (2) 500 $ 500,000 $ 5,769 0.01%
Preferred stock - B (2) 500 $ 500,000 $ 5,769 0.01%
Common stock (2) 260,000 $ 635,000 $ 0 0.00%
Display Technologies, Inc. -
Common stock (2) 127,604 $ 500,000 $ 0 0.00%
eOriginal, Inc. -
Series A, preferred stock (4) 6,000 $ 1,500,000 $ 4,794,000 8.79%
Series B-1, preferred stock (4) 1,785 $ 392,700 $ 1,426,215 2.62%
Series B-3, preferred stock (4) 447 $ 107,280 $ 357,153 0.65%
Series C-1, preferred stock (4) 2,353 $ 2,000,050 $ 2,000,050 3.67%
14
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Fortune Natural Resources Corp. -
Common stock 1,322,394 $ 545,500 $ 209,467 0.38%
Integrated Security Systems, Inc. -
Common stock 393,259 $ 215,899 $ 159,624 0.29%
Common stock - PIK (2) 13,463 $ 3,366 $ 5,189 0.01%
Series D, preferred stock (2) 187,500 $ 150,000 $ 92,250 0.17%
Series F, preferred stock (2) 2,714,945 $ 542,989 $ 1,046,339 1.92%
Series G, preferred stock (2) 18,334,755 $ 3,666,951 $ 7,016,215 12.86%
JAKKS Pacific, Inc. -
Common stock 87,347 $ 521,172 $ 1,638,674 3.00%
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%
15
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
ThermoView Industries, Inc. -
Common stock (2) 31,851 $ 415,384 $ 27,433 0.05%
Verso Technologies, Inc. -
Common stock (2) 179,375 $ 512,500 $ 219,196 0.40%
Miscellaneous Securities $ 5,915 $ 1,040,722 1.91%
----------- ----------- ------
$20,247,876 $32,870,044 60.27%
----------- ----------- ------
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
16
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
Other Portfolio Investments -
Common Stock, Preferred Stock, and
Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 524,979 $ 1,470,478 $ 5,296,037 9.71%
Dave & Busters, Inc. -
Common stock 100,000 $ 653,259 $ 621,720 1.14%
Display Technologies, Inc. -
Common stock (2) 13,880 $ 549,741 $ 0 0.00%
Preferred stock (2) 5,000 $ 500,000 $ 0 0.00%
Dwyer Group, Inc.
Common stock 675,000 $ 1,966,631 $ 3,307,838 6.07%
EDT Learning, Inc. -
Common stock 31,600 $ 16,590 $ 45,988 0.08%
Precis, Inc. -
Common stock 6,200 $ 36,740 $ 74,884 0.14%
17
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Investments (continued)
(unaudited)
December 31, 2001
---------------------------------------------
Fair % of
Shares Cost Value Net
Assets
RailAmerica, Inc. -
Common stock 40,000 $ 500,000 $ 493,696 0.91%
Miscellaneous Securities $ 0 $ 58,806 0.11%
----------- ----------- ------
$ 5,693,439 $ 9,898,969 18.15%
----------- ----------- ------
$35,015,807 $49,762,340 91.24%
=========== =========== ======
Allocation of Investments -
Restricted Shares, Unrestricted Shares,
and Other Securities
Restricted Securities Under Rule 144 $16,830,345 $19,300,331 35.39%
Unrestricted Securities $13,352,017 $19,957,563 36.59%
Other Securities (6) $ 4,833,445 $10,504,446 19.26%
(1) Valued at fair value as determined by the Investment Advisor (note 5).
(2) Restricted securities under Rule 144 (note 6).
(3) Company is liquidating in bankruptcy.
(4) Securities in a privately owned company.
(5) Securities have no provision that allows conversion into a security for
which there is a public market.
(6) Includes Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there is no
market.
