RENN Fund, Inc. - Quarter Report: 2004 June (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
the
quarterly period ended June 30, 2004
OR
[
] 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)
TX
|
75-2533518
|
(State
or other
jurisdiction
|
(I.R.S.
Employer
|
of
incorporation or
organization)
|
Identification
No.)
|
8080
N. Central Expressway, Suite 210,
LB-59, Dallas, TX 75206
|
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: 214-891-8294
None
(Former
name, former address and former fiscal year
if
changed since last report)
___________________
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 o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer S
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No
x
As
of
December 15, 2006, the issuer had 4,463,967 shares of common stock
outstanding.
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
|
||||
INDEX
|
||||
|
Page
|
|||
Number
|
||||
PART
I. FINANCIAL INFORMATION
|
||||
Item
1. Financial
Statements (Unaudited)
|
3 | |||
Statements
of Assets and Liabilities as of June 30, 2004 and December 31,
2003
|
3
|
|||
Schedules
of Investments as of June 30, 2004 and December 31, 2003
|
4
|
|||
Statements
of Operations for the three months and six months ended June 30,
2004 and
2003
|
16 | |||
Statements
of Change in Net Assets for the six months ended June 30, 2004
and
2003
|
18
|
|||
Statements
of Cash Flows for the six months ended June 30, 2004 and
2003
|
19
|
|||
Notes
to Financial Statements
|
20
|
|||
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
28
|
|||
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
|||
Item
4. Controls
and Procedures
|
32
|
|||
PART
II. OTHER INFORMATION
|
||||
Item
1. Legal
Proceedings
|
33
|
|||
Item
1A. Risk
Factors
|
33
|
|||
Item
2. Unregistered
Sales of Equity Securities and Use of
Proceeds
|
35
|
|||
Item
3. Defaults
Upon Senior Securities
|
35
|
|||
Item
4. Submission
of Matters to a Vote of Security Holders
|
35
|
|||
Item
5. Other
Information
|
35
|
|||
Item
6. Exhibits
|
35
|
PART
I -
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Assets and Liabilities
(Unaudited)
ASSETS
June
30, 2004
|
December
31, 2003
|
||||||
Cash
and cash equivalents
|
$
|
44,335,918
|
$
|
35,255,687
|
|||
Investments
at fair value, cost of $35,867,649
|
|||||||
and
$33,747,037 at June 30, 2004 and
|
|||||||
December
31, 2003, respectively
|
63,288,277
|
62,455,944
|
|||||
Accounts
receivable - settlement with affiliate
|
3,775,872
|
3,775,872
|
|||||
Interest
and dividends receivable
|
68,577
|
233,201
|
|||||
Prepaid
and other assets
|
7,759
|
145,307
|
|||||
$
|
111,476,403
|
$
|
101,866,011
|
||||
LIABILITIES
AND NET ASSETS
|
|||||||
Liabilities:
|
|||||||
Due
to broke
|
$
|
31,499,196
|
$
|
27,000,416
|
|||
Accounts
payable
|
83,609
|
57,273
|
|||||
Accounts
payable - affiliate
|
1,043,709
|
1,703,398
|
|||||
Accounts
payable - dividends
|
-
|
3,698,960
|
|||||
32,626,514
|
32,460,047
|
||||||
Commitments
and contingencies
|
|||||||
Net
assets:
|
|||||||
Common
stock, $1 par value; authorized
|
|||||||
20,000,000
shares; 4,561,618 issued;
|
|||||||
4,351,718
shares outstanding
|
4,561,618
|
4,561,618
|
|||||
Additional
paid-in-capital
|
35,960,535
|
37,058,788
|
|||||
Treasury
stock at cost, 209,900 shares
|
(1,734,967
|
)
|
(1,734,967
|
)
|
|||
Distributable
earnings
|
12,642,075
|
811,618
|
|||||
Net
unrealized appreciation of investments
|
27,420,628
|
28,708,907
|
|||||
Net
assets, equivalent to $18.12 and $15.95
|
|||||||
per
share at June 30, 2004 and
|
|||||||
December
31, 2003, respectively
|
78,849,889
|
69,405,964
|
|||||
$
|
111,476,403
|
$
|
101,866,011
|
See
accompanying notes
3
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments
(unaudited)
June
30, 2004
|
||||||||||||||||
Interest
|
Due
|
Fair
|
%
of Net
|
|||||||||||||
Rate
|
Date
|
Cost
|
Value
|
Investments
|
||||||||||||
Eligible
Portfolio Investments -
|
||||||||||||||||
Convertible
Debentures and
|
||||||||||||||||
Promissory
Notes
|
||||||||||||||||
Digital
Learning Management Corp. -
|
||||||||||||||||
Convertible
debenture (2)
|
7.00
|
%
|
02/27/11
|
$
|
1,000,000
|
$
|
2,684,563
|
4.24
|
%
|
|||||||
iLinc
Communications, Inc. -
|
||||||||||||||||
Convertible
redeemable note (2)
|
12.00
|
03/29/12
|
500,000
|
500,000
|
0.79
|
|||||||||||
Gasco
Energy, Inc. -
|
||||||||||||||||
Convertible
debenture (2)
|
8.00
|
10/15/08
|
625,000
|
2,031,251
|
3.21
|
|||||||||||
Integrated
Security Systems, Inc. -
|
||||||||||||||||
Promissory
notes (4)
|
8.00
|
09/30/04
|
525,000
|
525,000
|
0.83
|
|||||||||||
Promissory
notes (4)
|
7.00
|
10/01/04
|
200,000
|
200,000
|
0.32
|
|||||||||||
Simtek
Corporation -
|
||||||||||||||||
Convertible
debenture
|
7.50
|
06/28/09
|
1,000,000
|
2,275,641
|
3.60
|
|||||||||||
$
|
3,850,000
|
$
|
8,216,455
|
12.99
|
%
|
See
accompanying notes
4
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
(unaudited)
June
30, 2004
|
||||||||||||||||
Interest
|
Due
|
Fair
|
%
of Net
|
|||||||||||||
Rate
|
Date
|
Cost
|
Value
|
Investments
|
||||||||||||
Other Portfolio Investments - | ||||||||||||||||
Convertible
Debentures and
|
||||||||||||||||
Promissory
Notes
|
||||||||||||||||
Interpool,
Inc. -
|
||||||||||||||||
Convertible
debenture (2)
|
9.25
|
%
|
12/27/22
|
$
|
375,000
|
$
|
375,000
|
0.59
|
%
|
|||||||
$
|
375,000
|
$
|
375,000
|
0.59
|
%
|
See
accompanying notes
5
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
(unaudited)
June
30, 2004
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Eligible Portfolio Investments - | |||||||||||||
Common
Stock, Preferred Stock,
|
|||||||||||||
and
Miscellaneous Securities
|
|||||||||||||
CaminoSoft
Corp. -
|
|||||||||||||
Common
stock
|
1,750,000
|
$
|
4,000,000
|
$
|
700,000
|
1.11
|
%
|
||||||
Common
stock (2)
|
1,539,414
|
1,150,000
|
615,766
|
0.97
|
|||||||||
Common
stock (2)
|
250,000
|
125,000
|
100,000
|
0.16
|
|||||||||
eOriginal,
Inc.
