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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- --------------
Commission File Number: 020671
RENAISSANCE CAPITAL GROWTH & INCOME FUND III,
(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
4,250,630 shares of common stock outstanding at June 30, 1998.
The Registrant's Registration Statement on Form N-2 was declared effective by
the Securities and Exchange Commission on May 6, 1994.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
Assets
<CAPTION>
December 31, 1997 June 30, 1998
<S> <C> <C>
Cash $15,972,424 $2,317,393
Accounts receivable 180,025 261,449
Receivable from sale of investment 4,200,000 2,154,935
Temporary investments at cost - 4,986,564
Investments, at market value,
cost of $24,150,665 and $34,150,153 27,795,592 42,294,818
Organizational costs,
net of accumulated amortization 208,529 146,687
----------- ------------
$ 48,356,570 $52,161,846
========== =========
Liabilities and Net Assets
Liabilities:
Accounts payable - related parties $ 1,440,889 $ 1,020,713
Accounts payable - trade 31,198 14,075
Dividends payable 2,387,123 2,932,935
--------- ---------
3,859,210 3,967,723
--------- ---------
Net Assets:
Common stock, $1 par value;
20,000,000 shares authorized;
4,342,942 and 4,250,630 shares
issued and outstanding 40,601,838 39,759,381
Accumulated undistributed income (loss) 3,895,522 8,434,742
---------- ----------
Net assets 44,497,360 48,194,123
---------- ----------
$ 48,356,570 $ 52,161,846
========== ==========
Net asset value per share $ 10.25 $ 11.34
========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
<C> <C> <C> <C>
<S>
Investment Income:
Interest $ 681,298 $ 572,596 $ 1,194,212 $ 1,184,777
Dividends 75,000 - 150,000 -
Other investment income 26,000 96,500 51,000 390,988
------- ------- --------- ---------
Total investment income 782,298 669,096 1,395,212 1,575,765
------- ------- --------- ---------
Expenses:
Amortization 31,092 31,092 61,842 61,842
Bank charges 5,314 5,502 10,632 9,774
Directors' fees 13,500 16,000 31,500 38,500
Legal and professional 18,694 29,745 81,937 57,662
Management fees 180,269 295,102 367,405 457,718
Taxes 6,866 7,330 7,677 7,890
Other 61,079 53,246 115,194 92,865
------- ------- ------- -------
Total expenses 316,814 438,017 676,187 726,251
------- ------- ------- -------
Net investment income 465,484 231,079 719,025 849,514
Realized gain on investments - 2,504,596 419,905 2,504,596
Unrealized gain (loss) on investments (1,680,956) (2,829,090) (8,937,641) 4,499,723
Net increase (decrease) in net assets --------- --------- ---------- ---------
resulting from operations $(1,215,472) $ (93,415) $(7,798,711) $7,853,833
========= ========= ========== =========
<FN>
See accompanying notes to financial statements.
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statement of Changes in Net Assets
(Unaudited)
<CAPTION>
<S>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
<C> <C> <C> <C>
Increase (decrease) in net assets
resulting from operations
Investment income - net $ 465,484 $ 231,079 $ 719,025 $ 849,514
Realized gain on investments - 2,504,596 419,905 2,504,596
Unrealized gain (loss) on investments (1,680,956) (2,829,090) (8,937,641) 4,499,723
--------- --------- --------- ---------
Net increase (decrease) in net assets
resulting from operations (1,215,472) (93,415) (7,798,711) 7,853,833
Distributions to shareholders (347,436) (2,932,935) (694,872) (3,314,615)
Proceeds from shares issued - - 39,848 -
Cost of shares repurchased - (842,455) - (842,455)
---------- --------- --------- ---------
Total increase (decrease) (1,562,908) (3,868,805) (8,453,735) 3,696,763
Net assets
Beginning of period 42,239,493 52,062,928 49,130,320 44,497,360
----------- ---------- ---------- ----------
End of period $40,676,585 $48,194,123 $40,676,585 $48,194,123
========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
June 30, 1998
1. Organization and Business Purpose
Renaissance Capital Growth & Income Fund III, Inc. (the "Fund"), a Texas
Corporation, was incorporated on January 20, 1994, and had no operations
prior to June 24, 1994. The Fund seeks to achieve current income and
capital appreciation potential by investing primarily in unregistered
preferred stock investments of small and medium size companies which are
in need of capital and which it believes offer the opportunity for growth.
The Fund has elected to be treated as a business development company under
the Investment Company Act of 1940, as amended ("1940 Act").