18
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
(Unaudited)
Three Months Ended March 31
2001 2002
---- ----
Income:
Interest $ 294,736 $ 92,675
Dividend Income 23,329 18,510
Commitment and other fees 6,420 -
----------- -----------
324,485 111,185
----------- -----------
Expenses:
General and administrative 63,936 87,323
Incentive fee - -
Interest expense - 29,656
Legal and professional fees 41,037 66,131
Management fees 209,806 244,481
----------- -----------
314,779 427,591
------------ -----------
Net investment income (loss) 9,706 (316,406)
Realized and unrealized gain (loss) on investments:
Net unrealized appreciation
on investments 2,857,732 4,791,032
Net realized loss on investments (2,467,658) (3,375,228)
----------- -----------
Net gain on investments 390,074 1,415,804
----------- -----------
Net income $ 399,780 $1,099,398
=========== ==========
Net income per share $ 0.09 $ 0.25
=========== ==========
See accompanying notes to financial statements.
19
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
(Unaudited)
Three Months Ended March 31
2001 2002
---- ----
From operations:
Net investment income $ 9,706 $ (316,406)
Net realized gain (loss) on investments (2,467,658) (3,375,228)
Increase (decrease) in unrealized appreciation
on investments 2,857,732 4,791,032
----------- -----------
Net increase in net assets resulting from
operations 399,780 1,099,398
----------- -----------
From distributions to stockholders:
Common dividends from net investment income - -
Common dividends from realized gains - -
Common dividends from other sources - -
----------- ------------
Net decrease in net assets resulting from
distributions - -
----------- ------------
From capital transactions:
Shares issued - -
Purchase of treasury stock - -
----------- ------------
Net increase (decrease) in net assets resulting
from capital contributions - -
----------- ------------
Total increase in net assets 399,780 1,099,398
Net assets:
Beginning of period 47,346,067 54,537,508
------------ -----------
End of period $47,745,847 $55,636,906
============ ============
See accompanying notes to financial statements.
20
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
Three Months ended March 31
2001 2002
---- ----
Cash flows from operating activities:
Net income $ 399,780 $ 1,099,398
Adjustments to reconcile net income to
net cash provided by (used in) operation
activities:
Net unrealized (appreciation)
depreciation on investments (2,857,732) (4,791,032)
Net realized (gain) loss on investments 2,467,658 3,375,228
(Increase) decrease in interest receivable (173,331) 34,867
(Increase) decrease in other assets 6,398 6,398
Increase (decrease) in accounts payable (4,675) 20,104
Increase (decrease) in accounts payable -
affiliate 15,147 (10,831)
Increase (decrease) in other liabilities (1,006,166) (1,498,458)
----------- -----------
Net cash provided by (used in) operating
activities (1,152,921) (1,764,325)
----------- -----------
Cash flows from investing activities:
Purchase of investments (125,000) (1,400,230)
Proceeds from sale of investments 538,796 924,512
Repayment of debentures and notes 59,106 31,935
----------- -----------
Net cash provided by (used in)
investing activities 472,902 (443,783)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of shares - -
Purchase of treasury shares - -
Cash dividends - -
----------- -----------
Net cash used in financing activities - -
----------- -----------
Net increase (decrease) in cash and cash equivalents (680,019) (2,208,108)
Cash and cash equivalents at beginning of the period 19,697,211 27,125,926
----------- -----------
Cash and cash equivalents at end of the period $19,017,192 $24,917,818
=========== ===========
Cash paid during the year for interest $ 0 $ 29,656
Cash paid during the year for income/excise taxes $ 0 $ 0
Noncash investing activities:
During the quarter ended March 31, 2002, the Fund received common stock in
settlement of amounts due for interest and dividends totaling $9,397.
See accompanying notes to financial statements.
