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, 2001March 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
---------------------------------------------------------
(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 October 15, 2001.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 GROWTHRenaissance Capital Growth & INCOME FUNDIncome Fund III, INC.
StatementInc.
Statements of Assets and Liabilities
(Unaudited)
Assets December 31, 2000 September 30, 200131,2001 March 31,2002
Cash and cash equivalents $ 18,206,540 $ 24,208,711$27,125,926 $24,917,818
Investments at fair value, cost of $39,985,786$35,015,807
and $33,674,981
in 2000$32,093,757 December 31,2001 and
2001March 31, 2002, respectively 45,367,138 44,323,395
Accounts49,762,340 51,631,322
Interest receivable 464,110 626,066
Other assets 39,812 20,404
------------ ------------
$ 64,077,600 $ 69,178,576
============ ============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 $ 16,482,024 $ 18,020,09422,197,146 20,698,688
Accounts payable 14,082 52,019
Incentive fee and administrative fee
due to Investment Advisor 235,427 245,254
------------- ------------
16,731,533 18,317,367
------------- ------------13,472 33,576
Accounts payable - affiliate 268,542 257,711
Dividends payable - -
---------- ----------
22,479,160 20,989,975
---------- ----------
Net Assets:assets:
Common stock, $1 par value; authorized
20,000,000 shares authorized;shares; 4,561,618 issued, andissued;
4,361,618 shares outstanding 4,561,618 4,561,618
Additional paid-in capital 38,799,907 38,799,907paid-in-capital 37,125,714 37,125,714
Treasury stock at cost, 200,000 shares at
December 31, 2000,2001, and at September
30, 2001 ( 1,665,220) ( 1,665,220)
UndistributedMarch 31, 2002 (1,665,220) (1,665,220)
Distributions in excess of net investment income 5,649,762 9,164,904
------------ -----------(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, 47,346,067 50,861,209
------------ -----------
$ 64,077,600 $69,178,576
============== ===========
Net asset valueequivalent to $12.50 and $12.76
per share $ 10.86 $ 11.66
==============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 GROWTHRenaissance Capital Growth & INCOME FUNDIncome Fund III, INC.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 September 30,
2000March 31
2001 2002
---- ----
Investment
Income:
Interest $ 366,633294,736 $ 43,040
Dividends 23,403 104,511
Other investment income 20,375 3,00092,675
Dividend Income 23,329 18,510
Commitment and other fees 6,420 -
----------- -----------
Total investment income 410,411 150,551324,485 111,185
----------- -----------
Expenses:
Bank charges 14,506 7,707
Directors' fees 18,000 15,000General and administrative 63,936 87,323
Incentive fees -0- 7,571fee - -
Interest expense - 29,656
Legal and professional 37,923 67,547fees 41,037 66,131
Management fees 258,461 223,529
Franchise Taxes -0- 129
Other 42,886 45,651209,806 244,481
----------- -----------
Total expenses 371,776 367,134
-----------314,779 427,591
------------ -----------
Net investment income (loss) 38,635 ( 216,583)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 -0- 37,857
Unrealized gain (loss) on investments 3,601,156 ( 209,694)390,074 1,415,804
----------- -----------
Net increase (decrease) in net assets
resulting from operationsincome $ 3,639 791 $( 388,420)
============ ============399,780 $1,099,398
=========== ==========
Net income per share $ 0.09 $ 0.25
=========== ==========
See accompanying notes to financial statements.
19
RENAISSANCE CAPITAL GROWTHRenaissance Capital Growth & INCOME FUNDIncome Fund III, INC.Inc.
