Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any statement to this Form 10-K. o

 

TABLE OF CONTENTS
PART I
Item 1.		Business
Item 1A.		Risk Factors
Item 2.		Properties
Item 3.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Security Holders
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.		Selected Financial Data
Item 7.		Management’s Discussion and Analysis of Financial Condition
		and Results of Operations
Item 7A.		Quantitative and Qualitative Disclosure About Market Risk
Item 8.		Financial Statements and Supplementary Data
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A(T).		Controls and Procedures
Item 9B.		Other Information
		PART III
Item 10.		Directors and Executive Officers of Registrant
Item 11.		Executive Compensation
Item 12.		Security Ownership of Certain Beneficial Owners and Management
Item 13.		Certain Relationships and Related Transactions
Item 14.		Principal Accountant Fees and Services
PART IV
Item 15.		Exhibits, Financial Statement Schedules
Signatures
Index to Financial Statements				F-1
Financial Statements				F-2 TO F-27

Part I

Certain of the statements included below, including those regarding future financial performance or results that are not historical facts, contain “forward-looking” information as that term is defined in the Securities Exchange Act of 1934, as amended. The words “expect,” “believe,” “anticipate,” “project,” “estimate,” and similar expressions are intended to identify forward-looking statements. The Fund cautions readers that any such statements are not guarantees of future performance or events and that such statements involve risks, uncertainties and assumptions, including but not limited to industry conditions, general economic conditions, interest rates, competition, ability of the Fund to successfully manage its growth, and other factors discussed or included by reference in this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, those actual results and outcomes may differ materially from those indicated in the forward-looking statements.

Item 1. Business.

GENERAL

Renaissance Capital Growth & Income Fund III, Inc., (the “Fund” or the “Registrant”) is a non-diversified, closed-end fund that has elected to be treated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund, a Texas corporation, was organized and commenced operations in 1994.

The investment objective of the Fund is to provide its stockholders long-term capital appreciation by investing primarily in privately placed convertible securities and equity securities of emerging growth companies.

RENN Capital Group, Inc. (“RENN Group” or the “Investment Adviser”), a Texas corporation, serves as the Investment Adviser to the Fund. In this capacity, RENN Group is primarily responsible for the selection, evaluation, structure, valuation, and administration of the Fund’s investment portfolio, subject to the supervision of the Board of Directors. RENN Group is a registered investment adviser under the Investment Advisors Act of 1940, as amended (the “Advisors Act”).

 

Our Internet website address is www.rencapital.com. You can review the filings we have made with the U.S. Securities and Exchange Commission (“SEC”), free of charge, by linking to the Electronic Data Gathering, Analysis, and Retrieval System of the SEC (“EDGAR”) at www.sec.gov. From EDGAR, you should be able to access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

Generally, investments are, and will continue to be, in companies that have their common stock registered for public trading under the Securities Exchange Act of 1934, as amended (the “1934 Act”), or companies that in the opinion of the Investment Adviser have the ability to effect a public offering within three to five years. The Fund generally invests in privately placed convertible preferred stock, common stock, and warrants and debentures of a company to be held in the Fund’s portfolio (“Portfolio Company”). The convertible preferred stock, warrants and debentures securities typically are convertible into, or exchangeable for, the common stock of the Portfolio Company. While such common stock of the Portfolio Company may be publicly traded, the common stock acquired by the Fund is often unregistered. Therefore, such securities are restricted from distribution or sale to the public except in compliance with certain holding periods and exemptions under the Securities Act of 1933, as amended (the “1933 Act”), or after registration pursuant to the 1933 Act. Typically, the Fund receives registration rights for shares to be registered within a certain period of time. The Fund also purchases shares of small and micro-cap issuers in the open markets. These shares are freely tradable and have no restrictions on resale.

From inception through December 31, 2007, the Fund had made investments in eighty-four (84) different Portfolio Companies having an aggregate cost of $106,144,160. At December 31, 2007, the Fund had active investments in thirty-seven (37) Portfolio Companies. The Fund does not focus on particular industry segments. Instead, the Fund makes investment decisions using a bottom-up analysis of the potential Portfolio Company, with no predetermined industry bias.