21
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
(1) Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the Fund), a Texas
corporation, was formed on January 20, 1994. The Fund offered to sell
shares in the Fund until closing of the offering on December 31, 1994. The
Prospectus of the Fund required minimum aggregate capital contributions by
shareholders of not less than $2,500,000 and allowed for maximum capital
contributions of $100,000,000. The Fund seeks to achieve current income and
capital appreciation potential by investing primarily in unregistered
equity investments and convertible issues of small and medium size
companies which are in need of capital and which Renaissance Capital Group,
Inc. (Investment Advisor) believes offers the opportunity for growth. The
Fund is a non-diversified closed-end investment company and has elected to
be treated as a business development company under the Investment Company
Act of 1940, as amended (1940 Act).
(2) Summary of Significant Accounting Policies
(a) Valuation of Investments
Portfolio investments are stated at quoted market or fair value as
determined by the Investment Advisor (note 5). The securities held by
the Fund are primarily unregistered and their value does not
necessarily represent the amounts that may be realized from their
immediate sale or disposition.
(b) Other
The Fund follows industry practice and records security transactions
on the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded as earned on the accrual basis.
(c) Cash and Cash Equivalents
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) Federal Income Taxes
The Fund has elected the special income tax treatment available to
"regulated investment companies" 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
22
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
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
distribute all of its taxable investment income and long-term capital
gains within the defined period under the IRC to qualify as a
regulated investment company. Therefore, no federal income tax
provision is included in the accompanying financial statements.
(e) Net Income per Share
Net income per share is based on the weighted average of shares
outstanding of 4,361,618 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 as to the valuation of
investments that affect the amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
(3) Management and Organization Fees
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement (the Agreement), the Investment Adviser performs certain
services, including certain management, investment advisory, and
administrative services necessary for the operation of the Fund. In
addition, under the Agreement the Investment Adviser is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Agreement, the Prospectus, and
the original offering document are as follows:
o The Investment Adviser receives a fee equal to 0.4375% (1.75%
annually) of the Net Assets each quarter. The Fund incurred $244,481
for such management fees for the quarter ended March 31, 2002. Amounts
payable for such fees at March 31, 2002, were $244,481.
23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
o The Investment Adviser was reimbursed by the Fund for administrative
expenses paid by the Investment Adviser on behalf of the Fund. Such
reimbursements were $13,244 for the quarter ended March 31, 2002, and
are included in general and administrative expenses in the
accompanying statements of operations.
o The Investment Adviser is to receive an incentive fee in an amount
equal to 20% of any of the Fund's realized capital gains computed net
of all realized capital losses and cumulative unrealized depreciation
of the Fund, which fee is to be accrued and paid on a quarterly basis.
The Fund did not incur any incentive fees for the quarter ended March
31, 2002.
(4) Eligible Portfolio Companies and Investments
(a) Eligible Portfolio Companies. The Fund invests primarily in
convertible securities and equity investments of companies that
qualify as Eligible Portfolio Companies as defined in Section 2(a)(46)
of the 1940 Act or in securities that otherwise qualify for investment
as permitted in Section 55(a)(1) through (5). Under the provisions of
the 1940 Act at least 70% of the fund's assets, as defined under the
1940 Act, must be invested in Eligible Portfolio Companies. In the
event the Fund has less than 70% of its assets in eligible portfolio
investments, then it will be prohibited from making non-eligible
investments until such time as the percentage of eligible investments
again exceeds the 70% threshold.
(b) Investments. Investments are carried in the statements of assets and
liabilities as of December 31, 2001, and March 31, 2002, at fair
value, as determined in good faith by the Investment Adviser. The
convertible debt securities held by the Fund generally have maturities
between five and seven years and are convertible into the common stock
of the issuer at a set conversion price at the discretion of the fund.
The common stock underlying these securities is generally unregistered
and thinly to moderately traded but is not otherwise restricted. The
Fund may register and sell such securities at any time with the Fund
paying the costs of registration. Interest on the convertible
securities are generally payable monthly. The convertible debt
securities generally contain embedded call options giving the issuer
the right to call the underlying issue. In these instances, the Fund
has the right of redemption or conversion. The embedded call option
will generally not vest until certain conditions are achieved by the
issuer. Such conditions may require that minimum thresholds be met
relating to underlying market prices, liquidity, and other factors.