|
|||||||||||||
Series
A, preferred stock (1)(3)
|
10,680
|
4,692,207
|
387,656
|
0.61
|
|||||||||
Series
B, preferred stock (1)(3)
|
25,646
|
620,329
|
1,052,420
|
1.66
|
|||||||||
Series
C, preferred stock (1)(3)
|
28,929
|
699,734
|
1,186,660
|
1.88
|
|||||||||
Series
New C, preferred stock (1)(3)
|
22,319
|
360,000
|
204,803
|
0.32
|
|||||||||
Gaming
& Entertainment Group, Inc.-
|
|||||||||||||
Common
stock
|
500,000
|
500,000
|
335,000
|
0.53
|
|||||||||
Gasco
Energy, Inc. -
|
|||||||||||||
Common
stock
|
500,000
|
625,000
|
975,000
|
1.54
|
|||||||||
Global
Axcess Corporation -
|
|||||||||||||
Common
stock (2)
|
4,766,666
|
1,261,667
|
2,431,000
|
3.84
|
|||||||||
Integrated
Security Systems, Inc. -
|
|||||||||||||
Common
stock (2)
|
26,898,362
|
5,523,298
|
11,566,296
|
18.28
|
|||||||||
Series
D, preferred stock (2)
|
187,500
|
150,000
|
96,750
|
0.15
|
See
accompanying notes
6
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
(unaudited)
June
30,
2004
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Eligible Portfolio Investments - | |||||||||||||
Common
Stock, Preferred
Stock,
|
|||||||||||||
and
Miscellaneous Securities,
continued
|
|||||||||||||
Inyx,
Inc. -
|
|||||||||||||
Common
stock (2)
|
300,000
|
300,000
|
270,000
|
0.43
|
|||||||||
Laserscope
-
|
|||||||||||||
Common
stock
|
600,000
|
750,000
|
16,530,000
|
26.12
|
|||||||||
Poore
Brothers, Inc. -
|
|||||||||||||
Common
stock (2)
|
1,686,357
|
1,748,170
|
4,232,756
|
6.69
|
|||||||||
PracticeXpert,
Inc. -
|
|||||||||||||
Common
stock (2)
|
4,166,667
|
500,000
|
1,166,666
|
1.84
|
|||||||||
Simtek
Corp. -
|
|||||||||||||
Common
stock
|
1,000,000
|
195,000
|
710,000
|
1.12
|
|||||||||
Common
stock - private placement (2)
|
550,661
|
500,000
|
390,969
|
0.62
|
|||||||||
ThermoView
Industries, Inc. -
|
|||||||||||||
Common
stock
|
234,951
|
563,060
|
91,631
|
0.14
|
|||||||||
Miscellaneous
Securities
|
-
|
1,169,986
|
1.85
|
||||||||||
$
|
24,263,465
|
$
|
44,213,359
|
69.86
|
%
|
See
accompanying notes
7
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
(unaudited)
June
30, 2004
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Other
Portfolio Investments -
|
|||||||||||||
Common
Stock, Preferred Stock,
|
|||||||||||||
and
Miscellaneous Securities
|
|||||||||||||
AdStar,
Inc. -
|
|||||||||||||
Common
stock (2)
|
269,231
|
$
|
350,000
|
$
|
592,308
|
0.94
|
%
|
||||||
Capital
Senior Living Corp -
|
|||||||||||||
Common
stock
|
57,100
|
146,335
|
274,651
|
0.43
|
|||||||||
CNE
Group, Inc. -
|
|||||||||||||
Common
stock (2)
|
125,000
|
250,000
|
48,750
|
0.08
|
|||||||||
Dave
& Busters, Inc. -
|
|||||||||||||
Common
stock
|
100,000
|
653,259
|
1,879,000
|
2.97
|
|||||||||
iLinc
Communications, Inc. -
|
|||||||||||||
Common
stock
|
48,266
|
27,033
|
43,922
|
0.07
|
|||||||||
Flamel
Technologies, S.A. -
|
|||||||||||||
Common
stock
|
25,000
|
131,868
|
615,750
|
0.97
|
|||||||||
Franklin
Covey -
|
|||||||||||||
Common
stock
|
207,876
|
293,251
|
540,478
|
0.85
|
|||||||||
Gasco
Energy, Inc. -
|
|||||||||||||
Common
stock
|
750,000
|
639,105
|
1,462,500
|
2.31
|
|||||||||
Inet
Technologies, Inc. -
|
|||||||||||||
Common
stock
|
96,600
|
692,000
|
1,204,602
|
1.90
|
See
accompanying notes
8
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
(unaudited)
June
30, 2004
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Other Portfolio Investments - | |||||||||||||
Common
Stock, Preferred
Stock,
|
|||||||||||||
and
Miscellaneous Securities,
continued
|
|||||||||||||
Intrusion,
Inc. -
|
|||||||||||||
Convertible
preferred stock
|
159,033
|
500,000
|
377,862
|
0.60
|
|||||||||
Medical
Action Industries, Inc. -
|
|||||||||||||
Common
stock
|
25,000
|
292,329
|
460,000
|
0.73
|
|||||||||
Precis,
Inc. -
|
|||||||||||||
Common
stock
|
200,700
|
1,372,417
|
503,757
|
0.80
|
|||||||||
Stonepath
Group, Inc. -
|
|||||||||||||
Common
stock
|
131,240
|
246,000
|
280,854
|
0.44
|
|||||||||
Tarantella,
Inc. -
|
|||||||||||||
Common
stock
|
714,286
|
1,000,000
|
1,321,429
|
2.09
|
|||||||||
US
Home Systems, Inc. -
|
|||||||||||||
Common
stock
|
110,000
|
535,587
|
787,600
|
1.24
|
|||||||||
Vaso
Active Pharmaceuticals, Inc. -
|
|||||||||||||
Common
stock
|
150,000
|
250,000
|
90,000
|
0.14
|
|||||||||
7,379,184
|
10,483,463
|
16.56
|
%
|
||||||||||
$
|
35,867,649
|
$
|
63,288,277
|
100.00
|
%
|
||||||||
Allocation
of Investments -
|
|||||||||||||
Restricted
Shares, Unrestricted Shares,
|
|||||||||||||
and
Other Securities
|
|||||||||||||
Restricted
Securities (2)
|
$
|
14,358,135
|
$
|
27,102,075
|
42.82
|
%
|
|||||||
Unrestricted
Securities
|
$
|
14,412,244
|
$
|
31,459,677
|
49.71
|
%
|
|||||||
Other
Securities (5)
|
$
|
7,097,270
|
$
|
4,726,525
|
7.47
|
%
|
(1) |
Valued
at fair value as determined by the Investment Adviser (Note
6).
|
(2) |
Restricted
securities - securities that are not fully registered and freely
tradable.
|
(3) |
Securities
in a privately owned company.
|
(4) |
Securities
that have no provision allowing conversion into a security for which
there
is a public market.
|
(5)
|
Includes
Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there
is
no market.
