-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVsLabJPXZQMvQBMpZhEnZ6TcgLqYTe2zc2fdmAQfRH16j2SuD48vsCsnLXut3wQ Pgn5sWtlDIEoXp+j/eq60A== 0000919567-03-000055.txt : 20030818 0000919567-03-000055.hdr.sgml : 20030818 20030815174902 ACCESSION NUMBER: 0000919567-03-000055 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030818 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAISSANCE CAPITAL GROWTH & INCOME FUND III INC CENTRAL INDEX KEY: 0000919567 IRS NUMBER: 752533518 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 811-08376 FILM NUMBER: 03851483 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPRWY STREET 2: STE 210 LB59 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918294 MAIL ADDRESS: STREET 1: 8080 N CENTRAL EXPWY., SUITE 210 LB 59 CITY: DALLAS STATE: TX ZIP: 75206 10-Q 1 form10q06302003.txt JUNE 30, 2003 FORM 10-Q 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 June 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 0-20671 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. --------------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 75-2533518 --------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 8080 North Central Expressway, Dallas, Texas 75206-1857 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) 214-891-8294 --------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes __x__ No _____ 4,351,418 shares of common stock were outstanding at August 14, 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, 2002 June 30, 2003 Cash and cash equivalents $10,968,001 $35,172,840 Investments at fair value, cost of $32,918,344 and $34,521,950 December 31,2002 and June 30, 2003, respectively 39,459,243 49,563,287 Accounts receivable - brokerage 110,381 - Interest and dividends receivable 28,409 494,055 Prepaid expenses 40,068 2,877 ----------- ----------- $50,495,721 $85,343,440 =========== =========== Liabilities and Net Assets Liabilities: Due to broker (Note 3) 9,001,163 34,491,604 Accounts payable 12,106 21,632 Accounts payable - affiliate 223,386 344,753 ----------- ----------- 9,236,655 34,857,989 ----------- ----------- Commitments and contingencies Net assets: Common stock, $1 par value; authorized 20,000,000 shares; 4,561,618 issued; 4,351,418 shares outstanding 4,561,618 4,561,618 Additional paid-in-capital 35,642,954 35,642,954 Treasury stock at cost, 209,900 shares at December 31, 2002 , and at June 30, 2003 (1,734,966) (1,734,966) Accumulated deficit (3,751,440) (3,025,492) Net unrealized appreciation of investments 6,540,900 15,041,337 ----------- ----------- Net assets, equivalent to $9.48 and $11.60 per share at December 31, 2002 June 30, 2003, respectively 41,259,066 50,485,451 ----------- ----------- $50,495,721 $85,343,440 =========== =========== See accompanying notes to financial statements. 2 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (unaudited) June 30, 2003 --------------------------------------------------- Interest Due Fair % of Net Rate Date Cost Value Assets Eligible Portfolio Investments - Convertible Debentures and Promissory Notes Active Link Communications, Inc. - Convertible bridge note (2) 12.00 09/30/03 $ 19,023 $ 0 0.00 Convertible note (2) 8.00 09/30/03 125,000 0 0.00 Convertible note (2) 8.00 09/30/03 250,000 0 0.00 Business Process Outsourcing - Convertible debenture (1)(3) 12.00 08/31/03 98,000 100,001 0.20 Dexterity Surgical, Inc. - Convertible debenture (2) 9.00 12/19/04 1,316,282 1,066,282 2.11 EDT Learning, Inc. - Convertible redeemable note(2)12.00 03/29/12 500,000 500,000 0.99 Integrated Security Systems, Inc. - Promissory notes (4) 8.00 09/05/03 525,000 525,000 1.04 Laserscope - Convertible debenture (2) 8.00 02/11/07 1,300,000 8,226,503 16.29 Simtek Corporation - Convertible debenture (2) 7.50 06/28/09 1,000,000 1,094,872 2.17 ---------- ---------- ------ $ 5,133,305 $11,512,658 22.80% ----------- ----------- ----- 3 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 --------------------------------------------------- Interest Due Fair % of Net Rate Date Cost Value Assets Other Portfolio Investments - Convertible Debentures and Promissory Notes CareerEngine Network, Inc. - Convertible debenture (2) 12.00 03/31/10 $ 250,000 $ 250,000 0.50 Interpool, Inc. - Convertible debenture (2) 9.25 12/27/22 375,000 375,000 0.74 ----------- ----------- ----- $ 625,000 $ 625,000 1.24% ----------- ----------- ----- (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Includes Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 4 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Eligible Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities Bentley Pharmaceuticals, Inc. - Common stock 400,000 $ 500,000 $ 5,207,400 10.31 CaminoSoft Corp. - Common stock 1,750,000 4,000,000 727,650 1.44 Common stock (2) 708,333 875,000 229,650 0.45 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 Holdings, Inc. - Series A, preferred stock (1) 10,680 4,692,207 770,383 1.53 Series B, preferred stock (1) 25,646 620,329 1,849,928 3.66 Series C, preferred stock (1) 28,929 699,734 2,086,741 4.13 Fortune Natural Resources Corp. - Common stock 1,262,394 500,500 324,940 0.64 Gasco Energy, Inc. - Common stock (2) 250,000 250,000 217,800 0.43 Integrated Security Systems, Inc. - Common stock 393,259 215,899 54,506 0.11 Common stock - PIK (2) 208,004 49,173 0 0.00 Series D, preferred stock (2) 187,500 150,000 31,500 0.06 Series F, preferred stock (2) 2,714,945 542,989 456,111 0.90 Series G, preferred stock (2) 18,334,755 3,666,951 3,080,239 6.10 5 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Eligible Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities JAKKS Pacific, Inc. - Common stock 49,847 $ 297,421 $ 655,841 1.30 Laserscope - Common stock (2) 160,000 200,000 1,265,616 2.51 Poore Brothers, Inc. - Common stock (2) 2,016,357 2,078,170 7,645,225 15.14 Simtek Corp. - Common stock (2) 1,000,000 195,000 376,200 0.75 ThermoView Industries, Inc. - Common stock 134,951 497,832 85,505 0.17 Miscellaneous Securities 2,165 272,861 0.54 ----------- ----------- ------ $21,668,370 $25,338,096 50.19% ----------- ----------- ------ (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Included Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 6 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Other Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities AirNet Systems, Inc. - Common stock (2) 50,000 $ 212,500 $ 200,475 0.40 Bentley Pharmaceuticals, Inc. - Common stock 72,979 116,582 950,077 1.88 Canterbury Consulting Group, Inc. - Common stock 18,521 125,415 14,302 0.03 Capital Senior Living Corp - Common stock 57,100 146,335 176,935 0.35 Dave & Busters, Inc. - Common stock 100,000 653,259 1,079,100 2.14 Dwyer Group, Inc. - Common stock 525,000 