24
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
(5) 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:
o Generally, the guiding principle for valuation is application of
objective standards. The objective standards for determining market
prices and applying valuation methodologies will govern in all
situations except where a debt issuer is in default.
o Generally, the fair value of debt securities and preferred securities
convertible into common stock is the sum of (a) the value of such
securities without regard to the conversion feature, and (b) the
value, if any, of the conversion feature. The fair value of debt
securities without regard to conversion features is determined on the
basis of the terms of the debt security, the interest yield, and the
financial condition of the issuer. The fair value of preferred
securities without regard to conversion features is determined on the
basis of the terms of the preferred security, its dividend, and its
liquidation and redemption rights and absent special circumstances
will typically be equal to the lower of cost or 120% of the value of
the underlying common stock. The fair value of the conversion features
of a security, if any, are based on fair values as of the relevant
date less an allowance, as appropriate, for costs of registration, if
any, and selling expenses.
o Portfolio investments for which market quotations are readily
available and which are freely transferable are valued as follows: (i)
securities traded on a securities exchange or the Nasdaq or in the
over-the-counter market are valued at the closing price on, or the
last trading day prior to, the date of valuation, and (ii) securities
traded in the over-the-counter market that do not have a closing price
on, or the last trading day prior to, the date of valuation are valued
at the average of the closing bid and ask price for the last trading
day on, or prior to, the date of valuation. Securities for which
market quotations are readily available but are restricted from free
trading in the public securities markets (such as Rule 144 stock) are
valued by discounting the closing price or the closing bid and ask
prices, as the case may be, for the last trading day on, or prior to,
the date of valuation to reflect the liquidity caused by such
restriction, but taking into consideration the existence, or lack
thereof, of any contractual right to have the securities registered
and freed from such trading restrictions.
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 will govern the value of the
25
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
enterprise. This valuation method will cause the Fund's initial
investment in the private entity to be valued at cost. Thereafter, new
issuances of equity or equity-linked securities by a portfolio company
will be used to determine enterprise value as they will provide the
most objective and independent basis for determining the worth of the
issuer.
o Where a portfolio company is in default on a debt instrument held by
the Fund, and no market exists for that instrument, then the fair
value for the investment is determined on the basis of appraisal
procedures established in good faith by the Investment Adviser. This
type of fair value determination is based upon numerous factors such
as the portfolio company's earnings and net worth, market prices for
comparative investments (similar securities in the market place), the
terms of the Fund's investment, and a detailed assessment of the
portfolio company's future financial perspective. In the event of
unsuccessful operations by a portfolio company, the appraisal may be
based upon a net realizable value when that investment is liquidated.
As of December 31, 2001, and March 31, 2002, the net unrealized
appreciation associated with investments held by the Fund was
$14,746,533, and $19,537,655 respectively.
(6) Restricted Securities
As indicated on the statement of investments as of March 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 5).
(7) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are collateralized by
$22,990,230 in Federal securities and $2,404,637 in equity securities held
by the broker and are included in cash and cash equivalents and investments
on the statement of assets and liabilities as of March31, 2002.
26
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
March 31, 2002
(8) Financial Highlights
Selected per share data and ratios for each share of common stock
outstanding throughout the three months ended March 31, 2001 and 2002, are
as follows:
2001 2002
Net asset value, beginning of period $10.86 $12.50
Net investment income (loss) $ 0.00 $(0.07)
Net realized and unrealized gain on investments $ 0.09 $ 0.32
------ ------
Total return from investment operations $10.95 $12.75
------ ------
Net asset value, end of period $10.95 $12.75
====== ======
Per share market value, end of period $ 9.19 $10.80
Portfolio turnover rate (quarterly) 0.25% 1.78%
Quarterly return (a) 2.80% 5.37%
Ratio to average net assets (quarterly) (b):
Net investment income (loss) 0.00% -0.55%
Expenses, excluding incentive fees 0.66% 0.78%
Expenses, including incentive fees 0.66% 0.78%
(a) Quarterly return (not annualized) was calculated by comparing the common
stock price on the first day of the period to the common stock price on the
last day of the period, in accordance with AICPA guidelines.