|
See
accompanying notes
9
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2003
|
||||||||||||||||
Interest
|
Due
|
Fair
|
%
of Net
|
|||||||||||||
Rate
|
Date
|
Cost
|
Value
|
Investments
|
||||||||||||
Eligible
Portfolio Investments -
|
||||||||||||||||
Convertible
Debentures and
|
||||||||||||||||
Promissory
Notes
|
||||||||||||||||
Dexterity
Surgical, Inc. -
|
||||||||||||||||
Convertible
debenture (2)
|
9.00
|
%
|
12/19/04
|
$
|
1,316,282
|
$
|
375,000
|
0.60
|
%
|
|||||||
iLinc
Communications, Inc. -
|
||||||||||||||||
Convertible
redeemable note (2)
|
12.00
|
03/29/12
|
500,000
|
500,000
|
0.80
|
|||||||||||
Gasco
Energy, Inc. -
|
||||||||||||||||
Convertible
debenture (2)
|
8.00
|
10/15/08
|
625,000
|
1,333,334
|
2.13
|
|||||||||||
Integrated
Security Systems, Inc. -
|
||||||||||||||||
Promissory
notes (4)
|
8.00
|
09/30/04
|
525,000
|
525,000
|
0.84
|
|||||||||||
Promissory
notes (4)
|
7.00
|
10/01/04
|
200,000
|
200,000
|
0.32
|
|||||||||||
Simtek
Corporation -
|
||||||||||||||||
Convertible
debenture
|
7.50
|
06/28/09
|
1,000,000
|
3,846,155
|
6.16
|
|||||||||||
$
|
4,166,282
|
$
|
6,779,489
|
10.85
|
%
|
See
accompanying notes
10
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2003
|
||||||||||||||||
Interest
|
Due
|
Fair
|
%
of Net
|
|||||||||||||
Rate
|
Date
|
Cost
|
Value
|
Investments
|
||||||||||||
Other Portfolio Investments - | ||||||||||||||||
Convertible
Debentures and
|
||||||||||||||||
Promissory
Notes
|
||||||||||||||||
Interpool,
Inc. -
|
||||||||||||||||
Convertible
debenture (2)
|
9.25
|
%
|
12/27/22
|
$
|
375,000
|
$
|
375,000
|
0.60
|
%
|
|||||||
$
|
375,000
|
$
|
375,000
|
0.60
|
%
|
See
accompanying notes
11
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2003
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Eligible Portfolio Investments - | |||||||||||||
Common
Stock, Preferred Stock,
|
|||||||||||||
and
Miscellaneous Securities
|
|||||||||||||
Bentley
Pharmaceuticals, Inc. -
|
|||||||||||||
Common
stock
|
63,450
|
$
|
79,313
|
$
|
843,885
|
1.22
|
%
|
||||||
CaminoSoft
Corp. -
|
|||||||||||||
Common
stock
|
1,750,000
|
4,000,000
|
647,500
|
1.04
|
|||||||||
Common
stock (2)
|
1,539,414
|
1,150,000
|
569,583
|
0.91
|
|||||||||
Common
stock (2)
|
250,000
|
125,000
|
92,500
|
0.15
|
|||||||||
eOriginal,
Inc. -
|
|||||||||||||
Series
A, preferred stock (1)(3)
|
10,680
|
4,692,207
|
770,383
|
1.23
|
|||||||||
Series
B, preferred stock (1)(3)
|
25,646
|
620,329
|
1,849,928
|
2.96
|
|||||||||
Series
C, preferred stock (1)(3)
|
28,929
|
699,734
|
2,085,893
|
3.34
|
|||||||||
Series
New C, preferred stock (1)(3)
|
22,319
|
360,000
|
360,000
|
0.58
|
|||||||||
Fortune
Natural Resources Corp. -
|
|||||||||||||
Common
stock
|
1,262,394
|
500,500
|
138,863
|
0.22
|
|||||||||
Gasco
Energy, Inc. -
|
|||||||||||||
Common
stock
|
250,000
|
250,000
|
320,000
|
0.51
|
|||||||||
Global
Axcess Corporation -
|
|||||||||||||
Common
stock (2)
|
1,400,000
|
350,000
|
504,000
|
0.81
|
|||||||||
Integrated
Security Systems, Inc. -
|
|||||||||||||
Common
stock (2)
|
24,164,301
|
4,973,166
|
8,940,791
|
14.32
|
|||||||||
Series
D, preferred stock (2)
|
187,500
|
150,000
|
83,250
|
0.13
|
See
accompanying notes
12
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2003
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
Eligible Portfolio Investments - | |||||||||||||
Common
Stock, Preferred Stock,
|
|||||||||||||
and
Miscellaneous Securities, continued
|
|||||||||||||
Inyx,
Inc. -
|
|||||||||||||
Common
stock (2)
|
300,000
|
300,000
|
414,000
|
0.66
|
|||||||||
Laserscope
-
|
|||||||||||||
Common
stock
|
1,200,000
|
1,500,000
|
18,708,000
|
29.96
|
|||||||||
Poore
Brothers, Inc. -
|
|||||||||||||
Common
stock (2)
|
1,686,357
|
1,748,170
|
5,716,750
|
9.15
|
|||||||||
Simtek
Corp. -
|
|||||||||||||
Common
stock
|
1,000,000
|
195,000
|
1,200,000
|
1.92
|
|||||||||
Common
stock - private placement (2)
|
550,661
|
500,000
|
660,793
|
1.06
|
|||||||||
ThermoView
Industries, Inc. -
|
|||||||||||||
Common
stock
|
234,951
|
563,060
|
148,019
|
0.24
|
|||||||||
Miscellaneous
Securities
|
-
|
898,497
|
1.44
|
||||||||||
$
|
22,756,479
|
$
|
44,952,635
|
71.98
|
%
|
See
accompanying notes
13
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31, 2003
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
Other Portfolio Investments - | |||||||||||||
Common
Stock, Preferred Stock,
|
|||||||||||||
and
Miscellaneous Securities
|
|||||||||||||
AdStar,
Inc. -
|
|||||||||||||
Common
stock (2)
|
269,231
|
$
|
350,000
|
$
|
538,462
|
0.86
|
%
|
||||||
Blue
Rhino Corp. -
|
|||||||||||||
Common
stock
|
40,000
|
476,999
|
555,600
|
0.89
|
|||||||||
Capital
Senior Living Corp -
|
|||||||||||||
Common
stock
|
57,100
|
146,335
|
335,748
|
0.54
|
|||||||||
CNE
Group, Inc. -
|
|||||||||||||
Common
stock (2)
|
125,000
|
250,000
|
66,250
|
0.11
|
|||||||||
Dave
& Busters, Inc. -
|
|||||||||||||
Common
stock
|
100,000
|
653,259
|
1,268,000
|
2.03
|
|||||||||
iLinc
Communications, Inc. -
|
|||||||||||||
Common
stock
|
48,266
|
27,033
|
43,439
|
0.07
|
|||||||||
Flamel
Technologies, S.A. -
|
|||||||||||||
Common
stock
|
50,000
|
360,143
|
1,339,500
|
2.14
|
|||||||||
Franklin
Covey -
|
|||||||||||||
Common
stock
|
207,876
|
293,251
|
582,053
|
0.93
|
|||||||||
Gasco
Energy, Inc. -
|
|||||||||||||
Common
stock
|
750,000
|
639,105
|
960,000
|
1.54
|
|||||||||
I-Flow
Corporation -
|
|||||||||||||
Common
stock
|
50,000
|
117,043
|
696,000
|
1.11
|
|||||||||
Inet
Technologies, Inc. -
|
|||||||||||||
Common
stock
|
46,600
|
237,275
|
559,200
|
0.90
|
See
accompanying notes
14
Renaissance
Capital Growth & Income Fund III, Inc.
Schedules
of Investments (continued)
December
31,
2003
|
|||||||||||||
Fair
|
%
of Net
|
||||||||||||
Shares
|
Cost
|
Value
|
Investments
|
||||||||||
Other Portfolio Investments - | |||||||||||||
Common
Stock, Preferred
Stock,
|
|||||||||||||
and
Miscellaneous Securities,
continued
|
|||||||||||||
Medical
Action Industries, Inc. -
|
|||||||||||||
Common
stock
|
25,000
|
292,329
|
467,750
|
0.75
|
|||||||||
Precis,
Inc. -
|
|||||||||||||
Common
stock
|
200,700
|
1,372,417
|
778,716
|
1.25
|
|||||||||
Stonepath
Group, Inc. -
|
|||||||||||||
Common
stock
|
281,240
|
448,500
|
635,602
|
1.02
|
|||||||||
US
Home Systems, Inc. -
|
|||||||||||||
Common
stock
|
110,000
|
535,587
|
1,221,000
|
1.95
|
|||||||||
Vaso
Active Pharmaceuticals, Inc. -
|
|||||||||||||
Common
stock
|
50,000
|
250,000
|
301,500
|
0.48
|
|||||||||
6,449,276
|
10,348,820
|
16.57
|
%
|
||||||||||
$
|
33,747,037
|
$
|
62,455,944
|
100.00
|
%
|
||||||||
Allocation
of Investments -
|
|||||||||||||
Restricted
Shares, Unrestricted Shares,
|
|||||||||||||
and
Other Securities
|
|||||||||||||
|
|||||||||||||
Restricted
Securities (2)
|
$
|
12,712,618
|
$
|
20,169,713
|
32.29
|
%
|
|||||||
Unrestricted
Securities
|
$
|
13,937,149
|
$
|
35,596,530
|
57.00
|
%
|
|||||||
Other
Securities (5)
|
$
|
7,097,270
|
$
|
6,689,701
|
10.71
|
%
|
(1) |
Valued
at fair value as determined by the Investment Adviser (Note
6).
