10-Q 1 0001.txt FORM 10-Q FOR QUARTER ENDED 06/30/2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _________________ Commission File Number: 0-20671 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Texas 75-2533518 ----------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer I.D. No.) of incorporation or organization) 8080 North Central Expressway, Dallas, Texas 75206-1857 ----------------------------------------------------------------------------- (Address of principal executive offices)(Zip Code) 214/891-8294 ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ 4,361,617 shares of common stock were outstanding at August 15, 2000. The Registrant's Registration Statement on Form N-2 was declared effective by the Securities and Exchange Commission on May 6, 1994. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statement of Assets and Liabilities (Unaudited) Assets December 31, 1999 June 30, 2000 ----------------- ------------- Cash and cash equivalents $ 5,086,040 $ 6,034,266 Investments, at fair value, cost of $34,457,935 and $36,112,573 in 1999 and 2000 respectively 41,346,302 49,425,688 Interest receivable 224,283 238,391 Other assets 68,497 54,225 ----------- ----------- $46,725,122 $55,752,570 =========== =========== Liabilities and Net Assets Liabilities: Accounts payable $ 111,708 $ 266,262 Accounts payable - affiliate 213,390 307,825 Dividends payable 465,718 -0- ----------- ----------- 790,816 574,087 ----------- ----------- Net Assets: Common stock, $1 par value; 20,000,000 shares authorized; 4,561,618 issued, 4,142,942 and 4,361,617 outstanding 4,342,942 4,561,618 Additional paid-in capital 36,258,896 38,799,907 Treasury stock at cost, 200,000 shares at December 31, 1999 and at June 30, 2000 (1,665,220) (1,665,220) Undistributed net investment income 6,997,688 13,482,178 ----------- ----------- Net assets 45,934,306 55,178,483 ----------- ----------- $46,725,122 $55,752,570 =========== =========== Net asset value per share $ 11.09 $ 12.65 =========== =========== See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statement of Operations (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1999 2000 1999 2000 ---- ---- ---- ---- Investment Income: Interest $ 320,943 $ 393,628 $ 815,488 $ 759,158 Dividends 78,733 31,213 314,897 61,087 Other investment income 9,625 8,625 297 84,875 ---------- ------------ ----------- ----------- Total investment income 409,301 433,466 1,130,682 905,120 ---------- ------------ ----------- ----------- Expenses: Amortization -0- -0- 83,820 -0- Bank charges 5,361 9,446 10,691 18,180 Directors' fees 14,000 19,000 28,000 33,000 Legal and professional 22,761 53,016 51,076 116,909 Management fees 235,390 242,467 445,852 589,973 Taxes 27,840 25,763 27,840 24,884 Other 70,231 76,539 110,620 126,833 ---------- ------------ ----------- ----------- Total expenses 375,583 426,231 757,899 909,779 ---------- ------------ ----------- ----------- Net investment income 33,718 7,235 372,783 (4,659) Realized gain on investments 3,824,391 -0- 3,824,391 6,444,540 Unrealized gain (loss) on investments 1,190,168 (18,679,683) 7,274,888 6,424,738 ---------- ------------ ----------- ----------- Net increase (decrease) in net assets result- ing from operations $5,048,277 $(18,672,448) $11,472,062 $12,864,619 ========== ============ =========== =========== See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statement of Changes in Net Assets (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 1999 2000 1999 2000 ---- ---- ---- ---- Increase (decrease) in net assets resulting from operations Investment income - net $ 33,718 $ 7,235 $ 372,783 $ (4,659) Realized gain on investment 3,824,391 -0- 3,824,391 6,444,540 Unrealized gain (loss) on investments 1,190,168 (18,679,683) 7,274,888 6,424,738 ----------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 5,048,277 (18,672,448) 11,472,062 12,864,619 Proceeds from shares issued -0- 2,759,688 -0- 2,759,688 Distributions to shareholders (3,065,777) (6,380,130) (3,397,712) (6,380,130) Cost of shares repurchased -0- -0- (3,780) -0- ----------- ----------- ----------- ----------- Total increase (decrease) 1,982,500 (22,292,890) 8,070,570 9,244,177 Net assets Beginning of period 47,563,771 77,471,373 41,475,701 45,934,306 ----------- ----------- ----------- ----------- End of period $49,546,271 $55,178,483 $49,546,271 $55,178,483 =========== =========== =========== =========== See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements June 30, 2000 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 sold shares pursuant to its initial offering throughout 1994, and the final closing of the initial offering occurred on December 31, 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 Renaissance Capital Group, Inc. ("Investment Advisor") believes offers the opportunity for growth. The Fund is a non-diversified closed-end investment company and has elected to be treated as a business development company under the Investment Company Act of 1940, as amended ("1940 Act"). 