1,627,470 3,751,358 7.43 EDT Learning, Inc. - Common stock 48,266 27,033 17,202 0.03 7 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Other Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities Flamel Technologies, SA - Common stock 100,000 832,267 1,331,550 2.64 Gasco Energy, Inc. - Common stock 170,000 99,705 148,104 0.29 I-Flow Corporation - Common stock 100,000 254,038 735,570 1.46 Inet Technologies, Inc. - Common stock 96,600 530,338 951,558 1.88 Medical Action Industries, Inc. - Common stock 25,000 292,329 404,168 0.80 Precis, Inc. - Common stock 200,700 1,372,416 913,988 1.81 Stonepath Group, Inc. - Common stock (2) 200,000 270,000 461,360 0.91 8 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) June 30, 2003 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Other Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities US Home Systems, Inc. - Common stock 110,000 535,588 951,786 1.89 Miscellaneous Securities 0 0 0.00 ----------- ----------- ------ $ 7,095,275 $12,087,533 23.94% ----------- ----------- ------ $34,521,950 $49,563,287 98.17% =========== =========== ======= Allocation of Investments - Restricted Shares, Unrestricted Shares, and Other Securities Restricted Securities (2) $15,260,088 $25,476,833 50.46% Unrestricted Securities $12,624,427 $18,481,540 36.61% Other Securities (5) $ 6,637,435 $ 5,604,914 11.10% (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Includes Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 9 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (unaudited) December 31, 2002 --------------------------------------------------- Interest Due Fair % of Net Rate Date Cost Value Assets Eligible Portfolio Investments - Convertible Debentures and Promissory Notes Active Link Communications, Inc. - Convertible bridge note (2) 12.00 09/30/03 $ 41,480 $ 41,789 0.10 Convertible note (2) 8.00 09/30/03 125,000 126,000 0.31 Convertible note (2) 8.00 09/30/03 250,000 252,000 0.61 Business Process Outsourcing - Convertible debenture (1)(3) 12.00 08/31/03 98,000 100,000 0.24 Dexterity Surgical, Inc. - Convertible debenture (2) 9.00 12/19/04 1,316,282 1,066,282 2.58 EDT Learning, Inc. - Convertible redeemable note(2)12.00 03/29/12 500,000 500,000 1.21 eOriginal, Inc. - Promissory note (3) 12.00 12/31/02 1,139,683 1,139,683 2.76 Integrated Security Systems, Inc. - Promissory notes (4) 8.00 09/05/03 325,000 325,000 0.79 Laserscope - Convertible debenture (2) 8.00 02/11/07 1,500,000 5,026,000 12.18 Simtek Corporation - Convertible debenture (2) 7.50 06/28/09 1,000,000 1,000,000 2.42 ---------- ---------- ------ $ 6,295,445 $ 9,576,754 23.21% ----------- ----------- ------ 10 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) December 31, 2002 --------------------------------------------------- Interest Due Fair % of Net Rate Date Cost Value Assets Other Portfolio Investments - Convertible Debentures and Promissory Notes CareerEngine Network, Inc. - Convertible debenture (2) 12.00 03/31/10 $ 250,000 $ 250,000 0.61 Interpool, Inc. - Convertible debenture (2) 9.25 12/27/22 375,000 375,000 0.91 ----------- ------------ ------ $ 625,000 $ 625,000 1.51% ----------- ----------- ------ (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Included Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 11 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) December 31, 2002 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Eligible Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities Bentley Pharmaceuticals, Inc. - Common stock 400,000 $ 500,000 $ 3,187,800 7.73 CaminoSoft Corp. - Common stock 1,750,000 4,000,000 1,559,250 3.78 Common stock (2) 708,333 875,000 549,250 1.33 Dexterity Surgical, Inc. - Preferred stock - A (2) 500 500,000 0 0.00 Preferred stock - B (2) 500 500,000 0 0.00 Common stock (2) 260,000 635,000 0 0.00 eOriginal, Inc. - Series A, preferred stock (5) 6,000 1,500,000 794,000 1.92 Series B-1, preferred stock(5) 1,785 392,700 1,426,215 3.46 Series B-3, preferred stock (5) 447 107,280 357,153 0.87 Series C-1, preferred stock (5) 2,353 2,000,050 2,000,050 4.85 Fortune Natural Resources Corp. - Common stock 1,262,394 500,500 81,235 0.20 Gasco Energy, Inc. - Common stock (2) 250,000 250,000 112,150 0.27 Integrated Security Systems, Inc. - Common stock 393,259 215,899 93,438 0.23 Common stock - PIK (2) 104,787 28,319 23,640 0.06 Series D, preferred stock (2) 187,500 150,000 54,000 0.13 Series F, preferred stock (2) 2,714,945 542,989 612,492 1.48 Series G, preferred stock (2) 18,334,755 3,666,951 4,086,321 9.90 12 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) December 31, 2002 ----------------------------------------------- Shares Cost Value Assets Eligible Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities JAKKS Pacific, Inc. - Common stock 59,847 $ 357,088 $ 798,078 1.93 Poore Brothers, Inc. - Common stock (2) 2,016,357 2,078,170 4,669,485 11.32 Simtek Corp. - Common stock (2) 1,000,000 195,000 150,400 0.36 ThermoView Industries, Inc. - Common stock 134,951 497,832 120,241 0.29 Miscellaneous Securities 2,165 462,349 1.12 ----------- ----------- ------ $19,494,943 $21,137,547 51.23% ----------- ----------- ------ (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Included Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 13 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) December 31, 2002 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Other Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities AirNet Systems, Inc. - Common stock (2) 75,000 $ 318,750 $ 296,860 0.72 Bentley Pharmaceuticals, Inc. - Common stock 259,979 535,168 2,071,902 5.02 Canterbury Consulting Group, Inc. - Common stock 200,000 193,473 51,480 0.12 Capital Senior Living Corp - Common stock 44,500 110,975 112,340 0.27 Creative Host Services, Inc. - Common stock 4,830 7,921 9,085 0.02 Daisytek International, Inc. - Common stock 49,600 507,639 389,395 0.94 Dave & Busters, Inc. - Common stock 100,000 653,259 856,350 2.08 Dwyer Group, Inc. - Common stock 675,000 1,966,632 2,559,397 6.20 EDT Learning, Inc. - Common stock 48,266 27,033 14,335 0.03 I-Flow Corporation - Common stock 100,000 254,038 154,440 0.37 14 Renaissance Capital Growth & Income Fund III, Inc. Schedules of Investments (continued) (unaudited) December 31, 2002 ----------------------------------------------- Fair % of Net Shares Cost Value Assets Other Portfolio Investments - Common Stock, Preferred Stock, and Miscellaneous Securities Inet Technologies, Inc. - Common stock 75,000 $ 367,434 $ 452,925 1.10 Precis, Inc. - Common stock 100,700 1,025,047 550,305 1.33 US Home Systems, Inc. - Common stock 110,000 535,587 601,128 1.46 Miscellaneous Securities 0 0 0.00 ----------- ------------ ------ $ 6,502,956 $ 8,119,942 19.68% ----------- ----------- ------ $32,918,344 $39,459,243 95.64% =========== =========== ======= Allocation of Investments - Restricted Shares, Unrestricted Shares, and Other Securities Restricted Securities (2) $15,097,941 $19,191,669 46.52% Unrestricted Securities $12,255,525 $13,663,124 33.12% Other Securities (5) $ 5,564,878 $ 6,604,450 16.01% (1) Valued at fair value as determined by the Investment Adviser (Note 6). (2) Restricted securities - securities that are not fully registered and freely tradeable. (3) Securities in a privately owned company. (4) Securities that have no provision allowing conversion into a security for which there is a public market. (5) Includes Miscellaneous Securities, securities of privately owned companies, securities with no conversion feature, and securities for which there is no market. 