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Securities and Exchange Commission
Washington, D. C. 20549
Form 10-K
Mark One
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal Year Ended December 31, 1999 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 33-75758
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Exact name of Registrant as specified in its charter)
Texas 75-2533518
(State of incorporation or organizations) (I.R.S. Employer Identification No.)
Suite 210, LB 59, 8080 North Central Expressway, Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214)891-8294
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
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( )
Indicate by check mark if disclosure by delinquent filers pursuant to 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. (X)
As of March 29, 2000 there were 4,142,942 shares of Registrant's stock
outstanding. The aggregate market value of the stock held by non-affiliates,
based on the closing price of such stock as of March 29, 2000 was $56,333,684.
224,077 shares of stock held by affiliates were valued at $3,221,107.
Documents Incorporated by Reference: Certain portions of the Registrant's
Definitive Proxy Statement (the "Proxy Statement") for its Annual Meeting of
Shareholders to be held on May 19, 2000 pursuant to Regulation 14A are
incorporated by reference in Items 10 through 13 of Part III of this Annual
Report on Form 10-K.
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 Company 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 Company 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 DEVELOPMENT OF BUSINESS
Renaissance Capital Growth & Income Fund III, Inc. (sometimes referred to
as the "Fund" or the "Registrant") is a Texas corporation formed January 20,
1994 that has elected to operate as a Business Development Company (sometimes
referred to herein as a "Business Development Company" or a "BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). Through December
31, 1999, the Fund has raised $41,489,500 through capital contributions and the
public sale of its common stock, par value $1.00 per share.
The investment objective of the Fund is to provide its shareholders with
current income and long-term capital appreciation by investing primarily in
private placement securities of small and medium size public companies
("Portfolio Companies").
Renaissance Capital Group, Inc. ("Renaissance Group" or the "Investment
Adviser"), a Texas corporation, serves as the investment adviser to the Fund.
In this capacity, Renaissance Group is primarily responsible for the selection,
evaluation, structure, valuation, and administration of the Fund's investment
portfolio. Renaissance Group is a registered investment adviser under the 1940
Act and the Texas Securities Act. However, its activities are subject to the
supervision of the Board of Directors of the Fund ("Board of Directors") who
provide guidance with respect to the operations of the Fund.
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 "Exchange 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 preferred stock or
debentures of a Portfolio Company, which securities are convertible into or
exchangeable for 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 generally 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 "Securities Act"), or after registration pursuant to the Securities Act.
From inception through December 31, 1999 the Fund had made investments in
twenty five (25) different portfolio companies having an aggregate cost of
$50,840,461. The Fund had active investments in twenty (20) portfolio companies
at December 31, 1999, and is seeking additional investment opportunities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Fund has no concentrated industry segments. The Fund does not
contemplate specializing in any particular industry but instead anticipates
allocating its investments to a variety of industries.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Fund, as a Business Development Company, is engaged primarily in
investments in convertible securities of small and medium sized public
companies.
Under the provisions of the 1940 Act, a Business Development Company is to
invest 70% or more of its funds in "eligible portfolio investments," such being
generally defined as direct placements to "eligible portfolio companies" and
temporary investments in "cash items" pending other investments. Under and
pursuant to the provisions of the 1940 Act, a Business Development Company may
invest up to 30% of its funds in "Other Investments," or "non-eligible
investments," that is, investments that do not qualify as "eligible portfolio
investments." 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.
Pending investment in convertible securities of eligible Portfolio
Companies or other investments as provided under the 1940 Act, the Registrant's
funds are invested in "Short-term Investments" consisting primarily of U.S.
Government and agency debt.
At December 31, 1999, the Fund's investment assets were classified by
amount as follows:
Percentage
Classification Value Of Investments
-------------- ----- --------------
Eligible Portfolio Investments $36,675,064 79%
(including cash and cash
equivalents)
Other Portfolio Investments $ 9,757,278 21%
-----------
$46,432,342
INVESTMENT OBJECTIVES
The investment objective of the Fund is to provide its shareholders with
both current income and long-term capital appreciation.
The Fund seeks to provide current cash returns to shareholders through a
quarterly dividend of current investment interest income while providing
opportunities for capital gains appreciation through the appreciation in the
value of the Fund's securities.
The Fund anticipates paying a quarterly dividend to the shareholders, to be
made within 120 days of the end of each quarter. Dividends will be made in such
amounts as shall be determined by the Board of Directors and shall generally
reflect investment income and earnings from the prior quarter of the Fund.
Optionally, in addition to the quarterly dividends, the Fund may make
distributions of realized gains or of securities that have appreciated in value.
GENERAL INVESTMENT POLICIES
The Fund invests in Emerging Growth Company securities 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 product or services offered; and (3) a provider of new product
or service that allows the company an opportunity for exceptional growth.