Statement of Operations
(Unaudited)
Nine Months Ended September 30,
2000 2001
---- ----
Investment Income:
Interest $ 1,125,791 $ 357,605
Dividends 84,490 159,903
Other investment income 105,250 7,600
----------- ----------
Total investment income 1,315,531 525,108
----------- ----------
Expenses:
Bank charges 32,686 19,835
Directors' fees 51,000 46,500
Incentive fees 1,611,135 919,429
Legal and professional 154,832 179,598
Management fees 848,434 672,894
Franchise Taxes 24,884 32,139
Other 169,719 180,832
----------- ----------
Total expenses 2,892,690 2,051,227
----------- ----------
Net investment income (loss) (1,577,159) (1,526,119)
Realized gain on investments 8,055,675 2,129,486
Unrealized gain (loss) on investments 10,025,894 5,267,049
----------- ----------
Net increase (decrease) in net assets
resulting from operations $ 16,504,410 $ 5,870,416
============ ===========
See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Changes in Net Assets
(Unaudited)
Three Months Ended September 30,
2000March 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 operations:
Investment incomecapital contributions - net $ 38,635 $( 216,583)
Realized gain on investment -0- 37,857
Unrealized gain (loss) on investments 3,601,156 ( 209,694)-
----------- ------------
------------
NetTotal increase (decrease in net assets resulting from operations 3,639,791 ( 388,420)
Distributions to shareholders -0- ( 2,355,274)
------------ ------------
Total increase (decrease) 3,639,791 ( 2,743,694)399,780 1,099,398
Net assets:
Beginning of period 55,178,483 53,604,903
------------ ------------
End of period $ 58,818,274 $ 50,861,209
Nine Months Ended September 30,
2000 2001
---- ----
Increase (decrease) in net assets
resulting from operations:
Investment income - net $( 1,577,159) $( 1,526,119)
Realized gain on investment 8,055,675 2,129,486
Unrealized gain (loss) on investments 10,025,894 5,267,049
------------ -----------
Net increase (decrease in net assets
resulting from operations 16,504,410 5,870,416
Distributions to shareholders ( 6,380,130) ( 2,355,274)
Cost of shares repurchased 2,759,688 -0-
------------- -----------
Total increase (decrease) 12,883,968 3,515,142
Net assets:
Beginning of period 45,934,306 47,346,067 54,537,508
------------ -----------
End of period $58,818,274 $ 50,861,209$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
September 30, 2001
1.March 31, 2002
(1) Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the "Fund")Fund), a Texas
corporation, was formed on January 20, 1994. The Fund offered to sell
shares in 1994,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 ("BDC") under the Investment Company
Act of 1940, as amended ("1940 Act")(1940 Act).
The Fund seeks to achieve current income and
capital appreciation by investing primarily in unregistered convertible
securities(2) Summary of emerging growth size companies.
2. Significant Accounting Policies
A.(a) Valuation of Investments
Portfolio investments are stated at quoted market or fair value as
determined by the Investment Advisor (note 5). The securities held by
the Fund are primarily unregistered and their value does not
necessarily represent the amounts that may be realized from their
immediate sale or disposition.
(b) Other
The Fund follows industry practice and records security transactions
on the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded as earned on the accrual basis.
(c) Cash and Cash Equivalents
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) Federal Income Taxes -
The Fund has elected the special income tax treatment available to
a regulated"regulated investment company ("RIC")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
it pays out to its shareholders. If a RIC
meets certain diversification and distribution requirements under the
Code, it qualifies for pass-through tax treatment. The Fund would cease
to qualify for pass-through tax treatment if it were unable to comply
with these requirements. Failure to qualify as a RIC would subject the
Fund to federal income tax as if the Fund were an ordinary corporation,
which could result in a substantial reduction in both the Fund's net
assets and the amount of income available for distribution to
shareholders.
B. Distributions to Shareholders - Dividends paid to shareholders are
recorded on the ex- dividend date. The Fund announced a dividend of
$0.54 per share on July 16, 2001. The ex- dividend date was July 20,
2001, and the dividend was paid on August 16, 2001, to shareholders of
record July 24, 2001. With this dividend, the Fund has paid
shareholders a total of $7.56 per share in cash distributions since
inception.