Under the provisions of the 1940 Act, a Business Development Company generally is required to invest at least 70% of its assets directly in “Eligible Portfolio Companies” and temporary investments in “cash items” pending other investments. The term “Eligible Portfolio Company” generally includes any issuer that (1) is organized under the laws of, and has its principal place of business in, any U.S. state or states; (2) is not an investment company and (3) does not have any class of securities listed on a national securities exchange. The Fund determines whether any prospective investment is an Eligible Portfolio Company at the time the investment is made, and the calculation of the requisite percentage is also made at that time and is based on the most recent valuation of the Fund’s assets. Under the 1940 Act, a Business Development Company may invest up to 30% of its funds in companies that do not qualify as Eligible Portfolio Companies. In the event the Fund has less than 70% of its assets in the securities of Eligible Portfolio Companies, then the Fund will be prohibited from making investments in companies that are not Eligible Portfolio Companies until such time as the percentage of eligible investments again are at least equal to the 70% threshold.

Pending investment in securities of Eligible Portfolio Companies or other Portfolio Companies, the Registrant’s funds are invested in short-term investments consisting primarily of cash or U.S. Government and agency obligations.

 

At December 31, 2007, the Fund’s investment assets were classified by amount as follows:

					Percentage
Classification		Value			of Net Assets
Investments in Eligible Portfolio		$	23,553,371			62.38	%
Companies (including cash and
cash equivalents, net of liabilities)
Other Portfolio Investments			14,205,777			37.62
		$	37,759,148			100.00	%

 

As of December 31, 2007, the Fund was in compliance with the sections of the 1940 Act that address Eligible Portfolio Companies.  However, the Fund will not be permitted to make additional investments in companies that are not Eligible Portfolio Companies until such time as the percentage of eligible investments are at least equal to the 70% threshold.  The Fund’s ability to make additional investments in Eligible Portfolio Companies remains unrestricted.

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide its stockholders with long-term capital appreciation by investing primarily in privately placed convertible debt and equity securities of emerging growth public companies. The Fund seeks to provide returns to stockholders through cash dividends of net investment income and through distributions of realized gains.

 

GENERAL INVESTMENT POLICIES

The Fund invests in the securities of emerging growth companies that are generally not available to the public and which typically require substantial financial commitment. An “emerging growth company” is generally considered to have the following attributes: (1) either a publicly held company with a relatively small market capitalization or a privately held company; (2) an established operating history but of a limited period so as to not have fully developed its market potential for the products or services offered; and (3) a provider of a new or unique product or service that allows the company an opportunity for exceptional growth. Emerging growth companies typically require non-conventional sources of financing because the extent and nature of the market for their products or services is not fully known. Consequently, there is uncertainty as to the rate and extent of growth and also uncertainty as to the capital and human resources required to achieve the goals sought.

With respect to investments in emerging growth companies, the Fund emphasizes investing in convertible debentures or convertible preferred stock of publicly held companies that the Fund anticipates will be converted into common stock and registered for public sale within three to five years after the private placement. In addition, the Fund invests in privately placed common stock of publicly traded issuers that are initially restricted from trading. To a lesser extent, the Fund may participate in bridge financings in the form of loans or other preferred securities which are convertible into common stock of the issuer or issued together with equity participation, or both, for companies which the Fund anticipates will complete a stock offering or other financing within a year from the date of the investment. The Fund may also make bridge loans, either secured or unsecured, intended to carry the borrower to a private placement or an initial public offering, or to a merger, acquisition, or other strategic transaction.

Generally, the debt securities of Portfolio Companies have an initial fixed term of five to seven years, with no amortization of the principal amount for the initial two to three years. Further, privately-placed investments in Portfolio Companies will be individually negotiated, non-registered for public trading, and will be subject to legal and contractual investment restrictions. Accordingly, the Fund’s securities of Portfolio Companies are generally considered non-liquid.

The Fund has no fixed policy concerning the types of businesses or industry groups in which it may invest or as to the amount of funds that it will invest in any one issuer. However, the Fund will generally seek to limit its investment in securities of any single Portfolio Company to approximately 15% of the Portfolio Company’s net assets at the time of the investment.

 

In the event the Fund elects to participate as a member of the Portfolio Company’s Board of Directors, either through advisory or full membership, the Fund’s nominee to the board will generally be selected from among the officers of RENN Group. When, at the discretion of RENN Group, a suitable nominee is not available from among its officers, RENN Group will select, as alternate nominees, outside consultants who have prior experience as an independent outside director of a public company. At December 31, 2007, officers of the Fund served as directors of nine of the Fund’s portfolio companies. The Fund makes available significant managerial assistance to its portfolio companies through participating in discussions with management and review of various management reports.

Although the Fund has no intent to change its current investment objectives, they may be changed without a vote of the holders of a majority of the Fund’s common stock.

It is the policy of the Fund not to structure off-balance-sheet arrangements.

REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940

The 1940 Act was enacted to regulate investment companies. In 1980, the 1940 Act was amended by the adoption of the Small Business Investment Incentive Act. The purpose of the amendment was to remove regulatory burdens on professionally managed investment companies engaged in providing capital to smaller companies. The Small Business Investment Incentive Act established a new type of investment company specifically identified as a Business Development Company as a way to encourage financial institutions and other major investors to provide a new source of capital for small developing businesses.

BUSINESS DEVELOPMENT COMPANY

A business development company (“BDC”) is a closed-end management investment company that generally makes 70% or more of its investments in “Eligible Portfolio Companies” and “cash items” pending other investment. Under the 1940 Act, only certain companies may qualify as “Eligible Portfolio Companies.” To be an “Eligible Portfolio Company,” the company must satisfy the following:

 

·

it must be organized under the laws of, and have its principal place of business in, any state or states of the United States of America;

·

it is neither an investment company as defined in Section 3 of the 1940 Act (other than a small business investment company which is licensed by the Small Business Administration to operate under the Small Business Investment Act of 1958 and which is a wholly-owned subsidiary of the business development company) nor a company which would be an investment company under the 1940 Act except for the exclusion from the definition of investment company in Section 3(c) of the 1940 Act; and

 

·

it satisfies one of the following:

 

1)

it does not have any class of securities listed on a national securities exchange; or

2)

it has no class of securities on which a broker, dealer or national exchange member will extend credit; or

3)

it is controlled by a BDC (singly or in a group), in general terms, by virtue of the BDC’s ownership of 25% or more of the company’s voting securities and having a representative of the BDC on the company’s board of directors; or

4)

it has total assets of not more than $4 million and capital and surplus of not less than $2 million.

“Eligible Portfolio Companies” are, generally, those companies that, while being publicly held, might not have or do not have a broad-based market for their securities, or the securities that they wish to offer are restricted from public trading until registered. The Fund provides or offers to provide managerial assistance, and in certain circumstances contracts for the right to have a designee of the Fund elected to the board of directors of the Portfolio Company, or be designated as an advisory director. While these are the Fund’s general policies, the application of these policies, of necessity, varies with each investment situation.

1940 ACT REQUIREMENTS

The BDC election exempts the Fund from some provisions of the 1940 Act. However, except for those specific provisions, the Fund will continue to be subject to all provisions of the 1940 Act not otherwise exempted, including the following:

·

restrictions on the Fund from changing the nature of the Fund’s business so as to cease to be, or to withdraw its election as, a BDC without the majority vote of the shares outstanding;

·

restrictions against certain transactions between the Fund and affiliated persons;

·

restrictions on issuance of senior securities;

·

compliance with accounting rules and conditions as established by the SEC, including annual audits by independent accountants;

·

compliance with fiduciary obligations imposed under the 1940 Act; and

·

requirement that the stockholders ratify the selection of the Fund’s independent public accountants and the approval of the Fund’s Advisory Agreement with the Investment Adviser or similar contracts and amendments thereto.

CO-INVESTMENTS WITH ADVISER-AFFILIATED FUNDS

In accordance with the conditions of an exemptive order of the SEC permitting co-investments (the “Co-investment Order”), many of the Fund’s acquisitions and dispositions of investments are made in joint participation with funds that are also advised or managed by RENN Group (“Adviser-Affiliated Funds”).

 

The Co-investment Order provides that the Investment Adviser will review private placement investment opportunities on behalf of the Fund, including investments being considered on behalf of its Adviser-Affiliated Funds. If the Investment Adviser determines that any such investment is an eligible co-investment opportunity, the Fund must be offered the opportunity to invest in such investment in an amount recommended by the Adviser. Securities purchased by the Fund in a co-investment transaction with Adviser-Affiliated Funds will consist of the same class of securities and will have the same rights, price, terms and conditions. Any such co-investment transaction must be approved by the Fund’s Board of Directors, including a majority of its independent directors. The Fund will not make any direct investment in the securities of any issuers in which the other Adviser-Affiliated Funds, already hold an interest, except for follow-on investments in entities under a previous co-investment in which the Fund also participated. To the extent that the amount of a follow-on investment opportunity is not based on the amount of the Fund’s and the Adviser-Affiliated Funds’ initial investments, the relative amount of investment by the Adviser-Affiliated Funds and the Fund will be based on the ratio of the Fund’s remaining funds available for investment to the aggregate of the Fund’s and the Adviser-Affiliated Funds’ remaining funds available for investment.

 

The Fund will bear no more than its own transaction costs.