2. Significant Accounting Policies A. Federal Income Taxes - The Fund intends to elect the special income tax treatment available to "regulated investment companies" under Subchapter M of the Internal Revenue Code in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to its shareholders. The Fund's policy is to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all its taxable income to its shareholders. Therefore, no federal income tax provision is required. B. Distributions to Shareholders - Dividends to shareholders are recorded on the ex-dividend date. The Fund paid a $1.54 per share dividend on June 9, 2000 to shareholders of record at May 26, 2000. This dividend resulted from gains made in the first quarter of 2000 on the sale of a portion of the Fund's investment in Simtek Corporation. C. Management Estimates - The financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of the accompanying financial statements requires estimates and assumptions made by the Investment Adviser as to the valuation of investments that effect the amounts and disclosures in the financial statements. Actual results could differ significantly from those estimates. D. Financial Instruments - In accordance with the reporting requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the Company calculates the fair value of its financial instruments and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. 3. Investment Advisory Agreement The Investment Adviser for the Fund is registered as an investment adviser under the Investment Advisers Act of 1940. Pursuant to an Investment Advisory Agreement, the Investment Adviser performs certain services, including certain management, investment advisory and administrative services necessary for the operation of the Fund. The Investment Adviser receives a fee equal to .4375% (1.75% annually) of the Net Assets each quarter. The RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements (Continued) June 30, 2000 3. Investment Advisory Agreement Fund accrued a liability of $242,467 for such operational management fees performed during the quarter ended June 30, 2000. In addition to the management fee, the Investment Advisory Agreement entitles the Investment Adviser to an incentive fee equal to 20% of any net realized capital gains after allowance for any unrealized capital loss of the Fund. This management incentive fee is calculated on a quarterly basis. There were no incentive fees earned for the quarterly period that ended June 30, 2000. Finally, the Investment Adviser is reimbursed for administrative expenses paid by the Investment Adviser on behalf of the Fund. Such reimbursement was $46,335 for the quarter ending June 30, 2000, and is included in general and administrative expenses in the accompanying statement of operations. 4. Capital Share Transactions As of June 30, 2000 there were 20,000,000 shares of $1 par value capital stock authorized, 4,561,618 shares issued, 4,361,617 shares outstanding, and additional paid-in capital aggregating $41,696,306. On June 9, 2000, the Fund paid a dividend of $1.54 per share. At June 23, 2000, the Fund's stock was trading at a premium to its $12.62 Net Asset Value ("NAV"), thereby entitling those shareholders participating in the Dividend Reinvestment Plan ("DRIP") to have new shares issued by the Fund at NAV. As a result, 218,675 new shares were issued pursuant to the DRIP increasing the Fund's total shares outstanding to 4,361,617. Year-to-date transactions in capital stock are as follows: Shares Amount ------ ------ Balance December 31, 1999 4,142,942 $38,936,618 Shares repurchased 218,675 2,759,688 --------- ----------- Balance June 30, 2000 4,361,617 $41,696,306 ========= ===========