|
(2) |
Restricted
securities - securities that are not fully registered and freely
tradable.
|
(3) |
Securities
in a privately owned company.
|
(4) |
Securities
that have no provision allowing conversion into a security for which
there
is a public market.
|
(5)
|
Includes
Miscellaneous Securities, securities of privately owned companies,
securities with no conversion feature, and securities for which there
is
no market.
|
See
accompanying notes
15
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Operations
(Unaudited)
Three
Months Ended June 30,
|
|||||||
2004
|
2003
(restated)
|
||||||
Income:
|
|||||||
Interest
income
|
$
|
91,038
|
$
|
132,767
|
|||
Dividend
income
|
30,821
|
55,221
|
|||||
Other
income
|
5,308
|
1,553
|
|||||
127,167
|
189,541
|
||||||
Expenses:
|
|||||||
General
and administrative
|
107,000
|
118,132
|
|||||
Interest
expense
|
14,621
|
28,411
|
|||||
Legal
and professional fees
|
227,857
|
22,349
|
|||||
Management
fee to affiliate
|
348,396
|
242,343
|
|||||
697,874
|
411,235
|
||||||
Net
investment loss
|
(570,707
|
)
|
(221,694
|
)
|
|||
Realized
and unrealized gain (loss)
|
|||||||
on
investments:
|
|||||||
Net
change in unrealized appreciation of investments
|
(11,580,931
|
)
|
15,040,741
|
||||
Net
realized gain (loss) on investments
|
(1,462,277
|
)
|
150,484
|
||||
Net
gain (loss) on investments
|
(13,043,208
|
)
|
15,191,225
|
||||
Net
income (loss)
|
$
|
(13,613,915
|
)
|
$
|
14,969,531
|
||
Net
income (loss) per share
|
$
|
(3.13
|
)
|
$
|
3.44
|
||
Weighted
average shares outstanding
|
4,351,718
|
4,351,718
|
See
accompanying notes
16
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Operations
(Unaudited)
Six
Months Ended June 30,
|
|||||||
2004
|
2003
(restated)
|
||||||
Income:
|
|||||||
Interest
income
|
$
|
171,001
|
$
|
439,112
|
|||
Dividend
income
|
51,804
|
1,161,230
|
|||||
Other
income
|
33,590
|
1,553
|
|||||
256,395
|
1,601,895
|
||||||
Expenses:
|
|||||||
General
and administrative
|
210,364
|
193,180
|
|||||
Interest
expense
|
28,027
|
38,444
|
|||||
Legal
and professional fees
|
357,730
|
80,514
|
|||||
Management
fee to affiliate
|
758,527
|
420,819
|
|||||
1,354,648
|
732,957
|
||||||
Net
investment income (loss)
|
(1,098,253
|
)
|
868,938
|
||||
Realized
and unrealized gain (loss)
|
|||||||
on
investments:
|
|||||||
Net
change in unrealized appreciation of investments
|
(1,288,280
|
)
|
7,631,785
|
||||
Net
realized gain on investments
|
12,700,802
|
981,299
|
|||||
Net
gain on investments
|
11,412,522
|
8,613,084
|
|||||
Net
income
|
$
|
10,314,269
|
$
|
9,482,022
|
|||
|
|||||||
Net
income per share
|
$
|
2.37
|
$
|
2.18
|
|||
Weighted
average shares outstanding
|
4,351,718
|
4,351,718
|
See
accompanying notes
17
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Changes in Net Assets
(Unaudited)
Six
Months Ended June 30,
|
|||||||
2004
|
2003
(restated)
|
||||||
From
operations:
|
|||||||
Net
investment income (loss)
|
$
|
(1,098,253
|
)
|
$
|
868,938
|
||
Net
realized gain on investments
|
12,700,802
|
981,299
|
|||||
Net
change in unrealized
|
|||||||
appreciation
on investments
|
(1,288,280
|
)
|
7,631,785
|
||||
Net
income
|
10,314,269
|
9,482,022
|
|||||
From
distributions to stockholders:
|
|||||||
Common
stock dividends declared
|
|||||||
from
realized capital gains
|
(870,344
|
)
|
(1,406,919
|
)
|
|||
Total
increase in net assets
|
9,443,925
|
8,075,103
|
|||||
Net
assets:
|
|||||||
Beginning
of period
|
69,405,964
|
46,103,648
|
|||||
|
|||||||
End
of period
|
$
|
78,849,889
|
$
|
54,178,751
|
See
accompanying notes
18
Renaissance
Capital Growth & Income Fund III, Inc.
Statements
of Cash Flows
(Unaudited)
Six
Months Ended June 30,
|
|||||||
2004
|
2003
(restated)
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income
|
$
|
10,314,269
|
$
|
9,482,022
|
|||
Adjustments
to reconcile net income to net cash
|
|||||||
provided
by operating activities:
|
|||||||
Net
decrease (increase) in unrealized
|
|||||||
appreciation
on investments
|
1,288,280
|
(7,631,785
|
)
|
||||
Net
realized gain on investments
|
(12,700,802
|
)
|
(981,299
|
)
|
|||
(Increase)
decrease in interest and
|
|||||||
dividends
receivable
|
164,624
|
(465,646
|
)
|
||||
Increase
in accounts receivable-
|
|||||||
settlement
with affiliate
|
-
|
(287,886
|
)
|
||||
(Increase)
decrease in prepaid and
|
|||||||
other
assets
|
137,548
|
(73,190
|
)
|
||||
Increase
in accounts payable
|
26,336
|
9,526
|
|||||
Increase
(decrease) in accounts payable-
|
|||||||
affiliate
|
(659,689
|
)
|
155,308
|
||||
Increase
in due to broker
|
4,498,780
|
25,490,441
|
|||||
Purchase
of investments
|
(5,791,524
|
)
|
(3,676,266
|
)
|
|||
Proceeds
from sale of investments
|
16,371,713
|
3,031,501
|
|||||
Repayment
of debentures and notes
|
-
|
22,457
|
|||||
Net
cash provided by operating activities
|
13,649,535
|
25,075,183
|
|||||
Cash
flows from financing activities:
|
|||||||
Cash
dividends paid
|
(4,569,304
|
)
|
(870,344
|
)
|
|||
Net
increase in cash and cash equivalents
|
9,080,231
|
24,204,839
|
|||||
Cash
and cash equivalents at beginning
|
|||||||
of
the period
|
35,255,687
|
10,968,001
|
|||||
Cash
and cash equivalents at end of period
|
$
|
44,335,918
|
$
|
35,172,840
|
|||
|
|||||||
Cash
paid during the period
|
|||||||
Interest
|
$
|
28,027
|
$
|
38,444
|
See
accompanying notes
19
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 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 primarily in unregistered equity
investments and convertible issues of small and medium size companies which
are
in need of capital and which RENN Capital Group, Inc. (the “Investment
Adviser”), believes offer the opportunity for growth. The Fund is a
non-diversified closed-end fund and has elected to be treated as a business
development company under the Investment Company Act of 1940, as amended (“1940
Act”).
Note 2 - |
Summary
of Significant Accounting
Policies
|
Basis
of Presentation
We
have
prepared the accompanying unaudited interim financial statements pursuant to
the
rules and regulations of the Securities and Exchange Commission, which reflect
all adjustments which, in the opinion of management, are necessary to present
fairly the results for the interim periods. We have omitted certain information
and disclosures normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States
pursuant to those rules and regulations, although we believe that the
disclosures we have made are adequate to make the information presented not
misleading. You should read these unaudited interim financial statements in
conjunction with our audited financial statements and notes included in our
Annual Report on Form 10-K for the year ended December 31, 2003.