C. Management Estimates - The financial statements have been prepared
in conformity with generally accepted accounting principles. The
preparation of the accompanying financial statements requires estimates
and assumptions made by the Investment Adviser as to the valuation of
investments that effect the amounts and disclosures in the financial
statements. Actual results could differ significantly from those
estimates.
D. Financial Instruments - In accordance with the reporting
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financials Instruments," the Company
calculates the fair value of its financial instruments and includes
this additional information in the notes to the financial statements
when the fair value is different from the carrying value of those
financial instruments. When the fair value reasonably approximates the
carrying value, no additional disclosure is made.22
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2001
3. Investment Advisory AgreementMarch 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 Renaissance Capital Group, Inc.
("RCG"), is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended.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 .4375%0.4375% (1.75%
annually) of the net assetsNet Assets each quarter. The Fund accrued a liability of $223,529incurred $244,481
for such operational
management fees performed duringfor the quarter ended September 30, 2001.
In additionMarch 31, 2002. Amounts
payable for such fees at March 31, 2002, were $244,481.
23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to the management fee, the Investment Advisory Agreement
entitles theFinancial Statements
March 31, 2002
o The Investment Adviser to an incentive fee equal to 20% of any
net realized capital gains after allowance for any unrealized capital
depreciation ofwas reimbursed by the Fund. This management incentive fee is calculated
on a quarterly basis. For the three-month period ended September 30,
2001, the Investment Adviser earned incentive fees of $7,571.
Finally, the Investment Adviser is reimbursedFund for administrative
expenses paid by the Investment Adviser on behalf of the Fund. The Fund
accrued a liability of $29,107Such
reimbursements were $13,244 for these reimbursable administrative
expenses in the quarter ended September 30, 2001, which accrual isMarch 31, 2002, and
are included in general and administrative expenses in the
accompanying statementstatements of operations.
4. Capital Share Transactions
Aso The Investment Adviser is to receive an incentive fee in an amount
equal to 20% of September 30, 2001, there were 20,000,000 shares of $1 par value
capital stock authorized, 4,561,618 shares issued, 4,361,618 shares
outstanding, and additional paid-in capital aggregating $41,696,305.
Year-to-date transactions in capital stock are as follows:
Shares Amount
Balance December 31, 2000 4,361,618 $41,696,305
Shares repurchased - -
---------- -----------
Balance September 30, 2001 4,361,618 $41,696,305
========== ===========
5. Temporary Investments
At September 30, 2001, temporary investments were held in a money
market fund made up of U.S. Treasury obligations and a U.S. Treasury
bill. These investments qualify for investment as permitted in Section
55(a)(1)any of the 1940 Act.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2001
6. FunctionsFund's realized capital gains computed net
of all realized capital losses and Activities of Business Development Companies
Pursuant to Section 55(a)cumulative unrealized depreciation
of the 1940 Act,Fund, which fee is to be accrued and paid on a BDC is required to have at
least 70%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 the value of its total assets invested in eligible
portfolio 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 (6)(5). Under the provisions of
the 1940 Act.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 a BDCthe Fund has less than 70% of its assets in eligible or other qualified portfolio
investments, then it will be prohibited from making non-eligible
investments until such time as the percentage of eligible or other
qualified investments
again exceeds the 70% threshold.
At September 30,
2001, the Fund had more than 70% of its assets in eligible and other
qualified portfolio investments.
7.(b) Investments. Investments
The Fund's investments are carried in the statements of assets and
liabilities as of September 30,December 31, 2001, and March 31, 2002, at fair
value, as determined in good faith by the Investment Advisor.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 at a set conversion price.fund.
The common stock underlying these securities is generally unregistered
and thinly to moderately traded.