5. Temporary Investments At June 30, 2000, temporary investments were held in a money market fund made up of U.S. Treasury obligations. As additional cash is realized from the liquidation of investments, temporary investments will also be comprised of 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. RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements (Continued) June 30, 2000 6. Investments The Fund invests primarily in convertible securities and equity investments of companies that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46) of the 1940 Act or in securities that otherwise qualify for investment as permitted in Section 55(a)(1) through (5). Under the provisions of the 1940 Act at least 70% of the Fund's assets, 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 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's investments are carried in the statements of assets and liabilities as of June 30, 2000 at fair value as determined in good faith by the Investment Advisor. 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. The Fund may attempt to register and sell unregistered securities at any time if the Fund pays the costs of registration, or in the case of securities restricted by Rule 144 of the Securities Act of 1933 (the "Act"), the Fund may exit from some or all of a restricted position if certain holding periods, volume requirements, and other conditions of the Act are met. Interest on convertible debentures 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, and other factors. INVESTMENT VALUATION SUMMARY CONVERSION FAIR COST OR FACE VALUE VALUE Bentley Pharmaceuticals, Inc. Common Stock $ 1,536,029 $ 7,353,349 $ 7,279,816 Options -0- -0- -0- CaminoSoft Corp. Common Stock 4,625,000 8,015,626 7,796,408 Warrants to purchase 500,000 shares -0- 500,000 500,000 CareerEngine Network, Inc. 12% Convertible Debenture 250,000 250,000 250,000 Warrants to purchase 62,500 shares -0- -0- -0- Warrants to purchase 62,500 shares -0- -0- -0- CEREUS Technology Partners, Inc. Common Stock 512,500 916,094 811,128 Warrants to purchase 102,500 shares -0- -0- -0-
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements (Continued) June 30, 2000 6. Investments (continued) INVESTMENT VALUATION SUMMARY CONVERSION FAIR COST OR FACE VALUE VALUE Communications World Intl., Inc. 8% Convertible Debenture 250,000 250,000 250,000 Warrants to purchase 100,000 shares 2,000 80,625 25,788 Dexterity Surgical, Inc. 9% Convertible Debenture 1,500,000 1,500,000 1,500,000 8% Convertible Preferred Stock 1,000,000 552,884 552,884 Common Stock 635,000 186,875 125,662 Display Technologies, Inc. 8.75% Convertible Debenture 1,750,000 1,750,000 1,750,000 5.25% Convertible Preferred Stock 500,000 500,000 500,000 Common Stock 1,049,741 782,591 774,765 Warrants to purchase 126,000 shares -0- -0- -0- The Dwyer Group, Inc. Common Stock 1,966,632 1,771,875 1,754,156 eOriginal, Inc. 5% Convertible Preferred Stock 1,999,980 1,999,980 1,999,980 Warrants to purchase 659 shares 165 165 165 Fortune Natural Resources Corp. Common Stock 545,500 495,898 436,052 Warrants to purchase 200,000 shares -0- -0- -0- Grand Adventures Tour & Travel Publishing Corp. 10% Convertible Debenture 350,000 350,000 350,000 Common Stock 130,089 142,188 140,766 Integrated Security Systems, Inc. Promissory Notes 265,000 265,000 265,000 Convertible Note 375,000 495,219 465,506 9% Convertible Debenture 2,084,101 2,752,228 2,616,499 9% Convertible Preferred Stock 150,000 150,000 150,000 Common Stock 215,899 285,113 282,262 Warrants to purchase 814,299 shares 3,750 67,867 64,020 JAKKS Pacific, Inc. Common Stock 3,324,125 8,663,368 8,576,733 Laserscope 8% Convertible Debenture 1,500,000 1,837,500 1,677,250 Medical Action Industries, Inc. Common Stock 555,392 560,000 554,400 Play by Play Toys & Novelties, Inc. 8% Convertible Debenture 2,500,000 2,500,000 2,500,000
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements (Continued) June 30, 2000 6. Investments (continued) INVESTMENT VALUATION SUMMARY CONVERSION FAIR COST OR FACE VALUE VALUE Poore Brothers, Inc. 9% Convertible Debenture 859,047 1,422,797 1,337,429 Common Stock 1,104,123 1,776,013 1,619,452 Warrants to purchase 85,000 shares -0- 25,781 24,235 Options -0- 3,438 3,232 RailAmerica, Inc. 6% Convertible Debenture 500,000 500,000 500,000 Warrants to purchase 15,000 shares -0- -0- -0- Simtek Corporation Common Stock 195,000 1,500,000 1,360,000 SiVault, Inc. Common Stock 350,000 350,000 350,000 ThermoView Industries, Inc. Common Stock 500,000 -0- -0- Voice It Worldwide, Inc. Investment 3,028,500 3,028,500 282,100 ----------- ----------- ----------- $36,112,573 $53,580,974 $49,425,688 Pursuant to procedures established by the Investment Advisor, the fair value of each investment will initially be based upon its original cost to the Fund. Costs will be the primary factor used to determine fair value until significant developments affecting the investee