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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 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 75-2407159 _____________________________________________________________________________ (State or other jurisdiction (I.R.S. Employer I.D. No.) of 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() 4,342,942 shares of common stock outstanding at March 31, 1998. The Registrant's Registration Statement on Form N-2 was declared effective by the Securities and Exchange Commission on May 6, 1994. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) Assets December 31, 1997 March 31, 1998 Cash $15,972,424 $11,683,088 Accounts receivable 180,025 245,694 Receivable from sale of investment 4,200,000 - Investments, at market value, cost of $24,150,665 and $29,400,653 27,795,592 40,374,405 Organizational costs, net of accumulated amortization 208,529 177,779 48,356,570 52,480,966 Liabilities and Net Assets Liabilities: Accounts payable - related parties 1,440,889 47,387 Accounts payable - trade 31,198 23,215 Dividends payable 2,387,123 347,436 3,859,210 418,038 Net Assets: Common stock, $1 par value; 20,000,000 shares authorized; 4,342,942 and 4,342,942 shares issued and outstanding 40,601,838 40,601,838 Accumulated undistributed income (loss) 3,895,522 11,461,090 Net assets $44,497,360 $52,062,928 $48,356,570 $52,480,966 Net asset value per share $ 10.25 $ 11.99 <FN> <F1> See accompanying notes to financial statements. </FN> RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. STATEMENT OF OPERATIONS (UNAUDITED) Three Months ended March 31, 1997 1998 Investment Income: Interest $ 512,913 $ 612,181 Dividends 75,000 - Other investment income 25,000 294,488 Total investment income 612,913 906,669 Expenses: Amortization 30,750 30,750 Bank charges 5,318 4,272 Directors' fees 18,000 22,500 Legal and professional 63,243 27,917 Management fees 187,137 162,616 Taxes 811 560 Other 54,114 39,619 Total Expenses 359,373 288,234 Net investment income 253,540 618,435 Realized gain on investments 419,905 - Unrealized gain (loss) on investments (7,256,685) 7,328,813 Net increase (decrease) in net assets resulting from operations $ (6,583,240) $ 7,947,248 <FN> <F1> See accompanying notes to financial statements. </FN> RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED) Three Months ended March 31, 1997 1998 Increase (Decrease) in net assets resulting from operations Investment income - net $ 253,540 $ 618,435 Realized gain on investments 419,905 - Unrealized gain (loss) on investments (7,256,685) 7,328,813 Net increase (decrease) in net assets resulting from operations (6,583,240) 7,947,248 Distributions to shareholders from net investment income (347,435) (381,680) Capital share transactions 39,848 - Total increase (decrease) (6,890,827) 7,565,568 Net assets Beginning of period 49,130,320 44,497,360 End of period $ 42,239,493 $52,062,928 <FN> <F1> See accompanying notes to financial statements. </FN> RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1998 (Unaudited) 1. Organization and Business Purpose Renaissance Capital Growth & Income Fund III, Inc. (the "Fund"), a Texas Corporation, was incorporated on January 20, 1994. The Fund seeks to achieve current income and capital appreciation potential by investing primarily in unregistered preferred stock investments of small and medium size companies which are in need of capital and which it believes offer the opportunity for growth. The Fund has elected to be treated as a business development company under the Investment Company Act of 1940, as amended ("1940 Act"). 2. Significant Accounting Policies A. Federal Income Taxes - The Fund intends to elect the special income tax treatment available to "regulated investment companies" under Subchapter M of the Internal Revenue Code in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to its shareholders. The Fund's policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all its taxable income to its shareholders. Therefore, no federal income tax provision is required. B. Distributions to Shareholders - Dividends to shareholders are recorded on the ex-dividend date. The Fund declared dividends of $381,680 for the quarter ended March 31, 1998. 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 management of the Fund that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and income and expenses for the period. 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 Financial 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 than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. 3. Organization Expenses In connection with the offering of its shares, the Fund paid Renaissance Capital Group, Inc. (the "Investment Advisor") organizational expenses of $623,544. Such expenses are deferred and amortized on a straight-line basis over a five-year period. Amortization expense for the quarter ended March 31, 1998 was $30,750. 