In certain instances,traded but is not otherwise restricted. The
Fund may register and sell such securities at any time with the Fund
has registration rights. In addition,paying the Fund may sell restricted securities pursuant to Rule 144costs of the
Securities Act of 1933.registration. Interest on the convertible
debentures issecurities 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
September 30, 2001
INVESTMENT VALUATION SUMMARY
CONVERSION
COST OR FACE FAIR
VALUE VALUE
800America.com, Inc.
Common Stock $ 221,376 $ 92,880 $ 91,951
Active Link Communications, Inc.
8% Subordinated Convertible
Promissory Notes $ 375,000 $ 375,000 $ 375,000
Bentley Pharmaceuticals, Inc.
Common Stock $ 1,970,478 $ 5,781,118 $ 5,723,307
CaminoSoft Corp.
Common Stock $ 4,625,000 $ 3,825,000 $ 3,694,250
CareerEngine Network, Inc.
12% Convertible Debenture $ 250,000 $ 250,000 $ 250,000
Dexterity Surgical, Inc.
9% Convertible Debenture $ 1,370,276 $ 1,370,276 $ 1,370,276
8% Convertible Preferred Stock 1,000,000 38,462 38,462
Common Stock 635,000 13,000 -0-
Display Technologies, Inc.
8.75% Convertible Debenture $ 1,750,000 $ 1,750,000 $ 450,000
5.25% Convertible Preferred Stock 500,000 8,100 -0-
Common Stock 1,049,741 7,193 -0-
The DwyerMarch 31, 2002
(5) Valuation of Investments
On a quarterly basis, Renaissance Group Inc.
Common Stock $ 1,966,632 $ 1,957,500 $ 1,937,925
eOriginal, Inc.
5% Convertible Preferred Stock $ 4,000,030 $ 8,997,250 $ 8,577,418
Senior Secured Promissory Note 500,000 500,000 500,000
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2001
Fortune Natural Resources Corp.
Common Stock $ 545,500 $ 436,390 $ 432,026
Integrated Security Systems, Inc.
8% Promissory Note $ 75,000 $ 75,000 $ 75,000
Series D Preferred 150,000 90,000 90,000
Series F Convertible Preferred 542,989 1,085,978 1,020,819
Series G Convertible Preferred 3,666,950 7,333,902 6,843,868
Common Stock 215,899 157,303 155,730
JAKKS Pacific, Inc.
Common Stock $ 521,172 $ 1,179,184 $ 1,167,392
Laserscope
8% Convertible Debenture $ 1,500,000 $ 1,980,000 $ 1,811,200
Northwestern Steel & Wire Corp.
Bonds $ 127,500 $ 127,500 $ 127,500
Play by Play Toys & Novelties, Inc.
8% Convertible Debenture $ 2,425,748 $ 2,425,748 $ 1,925,748
Poore Brothers, Inc.
Common Stock $ 1,963,170 $ 6,064,461 $ 5,650,593
Precis, Inc.
Common Stock $ 14,105 $ 14,000 $ 13,860
RailAmerica, Inc.
6% Convertible Debenture $ 500,000 $ 625,000 $ 618,750
Simtek Corporation
Common Stock $ 195,000 $ 365,000 $ 343,100
ThermoView Industries, Inc.
Common Stock $ 500,000 $ 33,750 $ -0-
Verso Technologies, Inc.
Common Stock $ 512,500 $ 111,212 $ 104,539
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
September 30, 2001
Miscellaneous Securities $ 5,915 $ 1,049,559 $ 934,681
----------- ----------- -----------
Total $33,674,981 $48,119,766 $44,323,395
=========== =========== ===========
Pursuant to procedures established byprepares a valuation of the Investment Adviser,assets
of the fair value of
each investment is based upon its costFund subject to the Fund. Costsapproval of the Board of Directors. The
valuation principles are as follows:
o Generally, the primary factor
used to determine fair value until significant developments affectingguiding 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
investee company provide a basis for use in an appraisal valuation. 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, would be
required to liquidate the position, and selling expenses.