 

INVESTMENT ADVISERS ACT OF 1940 AND THE ADVISORY AGREEMENT

RENN Group is the Investment Adviser to the Fund pursuant to the Advisory Agreement (the “Advisory Agreement”). RENN Group is registered as an Investment Adviser under the Advisers Act and is subject to its filing and other requirements. The Advisers Act also provides restrictions on the activities of registered advisers in order to protect clients from manipulative or deceptive practices.

The Advisory Agreement is further subject to the 1940 Act, which requires that the Advisory Agreement, in addition to having to be initially ratified by the holders of a majority of the outstanding shares of the Fund, must precisely describe all compensation to be paid to RENN Group, must be approved annually by a majority vote of the Board of Directors of the Fund, may be terminated without penalty on at least 60 days notice by a vote of the holders of a majority of the outstanding shares of the Fund or by the vote of the Funds’ directors or the Adviser, and must automatically terminate in the event of assignment.

 

Pursuant to the Advisory Agreement, RENN Group 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 on the last day of the calendar quarter. In addition, under the Advisory Agreement, RENN Group 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 the portfolio investments of the Fund. The incentive fee is calculated and paid on an annual basis.

FUND PORTFOLIO INVESTMENTS

At December 31, 2007, the Fund had active investments in the following companies:

Access Plans USA, Inc. (Nasdaq:AUSA)

4929 West Royal Lane, Irving, TX 75063

 

Access Plans USA, Inc. develops and distributes various health insurance products and non-insurance health care discount programs to individuals, families, affinity groups and employer groups in the United States. 

 

At December 31, 2007, the Fund owned a total of 890,500 shares of the company’s common stock, options to purchase 3,659 shares of common stock at $2.30 per share and options to purchase 2,439 shares of common stock at $2.25 per share. These securities have a cost basis of $2,139,777.

 

AdStar, Inc. (Nasdaq:ADST)

4553 Glencoe Avenue, Suite 300, Marina del Rey, CA 90292

AdStar, Inc. provides technology services to the classified advertising industry in the United States. It offers services using its proprietary software that electronically connects advertisers with newspaper publishing systems, as well as online advertising formats. The company enables professional advertising agencies, businesses, and individuals to send ads to publishers electronically.

During the fourth quarter of 2007, the Fund sold 15,731 shares of common stock for $7,014, recognizing a loss of $12,266.

At December 31, 2007, the Fund owned 253,500 shares of common stock in the company, having a cost basis of $330,718.

Advance Nanotech, Inc. (OTCBB:AVNA)

600 Lexington Avenue, 29^th Floor, New York, New York 10022

Advance Nanotech, Inc. engages in the acquisition and commercialization of nanotechnologies in the areas of homeland security and display.

In the second quarter of 2007, the Fund sold 165,000 shares of common stock for $64,154, recognizing a loss of $254,647.

At December 31, 2007, the Fund owned 5,796 shares of common stock and warrants to purchase 82,500 shares of common stock. These securities have a cost basis of $11,199.

 

Asian Financial, Inc. (Duoyuan Digital Printing Technology) (Private)

No. 3 Jinyuan Road, Daxing District Industrial Development Zone, Beijing, China, 102600

 

Duoyuan Digital Printing Technology engages in the design, development, and manufacture of offset printing equipment and solutions in the People’s Republic of China. Duoyuan Digital Printing Technology is in the process of going through a reverse merger with a public shell known as Asian Financial, Inc.

At December 31, 2007, the Fund owned 130,209 shares of common stock in the company, having a cost basis of $500,000.

 

Bovie Medical Corporation (AMEX:BVX)

734 Walt Whitman Road, Melville, NY 11747

 

Bovie Medical Corporation engages in the manufacture and marketing of medical products and the development of related technologies. The company offers electrosurgery products, which include desiccators, generators, electrodes, electrosurgery pencils, and various ancillary disposable products used in surgery for the cutting and coagulation of tissue, Bovie/Aaron 800 and 900 High Frequency Desiccators, which are designed for dermatology and plastic surgery for removing small skin lesions and growths, Bovie/Aaron 950 that is developed for outpatient surgical procedures used in various specialties, including dermatology, gynecology, and plastic surgery, Bovie/Aaron 1250, an electrosurgery generator, and Bovie/Aaron 2250/IDS 300, which is a multipurpose digital electrosurgery generator for the surgi-center market.

 

At December 31, 2007, the Fund owned 500,000 shares of common stock in the company, having a cost basis of $907,844.