4. Investment Advisory Agreement The Investment Advisor for the Fund is registered as an investment advisor under the Investment Advisors Act of 1940. Pursuant to an Investment Advisory Agreement, the Investment Advisor performs certain services, including certain management, investment advisory and administrative services necessary for the operation of the Fund. The Investment Advisor receives a fee equal to .4375% (1.75% annually) of the Net Assets each quarter. The Fund accrued a liability of $162,616 for such operational management fees performed during the quarter ended March 31, 1998. In addition, the Fund has agreed to pay the Investment Advisor an incentive fee equal to 20% of any net realized capital gains after allowance for any realized capital losses and unrealized depreciation of the Fund. This management incentive fee is calculated on an annual basis. 5. Capital Share Transactions As of March 31, 1998 there were 20,000,000 shares of $1 par value capital stock authorized and capital paid-in aggregated $36,258,896. Year-to-date transactions in capital stock are as follows: Shares Amount Balance December 31, 1997 4,342,942 $40,601,838 Balance March 31, 1998 4,342,942 $40,601,838 <FN> <F1> The Fund received an additional $61,200 from its shareholders during the current quarter. These funds were used to purchase Fund shares in the open market. </F1> 6. Related Party Transactions The Investment Advisor is reimbursed by the Fund for certain administrative expenses under the Investment Advisory Agreement. The Fund accrued a liability of $28,236 for such reimbursements during the quarter ended March 31, 1998. 7. Short-term Investments Short-term investments are comprised of U. S. Government and Agency obligations maturing from May 7, 1998 to May 20,1998. Such investments qualify for investment as permitted in Section 55(a) (1) through (5) of the 1940 Act. 8. Investments 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 must be invested in Eligible Portfolio Companies. These stocks are carried on the Statement of Assets and Liabilities as of March 31, 1998, at fair value, as determined in good faith by the Investment Advisor. The securities held by the Fund are unregistered and their value does not necessarily represent the amounts that may be realized from their immediate sale or disposition. The investments held by the Fund are convertible, generally after five years, into the common stock of the issuer at a set conversion price. The common stock acquired upon exercise of the conversion feature is generally unregistered and is thinly to moderately traded but is not otherwise restricted. The Fund generally may register and sell such securities at any time with the Fund paying the costs of registration. Dividends are generally payable monthly. The stocks often have call options, usually commencing three years subsequent to issuance, at prices specified in the stock agreements. INVESTMENT VALUATION SUMMARY CONVERSION COST OR FACE VALUE FAIR VALUE Bentley Pharmaceuticals, Inc. 12% Convertible Debenture 744,800 1,180,000 1,069,200 Document Authentication Systems Preferred Stock 500,000 500,000 500,000 The Dwyer Group, Inc. Common Stock 1,966,632 1,476,563 1,476,563 Fortune Natural Resources Corp. 12% Convertible Debenture 350,000 350,000 350,000 Integrated Security Systems, Inc. 9% Convertible Debenture 2,300,000 2,487,687 2,359,816 Warrants 3,750 3,750 3,750 Interscience Computer Corporation Series A Cumulative Convertible 4,000,000 4,000,000 1,400,000 Redeemable Preferred Stock RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 1998 8. Investments (continued) INVESTMENT VALUATIONSUMMARY CONVERSION COST OR FACE VALUE FAIR VALUE Intile Designs, Inc. Common Stock 500,000 125,000 67,500 Jakks Pacific, Inc. 9% Convertible Debenture 3,000,000 4,076,087 4,035,326 La-Man Corporation 8.75% Convertible Debenture 1,750,000 1,750,000 1,750,000 Common Stock 500,000 368,924 296,789 LifeQuest Medical, Inc. 9% Convertible Debenture 1,500,000 1,546,875 1,531,406 Common Stock 500,000 546,875 541,719 NewCare Health Corp. 8.5% Convertible Debenture 2,500,000 2,500,000 2,500,000 Play by Play Toys & Novelties, Inc. 8% Convertible Debenture 2,500,000 2,949,219 2,919,727 Poore Brothers., Inc. 9% Convertible Debenture 1,788,571 1,788,571 1,788,571 TAVA Technologies, Inc. 9% Convertible Debentures 1,500,500 13,129,375 12,998,080 Warrants -0- 290,625 287,719 Voice It Worldwide, Inc. 8% Convertible Debenture 2,450,000 3,546,053 3,283,290 Common Stock 1,046,400 1,292,500 1,214,950 $29,400,653 $43,908,104 $40,374,406 <FN> <F1> The fair value of debt securities convertible into common stock is the sum of </FN> [FN] <F2> (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 the conversion features of a security, if any, are based on fair values as of this date less an allowance, as appropriate, for costs of registration, if any, and selling expenses. Publicly traded securities, or securities that are convertible into publicly traded securities, are valued at the last sale price, or at the average closing bid and asked price, as of the valuation date. While these valuations are believed to represent fair value, these values do