2. Significant Accounting Policies
A. Federal Income Taxes - The Fund intends to elect the special income
tax treatment available to "regulated investment companies" under Sub-
chapter M of the Internal Revenue Code in order to be relieved of
federal income tax on that part of its net investment income and
realized capital gains that it pays out to its shareholders. The
Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies
and to distribute all its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
B. Distributions to Shareholders - Dividends to shareholders are
recorded on the ex-dividend date. The Fund declared dividends of
$2,932,935 for the quarter ended June 30, 1998.
C. Management Estimates - The financial statements have been prepared in
conformity with generally accepted accounting principles. The pre-
paration of the accompanying financial statements requires estimates
and assumptions made by management of the Fund that affect the
reported amounts of assets and liabilities as of the date of the
statements of financial condition and income and expenses for the
period. Actual results could differ significantly from those
estimates.
D. Financial Instruments - In accordance with the reporting requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," the Company calculates the
fair value of its financial instruments and includes this additional
information in the notes to the financial statements when the fair
value is different than the carrying value of those financial instru-
ments. When the fair value reasonably approximates the carrying
value, no additional disclosure is made.
3. Organization Expenses
In connection with the offering of its shares, the Fund paid Renaissance
Capital Group, Inc. (the "Investment Adviser") organizational expenses of
$623,544. Such expenses are deferred and amortized on a straight-line
basis over a five-year period. Amortization expense for the quarter ended
June 30, 1998 was $61,842.
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (cont'd)
June 30, 1998
(unaudited)
4. 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 Ad-
visory Agreement, the Investment Adviser performs certain services, in-
cluding certain management, investment advisory and administrative serv-
ices 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 Fund accrued a liability of $295,102 for such operational
management fees performed during the quarter ended June 30, 1998.
In addition, the Fund has agreed to pay the Investment Adviser 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.
5. Capital Gains
The Fund realized a capital gain of $3,130,746 on the sale of 333,665
shares of TAVA Technologies, Inc. common stock. The gain is shown on
the accompanying statement of operations net of the $626,149 management
incentive fee payable to the Investment Adviser.
6. Capital Share Transactions
As of June 30, 1998 there were 20,000,000 shares of $1 par value capital
stock authorized and capital paid-in aggregated $36,258,896.
Year-to-date transactions in capital stock are as follows:
<TABLE>
<S>
Shares Amount
<C> <C>
Balance December 31, 1997 4,342,942 $40,601,838
Shares repurchased (92,312) (842,457)
--------- -----------
Balance June 30, 1998 4,250,630 $39,759,381
========= ==========
</TABLE>
7. Related Party Transactions
The Investment Adviser is reimbursed by the Fund for certain administra-
tive expenses under the Investment Advisory Agreement. Such reimburse-
ments were $52,075 for the quarter ended June 30, 1998.
8. Short-term Investments
Short-term investments are comprised of U. S. Government and Agency obli-
gations maturing no later than August 5, 1998. Such investments qualify
for investment as permitted in Section 55(a) (1) through (5) of the 1940
Act.
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (cont'd)
June 30, 1998
9. Investments
The Fund invests primarily in convertible securities and equity invest-
ments of companies that qualify as Eligible Portfolio Companies as de-
fined in Section 2(a) (46) of the 1940 Act or in securities that other-
wise qualify for investment as permitted in Section 55(a) (1) through (5).
Under the provisions of the 1940 Act at least 70% of the Fund's assets
must be invested in Eligible Portfolio Companies. These stocks are
carried on the Statement of Assets and Liabilities as of June 30, 1998,
at fair value, as determined in good faith by the Investment Adviser.
The securities held by the Fund are unregistered and their value does not
necessarily represent the amounts that may be realized from their immed-
iate sale or disposition. The investments held by the Fund are convert-
ible, generally after five years, into the common stock of the issuer
at a set conversion price. The common stock acquired upon exercise of the
conversion feature is generally unregistered and is thinly to moderately
traded but is not otherwise restricted. The Fund generally may register
and sell such securities at any time with the Fund paying the costs of
registration. Dividends are generally payable monthly. The stocks often
have call options, usually commencing three years subsequent to issuance,
at prices specified in the stock agreements.
INVESTMENT VALUATION SUMMARY
<TABLE>
<S>
CONVERSION FAIR
COST OR FACE VALUE VALUE
<C> <C> <C>
Bentley Pharmaceuticals, Inc.
12% Convertible Debenture 744,800 960,000 950,400
Document Authentication Systems
5% Convertible Preferred Stock 1,500,000 1,500,000 1,500,000
The Dwyer Group, Inc.
Common Stock 1,966,632 1,560,938 1,560,938
Fortune Natural Resources Corp.