(b) Average net assets have been computed based on quarterly valuations.
27
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 March
31, 2002 (portfolio companies are herein referred to as the "Company"):
Active Link Communications, Inc. (OTC:ACVE) 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. At March 31, 2002, the Company still owed $98,027
on the convertible bridge loan due in May 2002.
DaisyTek International, Inc. (NASDAQ:DZTK) In the first quarter of 2002,
the Fund purchased 10,000 shares of the Company's common shares in the
open market for $136,918 or $13.69 per share. All stock is freely
tradeable. This is a new investment for the Fund.
DaisyTek is a leading wholesale distributor of computer and office
supplies and professional tape products, in addition to providing
marketing and demand generation services. The Company has significant
international operations in Canada, Australia, Mexico, and South
America, and additionally owns 50% of ISA International, a billion
dollar office and computer supply distributor in the UK. ISA in turn
owns 47% of Kingfield Heath, another major international distributor
of computer and office supply products.
Dexterity Surgical, Inc. (OTC:DEXT) In the first quarter of 2002, the
Company made a principal payment of $13,296 on the Fund's 9%
Convertible Debentures. The remaining balance on the debentures at
March 31, 2002, was $1,316,282.
Because of the Company's continuing operational and financial
difficulties, the Fund has taken an additional reserve on the
debentures of $500,000, leaving the Fund with a fair valuation at
March 31 of $816,282. Additionally, the Fund has fully reserved all of
its preferred and common stock positions.
Display Technologies, Inc. (OTC:DTEK) In the first quarter of 2002, the
Fund wrote off its entire investment in the Company, realizing a tax
loss of $3,299,741.
EDT Learning, Inc. (AMEX:EDT) 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.
28
eOriginal, Inc. (Private) In March 2002, the Fund made a follow-on
investment by advancing $75,000 to purchase Senior Secured Promissory
Notes of eOriginal. The notes bear interest at 12%, payable at
maturity on June 30, 2002, and are secured by all intellectual
property and software owned by the Company.
Fortune Natural Resources Corp. (OTC:FPXA) In the first quarter of 2002,
the Fund invested $120,000 to purchase Series B Preferred Stock of
Fortune (the "Series B"). The Series B pays a 10% dividend, payable
cumulatively over the six-month term of the instrument, and entitles
the Fund to redemption on the earlier of (1) 180 days after the date
of issuance of the Series B or (2) the funding of a private placement
of the Company's Series A Convertible Participating Preferred Stock.
In the event that redemption does not occur within six months upon
issuance of the Series B, then the Fund is entitled to put its entire
position in Fortune to the Company at cost plus any accrued and unpaid
dividends on the Series B. At March 31, 2002, the Fund owned 1,322,394
shares of Fortune common having a cost basis of $545,500. As
additional consideration for the Series B investment, the Fund is
entitled to warrant coverage at varying strike prices and in varying
amounts depending on the amount of time the Series B is outstanding.
If the Series B is carried to its term, then the Fund will be entitled
to 60% warrant coverage on its Series B investment.
I-Flow Corporation (NASDAQ:IFLO) In the first quarter of 2002, the Fund
purchased 17,500 shares of the Company's common stock in the open
market for $57,718.50, or $3.30 per share. This is a new investment
for the Fund.
I-Flow Corporation designs, develops, manufactures, and markets
ambulatory infusion systems. The Company's products administer
antibiotics, analgesics, chemotherapeutic agents, hormones, nutrients,
hydration therapies, and other medical treatments to patients. The
Company's products are used primarily in the home, hospital, and
physician office.