not necessarily reflect amounts which may be ultimately realized upon disposition of such securities. </FN> ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (1) MATERIAL CHANGES IN FINANCIAL CONDITION The following portfolio transactions are noted for the quarter ended March 31, 1998 (portfolio companies are herein referred to as the "Company"): INTEGRATED SECURITY SYSTEMS, INC. Effective March 18, 1998, the conversion price on the Fund's Convertible Debenture was reduced from $1.05 per share to $0.549 per share. The terms of the Debenture allowed the Fund the one-time adjustment when the Company failed to achieve minimum net sales and net after tax income benchmarks based on 1997 year end numbers. As a result of the adjustment, the Fund's Debenture is now convertible into 4,189,435 shares of the Company's common stock, of which 1,998,959 are considered unregistered, while the remaining 2,190,476 shares are registered and are freely marketable in the event the Fund converts from debt into equity. DOCUMENT AUTHENTICATION SYSTEMS. Effective February 5, 1998, the Fund invested $500,000 in the 5% Series A Cumulative Convertible Preferred Stock of Document Authentication Systems, Inc. ("DAS"). The Preferred is convertible into shares of common stock of DAS at $250.00 per share. DAS is currently private, and owns a patented process covering paperless transactions. In addition to the Fund's Investment, Renaissance US Growth and Income Trust, PLC ("RUSGIT") invested $500,000 in the 5% Series A Cumulative Convertible Preferred Stock of DAS. The investment by RUSGIT was made under the same terms and conditions as the Fund's investment. LA-MAN CORPORATION. On March 2, 1998, the Fund invested $2,250,000 in La-Man Corporation ("La-Man"). Of the total investment, the Fund invested $1,750,000 for the purchase of an 8.75% Convertible Debenture, maturing in seven years and convertible into La-Man's common stock at $4.75 per share. In addition, the Fund invested $500,000 in La-Man's common stock at a price of $4.32 per share. La-Man is a leading competitor in the market for design, manufacture, and placement of large electronic advertising signs for businesses, entertainment, and sports venues, as well as signage for schools and churches. In addition to the Fund's investment, RUSGIT invested $2,250,000 in La-Man by purchasing an 8.75% Convertible Debenture for $1,750,000, and by purchasing $500,000 of La-Man common stock at $4.32 per share. The investment by RUSGIT was made under the same terms and conditions as the Fund's investment. NEWCARE HEALTH CORPORATION. On January 27, 1998, the Fund invested $2,500,000 for the purchase of an 8.50% Convertible Debenture of NewCare Health Corporation ("NewCare"). The Debenture matures in seven years and is convertible into shares of NewCare's common stock at $3.81 per share. In addition, the Fund has options to purchase 100,000 shares of NewCare's common stock at a price of $4.19 per share. NewCare is a fast growing provider of senior residential care services, including long-term care, assisted living and independent living services. NewCare also owns and manages hospitals. In addition to the Fund's investment, RUSGIT invested $2,500,000 in an 8.50% Convertible Debenture of NewCare, and also received options on 100,000 shares of NewCare's common stock. The investment by RUSGIT was made under the same terms and conditions as the Fund's investment. JAKKS PACIFIC INC. Subsequent to March 31, 1998, the Fund invested $3,000,000 in the Series A Cumulative Convertible Preferred Stock of JAKKS Pacific, Inc. ("JAKKS"). The Preferred stock calls for a 7% dividend, and is convertible into common stock of JAKKS at a price of $8.95 per share. This represents the Fund's second investment in JAKKS. On December 31, 1996, the Fund invested $3,000,000 in a 9% Convertible Debenture of the Company. (2) MATERIAL CHANGES IN OPERATIONS Net investment income for the quarter ended March 31, 1998, as compared to March 31, 1997, reflects an increase of $346,895. This reported increase is attributable to an adjustment of prior year expenses resulting in an increase of income. During the first quarter, the Fund experienced $7,328,813 of unrealized gains resulting from an increase in the fair value of its investments. Pending investment in portfolio investments, funds are invested in temporary cash accounts and in government securities. Although income and expenses are essentially stable, the Registrant anticipates that income will continue to increase as investments are made. An aggressive search for potential investments is ongoing. During the quarter ended March 31, 1998, the Registrant paid dividend distributions of income to shareholders in the amount of $2,421,369 and accrued dividends payable to shareholders in the amount of $381,680. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. May 15, 1998 _______________\S\_______________________ Russell Cleveland, President and Chairman May 15, 1998 _________________\S\_________________________ Barbe Butschek, Corp. Secretary and Treasrer