15 Renaissance Capital Growth & Income Fund III, Inc. Statements of Operations (Unaudited) Three Months Ended June 30, 2002 2003 ---- ---- Income: Interest $ 93,430 $ 86,954 Dividend 24,728 55,221 Commitment and other fees - 1,553 ------------ ------------ 118,158 143,728 ------------ ------------ Expenses: General and administrative 159,287 118,130 Incentive fee - 30,097 Interest expense 14,745 28,411 Legal and professional fees 99,158 22,349 Management fees 233,831 223,901 ------------ ----------- 507,021 422,888 ------------ ----------- Net investment income (loss) (388,863) (279,160) Realized and unrealized gain (loss) on investments: Net unrealized appreciation (depreciation) on investments ( 1,985,523) 15,041,337 Net realized loss (gain) on investments ( 49,164) 150,483 ------------- ----------- Net gain (loss) on investments ( 2,034,687) 15,191,820 ------------ ----------- Net income (loss) ($ 1,423,550) $14,912,660 =========== =========== Net income (loss) per share ($ 0.56) $ 3.43 ============= =========== See accompanying notes to financial statements. 16 Renaissance Capital Growth & Income Fund III, Inc. Statements of Operations (Unaudited) Six Months Ended June 30, 2002 2003 ---- ---- Income: Interest $ 186,104 $ 347,486 Dividend 43,238 1,161,230 Commitment and other fees - 1,553 ----------- ---------- 229,342 1,510,269 ----------- ---------- Expenses: General and administrative 246,609 193,180 Incentive fee - 196,260 Interest expense 44,401 38,444 Legal and professional fees 165,289 80,514 Management fees 478,313 386,878 ----------- ---------- 934,612 895,276 ----------- ---------- Net investment income (loss) ( 705,270) 614,993 Realized and unrealized gain (loss) on investments: Net unrealized appreciation (depreciation) on investments 2,805,510 8,500,437 Net realized loss (gain) on investments ( 3,424,391) 981,299 ----------- ---------- Net gain (loss) on investments ( 618,881) 9,481,736 ----------- ---------- Net income (loss) ($ 1,324,151) $10,096,729 =========== =========== Net income (loss) per share ($ 0.30) $ 2.32 ============ =========== See accompanying notes to financial statements. 17 Renaissance Capital Growth & Income Fund III, Inc. Statement of Changes in Net Assets (Unaudited) Three Months Ended June 30, 2002 2003 ---- ---- From operations: Net investment income (loss) ($ 388,863) ($ 279,160) Net realized gain (loss) on investments ( 49,164) 150,483 Increase (decrease) in unrealized appreciation on investments ( 1,985,523) 14,561,632 ----------- ------------ Net increase (decrease) in net assets resulting from operations ( 2,423,550) 14,432,955 ----------- ----------- From distributions to stockholders: Common dividends from net investment income - ( 435,172) ------------ ------------ Net decrease in net assets resulting from distributions - ( 435,172) ------------ ------------ Total increase (decrease) in net assets ( 2,423,550) 13,997,783 Net assets: Beginning of period 55,636,907 36,487,668 ----------- ----------- End of period $53,213,357 $50,485,451 =========== =========== See accompanying notes to financial statements. 18 Renaissance Capital Growth & Income Fund III, Inc. Statement of Changes in Net Assets (Unaudited) Six Months Ended June 30, 2002 2003 ---- ---- From operations: Net investment income (loss) ($ 705,270) $ 614,993 Net realized gain (loss) on investments ( 3,424,391) 981,299 Increase (decrease) in unrealized appreciation on investments 2,805,510 8,500,437 ----------- ----------- Net increase (decrease) in net assets resulting from operations ( 1,324,151) 10,096,729 ----------- ----------- From distributions to stockholders: Common dividends from net investment income - ( 870,344) ----------- ----------- Net decrease in net assets resulting from distributions - ( 870,344) ----------- ----------- Total increase (decrease) in net assets ( 1,324,151) 9,226,385 Net assets: Beginning of period 54,537,508 41,259,066 ----------- ----------- End of period $53,213,357 $50,485,451 =========== =========== See accompanying notes to financial statements. 19 Renaissance Capital Growth & Income Fund III, Inc. Statement of Cash Flows Three Months ended June 30, 2002 2003 ---- ---- Cash flows from operating activities: Net income (loss) ($ 2,423,550) $14,912,660 Adjustments to reconcile net income to net cash provided by (used in) operation activities: Net unrealized (appreciation) depreciation on investments 1,985,523 ( 15,041,337) Net realized (gain) loss on investments 49,164 ( 150,483) (Increase) decrease in interest and dividends receivable ( 49,445) ( 75,648) (Increase) decrease in other receivables - ( 110,381) (Increase) decrease in other assets 6,470 18,698 Increase (decrease) in accounts payable ( 18,238) 700 Increase (decrease) in accounts payable - affiliate 17,539 ( 27,416) Increase (decrease) in other liabilities ( 4,331,990 15,487,613 ---------- ----------- Net cash provided by (used in) operating activities ( 4,764,527) 15,014,406 ----------- ----------- Cash flows from (used in) investing activities: Purchase of investments ( 2,584,815) ( 1,526,194) Proceeds from sale of investments 3,016,629 1,911,838 Repayment of debentures and notes 577,162 22,457 ------------ ----------- Net cash provided by (used in) investing activities 1,008,976 408,101 ----------- ----------- Cash flows from (used in) financing activities: Cash dividends - ( 435,172) ----------- ----------- Net cash used in financing activities - ( 435,172) ----------- ---------- Net increase (decrease) in cash and cash equivalents ( 3,755,551) $14,987,335 Cash and cash equivalents at beginning of the period 24,917,818 20,185,505 ---------- ------------ Cash and cash equivalents at end of the period $21,162,267 $35,172,840 =========== =========== Cash paid during the period for interest $ 14,745 $ 28,411 Cash paid during the period for taxes $ 25,779 $ 1,671 Noncash investing activities: During the quarter ended March 31, 2002, the Fund received common stock in settlement of amounts due from interest and dividends totaling $9,308. During the quarter ended March 31, 2003, the Fund received common stock in settlement of amounts due for interest and dividends totaling $891,417. See accompanying notes to financial statements. 