 

BPO Management Services, Inc. (AMEX:BVX)

1290 North Hancock Street, Suite 202, Anaheim, CA 92807

 

BPO Management Services, Inc. provides business process outsourcing (BPO) services in the United States and Canada. It offers a range of services, including human resources, information technology, enterprise content management, and finance and accounting to support the back-office functions of middle-market enterprises on an outsourced basis.

 

In the quarter ended June 30, 2007, the Fund bought 104,167 shares of Series D preferred stock for $1,000,000 ($9.60 per share). Such shares are convertible into 1,666,667 common shares. The Fund also received warrants to purchase 833,334 shares and 1,666,667 shares of common stock at $0.90 per share and $1.25 per share, respectively. Additionally, the Fund received a J warrant, which gives the Fund the right to purchase 104,167 shares of Series D-2 preferred stock at $14.40. Such shares are convertible into 1,666,667 common shares. If the J warrant is exercised, the Fund will receive warrants to purchase another 833,334 shares and 1,666,667 shares of common stock at $1.35 per share (C warrants) and $1.87 (D warrants) per share, respectively.

 

During the fourth quarter of 2007, the Fund agreed to exercise half of the J warrant at $0.60 per share rather than $0.90 per share. In addition, the strike price on half of the C warrants was reset to $0.01 and the strike price on half of the D warrants was reset to $1.10. This transaction required a cash outlay of $500,000.

 

At December 31, 2007, the Fund owned 104,167 shares of Series D preferred stock. Such shares are convertible into 1,666,667 common shares. The Fund also held warrants to purchase 833,334 shares and 1,666,667 shares of common stock at $0.90 per share and $1.25 per share, respectively. In addition, the Fund owned 52,084 shares of Series D-2 preferred stock. The Fund held a J warrant to purchase another 52,084 shares of Series D-2 preferred stock. If the J warrant is exercised, the Fund will receive a C warrant to purchase 416,667 shares of common stock at $1.35 per share and 416,667 shares of common stock at $0.01. Additionally, if the J warrant is exercised, the Fund will receive a D warrant to purchase 833,334 shares of common stock at $1.87 per share and 833,334 shares of common stock at $1.10 per share.

 

CaminoSoft Corporation (OTC:CMSF)

600 North Hampshire Road, Suite 105, West Lake Village, CA 91361

 

CaminoSoft Corp. engages in the development and marketing of enterprise data management software for small and medium-sized organizations. It offers software solutions that store, manage, and safeguard data created in a business and application settings.

 

At December 31, 2007, the Fund held a $250,000 promissory note. The Fund also owned 3,539,414 shares of common stock in the company having a basis of $5,275,000. Additionally, the Fund owned warrants to purchase 1,602,779 shares common at exercise prices ranging from $0.53 per share to $1.11 per share, with varying expiration dates, and options to purchase 94,200 shares common with strike prices ranging from $0.41 per share to $0.61 per share.

 

Chardan South China Acquisition Corporation (OTCBB:CSCA)

625 Broadway, Suite 1111, San Diego, CA 92101

 

Chardan South China Acquisition Corporation is an engineering company, providing design, construction, and installation services for distributed power generation and micro power networks in China. Subsequent to December 31, 2007, the company changed its name to A-Power Energy Generation Systems, Ltd. (Nasdaq:APWR).

 

During the third quarter of 2007, the Fund purchased 48,000 shares of common stock for $409,256.

 

At December 31, 2007, there was no change in the Fund’s ownership in these securities.

 

Comtech Group, Inc. (Nasdaq:COGO)

 

Room 1001 Tower C Skyworth Building High-Tech Industrial Park Nanshan, Shenzhen, China 518057

 

Comtech Group, Inc. provides customized module design solutions to electronic manufacturers in China.

 

 

During the second quarter of 2007, the Fund sold 100,000 shares of common stock for $1,869,947, realizing a gain of $1,519,947.  

 

At December 31, 2007, the Fund held 200,000 shares of the company’s common stock, with a cost basis of $836,019.

 

eOriginal, Inc. (Private)

351 West Camden Street, Suite 800, Baltimore, MD 21201

eOriginal, Inc. has a patented process for creating, executing, storing and retrieving legal documents in an electronic format.

At December 31, 2007, the Fund owned 10,680 shares of Series A Convertible Preferred Stock; 25,646 shares of Series B Convertible Preferred Stock; 51,249 shares of Series C Convertible Preferred Stock; 36,711 shares of Series D Convertible Preferred Stock; warrants to purchase 2,258 shares of Series A Convertible Preferred Stock at an exercise price of $16.12 per share and warrants to purchase 14,861 shares of common stock at exercise prices ranging from $16.12 to $20.97 per share. The aggregate cost basis is $6,872,270.

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