Publiclyo 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 securities that are convertible into publicly traded securities,the Nasdaq or in the
over-the-counter market are valued at the closing price on, or the
last sale price, ortrading day prior to, the date of valuation, and (ii) securities
traded in the event an over-the-counter security
has nomarket that do not have a closing price
thenon, or the security islast trading day prior to, the date of valuation are valued
at the average of the closing bid and askedask 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 valuation date. While these valuationsFund
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 believedcollateralized 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 represent fairFinancial 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, these values do not necessarily reflect amounts which may
be ultimatelybeginning of period $10.86 $12.50
Net investment income (loss) $ 0.00 $(0.07)
Net realized upon dispositionand unrealized gain on investments $ 0.09 $ 0.32
------ ------
Total return from investment operations $10.95 $12.75
------ ------
Net asset value, end of such securities.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 September 30, 2001March
31, 2002 (portfolio companies are herein referred to as the "Company"):
800America.com,Active Link Communications, Inc. (ACCO)(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 thirdfirst quarter 2001,of 2002,
the Fund purchased 54,00010,000 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 $221,376, a cost of $4.10$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 sharesCompany's products administer
antibiotics, analgesics, chemotherapeutic agents, hormones, nutrients,
hydration therapies, and other medical treatments to patients. The
Company's products are freely tradeable.
Bentley Pharmaceutical, Inc. (BNT) In the third quarter 2001, the Fund
exercised its option to purchase 7,779 shares of the Company's common stock
at a rate of $3 per share. The Fund sold none of the common stock during
the quarter. The shares are freely tradeable.
Dexterity Surgical, Inc. (DEXT) In the quarter ended September 30,
2001, the Company made principal repayments on the Fund's convertible
debentures of $41,944, reducing the outstanding principal balance on the
debentures to $1,370,276.
Renaissance US Growth & Income Trust PLC ("RUSGIT") also received
$41,944 in principal repayments on its debenturesused primarily in the second quarter,
reducing the outstanding balance on the RUSGIT debentures to $1,370,276 at
September 30, 2001.
Display Technologies, Inc. (DTEK) Due to the operational difficulties
being experienced at the Company, the Fund fully reserved all its preferredhome, hospital, and
common stock positions in the Company and additionally reserved the
value of its convertible debenture to $450,000.
RUSGIT also placed identical reserves on its investments in the
Company in the third quarter 2001.
Grand Adventures Tour & Travel (GATT) In the quarter ended September
30, 2001, the Fund realized a tax loss on its investments in the Company
which consisted of $350,000 in principal balance of 10% convertible
debentures, $1,000,000 in principal balance of 8% convertible debentures,
and 45,500 shares of common stock having a cost basis of $130,089.
RUSGIT also wrote off its entire investment in the Company, which
consisted of $400,000 in principal balance of 10% convertible debentures,
$1,000,000 in principal balance of 8% convertible debentures, and 55,500
shares of common stock having a cost basis of $165,707.
physician office.
Integrated Security Systems, Inc. (IZZI)(OTC:IZZI) In the thirdfirst quarter 2001,of 2002,
the Fund invested $75,000$50,000 to purchase an 8%,a 120-day promissory note
of the
Company, which is secured by all of the assets of the Companybearing interest at 8% and all of
its subsidiary companies. As additional consideration for the investment,
the Fund received 375,000 warrants to purchase common stock of the Company
at a rate of $0.20 per share on or before September 27, 2006.
RUSGIT also invested $75,000 in the third quarter 2001 to purchase an
8%, 120-day promissory note of the Company that is secured by all the assets of the Company
and its subsidiaries. RUSGIT also receivedAs additional consideration of 375,000for 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
atCompany'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 ratebasis of $0.20$3,403, or $0.32 per shareshare. 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 before September 27, 2006.
Medical Action Industries,$0.29 per share.