20 Renaissance Capital Growth & Income Fund III, Inc. Statement of Cash Flows Six Months ended June 30, 2002 2003 ---- ---- Cash flows from operating activities: Net income (loss) ($ 1,324,151) $10,096,729 Adjustments to reconcile net income to net cash provided by (used in) operation activities: Net unrealized (appreciation) depreciation on investments ( 2,805,509) ( 8,500,437) Net realized (gain) loss on investments 3,424,392 ( 981,299) (Increase) decrease in interest and dividends receivable ( 14,577) ( 465,646) (Increase) decrease in other receivables - ( 110,381) (Increase) decrease in other assets 12,868 37,191 Increase (decrease) in accounts payable 1,866 9,526 Increase (decrease) in accounts payable - affiliate 6,706 121,367 Increase (decrease) in other liabilities ( 5,830,448) 25,490,441 ------------ ---------- Net cash provided by (used in) operating activities ( 6,528,853) 25,697,491 ------------ ---------- Cash flows from (used in) investing activities: Purchase of investments ( 3,985,044) ( 3,676,266) Proceeds from sale of investments 3,941,141 3,031,501 Repayment of debentures and notes 609,097 22,457 ------------ ----------- Net cash provided by (used in) investing activities 565,194 ( 622,308) ------------ ----------- Cash flows from (used in) financing activities: Cash dividends - ( 870,344) ------------ ----------- Net cash used in financing activities - ( 870,344) ------------ ----------- Net increase (decrease) in cash and cash equivalents ( 5,963,659) $24,204,839 Cash and cash equivalents at beginning of the period 27,125,926 10,968,001 ---------- ----------- Cash and cash equivalents at end of the period $21,162,267 $35,172,840 =========== =========== Cash paid during the period for interest $ 44,401 $ 38,444 Cash paid during the period for taxes $ 25,779 $ 1,671 Noncash investing activities: During the quarter ended March 31, 2002, the Fund received common stock in settlement of amounts due from interest and dividends totaling $9,308. During the quarter ended March 31, 2003, the Fund received common stock in settlement of amounts due for interest and dividends totaling $891,417. During the quarter ended June 30, 2002, the Fund received common stock in settlement of amounts due from interest and dividends totaling $6,745. During the quarter ended June 30, 2003, the Fund received common stock in settlement of amounts due from interest totaling $1,994. See accompanying notes to financial statements. 21 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 (1) Organization and Business Purpose Renaissance Capital Growth & Income Fund III, Inc. (the Fund), a Texas corporation, was formed on January 20, 1994. The Fund seeks to achieve current income and capital appreciation potential by investing in equity securities and convertible issues of small and medium size companies which are in need of capital and which Renaissance Capital Group, Inc. (Investment Adviser) believes offers the opportunity for growth. The Fund is a non- diversified closed-end investment company and has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act). (2) Summary of Significant Accounting Policies (a) Valuation of Investments Portfolio investments are stated at quoted market or fair value as determined by the Investment Adviser (Note 6). The securities held by the Fund are primarily unregistered and their value does not necessarily represent the amounts that may be realized from their immediate sale or disposition. (b) Other The Fund 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. 22 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 (d) Federal Income Taxes The Fund has elected the special income tax treatment available to "regulated investment companies" ("RIC") under Subchapter M of the Internal Revenue Code (IRC) in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to its shareholders. The Fund's policy is to comply with the requirements of the IRC that are applicable to regulated investment companies. Such requirements include, but are not limited to certain qualifying income tests, asset diversification tests and distribution of substantially all of the Fund's taxable investment income to its shareholders. It is the intent of management to comply with all IRC requirements as they pertain to a RIC and to distribute all of the Fund's taxable investment income and long-term capital gains within the defined period under the IRC to qualify as a RIC. Failure to qualify as a RIC would subject the Fund to federal income tax as if the Fund were an ordinary corporation, which could result in a substantial reduction in the Fund's net assets as well as the amount of income available for distribution to shareholders. (e) Net Income per Share Net income per share is based on the weighted average of shares outstanding of 4,351,718 during the period. (f) Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual results could differ from these estimates. (3) Due to Broker The Fund conducts business with a broker for its investment activities. The clearing and depository operations for the investment activities are performed pursuant to agreements with this broker. Due to broker represents a margin loan payable to the broker, which is secured by investments in securities maintained with the broker. Cash and cash equivalents related to the margin loan payable are held by the broker as collateral for the margin loan. The Fund is subject to credit risk to the extent the broker is unable to deliver cash balances or securities, or clear security transactions on the Fund's behalf. The Investment Adviser actively monitors the Fund's exposure to the broker and believes the likelihood of loss under those circumstances is remote. 