company provide a basis for use in an appraisal valuation. The fair value of debt securities and preferred securities convertible into common stock is the sum of (a) the value of such securities without regard to the conversion feature, and (b) the value, if any, of the conversion feature. The fair value of debt securities without regard to conversion features is determined on the basis of the terms of the debt security, the interest yield and the financial condition of the issuer. The fair value of preferred securities without regard to conversion features is determined on the basis of the terms of the preferred security, its dividend, and its liquidation and redemption rights and absent special circumstances will typically be equal to the lower of cost or 120% of the value of the underlying common stock. The fair value of the conversion features of a security, if any, are based on fair values as of the relevant date less an allowance, as appropriate, for costs of registration, if any, and selling expenses. Publicly traded securities, or securities that are convertible into publicly traded securities, are valued at the last sale price, or in the event no closing price exists at the average closing bid and asked price, as of the valuation date. While these valuations are believed to represent fair value, these values do not necessarily reflect amounts which may be ultimately realized upon disposition of such securities.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (1) Material Changes in Financial Condition The following portfolio transactions are noted for the quarter ended June 30, 2000 (portfolio companies are herein referred to as the "Company"): CareerEngine Network, Inc. (CNE) During the second quarter, the Fund advanced the Company $250,000 pursuant to a 12% Convertible Subordinated Debenture due May 2010. The debenture is subordinated to the Company's senior lenders and is convertible into the Company's common stock at a rate of $2.00 per share. The debenture contains standard anti-dilution provisions and entitles the Fund to demand and piggyback registration rights. The Company has the right to redeem the debenture with at least thirty days' notice to the Fund so long as the reported closing price of the common stock equals or exceeds 2.154 times the conversion price in effect for a period of twenty consecutive trading days. In addition to the debenture, as consideration for making the investment the Fund received 125,000 warrants to purchase the Company's common stock. Half of the warrants are exercisable at $4.00 per share on or before May 2003, and the remaining 62,500 warrants are exercisable at $6.00 per share on or before May 2005. In addition to the Fund's investment, Renaissance US Growth and Income Trust PLC ("RUSGIT") also purchased $250,000 worth of the Company's Convertible Subordinated Debentures and also received 125,000 warrants to purchase the Company's common stock all of which were purchased pursuant to the same terms and conditions as the Fund's investment. Dexterity Surgical, Inc. (DEXT) In the second quarter, the conversion price on the Fund's preferred stock investments was lowered from $1.60 per share to $1.56 per share in consideration of the Fund's allowance of an investment into the Company by third party investors. RUSGIT also had the conversion prices on its preferred stock investments lowered from $1.60 per share to $1.56 per share in an identical fashion to the lowering of the Fund's conversion prices. Grand Adventures Tour and Travel Publishing Corp. (GATT) Subsequent to June 30, 2000, the Fund made a follow-on investment in the Company by purchasing $500,000 in 8% Convertible Debentures. The debentures have a four year term, accrue interest quarterly, and are convertible into the Company's common stock at a rate of $3.10 per share. The debentures may be redeemed by the Company if the per share bid price of the common stock at the close of trading on each of the ten business days preceding the delivery date of the notice of redemption equals or exceeds $8.50 per share and at least thirty days' notice is given to the Fund of the redemption. As consideration for making the investment, the Fund received piggyback registration rights for all of its investments. RUSGIT also made a $500,000 follow-on investment in the 8% Convertible Debentures of the Company subsequent to June 30, 2000. The investment by RUSGIT was made pursuant to the same terms and conditions as the Fund's investment, and also entitles RUSGIT to the same registration rights on all