The
results of operations for the interim periods are not necessarily indicative
of
the results we expect for the full year.
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.
Other
The
Fund
records security transactions on the trade date. Dividend income is recorded
on
the record date. Interest income is recorded as earned on the accrual
basis.
Cash
and Cash Equivalents
The
Fund
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
20
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 2 - |
Summary
of Significant Accounting Policies,
continued
|
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 the 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.
Net
Income Per Share
Net
income per share is based on the weighted average
of shares outstanding of 4,351,718 during the period.
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.
Note 3 - |
Due
to Broker
|
The
Fund
conducts business with various brokers for its investment activities. The
clearing and depository operations for the investment activities are performed
pursuant to agreements with these brokers. Due to broker represents a margin
loan payable to one of these brokers, which is secured by investments in
securities maintained with the lending broker as collateral for the margin
loan.
Cash and cash equivalents related to the margin loan payable are held by the
lending broker as additional collateral for the margin loan. The Fund is subject
to credit risk to the extent the brokers are 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 these brokers and believes the
likelihood of loss under those circumstances is remote.
Note 4 - |
Management
and Incentive Fees
|
The
Investment Adviser for the Fund is registered as an investment adviser under
the
Investment Advisers Act of 1940 (the "Advisers Act"). 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 directly
allocable 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:
21
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 4 - |
Management
and Organization Fees,
continued
|
·
|
The
Investment Adviser receives a management fee equal to a quarterly
rate of
0.4375% 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 $758,527 and $420,819 for management fees
during the six months ended June 30, 2004 and 2003,
respectively.
|
·
|
The
Investment Adviser receives an incentive fee in an amount equal to
20% of
the Fund’s cumulative realized capital gains in excess of cumulative
realized capital losses of the Fund after allowance for any unrealized
capital depreciation on the portfolio investments of the Fund at
the end
of the period being calculated less cumulative incentive fees previously
accrued. Unrealized capital depreciation equals net unrealized capital
loss on each class of security without netting net unrealized capital
gains on other classes of securities. Because the incentive fee is
calculated, accrued, and paid on an annual basis as of each year
end and
no probability or estimate of the ultimate fee can be ascertained,
no
incentive fee was recorded during the six months ended June 30, 2004
and
2003.
|
·
|
The
Investment Adviser was reimbursed by the Fund for administrative
expenses
paid by the Investment Adviser on behalf of the Fund. Such reimbursements
were $161,721 and $1,552 during the six months ended June 30, 2004
and
2003, respectively.
|
As
of
June 30, 2004 and December 31, 2003, the Fund had an account payable of
$1,043,709 and $1,703,398, respectively, for the amount due for the fees and
expense reimbursements above.
As
explained in Note 9, during 2005, the Investment Adviser resolved a dispute
with
the staff of the Securities and Exchange Commission involving the appropriate
interpretation of section 205(b)(3) of the Advisers Act. As part of the
settlement, the Investment Adviser agreed to pay $2,851,362 as a reduction
of
incentive fees for the period from inception through December 31, 2003. The
Fund
reported a receivable of $3,775,872 as of June 30, 2004 and December 31, 2003
to
reflect the settlement which included interest income of $924,510, of which
$91,626 was reflected as interest income during the six months ended June 30,
2003.
Note 5 - |
Eligible
Portfolio Companies and
Investments
|
Eligible
Portfolio Companies
The
Fund
invests primarily in convertible securities and equity investments of companies
that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46)
of
the 1940 Act or in securities that otherwise qualify for investment as permitted
in Section 55(a)(1) through (5). Under the provisions of the 1940 Act at least
70% of the Fund’s assets, as defined under the 1940 Act, must be invested in
Eligible Portfolio Companies. In the event the Fund has less than 70% of its
assets 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. The Fund was in compliance
with these provisions at June 30, 2004.
22
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 5 - |
Eligible
Portfolio Companies and Investments,
continued
|
Investments
Investments
are carried in the statements of assets and liabilities 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 is 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,
or
other factors.
Note 6 - |
Valuation
of Investment
|
On
a
quarterly basis, the Investment Adviser prepares a valuation of the assets
of
the Fund,
subject
to the approval of the Board of Directors of the Fund. The valuation principles
are described below.
·
|
The
common stock of companies listed on an exchange, Nasdaq or in the
over-the-counter market is valued at the closing price on the date
of
valuation.
|
·
|
The
unlisted preferred stock of companies with common stock listed on
an
exchange, Nasdaq or in the over-the-counter market is valued at the
closing price of the common stock into which the preferred stock
is
convertible on the date of valuation. If the preferred stock is
redeemable, the preferred stock is valued at the greater of cost
or
market.
|
·
|
The
unlisted in-the-money options or warrants of companies with the underlying
common stock listed on an exchange, Nasdaq or in the over-the-counter
market are valued at the positive difference between the closing
price of
the underlying common stock and the strike price of the warrant or
option.
An out-of-the money warrant or option has no intrinsic value; thus,
we
assign no value to it.
|
·
|
Debt
securities are valued at the greater of (i) cost or (ii) the market
value
of the underlying common stock into which the debt instrument is
convertible. In cases where the debt instrument is in default or
the
company is in bankruptcy, the value will be (i) the value of the
underlying common stock, (ii) the value of the collateral, if secured,
or
(iii) zero, if the common stock has no value and there is no
collateral.
|
23
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 6 - |
Valuation
of Investment,
continued
|
·
|
If
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 to independent third parties by the entity governs
the
value of that enterprise. This valuation method causes the Fund’s initial
investment in the private entity to be valued at cost. Thereafter,
new
issuances or offers of equity or equity-linked securities by the
portfolio
company to new investors will be used to determine enterprise value
as
they will provide the most objective and independent basis for determining
the worth of the issuer. Where a private entity does not have an
independent value established over an extended period of time, then
the
Investment Adviser will determine fair value on the basis of appraisal
procedures established in good faith and approved by the Fund’s Board of
Directors.
|
As
of
June 30, 2004, and December 31, 2003, the net unrealized appreciation associated
with investments held by the Fund was $27,420,628 and $28,708,907, respectively.
For the periods ended June 30, 2004 and December 31, 2003, the Fund had gross
unrealized gains of $37,920,367 and $39,158,309, respectively, and gross
unrealized losses of $10,499,739 and $10,449,402, respectively.
Note 7 - |
Restricted
Securities
|
As
indicated on the schedules of investments as of June 30, 2004 and December
31,
2003, 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
(See
Note 6).
Note 8 - |
Distributions
to Shareholders
|
During
the three months ended June 30, 2003, the Fund declared dividends of $435,172,
resulting in total declared dividends for the six months ended June 30, 2003
of
$1,406,919. During the three months ended June 30, 2004, the Fund declared
dividends of $435,170, resulting in total declared dividends for the six months
ended June 30, 2004 of $870,344.
Note 9 - |
Settlement
with Securities and Exchange
Commission
|
During
2004, the staff (“Staff”) of the Securities and Exchange Commission (“SEC”)
informed the Fund’s counsel of significant potential regulatory issues in
connection with the Staff’s review of a registration statement for a proposed
rights offering. On December 1, 2005, the Investment Adviser consented, without
admitting or denying the findings, to the entry of an order by the SEC
instituting public administrative and cease and desist proceedings and imposing
remedial sanctions (the “Order”).