12% Convertible Debenture 350,000 350,000 350,000
Integrated Security Systems, Inc.
9% Convertible Debenture 2,300,000 4,713,115 4,503,542
Warrants 3,750 3,750 3,750
Interscience Computer Corporation
Series A and Series B
Cumulative Convertible
Redeemable Preferred Stock 4,000,000 4,000,000 1,400,000
Intile Designs, Inc.
Common Stock 500,000 236,350 50,000
<PAGE>
JAKKS Pacific, Inc.
9% Convertible Debenture 3,000,000 6,391,304 6,327,391
7% Convertible Preferred Stock 3,000,000 4,106,145 3,809,776
La-Man Corporation
8.75% Convertible Debenture 1,750,000 1,750,000 1,750,000
Common Stock 500,000 390,625 317,188
LifeQuest Medical, Inc.
9% Convertible Debenture 1,500,000 1,500,000 1,500,000
Common Stock 500,000 296,875 293,906
NewCare Health Corp.
8.5% Convertible Debenture 2,500,000 2,500,000 2,500,000
<PAGE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (Continued)
June 30, 1998
9. Investments (continued)
INVESTMENT VALUATION SUMMARY
CONVERSION FAIR
COST FACE VALUE VALUE
Optical Security Group, Inc.
8% Convertible Debenture 500,000 500,000 500,000
Play by Play Toys & Novelties, Inc.
8% Convertible Debenture 2,500,000 2,500,000 2,500,000
Poore Brothers., Inc.
9% Convertible Debenture 1,788,571 2,102,473 2,081,448
Simtek Corporation
9% Convertible Debenture 750,000 750,000 750,000
Warrants -0- -0- -0-
TAVA Technologies, Inc.
9% Convertible Debentures 1,000,000 6,583,333 6,517,500
Warrants -0- 209,375 207,281
Voice It Worldwide, Inc.
8% Convertible Debenture 2,450,000 2,450,000 2,176,116
Common Stock 1,046,400 793,172 745,582
Warrants -0- -0- -0-
--------- --------- ----------
$34,150,153 $46,147,455 $42,294,818
========== ========== ==========
</TABLE>
The fair value of debt 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 con-
dition of the issuer. The fair value of the conversion features of a secur-
ity, if any, are based on fair values as of this date less an allowance, as
appropriate, for costs of registration, if any, and selling expenses. Publicly
traded securities, or securities that are convertible into publicly traded
securities, are valued at the last sale price, or at the average closing bid
and asked price, as of the valuation date. While these valuations are be-
lieved 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, 1998 (portfolio companies are herein referred to as the "Company"):
Document Authentication Systems. On May 11, 1998, the Fund invested $1
million in the 5% Series A Cumulative Convertible Preferred Stock of the
Company. The Preferred is convertible into shares of common stock of DAS at
$250 per share. DAS is currently private, and owns a patented process covering
paperless transactions.
In addition to the Fund's investment, Renaissance US Growth & Income Trust,
PLC ("RUSGIT") invested $1 million in the 5% Series A Cumulative Convertible
Preferred Stock of DAS. The investment by RUSGIT was made under the same
terms and conditions as the Fund's investment.
Interscience Computer Corporation. Subsequent to June 30, 1998, Inter-
science effectuated its Chapter XI Plan of Reorganization and emerged from
bankruptcy. As a result of the reorganization, the Fund converted all of its
shares of Series A and B Preferred Stock into 1,750,000 shares of Inter-
science common stock, or 40% of the common shares outstanding, and warrants
to purchase 500,000 shares of the Company's common stock at $1.00 per share.
JAKKS Pacific, Inc. On April 1, 1998, the Fund invested $3 million for the
purchase of 600 shares of the Company's Series A Cumulative Convertible Pre-
ferred Stock. The Preferred has a 7% cumulative dividend, payable quarterly,
and is convertible into the Company's common stock at a price of $8.95 per
share. This represents the Fund's second investment in JAKKS. On December
31, 1996, the Fund invested $3 million in a 9% convertible debenture of the
Company.
Optical Security Group, Inc. On June 18, 1998, the Fund invested $500,000
in the 8% Senior Subordinated Convertible Debentures of Optical Security Group,
Inc. ("OPSC"). The Debentures are convertible into shares of OPSC common
stock at $6.50 per share and are subordinate to all senior indebtedness of the
Company, which is defined to include both secured and unsecured obligations of
the Company. In addition, the Debenture provides for the establishment of a
sinking fund whereby the Company will make payments into the Fund to cover the
Debenture obligations beginning on July 1, 2002, with payments to be made every
July 1 thereafter until July 1, 2004.