Integrated Security Systems, Inc. (OTC:IZZI) 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.
29
Precis, Inc. (NASDAQ:PCIS) In the first quarter of 2002, the Fund added to
its ownership of common stock in this company. All shares were
purchased on the open market and are freely tradeable. In total, the
Fund purchased 40,000 shares of the Company's common stock for
$460,593, a cost of $11.51 per share, bringing the Fund's total
ownership to 46,200 shares having a basis of $594,190, or $11.07 per
share.
RailAmerica, Inc. (NYSE:RRA) In the first quarter of 2002, the Fund sold
its entire position in RailAmerica and realized proceeds of
$924,512.78, a loss of $75,487.22.
Results of Operations for the Quarter Ended March 31, 2002
For the quarter ended March 31, 2002, the Fund had net investment loss of
($316,406) compared to net investment income of $9,706 for the first
quarter of 2001. This change was due in large part to a reduction in
investment income from $324,485 for the first quarter of 2001 to $111,185
for the comparable period of 2002, a decrease of 65.73%. This reduction in
investment income is primarily the result of lower interest and dividend
income due to the fund's more concentrated position in common stock and
other non-interest bearing instruments, coupled with the lack of new
investment activity in yield-bearing instruments and the failure of some
portfolio companies to make required interest payments. In addition,
general and administrative expenses increased for the first quarter of 2002
to $87,323 from $63,936, an increase of 36.58%. Interest expense for the
quarter ended March 31, 2002, was $29, 656, compared to zero in the
comparable period of 2001. Legal and professional fees increased 61.15%
from $41,037 in 2001 to $66,131 for the first quarter of 2002. Finally,
management fee expense increased from $209,806 for the first quarter of
2001 to $244,481 for the comparable period in 2002, an increase of 16.53%,
due to higher market values for portfolio investments.
Liquidity and Capital Resources
For the three months ended March 30, 2002, net assets increased $1,099,398
representing an increase of 2.02% over the period, entirely resulting from
operations. This increase is due primarily to the Fund's unrealized gains
on investments in the amount of $4,791,032, offset by the net investment
loss of ($316,406) as discussed previously and a net realized loss on
investments in the amount of $3,375,228. This realized loss is a
combination of the ($75,487) loss on the disposition of the Fund's entire
position in RailAmerica, Inc., and the loss realized on the Fund's entire
investment in Display Technologies, Inc., in the amount of( $3,299,741).
At the end of the first quarter of 2002, the Fund had net cash and cash
equivalents of $4,219,131 versus net cash and cash equivalents of
$4,928,780 at December 31, 2001. The Fund's interest receivable decreased
from $114,539 at December 31, 2001, to $70,276 at March 31, 2002, a
decrease of 38.64%.
30
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.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) Amendment #1 to Dividend Reinvestment Plan
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Fund
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
May 15, 2002 _____/S/ Russell Cleveland___________________________
Russell Cleveland, President and CEO
(Principal Executive Officer)
May 15, 2002 _____/S/ Barbe Butschek______________________________
Barbe Butschek, Chief Financial Officer
(Principal Financial Officer)
31
EXHIBIT 1
AMENDMENT #1 TO DIVIDEND REINVESTMENT PLAN
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
DIVIDEND REINVESTMENT PLAN
NOTICE OF CHANGE OF PLAN AGENT AND AMENDMENTS TO PLAN
To the Beneficial Shareholder:
Effective August 15, 2001, the Plan Agent for the Dividend Reinvestment
Plan of Renaissance Growth & Income Fund III, Inc., is American Stock Transfer &
Trust Company.
Further, the references to forty-five (45) days in Sections 3 and 4 shall
be changed to thirty (30) days with respect to the period for open-market
purchases of shares through the reinvestment of dividends, and the parenthetical
reference in the third sentence of Section 3 is eliminated.
Dated: July 2, 2001