RUSGIT investments as was obtained by the Fund. Integrated Security Systems, Inc. (IZZI) On May 5, 2000, the Fund advanced the Company $150,000 pursuant to a 9% Promissory Note in which all accrued unpaid interest and principal on the note is due and payable on demand. The note is secured by the parent and its four subsidiaries which own all or substantially all the assets of the Company, and is also secured by a Stock Pledge Agreement between the parent company and the Fund. Also on May 5, 2000, the Fund renewed and extended its $115,000 Promissory Note and amended its $375,000 Convertible Promissory Note so that both became secured by all or substantially all the Company's assets. RUSGIT also lent the Company $150,000 pursuant to a 9% Promissory Note on May 5, 2000, and on that date also renewed and extended its $115,000 Promissory Note and amended its $225,000 Convertible Promissory Note, all of which were done under identical terms and conditions as the Fund's transactions. Poore Brothers, Inc. (SNAK) Effective June 28, 2000, the Fund obtained options to purchase the Company's common stock pursuant to the Company's 1995 Stock Option Plan. In total, the Fund received options to purchase 15,000 shares of Poore Brothers common stock at a price of $3.06 per share, which options were granted June 12, 1997, vested June 12, 1998, and must be exercised on or before June 12, 2002. In addition, the Fund obtained options to purchase 10,000 shares of the Company's common stock at $1.31 per share, which options were granted May 14, 1998, vested May 14, 1999, and must be exercised on or before May 14, 2003. These options were obtained by assignment from Robert C. Pearson, Senior Vice President of Renaissance Capital Group, Inc., who earned the options as a member of the Board of Directors of the Company. RUSGIT did not receive any of the above referenced options to purchase the Company's common stock because RUSGIT had no investment in the Company at the time the above referenced options were granted. (2) Material Changes in Operations For the quarter ended June 30, 2000, the Fund had net investment income of $7,235, a decrease from the $33,718 in net investment income realized in the second quarter of 1999. The decrease was primarily a result of increased legal and professional fees, and increased management fees which resulted from an increase in the value of the Fund's investment portfolio. For the quarter, operating expenses increased 13.5% in comparison to the same quarter of last year, which increase outweighed the 5.9% increase in investment income in the period, which increase was attributable to higher interest earned on porfolio assets. For the six months ended June 30, 2000, the Fund had a net investment loss of $(4,659) versus net investment income of $372,783 for the comparable period of 1999. The decrease is attributable to a 19.9% decrease in investment income which resulted from lower interest and dividend income to the Fund as a result of converting debt and preferred stock instruments into non-income generating common stock, together with a 20% increase in operating expenses for the period, due to increased legal and professional fees and higher management fees resulting from an increase in the value of the Fund's investment portfolio. During the second quarter, the Fund experienced $18,679,683 of unrealized losses as a result of lower market prices for securities held in the investment portfolio. For the year to date, however, the Fund has experienced $6,424,738 in unrealized gains on its investments. Pending investment in portfolio investments, funds are invested in temporary cash accounts and in government securities. At June 30, 2000, all of these funds were held in a money market fund made up of U.S. Treasury obligations. As additional cash is realized from the liquidation of investments, temporary investments will also be comprised of 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. On June 9, 2000, the Registrant paid a dividend to shareholders in the amount of $6,380,130 or $1.54 per share, bringing total distributions made over the life of the Fund to $7.02. 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 thereunto duly authorized. RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. August 15, 2000 /S/ _________________________________________________ Russell Cleveland, Chairman and President (Principal Executive Officer) August 15, 2000 /S/ _________________________________________________ Barbe Butschek, Chief Financial Officer (Principal Financial Officer)