However, because the extent and nature of the market for such product or
services is not fully known, 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 preferred stock or convertible debentures 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 anticipates participating in bridge
financings in the form of loans 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 one to two years from the date of the investment. The Fund will make
bridge loans, either secured or unsecured, intended to carry the borrower to a
private placement, an initial public offering or a merger and acquisition
transaction.
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 currently intends to limit its investment
in securities of any single Portfolio Company to approximately 10% (8% to 12%)
of its 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 Renaissance Group. When, at the discretion of Renaissance Group, a suitable
nominee is not available from among its officers, Renaissance Group will select,
as alternate nominees, outside consultants who have prior experience as an
independent outside director of a public company.
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 BDC:
I. is a closed-end management company that generally makes 70% or more of
its investments in "Eligible Portfolio Companies" and "cash items"
pending other investment. Under the regulations established by the
Securities and Exchange Commission (the "SEC") 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:
A. it must be organized under the laws of, and has its principal place
of business in, any state or states;
B. is neither an investment company as defined in Section 3 (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 except for the exclusion from the definition of
investment company in Section 3(c); and
C. satisfies one of the following:
1. It does not have any class of securities with respect to which
a member of a national securities exchange, broker, or dealer
may extend or maintain credit to or for a customer pursuant to
rules or regulations adopted by the Board of Governors of the
Federal Reserve System under Section 7 of the Securities
Exchange Act of 1934;
2. It is controlled by a business development company, either
alone or as part of a group acting together, and such business
development company in fact exercises a controlling influence
over the management or policies of such eligible portfolio
company and, as a result of such control, has an affiliated
person who is a director of such eligible portfolio company;
3. It has total assets of not more than $4,000,000, and capital
and surplus (shareholders' equity less retained earnings) of
not less than $2,000,000, except that the Commission may adjust
such amounts by rule, regulation, or order to reflect changes
in one or more generally accepted indices or other indicators
for small businesses; or
4. It meets such other criteria as the Commission may, by rule,
establish as consistent with the public interest, the
protection of investors, and the purposes fairly intended by
the policy and provisions of this title.
Therefore, the Investment Adviser believes that "Eligible Portfolio
Companies" are, generally, those companies that, while being publicly held, may
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. Further, while the 1940 Act allows a BDC to "control" a Portfolio
Company, it is not the general policy of the Fund to acquire a controlling
position in its Portfolio Companies. The Fund only provides managerial
assistance, and seeks to limit its "control" position by requiring only that a
designee of the Fund be elected to the board of directors of the Portfolio
Company, or be selected an advisory director. While these are the Fund's
general policies, the application of these policies, of necessity, vary 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 exempted, including the following:
1. restrictions on the Fund from changing the nature of business so as to
cease to be, or to withdraw its election as, a BDC without the majority
vote of the shares outstanding;
2. restrictions against certain transactions between the Fund and
affiliated persons;
3. restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
4. compliance with accounting rules and conditions as established by the
SEC, including annual audits by independent accountants;
5. compliance with fiduciary obligations imposed under the 1940 Act; and
6. requirement that the shareholders ratify the selection of the Fund's
independent public accountants and the approval of the investment
advisory agreement or similar contracts and amendments thereto.
On September 19, 1996, the Fund and the Investment Advisor filed their
Application for an order pursuant to Sections 6(c) and 57(i) of the Investment
Company Act of 1940 and Rule 17d-1 thereunder authorizing certain joint
transactions otherwise prohibited by Section 57(a)(4) of the Act requesting an
order from the SEC permitting the Fund to co-invest with companies that are
affiliated with the Investment Advisor, including Renaissance US Growth and
Income Trust PLC ("RUSGIT" or "Advisor Affiliate"). The order was granted on
December 30, 1996.
In order for the Fund and the Advisor Affiliate (together referred to as
the "Funds") to make co-investments in the same entity, the following conditions
apply:
A. the Investment Advisor will determine if the investment is eligible for
investment by the Funds;
B. the Investment Advisor will determine an appropriate amount that the
Funds should invest;
C. the Investment Advisor will distribute written information, including
the amount of the proposed investment, concerning all co-investment
opportunities to the Board of Directors of both the Fund and RUSGIT.