29
Precis, Inc. (MDCI) Throughout(NASDAQ:PCIS) In the thirdfirst quarter 2001,of 2002, the Fund soldadded to
its entire investment in the Company in the open
market. The total investment of the Fund was 160,000 sharesownership of common stock having a cost basis of $555,392, a rate of $3.47 per share.in this company. All shares were
purchased on the open market and are freely tradeable. In total, the
Fund received proceeds of $2,073,337 from its stock sales, representing an
average exit price of $12.96 per share, representing a gain of $1,517,945.
RUSGIT also exited from its entire position in Medical Action
Industries, Inc., during the third quarter 2001.
Precis, Inc. (PCIS) In the third quarter 2001, the Fund made a new
investment into this Company by purchasing 3,500purchased 40,000 shares of the Company's common stock on the open market for
approximately $4.03$460,593, a cost of $11.51 per share, representingbringing the Fund's total
ownership to 46,200 shares having a total costbasis of $14,105. Precis operates through two
subsidiary companies. Foresight,$594,190, or $11.07 per
share.
RailAmerica, Inc., provides product enhancements (NYSE:RRA) In the first quarter of 2002, the Fund sold
its entire position in the
formRailAmerica and realized proceeds of
"club benefits" to markets including rent-to-own, banking, consumer
finance, and other national associations. Care Entree is the primary
business, and it is$924,512.78, a providerloss of medical savings programs designed to
lower health care costs for consumers and accelerate payments to providers.
The Fund's stock in the Company is freely tradeable.$75,487.22.
Results of Operations for the Quarter Ended September 30, 2001March 31, 2002
For the three monthsquarter ended September 30, 2001,March 31, 2002, the Fund had a net
decrease in net assets resulting from operations in the amount of $388,420,
in comparison to a net increase in net assets of $3,639,791 for the three
months ended September 30, 2000. The change is primarily due to an
unrealized loss on investments of $209,694, due to lower values for
portfolio investments and a net investment loss of
$216,583, in comparison($316,406) compared to an unrealized gain on investments of $3,601,156 and net investment income of $38,635$9,706 for the three months ended September 30, 2000. The Fund's
net decreasefirst
quarter of 2001. This change was due in net assetslarge part to a reduction in
investment income from $324,485 for the 2001 period was reduced somewhat by a
realized gain on investments of $37,857, which represents the gains
realized on the Fund's sale of its stock in Medical Action Industries,
Inc., net of the losses realized on the Fund's investments in Grand
Adventures Tour and Travel Publishing, Inc. The net realized gain on
investments resulted in an incentive fee of $7,571 for the third quarter
ended September 30, 2001.
In the thirdfirst quarter of 2001 to $111,185
for the Fund's totalcomparable period of 2002, a decrease of 65.73%. This reduction in
investment income was
$150,551, a 63.3% decrease relative to total investment incomeis primarily the result of $410,411
for the three months ended September 30, 2000. The reason for the
difference is a 62.2% decrease inlower interest and dividend
income due to fewerthe 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 Fund's investments being held in interest-bearing instruments. Totalfailure of some
portfolio companies to make required interest payments. In addition,
general and administrative expenses increased for the Fund were $367,134 for the 2001 third quarter, a 1.3%
decrease in comparison to total expenses of $371,776 in the comparablefirst quarter of 2000. Expenses were driven lower primarily by a 13.5% reduction
in management fees due2002
to lower valuations$87,323 from $63,936, an increase of 36.58%. Interest expense for the Fund's invested
portfolio, together with lower bank charges of 46.9% as a result of the new
custodial relationship, offset by higher legal and professional fees. For
the third quarter of 2001, professional fees were $67,547, a 78.1% increase
over the $37,923 in legal and professional fees incurred in the
quarter ended September 30, 2000.