23 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 (4) 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 management fee equal to a quarterly rate of 0.4375% (1.75% annually) of the Fund's Net Assets, as determined at the end of such quarter with each such payment to be due as of the last day of the calendar quarter. The Fund incurred $223,901 and $233,831 for management fees during the quarter ended June 30, 2003, and June 30, 2002, respectively. Amounts payable for such fees at June 30, 2003, and June 30, 2002, were $223,901 and $233,831, respectively, and are included in Accounts payable - affiliate on the statements of assets and liabilities. o The Investment Adviser receives an incentive fee in an amount equal to 20% of the Fund's realized capital gains in excess of realized capital losses of the Fund after allowance for any unrealized capital losses in excess of unrealized capital gains on the portfolio investments of the Fund. The incentive fee is calculated, accrued, and paid on a quarterly basis. During the quarter ended June 30, 2003, the Fund incurred $30,097 during the quarter ended June 30, 2003, for such incentive fees, which are included in Accounts payable - affiliate on the statements of assets and liabilities. The Fund did not incur any incentive fees for the quarter ended June 30, 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 $49,279 and $28,190 during the quarter ended June 30, 2003, and June 30, 2002, respectively, and are included in general and administrative expenses in the accompanying statements of operations. 24 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 (5) Eligible Portfolio Companies and Investments (a) Eligible Portfolio Companies. The Fund invests primarily in convertible securities and equity investments of companies that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46) of the 1940 Act or in securities that otherwise qualify for investment as permitted in Section 55(a)(1) through (5) of the 1940 Act. Under the provisions of the 1940 Act at least 70% of the fund's assets, as defined under the 1940 Act, must be invested in Eligible Portfolio Companies. In the event the Fund has less than 70% of its assets invested in eligible portfolio investments, then it will be prohibited from making non- eligible investments until such time as the percentage of eligible investments again exceeds the 70% threshold. (b) Investments. Investments are carried in the statements of assets and liabilities as of December 31, 2002, and June 30, 2003, at fair value, as determined in good faith by the Investment Adviser. The convertible debt securities held by the Fund generally have maturities between five and seven years and are convertible into the common stock of the issuer at a set conversion price at the discretion of the fund. The common stock underlying these securities is generally unregistered and thinly to moderately traded but is not otherwise restricted. Generally, the Fund may register and sell such securities at any time with the Fund paying the costs of registration. Interest on convertible securities are generally payable monthly. The convertible debt securities generally contain embedded call options giving the issuer the right to call the underlying issue. In these instances, the Fund has the right of redemption or conversion. The embedded call option will generally not vest until certain conditions are achieved by the issuer. Such conditions may require that minimum thresholds be met relating to underlying market prices, liquidity, and other factors. (6) 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 the application of objective standards. The objective standards for determining market prices and applying valuation methodologies will govern in all situations except where a debt issuer is in default. 25 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 o Generally, the fair value of debt securities and preferred securities convertible into common stock is the sum of (a) the value of such securities without regard to the conversion feature, and (b) the value, if any, of the conversion feature. The fair value of debt securities without regard to conversion features is determined on the basis of the terms of the debt security, the interest yield, and the financial condition of the issuer. The fair value of preferred securities without regard to conversion features is determined on the basis of the terms of the preferred security, its dividend, and its liquidation and redemption rights and absent special circumstances will typically be equal to the lower of cost or 120% of the value of the underlying common stock. The fair value of the conversion features of a security, if any, are based on fair values of the derivative securities as of the relevant date less an allowance, as appropriate, for costs of registration, if any, and selling expenses. o Portfolio investments for which market quotations are readily available and which are freely transferable are valued as follows: (i) securities traded on a securities exchange or the Nasdaq or in the over-the-counter market are valued at the closing price on, or the last trading day prior to, the date of valuation, and (ii) securities traded in the over-the-counter market that do not have a closing price on, or the last trading day prior to, the date of valuation are valued at the average of the closing bid and ask price for the last trading day on, or prior to, the date of valuation. Securities for which market quotations are readily available but are restricted from free trading in the public securities markets (such as Rule 144 stock) are valued by discounting the value for the last trading day on, or prior to, the date of valuation to reflect the liquidity caused by such restriction, but taking into consideration the existence, or lack thereof, of any contractual right to have the securities registered and freed from such trading restrictions. o Because there is no independent and objective pricing authority (i.e. a public market) for investments in privately held entities, the latest sale of equity securities by the entity governs the value of the enterprise. This valuation method causes the Fund's initial investment in the private entity to be valued at cost. Thereafter, new issuances of equity or equity-linked securities by a portfolio company will be used to determine enterprise value as they will provide the most objective and independent basis for determining the worth of the issuer. There can be no assurance that stated market fair values for private equities will stay constant, or that future equity raises will value the portfolio company at levels equal to or greater than the prior equity financing for the issuer. As a result, the Fund's valuation of 26 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 a privately held portfolio company may be subject to downward adjustment that would directly impact the Fund's net asset value and which could result in a substantial reduction in the fund's net assets. o Where a portfolio company is in default on a debt instrument held by the Fund, and no market exists for that instrument, the fair value for the investment is determined on the basis of appraisal procedures established in good faith by the Investment Adviser. This type of fair value determination is based upon numerous factors such as the portfolio company's earnings and net worth, market prices for comparative