24
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 9 - |
Settlement
with Securities and Exchange Commission,
continued
|
In
summary, the dispute concerned the definition of the wording of the incentive
fee calculation in the Advisers Act. Under Section 205(b)(3) of the Advisers
Act, a performance fee may be earned. The Investment Adviser, for many years,
believed the word “capital” referred to the Fund’s shareholders equity as a
whole. In 2004, the SEC informed the Investment Adviser that capital
depreciation in the formula referred only to unrealized capital losses on
marketable securities in the portfolio and therefore the calculations in
previous years were incorrect. In the Order, the SEC states that in calculating
a performance-based fee under Section 205(b)(3), an Investment Adviser must
account for its client’s assets on a security-by-security basis and may not take
into consideration unrealized capital appreciation on any individual security
or
the portfolio as a whole. Section 205(b)(3) does not require that fees earned
in
one period be subject to repayment based upon performance in a subsequent
period. If the performance fee is calculated on a cumulative basis and is based
on the period since inception, the unrealized capital depreciation may be
calculated for each calculation period by subtracting each security’s valuation
at the end of the applicable calculation period from the original cost, as
adjusted, of purchasing that security. In practice, the Investment Adviser
also
took into account unrealized capital appreciation, which offset unrealized
capital depreciation, to calculate its performance-based fee. Thus, beginning
in
fiscal year 1996, the first period in which the Fund realized capital gains,
the
Investment Adviser’s formula for calculating that fee was not consistent with
the agreed formula permitted under Section 205(b)(3).
As
part
of the settlement of the SEC proceedings, the Investment Adviser agreed to
pay
$2,851,362 for adjustments in the incentive fee from the inception through
December 31, 2003, plus prejudgment interest of $924,509 and a penalty of
$100,000 to the Fund. The Investment Adviser satisfied this obligation in full
as of December 8, 2005.
The
effect of the SEC settlement, was reflected retroactively. As such the effect
of
the adjustments in incentive fees were reported in prior years as though the
agreed methodology had been in place since inception. Interest received by
the
fund upon settlement was allocated to the years in which it was earned. The
$100,000 penalty received upon settlement was reflected in the year settlement
was reached (2005).
Note 10 - |
Restatement
|
Subsequent
to the previous issuance of financial statements for 2003, the Investment
Adviser determined that the method used in valuing certain unregistered
securities was inappropriate based upon changes in SEC guidelines. For this
reason, the unrealized gains on those securities was increased (decreased)
as
appropriate.
Because
of the changes in the Fund’s net assets resulting from the settlement with the
SEC as disclosed in Note 9 and the revaluation of investments, the Fund
recomputed the management fee explained in Note 4 resulting in an increase
in
management fees of $251,764 from inception through December 31,
2003.
25
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 10 - |
Restatements,
continued
|
The
effect of the SEC settlement disclosed in Note 9 was reflected as a prior period
adjustment. As such the effect of the adjustments in incentive fees were
reported in prior years as though the agreed methodology had been in place
since
inception. Interest received by the Fund upon settlement was allocated to the
years in which it was earned. The penalty received upon settlement was reflected
in the year settlement was reached (2005).
The
Fund
also reported the effect of the revaluation of investments discussed above
as a
prior period adjustment.
The
resultant increase in management fees was allocated to each period based on
the
recalculation of net assets as restated.
The
Fund
reflected these adjustments retrospectively for the three and six months ended
June 30, 2003 as follows:
Three
months ended
|
Six
months ended
|
||||||
June
30, 2003
|
June
30, 2003
|
||||||
Net
income as originally reported
|
$
|
14,912,660
|
$
|
10,096,729
|
|||
Increase
in interest income
|
45,813
|
91,626
|
|||||
Decrease
in net change in unrealized
|
|||||||
appreciation
on investments
|
(597
|
)
|
(868,652
|
)
|
|||
Reduction
in incentive fees
|
30,097
|
196,260
|
|||||
Increase
in management fees
|
(18,442
|
)
|
(33,941
|
)
|
|||
Net
income, as restated
|
$
|
14,696,531
|
$
|
9,482,022
|
Earnings
per share for the three and six months ended June 30, 2003 was adjusted as
follows:
As originally
reported
|
$
|
3.43
|
$
|
2.32
|
|||
Adjustment
|
.01
|
(.14
|
)
|
||||
As
restated
|
$
|
3.44
|
$
|
2.18
|
26
RENAISSANCE
CAPITAL GROWTH & INCOME FUND III, INC.
Notes
to
Unaudited Financial Statements
June
30,
2004
Note 11 - |
Commitments
and Contingencies
|
As
disclosed in Note 4, the Fund is obligated to pay to the Investment Adviser
an
incentive fee equal to 20% of the funds cumulative realized capital gains in
excess of cumulative capital losses of the Fund after allowance for any capital
depreciation on the portfolio investments of the Fund. As incentive fees on
capital gains are not due to the Investment Adviser until the capital gains
are
realized, any obligations for incentive fees based on unrealized capital gains
are not reflected in the accompanying financial statements as there is no
assurance that the unrealized gains as of the end of any period will ultimately
become realized. Had an incentive fee been accrued as a liability based on
all
unrealized capital gains, net assets of the Fund would have been reduced by
$7,831,661 as of December 31, 2003.
Note 12 - |
Financial
Highlights
|
Selected
per share data and ratios for each share of common stock outstanding throughout
the six months ended June 30, 2004 and 2003 are as follows:
2004
|
2003
(restated)
|
||||||
Net
asset value, beginning of period
|
$
|
15.95
|
$
|
10.59
|
|||
Net
investment income (loss)
|
(0.25
|
) |
0.20
|
||||
Net
realized and unrealized gain on investments
|
2.62
|
1.98
|
|||||
Total
return from investment operations
|
2.37
|
2.18
|
|||||
Distributions
|
(0.20
|
) |
(0.20
|
) | |||
Net
asset value, end of period
|
$
|
18.12
|
$
|
12.57
|
|||
|
|||||||
Per
share market value, end of period
|
$
|
13.15
|
$
|
9.35
|
|||
Portfolio
turnover rate (quarterly)
|
8.91
|
%
|
7.15
|
%
|
|||
Quarterly
return (a)
|
(1.79
|
%) |
18.96
|
%
|
|||
Ratio
to average net assets (quarterly) (b):
|
|||||||
Net
investment income (loss)
|
(1.37
|
%) |
1.85
|
%
|
|||
Expenses
|
1.69
|
1.56
|
%
|
(a)
|
Six
month return (not annualized) was calculated by comparing the common
stock
price on the first day of the period to the common stock price on
the last
day of the period, in accordance with American Institute of Certified
Public Account 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 material portfolio transactions occurred during the quarter ended
June
30, 2004:
Dexterity
Surgical, Inc.
(OTCBB:DEXT) During the second quarter of 2004, the company declared bankruptcy.
Thus, the Fund wrote off its $1,316,282 investment in the company.
Fortune
Natural Resources Corporation
(Nasdaq:FPXA) In the second quarter of 2004, the company declared bankruptcy.
Thus, the Fund wrote off its $500,500 investment in the company.
Global
Axcess Corporation
(OTCBB:GLXS) In the quarter ended June 30, 2004, the Fund received warrants
to
purchase 2,100,000 shares of common stock at prices ranging from $0.35 to $1.00.
INET
Technologies, Inc.
(Nasdaq:INTI) In the quarter ended June 30, 2004, the Fund bought 50,000 shares
of common stock for $454,725.
Integrated
Security Systems, Inc.
(OTC:IZZI) In the second quarter of 2004, the Fund received 4,713 shares of
common stock of the Company as payment in kind for Russell Cleveland’s
director’s fee, having an imputed cost of $1,060. In addition, the Fund
exercised warrants to purchase 2,425,000 shares at $0.20 per share for a total
of $485,000.
PracticeXpert,
Inc.
(OTCBB:PXPT) In the second quarter of 2004, the Fund bought 4,166,667 shares
of
common stock and warrants to purchase another 4,166,667 shares of common stock
at $0.30 for $500,000.
Simtek
Corporation
(OTCBB:SRAM) In the second quarter of 2004, in connection with the service
of
Robert Pearson, a vice president of the Fund, as a director of Simtek, the
Fund
received options to purchase 9,188 shares of common stock at $1.16 per share.
Stonepath
Group, Inc.
(AMEX:STG) In the second quarter of 2004, the Fund sold 150,000 shares of common
stock realizing proceeds of $557,005, representing a gain of 354,505.