For the nine months ended September 30, 2001, the Fund's increaseMarch 31, 2002, was $29, 656, compared to zero in
net assets resulting from operations amounted to $5,870,416 in comparison
to the net increase in net assets of $16,504,410 in the nine months ended
September 30, 2000. The net increase in net assets for the first three
quarters of 2001 is primarily due to an unrealized gain on the Fund's
investment portfolio of $5,267,049 coupled with net realized gains on
investments of $2,129,486. This compares to unrealized gains on investments
of $10,025,894 for the nine months ended September 30, 2000, together with
net realized gains on investments of $8,055,675. The net realized gain on
investments for the two periods includes incentive fees of $919,429 for the
nine months ended September 30, 2001, and $1,611,135 for incentive fees
realized in the first nine months of 2000. For 2001 the nine-month increase
in net assets was offset slightly by the Fund's net investment loss of
$1,526,119 due primarily to lower investment income being generated by Fund
investments.
For the nine months ended September 30, 2001, total investment income
was $525,108, a decline of 60.1% in comparison to the same period of 2000,
and is mostly explained by lower interest and dividend income on portfolio
investments. Interest and dividend income for the nine-month period ended
September 30, 2001, was $517,508, a decrease of 57.2% in relation to the
$1,210,281 in interest and dividend income for the same period of 2000. The
decrease in interest and dividend income is a result of fewer of the Fund's
investments being held in interest-bearing instruments. In addition, other
investment income declined 92.8% to $7,600 for the 2001 period in
comparison to $105,250 realized in the first nine months of 2000, due to
fewer originations of new privately placed investments. Offsetting the
decline in total investment income were lower overall total expenses. For
the first nine months of 2001, the Fund's total expenses were $2,051,227, a
29.1% decrease from the
comparable period of 2000 when total expenses were
$2,892,690. The primary reason2001. 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 reduction is lower
management feesincreased 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 lowerhigher market values for investment holdings, decreased
incentive fees resulting from a decrease in realized gains, and lower bank
charges resulting from a new custodial relationship, offset somewhat by
higher legal and professional fees.
portfolio investments.
Liquidity and Capital Resources
For the three months ended SeptemberMarch 30, 2001, net assets declined
$2,743,694 representing a 5.1% decline over the period. The primary reason
for the decline is a $0.54 dividend declared and paid to shareholders in
the third quarter. The total dividend amounted to $2,355,274. The remaining
decrease in net assets resulted primarily from an unrealized loss on
investments of $209,694 together with a net investment loss of $216,583,
offset by the Fund's realized gain on investments of $37,857.
For the nine months ended September 30, 2001,2002, net assets increased $3,515,142, a 7.4%$1,099,398
representing an increase of 2.02% over the period. Theperiod, entirely resulting from
operations. This increase is a result ofdue primarily to the Fund's unrealized gains
on investments in the amount of $5,267,049 together with net
realized gains on investments of $2,129,486$4,791,032, offset by athe net investment
loss of $1,526,119($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 $0.54 per share distribution to shareholdersloss realized on the Fund's entire
investment in Display Technologies, Inc., in the third quarter which totaled $2,355,274.amount of( $3,299,741).
At the end of the thirdfirst quarter of 2002, the Fund had net cash and cash
equivalents of $6,188,617$4,219,131 versus net cash and cash equivalents of
$1,724,516$4,928,780 at December 31, 2000. In addition, the2001. The Fund's accountsinterest receivable was $626,066 in comparison to accounts receivable of $464,110decreased
from $114,539 at December 31, 2000. Overall, in the nine-month period ended September2001, to $70,276 at March 31, 2002, a
decrease of 38.64%.
30
2001, net assets have returned 7.4% from December 31, 2000, after
distribution of the dividend, and have increased more than 12% on a total
return basis for the fiscal year to date before the distribution of the
$0.54 per share dividend to shareholders in the third quarter 2001.
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
None(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.
November 13, 2001 /S/__________________________________________________May 15, 2002 _____/S/ Russell Cleveland___________________________
Russell Cleveland, ChairmanPresident and PresidentCEO
(Principal Executive Officer)
November 13, 2001 /S/_________________________________________________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