investments (similar securities in the market place), the terms of the Fund's investment, and a detailed assessment of the portfolio company's future financial prospects. In the event of unsuccessful operations by a portfolio company, the appraisal may be based upon an estimated net realizable value when that investment is liquidated As of June 31, 2003, and December 31, 2002, the net unrealized appreciation associated with investments held by the Fund was $15,041,337, and $6,540,900, respectively. (7) Restricted Securities As indicated on the schedule of investments as of June 30, 2003, and December 31, 2002, the Fund holds investments in shares of common stock, the sale of which is restricted. These securities have been valued by the Investment Adviser after considering certain pertinent factors relevant to the individual securities (note 5). (8) Purchase of Additional Shares In accordance with Fund guidelines, certain shareholders reinvested their dividends in the Fund. The Fund issued no shares during the three months and six months ended June 30, 2003, under the dividend reinvestment plan. (9) Distributions to Shareholders During the three months ended June 30, 2003, the Fund distributed $435,172, resulting in total distributions for the six months ended June 30, 2003, amounting to $870,344. The final tax characteristics of this distribution cannot be determined at this time. 27 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2003 (10) Financial Highlights Selected per share data and ratios for each share of common stock outstanding throughout the three months ended June 30, 2002, and 2003, are as follows: 2002 2003 Net asset value, beginning of period $ 12.75 $ 8.39 Net investment income (loss) $( 0.09) $( 0.06) Net realized and unrealized gain on investments $( 0.30) $ 3.37 ------- ------- Total return from investment operations $( 0.55) $ 3.31 ------- ------- Distributions: $ 0.00 $ 0.10 ------- ------- Net asset value, end of period $ 12.20 $ 11.60 ======= ======= Per share market value, end of period $ 10.00 $ 9.35 Portfolio turnover rate (quarterly) 3.18% 2.83% Quarterly return (a) -7.41% 38.52% Ratio to average net assets (quarterly)(b): Net investment income (loss) -0.71% -0.65% Expenses, excluding incentive fees 0.93% 0.92% Expenses, including incentive fees 0.93% 0.99% (a) Quarterly return (not annualized) was calculated by comparing the common stock price on the first day of the period to the common stock price on the last day of the period. (b) Average net assets have been computed based on quarterly valuations. 28 (10) Financial Highlights (continued) Selected per share data and ratios for each share of common stock outstanding throughout the six months ended June 30, 2002, and 2003, are as follows: 2002 2003 Net asset value, beginning of period $ 12.50 $ 9.48 Net investment income (loss) $( 0.16) $ 0.14 Net realized and unrealized gain on investments $( 0.14) $ 2.18 ------- ------- Total return from investment operations $( 0.30) $ 2.32 ------- ------- Distributions: $ 0.00 $ 0.20 ------- ------- Net asset value, end of period $ 12.75 $ 11.60 ======= ======= Per share market value, end of period $ 10.00 $ 9.35 Portfolio turnover rate (semi-annually) 6.00% 7.15% Six-month return (a) -3.01% 18.96% Ratio to average net assets (semi-annually) (b): Net investment income (loss) -1.30% 1.44% Expenses, excluding incentive fees 1.72% 1.64% Expenses, including incentive fees 1.72% 2.10% (a) Semi-annual return (not annualized) was calculated by comparing the common stock price on the first day of the period to the common stock price on the last day of the period. (b) Average net assets have been computed based on quarterly valuations. 29 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 June 30, 2003: Active Link Communications, Inc. (OTC:ACVE) In the second quarter of 2003, the Company made a principal repayment on the convertible bridge note owned by the Fund of $22,457, reducing the balance outstanding on the bridge note to $19,023. At June 30, 2003, the Company was in default on principal and interest payments due to the Fund. As a result of the default, the Fund has placed a reserve equal to 100% of the par value of the principal amounts of all positions held by the Fund in the Company. Airnet Systems, Inc. (NYSE:ANS) During the second quarter of 2003, the Fund sold 25,000 shares of Airnet common stock in the open market realizing proceeds of $107,756, representing a gain of $1,506. At June 30, 2003, the Fund had 50,000 shares of ANS remaining having a basis of $212,500, or $2.13 per share. Bentley Pharmaceuticals, Inc. (AMEX:BNT) In the second quarter of 2003, the Fund sold 62,900 shares of common stock in the open market realizing proceeds of $605,893, representing a gain of $476,151. At June 30, 2003, the Fund owned 472,979 shares of Bentley common stock with a basis of $616,582 or $1.30 per share. Canterbury Consulting Group, Inc. (NASDAQ:CITI) In the second quarter of 2003, the Fund sold 10,050 shares of Canterbury common stock in the open market realizing proceeds of $7,537, representing a loss of $60,517. At June 30, 2003, the Fund owned 18,521 shares of CITI common stock with a basis of $125,415 or $6.77 per share. Creative Host Services, Inc. (NASDAQ:CHST) During the second quarter of 2003, the Fund exited its position in Creative Host. The Fund sold 4,830 shares of CHST common stock in the open market realizing proceeds of $8,403, representing a gain of $482. DaisyTek International, Inc. (NASDAQ:DZTK) During the quarter ending June 30, 2003, the Fund sold its entire position of 149,600 shares of DaisyTek common stock in the open market realizing proceeds of $82,414, representing a loss of $569,524. The Dwyer Group, Inc. (NASDAQ:DWYR) In the second quarter of 2003, the Fund sold 100,000 shares of Dwyer common stock in the open market realizing proceeds of $651,870, representing a gain of $312,709. At June 30, 2003, the Fund owned 575,000 shares of DWYR common stock having a basis of $1,627,470 or $2.83 per share. Flamel Technologies, SA (Nasdaq:FLML) In the second quarter of 2003, the Fund purchased 80,000 shares of the Company's shares in the open market for 30 $746,053, a cost of $9.33 per share. At June 30, 2003, the Fund owned 100,000 shares of FLML common stock having a basis of $832,267, or 8.32 per share. Gasco Energy, Inc. (OTC:GASE) In the quarter ended June 30, 2003, the Fund purchased an additional 101,875 shares of the Company's common stock in the open market for $50,938, a cost of $0.50 per share. At June 30, 2003, the Fund owned a total of 170,000 common shares having a basis of $48,767, or $0.29 per share purchased in the open market and 250,000 shares at $1.00 per share that were purchased