Results
of Operations for the Three Months Ended June 30, 2004
For
the
quarter ended June 30, 2004, the Fund had a net investment loss of $570,707
compared to a net investment loss of $221,694 for the second quarter of 2003.
This change was due in part to a decrease in investment income from $189,541
for
the second quarter of 2003 to $127,167 for the comparable period of 2004. This
decrease in investment income was attributable to the Fund holding fewer
investments that earned dividends and interest in the second quarter of 2004.
Interest income decreased from $132,767 for the three months ended June 30,
2003
to $91,038 for the same period of 2004, as a result of debt investments being
sold, redeemed, or realized as losses during 2003. Dividend income for the
three-month period ended June 30, 2004 was $30,821 versus $55,221 for the same
period in 2003 as a result of preferred stock holdings being converted to common
stock.
28
Expenses
increased from $411,235 for the quarter ended June 30, 2003 to $697,874 for
the
second quarter 2004. General and administrative expenses decreased for the
second quarter of 2004 to $107,000 from $118,132 for the second quarter of
2003
primarily due to lower investor relations and printing expenses, offset by
higher travel, rights offering, and insurance expenses in 2004. Interest expense
decreased from $28,411 for the second quarter of 2003 to $14,621 for the
comparable period of 2004 as a result of higher margin balances during the
quarter ended June 30, 2003. Legal and professional fees increased from $22,349
for the second quarter of 2003 to $227,857 in the same period 2004 as a result
of increased expenses relating to a rights offering in the second quarter of
2004. Management fees increased from $242,343 for the second quarter of 2003
to
$348,396 for the second quarter of 2004 as a result of higher market values
for
portfolio investments at the quarter end of June 30, 2004.
Net
change in unrealized appreciation increased $15,040,741 for the quarter ended
June 30, 2003. Net change in unrealized appreciation decreased $11,580,931
for
the quarter ended June 30, 2004. The variance is a result of fluctuations in
market values of securities at each quarter end and the realization of gains
or
losses upon disposition of investments.
Realized
gains decreased from $150,484 for the quarter ended June 30, 2003 to a realized
loss of $1,462,277 for the same period in 2004, as a result of losses incurred
from bankruptcy filings by Dexterity Surgical, Inc. and Fortune Natural
Resources Corp. during the quarter ended June 30, 2004.
Results
of Operations for the Six Months Ended June 30, 2004
For
the
six months ended June 30, 2004, the Fund experienced a net investment loss
in
the amount of $1,098,253 compared to a net investment income in the amount
of
$868,938 for the same six-month period in 2003. This change was due in part
to a
decrease in investment income from $1,601,895 for the six months ended June
30,
2003 to $256,395 for the comparable period of 2004. This decrease in investment
income was attributable to lower dividend and interest income being earned
in
2004. Interest income decreased from $439,112 for the six months ended June
30,
2003 to $171,001 for the same period of 2004 primarily due to debt investments
being converted to equity in addition to being sold, redeemed, or realized
as
losses in 2003. Dividend income for the six-month period ended June 30, 2004,
was $51,804 versus $1,161,230 for the same period in 2003, as a result of
dividends being earned upon the conversion of eOriginal, Inc. and Integrated
Security Systems, Inc. preferred stock in 2003.
29
Expenses
increased from $732,957 for the six months ended June 30, 2003 to $1,354,648
for
the same period in 2004. General and administrative expenses increased from
$193,180 in the six months ended June 30, 2003 to $210,364 for the same period
in 2004 primarily due to higher travel, marketing, rights offering, and bank
charge expenses, offset by lower investor relation, printing, and insurance
expenses in 2004. Interest expense decreased from $38,444 for the six months
ended June 30, 2003 to $28,027 for the comparable period of 2004 as a result
of
lower margin balances during the six months ended June 30, 2004. Legal and
professional fees increased from $80,514 for the six months ended June 30,
2003
to $357,730 for the six months ended June 30, 2004 as a result of rights
offering expenses for the six months ended June 30, 2004. Management fees
increased from $420,819 for the six months ended June 30, 2003 to $758,527
for
the same period in 2004 due to higher market values of portfolio investments
during the six months ended June 30, 2004.
The
net
change in unrealized appreciation increased $7,631,785 for the six months ended
June 30, 2003. The net change in unrealized appreciation decreased $1,288,280
for the six months ended June 30, 2004. The variance was a result of
fluctuations in market values of securities at each quarter end and the
realization of gains or losses upon disposition of investments.
Realized
gains increased from $981,299 for the six months ended June 30, 2003 to
$12,700,802 for the same period in 2004 as a result of gains earned from the
sale of investments during the six months ended June 30, 2004 primarily from
the
sale of Laserscope common stock.
Liquidity
and Capital Resources
For
the
six months ended June 30, 2004, net assets increased from $69,405,964 at
December 31, 2003 to $78,849,889 at June 30, 2004.
At
the
end of the second quarter of 2004, the Fund had cash and cash equivalents of
$44,335,918 versus cash and cash equivalents of $35,255,687 at December 31,
2003. This increase is primarily attributable to a higher T-Bill holding at
June
30, 2004 and an increased cash balance due to the sale of Laserscope common
stock. The Fund’s interest and dividends receivable decreased from $233,201 at
December 31, 2003 to $68,577 at June 30, 2004 due primarily to the receipt
of a
bankruptcy payment from VoiceIt Worldwide, Inc.
Accounts
payable increased from $57,273 at December 31, 2003 to $83,609 at June 30,
2004
primarily due to legal and marketing expenses accrued at June 30, 2004. Accounts
payable to affiliate decreased from 1,703,398 at December 31, 2003 to $1,043,709
at June 30, 2004, reflecting the payments of management fee and 2003 incentive
fee offset by the accrual of management fee payable to the Fund’s investment
adviser for the first two quarters of 2004.
30
During
the six months ended June 30, 2004 the Fund paid $4,569,304 of dividends to
shareholders of which $3,698,960 was capital gains dividend payable at December
31, 2003 and $870,344 of dividends declared and payable during the six months
ended June 30, 2004.
The
majority of the Fund’s investments in portfolio companies are individually
negotiated, non-registered for public trading, and are subject to legal and
contractual investment restrictions. Accordingly, the Fund’s portfolio
investments are generally considered non-liquid. This lack of liquidity
primarily affects the Fund’s ability to make new investments and distributions
to shareholders.
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.
Contractual
Obligations
The
Fund
has a contract for the purchase of services under which it will have future
commitments: the investment advisory agreement, pursuant to which RENN Capital
Group, Inc. has agreed to serve as the Fund’s investment adviser. Such agreement
has contractual obligations with fees which are based on values of the portfolio
investments which the Fund owns. For further information regarding the Fund’s
obligations under the investment advisory agreement see Note 4 of the Financial
Statements.
Because
the Fund does not enter into other long-term debt obligations, capital lease
obligations, operating lease obligations, or purchase obligations, a table
of
contractual obligations has not been presented.
31
Item
3. Quantitative and Qualitative Disclosure About Market Risk
The
Fund
is subject to financial market risks, including changes in market interest
rates
as well as changes in marketable equity security prices. The Fund does not
use
derivative financial instruments to mitigate any of these risks. The return
on
the Fund’s investments is generally not affected by foreign currency
fluctuations.
A
majority of the Fund’s net assets consists of common stocks and warrants and
options to purchase common stock in publicly traded companies. These investments
are directly exposed to equity price risk, in that a percentage change in these
equity prices would result in a similar percentage change in the fair value
of
these securities.
A
lesser
percentage of the Fund’s net assets consist of fixed rate convertible debentures
and other debt instruments as well as convertible preferred securities. Since
these instruments are generally priced at a fixed rate, changes in market
interest rates do not directly impact interest income, although they could
impact the Fund’s yield on future investments in debt instruments. In addition,
changes in market interest rates are not typically a significant factor in
the
Fund’s determination of fair value of its debt instruments, as it is generally
assumed they will be held to maturity, and their fair values are determined
on
the basis of the terms of the particular instrument and the financial condition
of the issuer.