OPSC utilizes its diffractive coating, holographic, and other proprietary
imaging technologies to provide tamper-evident packaging labels, authenticat-
ing labels, and tags for consumer product protection, and security foils for
protection against counterfeiting of checks, cards and any other documents of
value. In addition to the Fund's investment, RUSGIT invested $500,000 in the
8% Senior Subordinated Convertible Debentures of OPSC. The investment by
RUSGIT was made under the same terms and conditions as the Fund's investment.
Simtek Corporation. On June 12, 1998, the Fund invested $750,000 in a 9%
Convertible Debenture of Simtek Corporation. Simtek designs and markets non-
volatile static random access memory chips in an all-silicon (and non-battery
driven) package, that enables the computer to retain data even after the power
is shut off to the device. The Debentures are convertible into the Company's
common stock at $.35 per share. The Fund's position is secured by all the
assets of the Company, except that the Fund's security interest in certain of
the collateral is subordinate to previously existing security interests
granted to other lending institutions. In addition to the Debentures, the
Fund received warrants to purchase 400,000 shares of Simtek common stock exer-
cisable at $.40 per share.
In addition to the Fund's investment, RUSGIT invested $750,000 in a 9%
Convertible Debenture of Simtek and also received Warrants to purchase 400,000
shares of the Company's common stock. The investment by RUSGIT was made
under the same terms and conditions as the Fund's investment.
TAVA Technologies, Inc. During the Quarter ended June 30, 1998, the Fund
converted Debenture Nos. 4 - 8, which Debentures had a cost basis of $500,500,
into 333,664 shares of TAVA common stock, and subsequently sold these shares
for $3,631,243.04, recording a realized gain of $3,130,745.54.
Voice-It Worldwide, Inc. The Company is in arrears on its interest
obligations to the Fund. Accordingly, the Fund's position in the Company's
Convertible Debentures has been marked to the market price of the underlying
common stock.
(2) Material Changes in Operations
Net investment income for the quarter ended June 30, 1998, as compared
to June 30, 1997, reflects an increase of $130,489. This reported in-
crease is primarily attributable to the closing fees generated from this
period's investment activity along with an adjustment from prior years
which generated $187,988 of other income. Additionally, dividend income
decreased by $150,000 due to the bankruptcy of Interscience Computer Corp.
During the second quarter, the Fund experienced $2,289,090 of unrealized
losses resulting from a decrease in fair value of its investments. The Fund
realized capital gains of $3,130,746 on the sale of 333,665 shares of TAVA
Technologies, Inc. common stock.
Pending investment in portfolio investments, funds are invested in temporary
cash accounts and in government securities. Although income and expenses are
essentially stable, the Registrant anticipates that income will continue to
increase as investments are made. Although an aggressive search for potential
investments is ongoing, the Fund is nearing full investment, and Registrant
expects full investment to be achieved sometime in 1998.
During the quarter ended June 30, 1998, the Registrant paid dividend
distributions of income and capital gains to shareholders in the amount of
$347,435, and accrued dividends payable to shareholders in the amount of
$2,932,935.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
/s/ Russell Cleveland
August 13, 1998 ------------------------------------------
Russell Cleveland, President and Chairman
/s/ Barbe Butschek
August 13, 1998 --------------------------------------------
Barbe Butschek, Secretary and Treasurer
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 34,150,153
<INVESTMENTS-AT-VALUE> 42,294,818
<RECEIVABLES> 2,416,384
<ASSETS-OTHER> 146,687
<OTHER-ITEMS-ASSETS> 7,303,957
<TOTAL-ASSETS> 52,161,846
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,967,723
<TOTAL-LIABILITIES> 3,967,723
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,759,381
<SHARES-COMMON-STOCK> 4,250,630
<SHARES-COMMON-PRIOR> 4,342,942
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 290,077
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,144,665
<NET-ASSETS> 48,194,123
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,184,777
<OTHER-INCOME> 390,988
<EXPENSES-NET> 726,251
<NET-INVESTMENT-INCOME> 849,514
<REALIZED-GAINS-CURRENT> 2,504,596
<APPREC-INCREASE-CURRENT> 4,499,723
<NET-CHANGE-FROM-OPS> 7,853,833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 849,514
<DISTRIBUTIONS-OF-GAINS> 2,465,101
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 92,312
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,696,763
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 250,595
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 457,718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 726,251
<AVERAGE-NET-ASSETS> 46,345,742
<PER-SHARE-NAV-BEGIN> 10.25
<PER-SHARE-NII> .20
<PER-SHARE-GAIN-APPREC> 1.66
<PER-SHARE-DIVIDEND> .77
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.34
<EXPENSE-RATIO> .016
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