in a private placement. Integrated Security Systems, Inc. (OTC:IZZI) In the second quarter of 2003, the Fund received common stock of the Company as payment in kind for interest on 8% Promissory Notes owned by theFund. In total, the Fund received 13,297 shares of IZZI having an imputed cost of $1,994, a rate of $0.15 per share, as payment in kind for interest on the notes. The total number of shares owned by the Fund as a result of PIK agreements with the Company at June 30, 2003, was 208,004 shares of the Company's common stock having a basis of $49,173, a rate of $0.24 per share. Also during the second quarter of 2003, the Fund purchased two $100,000, 8% promissory notes due July 1, 2004, and as additional consideration for the loans received five-year warrants to purchase a total of 1,000,000 shares of the Company's common stock at $0.20. In conjunction with these purchases, the Fund agreed to extend the due date of the previously existing promissory notes to July 1, 2004. At June 30, 2003, in addition to the PIK shares discussed above, the Fund owned the following: $525,000 in 8% Promissory Notes with no conversion feature; $542,989 in Series F Preferred convertible into the Company's common stock at a rate of $0.20 per share; $3,666,951 in Series G Preferred convertible into common at a rate of $0.20 per share; $150,000 in Series D Preferred convertible into common at a rate of $0.80 per share; 393,259 shares of the Company's common stock having a basis of $215,899 or $0.55 per share; warrants to purchase 364,299 shares of the Company's common stock at $0.549 per share on or before March 8, 2004; warrants to purchase 312,500 shares of the Company's common stock at $0.80 per share on or before October 2, 2003; warrants to purchase 125,000 shares of the Company's common stock at $1.00 per share on or before October 11, 2004; warrants to purchase 2,625,000 shares of the Company's common stock at $0.20 per share with term dates ranging from September 2006 to June 2008; and options to purchase 41,034 shares of the Company's common stock having strike prices ranging between $0.21 and $0.49 per share and term dates ranging from May 2006 to August 2007. JAKKS Pacific, In. (Nasdaq:JAKK) During the second quarter of 2003, the Fund sold 10,000 shares of the Company's common stock in the open market realizing proceeds of $128,483, representing a gain of $68,816. At June 30, 2003, the Fund owned 49,847 shares of JAKK common stock having a basis of $297,421, or a cost of $5.97 per share. Laserscope (Nasdaq:LSCP) During the second quarter of 2003, the Fund converted $200,000 of its 8% Debentures into 160,000 shares of the Company's common stock at $1.25 per share in lieu of mandatory principal 31 payments on the debentures. At June 30, 2003, the Fund owned $1,300,000 in 8% Convertible Debentures of the Company having a conversion rate of $1.25 per share and options to purchase 30,000 common shares at $4.19. Medical Action Industries, Inc. (Nasdaq:MDCI) In the second quarter of 2003, the Fund purchased an additional 15,000 shares of Medical Action common stock in the open market for $179,839, a rate of $11.99 per share. At June 30, 2003, the Fund owned a total of 25,000 shares of MDCI common stock having a basis of $292,329, or $11.69 per share. Nautilus Group, Inc. (NYSE:NLS) During the second quarter of 2003, the Fund exited its position in Nautilus by selling 25,000 shares of its common stock in the open market realizing proceeds of $319,485, representing a loss of $81,140. Simtek Corporation (OTC:SRAM) In the second quarter of 2003, the Fund acquired options to purchase 5,288 shares of the Company's common stock at $0.165 per share. These options were obtained by assignment from Robert C. Pearson, Executive Vice-President of RENN Capital Group, Inc., who earned the options as a member of the Company's Board of Directors. At June 30, 2003, in addition to the options discussed previously, the Fund owned a $1,000,000, 7.5% Convertible Debenture, convertible into the Company's common stock at a rate of $3.12 per share and 1,000,000 shares of the Company's common stock having a basis of $195,000 or $0.195 per share. 32 Results of Operations for the Three Months Ended June 30, 2003 For the quarter ended June 30, 2003, the Fund had a net investment loss of ($279,160) compared to a net investment loss of ($388,863) in the second quarter of 2002. This reduction in net loss resulted from a combination of increased income and decreased expenses in the second quarter of 2003 compared to the same period of 2002. Interest income decreased 6.93% from $93,429 in the second quarter of 2002 to $86,954 for the second quarter of 2003. Dividend income increased to $55,221 in 2003 from $24,728 for the second quarter of 2002, an increase of 123.31%. This increase in dividend income is due primarily to the accrual of dividends due on Series F and G Preferred Stock of Integrated Security Systems, Inc. In the second quarter of 2003, the Fund accrued $1,552 in income from commitment and other fees, compared to no commitment and other fee income in the second quarter 2002. General and administrative expenses decreased from $159,287 in the second quarter of 2002 to $118,130 in the same period of 2003, a decrease of 25.84%. Legal and professional fees decreased 77.46% from $99,158 in the second quarter of 2002 to $22,349 in the same period 2003. Management fees decreased from $233,831 for the second quarter of 2002 to $223,901 for the second quarter of 2003, a decrease of 4.25%, and incentive fees increased to $30,097 for the second quarter of 2003 compared to no incentive fees incurred in the second quarter of 2002. Net income for the second quarter of 2003 was $14,912,660 compared to a net loss of ($2,423,550) for the same period of 2002. This increase was due primarily to an increase from net unrealized depreciation on investments from ($1,985,523) in 2002 to net unrealized appreciation on investments in the amount of $15,041,337 in 2003. In addition, in the second quarter of 2003, the Fund realized net gains on investments in the amount of $150,483, compared to a net realized loss on investments of ($49,164) in the second quarter of 2002. Results of Operations for the Six Months Ended June 30, 2003 For the six months ended June 30, 2003, the Fund experienced net investment income in the amount of $614,993, compared to a net investment loss in the amount of ($705,270) for the same six-month period in 2002. Interest income increased from $185,104 for the six months ended June 30, 2002, to $347,486 for the same period of 2003, an increase of 86.72%. Dividend income for the six-month period ended June 30, 2003, was $1,161,230 versus $43,238 for the same period in 2002. General