A
small
percentage of the Fund’s net assets consist of equity investments in private
companies. The Fund would anticipate no impact on these investments from modest
changes in public market equity prices. However, should significant changes
in
market prices occur, there could be a longer-term effect on valuations of
private companies which could affect the carrying value and the amount and
timing of proceeds realized on these investments.
Item
4. Controls and Procedures.
The
Fund
has in place systems relating to disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the 1934 Act). Our principal executive
officer and principal financial officer evaluated the effectiveness of these
disclosure controls and procedures as of the end of our quarter ended June
30,
2004 in connection with the preparation of this report. They concluded that
the
controls and procedures were effective and adequate at that time. There were
no
significant changes in the Fund’s internal control over financial reporting
during the first quarter of fiscal 2004 that have materially affected, or are
reasonably likely to materially affect the Fund’s control over financial
reporting.
32
PART
II
Item 1. |
Legal
Proceedings
|
None
Item 1A. |
Risk
Factors
|
You
should carefully consider the risks described below and all other information
contained in this quarterly report on Form 10-Q, including our financial
statements and the related notes thereto before making a decision to purchase
our common stock. The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties not presently known to us,
or
not presently deemed material by us, may also impair our operations and
performance. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. If that happens, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Failure
to Meet Listing Standards.
It
is
uncertain whether our common stock will meet the requirements for listing on
Nasdaq, or any other stock exchange or quotation service.
In
July
2004, due to our inability to complete our audit and file our Form 10-K for
the
year ended December 31, 2003 in a timely manner, the Fund’s common stock was
delisted from Nasdaq. As we become current with the delinquent filings, we
will
attempt to relist with Nasdaq or a national stock exchange, but there is no
certainty that we will be able to do so.
Our
Growth is Dependent on Investing in Quality Transactions.
Sustaining growth depends on our ability to identify, evaluate, finance, and
invest in companies that meet our investment criteria. Accomplishing such
results on a cost-effective basis is a function of our marketing capabilities
and skillful management of the investment process. Failure to achieve future
growth could have a material adverse effect on our business, financial
condition, and results of operations.
Failure
to Invest Capital Effectively May Decrease Our Stock Price.
If we
fail to invest our capital effectively, our return on equity may be decreased,
which could reduce the price of the shares of our common stock.
Highly
Competitive Market for Investments.
We
compete with a number of private equity funds, other investment entities and
individuals for investment opportunities. Some of these competitors are
substantially larger and have greater financial resources, and some are subject
to different and frequently less stringent regulation. As a result of this
competition, we may not be able to take advantage of attractive investment
opportunities from time to time and there can be no assurance that we will
be
able to identify and make investments that satisfy our objectives.
33
Lack
of Publicly Available Information on Certain Portfolio
Companies.
Some of
the securities in our portfolio are issued by privately held companies. There
is
generally little or no publicly available information about such companies,
and
we must rely on the diligence of our management to obtain the information
necessary for our decision to invest. There can be no assurance that such
diligence efforts will uncover all material information necessary to make fully
informed investment decisions.
Dependence
on Key Management.
Selecting, structuring and closing our investments depends upon the diligence
and skill of our management, which is responsible for identifying, evaluating,
negotiating, monitoring and disposing of our investments. Our management's
capabilities will significantly impact our results of operations. If we lose
any
member of our management team and he/she cannot be promptly replaced with an
equally capable team member, our results of operations could be significantly
impacted.
Failure
to Deploy Capital may Lower Returns.
Our
failure to successfully deploy sufficient capital may reduce our return on
equity.
Results
May Fluctuate.
Our
operating results may fluctuate materially due to a number of factors including,
among others, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter competition in
our
portfolio companies’ markets, the ability to find and close suitable
investments, and general economic conditions. As a result of these factors,
results for any period should not be relied upon as being indicative of
performance in future periods.
Uncertain
Value of Certain Restricted Securities.
Our net
asset value is based on the values assigned to the various investments in our
portfolio, determined in good faith by our board of directors. Because of the
inherent uncertainty of the valuation of portfolio securities which do not
have
readily ascertainable market values, our fair value determinations may differ
materially from the values which would be applicable to unrestricted securities
having a public market.
Illiquid
Securities May Adversely Affect Our Business.
Our
portfolio contains securities which are subject to restrictions on sale because
they were acquired from issuers in "private placement" transactions or because
we are deemed to be an affiliate of the issuer. Unless an exemption from the
registration requirements of the Securities Act of 1933 is available, we will
not be able to sell these securities publicly without the expense and time
required to register the securities under applicable federal and state
securities laws. In addition, contractual or practical limitations may restrict
our ability to liquidate our securities in portfolio companies, because we
may
own a relatively large percentage of the issuer's outstanding securities. Sales
may also be limited by unfavorable market conditions. The illiquidity of our
investments may preclude or delay the disposition of such securities, which
may
make it difficult for us to obtain cash equal to the value at which we record
our investments.
Regulated
Industry.
Publicly
traded investment funds are highly regulated. Changes in securities laws or
regulations governing our operations or our failure to comply with those laws
or
regulations may adversely affect our business.
Failure
to Qualify for Favorable Tax Treatment.
We may
not qualify for conduit tax treatment as a Regulated Investment Company ("RIC")
if we are unable to comply with the requirements of Subchapter M of the Internal
Revenue Code. If we fail to satisfy such requirements and cease to qualify
for
conduit tax treatment, we will be subject to federal taxes on our net investment
income. The loss of this pass-through tax treatment could have a material
adverse effect on the total return, if any, obtainable from an investment in
our
common stock.
Highly
Leveraged Portfolio Companies.
Some of
our portfolio companies could incur substantial indebtedness in relation to
their overall capital base. Such indebtedness often has a term that will require
the balance of the loan to be refinanced when it matures. If portfolio companies
cannot generate adequate cash flow to meet the principal and interest payments
on their indebtedness, the value of our investments could be reduced or
eliminated through foreclosure on the portfolio company's assets or by the
portfolio company's reorganization or bankruptcy.
Our
Common Stock Often Trades at a Discount.
Our
common stock often trades at a discount from net asset value. Our common stock
is traded over-the-counter in the pink sheets. Stockholders desiring liquidity
may sell their shares at current market value, which has often been below net
asset value. Shares of closed-end investment companies frequently trade at
discounts from net asset value, which is a risk separate and distinct from
the
risk that a fund's performance will cause its net asset value to
decrease.
Nature
of Investment in Our Common Stock.
Our
stock is intended for investors seeking long-term capital appreciation. Our
investments in portfolio securities generally require some time to reach
maturity, and such investments generally are illiquid. An investment in our
shares should not be considered a complete investment program. Each prospective
purchaser should take into account his or her investment objectives as well
as
his or her other investments when considering the purchase of our
shares.
Our
Stock Price May Fluctuate Significantly.
The
market price of our common stock may fluctuate significantly. The market price
and marketability of shares of our common stock may from time to time be
significantly affected by numerous factors, including our investment results,
market conditions, and other influences and events over which we have no control
and that may not be directly related to us.
34
Item 2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None |
Item 3. | Defaults Upon Senior Securities |
None |
Item 4. | Submission of Matters to a Vote of Security Holders |
None |
Item 5. | Other Information |
None |
Item 6. | Exhibits |
31.1
|
Certification
of the principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2
|
Certification
of the principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
Certification
of the principal executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of the principal financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
35
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.
/s/ Russell Cleveland | December 19, 2006 | ||
Russell Cleveland, President and Cheif Executive Officer | |||
(Principal Executive Officer) | |||
/s/ Barbe Butschek | December 19, 2006 | ||
Barbe Butschek, Chief Financial Officer | |||
(Principal Financial Officer) |