and administrative expenses decreased from $246,609 in the six months ended June 30, 2002, to $193,180 for the same period in 2003. Legal and professional expenses also decreased from $165,289 in 2002 to $80,514 for the six months ended June 30, 2003. Management fees decreased from 33 $478,313 for the six months ended June 30, 2002, to $386,878 for the same period in 2003; whereas incentive fees increased from zero in 2002 to $196,260 for the six months ended June 30, 2003. Net income for the first six months of 2003 was $10,096,729, compared to a net loss in the amount of ($1,324,151) for the same period of 2002. In addition to the increases in income and decreases in expenses discussed previously, this increase was driven by an increase in net unrealized appreciation on investments from $2,805,510 in 2002 to $8,500,437 in 2003. In addition, in the first six months of 2003, the Fund realized net gains on investments in the amount of $981,299, compared to a net realized loss on investments of ($3,424,391) in the same period of 2002. Liquidity and Capital Resources For the six months ended June 30, 2003, net assets increased 38.36% from $36,487,668 at March 31, 2003, to $50,485,451, or $11.60 per share, at June 30, 2003. This increase is primarily attributable to an increase in the net unrealized appreciation of investments from $479,705 at March 31, 2003, to $15,041,337 at June 30, 2003. At the end of the second quarter of 2003, the Fund had net cash and cash equivalents of $681,236 versus net cash and cash equivalents of $1,181,514 at March 31, 2003, primarily due to an increase in the Fund's margin balance. Receivables, including interest, dividends, and brokerage, increased from $418,407 at March 31 to $604,436 at June 30, 2003, due primarily to a combination of dividends accrued on Integrated Security Systems Series F and G Preferred Stock, interest and dividends that were accrued on the restructuring of eOriginal, and the brokerage receivable. Prepaid expenses decreased from $21,575 at March 31 to $2,877 at June 30, 2003, primarily due to quarterly charges against prepaid insurance amounts. Accounts payable increased slightly from $20,932 at March 31, to $21,632 at June 30, 2003. Accounts payable to affiliate decreased 7.37% from 372,169 at March 31, to $344,753 at June 30, 2003, reflecting an increase in management fee due to higher portfolio values in the second quarter offset by a decrease in incentive fees due to lower realized gains during the second quarter. 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. 34 PART II ITEM 1. LEGAL PROCEEDINGS. Not applicable ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The Annual Meeting of Shareholders of the Fund (the "Meeting") was held on May 16, 2003. Proxies for the Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to the management's nominees as listed in the proxy statement. (b) At the Meeting, the Fund's shareholders voted upon the election of two Class Three directors of the Fund to hold office for terms of three years or until their successors are elected and qualified. Management's nominees were Mr. Russell Cleveland and Mr. Ernest C. Hill. There were no other nominees. Each of the nominees received a plurality of the shares present in person or by proxy and entitled to vote and were therefore elected as directors. The following are the respective numbers of votes cast "for" and "against" with respect to each nominee. Name of Nominee Votes Cast For Votes Cast Against - --------------- -------------- ------------------ Russell Cleveland 2,908,201 52,232 Ernest C. Hill 2,960,433 49,832 In addition to the directors elected at the Meeting, the following directors' terms continued after the meeting: Peter Collins, Class One director whose term expires at the Annual Meeting in 2004; and Edward O. Boshell, Jr., and Charles C. Pierce, Jr., Class Two directors whose terms expire at the Annual Meeting in 2005. 35 (c) Shareholders also voted on Management's proposal to amend the Fund's Articles of Incorporation to change the name of the Fund to RENN Capital Fund III, Inc. This proposal required the affirmative vote of the holders of at least two-thirds (2/3) of the outstanding shares of Common stock entitled to vote. Because the required two- thirds majority vote was not obtained, the proposal to amend the Fund's Articles of Incorporation to change the name of the Fund did not pass. The following are the numbers of votes cast "for," "against," and "abstain" with respect to the name change proposal. Votes Cast For Votes Cast Against Abstain % In Favor - -------------- ------------------ ------- ---------- 2,881,511 53,345 25,577 61.147% ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31-1 Certification of Russell Cleveland, President and CEO 31-2 Certification of Barbe Butschek, Chief Financial Officer 32-1 Certification of Russell Cleveland, President and CEO 32-2 Certification of Barbe Butschek, Chief Financial Officer (b) Reports on Form 8-K None 36 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. August 15, 2003 /S/ Russell Cleveland Russell Cleveland, President and CEO (Principal Executive Officer) August 15, 2003 /S/ Barbe Butschek Barbe Butschek, Chief Financial Officer (Principal Financial Officer) 37 EXHIBIT 31-1 CERTIFICATION I, Russell Cleveland, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital Growth & Income Fund III, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and to the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 1 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ Russell Cleveland Russell Cleveland President and CEO August 15, 2003 2 EXHIBIT 31-2 CERTIFICATION I, Barbe Butschek, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Renaissance Capital Growth & Income Fund III, Inc.; 2. Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and to the audit committee of the registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 1 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ Barbe Butschek Barbe Butschek Chief Financial Officer August 13, 2003 2 EXHIBIT 32-1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss.1350, the undersigned officer of Renaissance Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 15, 2003 /S/ Russell Cleveland Russell Cleveland President & CEO 1 EXHIBIT 32-2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. ss.1350, the undersigned officer of Renaissance Capital Growth & Income Fund III, Inc. (the "Company"), hereby certifies, to such officer's knowledge, that the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2003 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 15, 2003 /S/ Barbe Butschek Barbe Butschek Chief Financial Officer 2 -----END PRIVACY-ENHANCED MESSAGE-----