The Fund will co-invest only if a required majority of the Fund's
Independent Directors conclude, prior to the acquisition of the
investment, that the investment should be made;
D. the Fund will not make an investment if any Advisor Affiliate, the
Investment Advisor, or a person controlling, controlled by, or under
common control with the Advisor is an existing investor in such issuer;
E. the terms, conditions, price, class of securities, settlement date, and
registration rights shall be the same for the Fund and the Advisor
Affiliate;
F. the Fund's Independent Directors will review quarterly all information
concerning co-investment opportunities during the preceding quarter to
determine whether the conditions set forth in the application were
complied with;
G. the Fund will maintain the records required by section 57(f)(3) of the
Act as if each of the investments permitted under these conditions were
approved by the Fund's Independent Directors under section 57(f) of the
Act; and
H. no Independent Director of the Fund will be a director or general
partner of any Advisor Affiliate with the Fund co-investors.
The Fund has made numerous investments with the Advisor Affiliate and
anticipates making additional investments in the future.
INVESTMENT ADVISERS ACT OF 1940 AND INVESTMENT ADVISER'S AGREEMENT
Renaissance Group is the investment adviser to the Fund pursuant to the
Investment Advisory Agreement dated and approved by the Board of Directors on
February 15, 1994 ( the "Investment Advisory Agreement") and is registered as an
investment adviser under the Advisers Act and is subject to the reporting and
other requirements thereof. The Advisers Act also provides restrictions on the
activities of registered advisers to protect its clients from manipulative or
deceptive practices, while the Advisers Act generally restricts performance
compensation of up to 20% on realized capital gains computed net of all realized
capital losses and unrealized capital depreciation.
The Investment Advisory Agreement provides that Renaissance Group is
entitled to receive an annual management fee of 1.75% of the Fund's assets. In
addition to the annual management fee of 1.75% of the Fund's assets, Renaissance
Group is entitled to receive an incentive fee (the "Incentive Fee") in an amount
equal to 20% of the Fund's realized capital gains computed net of all realized
capital losses and unrealized depreciation.
At the Annual Shareholders' Meeting for the Fund held in May 1999, the
shareholders approved certain amendments to the Investment Advisory Agreement.
First, in an effort to correct inconsistencies between the language of the
original Fund Prospectus dated May 25, 1994 and the Investment Advisory
Agreement, certain language of the Investment Advisory Agreement was deleted so
that the annual management fee would be determined and payable quarterly
throughout the term of the Investment Advisory Agreement. Second, an amendment
was made to the Agreement allowing the incentive fee to be accrued and paid on a
quarterly basis in an effort to better reflect the operating results and
financial position of the Fund on a quarterly basis.
Investment advisory agreements are further subject to the 1940 Act, which
requires that the agreement, in addition to having to be initially ratified by a
majority of the outstanding shares, shall precisely describe all compensation to
be paid, shall be approved annually by a majority vote of the Board of
Directors, may be terminated without penalty on not more than 60 days notice by
a vote of a majority of the outstanding shares, and shall terminate
automatically in the event of assignment. The Board of Directors has determined
that the Investment Advisory Agreement shall constitute the Fund's advisory
agreements and at all times be construed so as to comply with the Advisers Act
and the 1940 Act.
FUND PORTFOLIO INVESTMENTS
At December 31, 1999 the Fund had active investments in twenty (20)
Portfolio Companies.
Bentley Pharmaceuticals, Inc. (BNT)
In the second quarter of 1999, the Fund purchased an additional 145,100
shares of the Company's common stock on the open market for $291,229, a cost
basis of $2.01 per share.
Bentley Pharmaceuticals, Inc. is an emerging international pharmaceutical
company focused on improving drugs through new drug delivery technologies and
commercializing such drugs in the U.S. and other major markets. Bentley also
manufactures and markets pharmaceutical products in Spain for the treatment of
cardiovascular, gastrointestinal, neurological, infectious and other diseases.
At December 31, 1999, the Fund owned 545,100 shares of the Company's common
stock and also owned 800 units, having a stated value of $1,000 per unit, of the
Company's 12% Convertible Senior Subordinated Debentures due February 2006. The
debentures are unsecured and are convertible into shares of common stock of the
Company at $2.50 per share entitling the Fund to 320,000 shares upon full
conversion. Interest is payable quarterly. The Fund's cost basis in the
debentures is $744,800.
Communications World International, Inc. (CWII)
In the fourth quarter of 1999, the Fund invested $252,000 into a
Subordinated Convertible Promissory Note and warrants to purchase 100,000 shares
of the Company's common stock. The Convertible Promissory Note has a cost basis
of $250,000, accrues interest at 8%, is unsecured, and matures on the earlier to
occur of September 30, 2002, or receipt by the Company of gross cash proceeds
from an equity financing in excess of $4,000,000, or the completion of a merger
of the Company into another company in which the Company shareholders receive a
minimum of $10,000,000. The Note is convertible into the Company's common stock
at $1.50 per share, and contains standard anti-dilution provisions which protect
the Fund in the event that common stock is issued by the Company for a price per
share below the conversion price, or where the common stock issuable upon
conversion of the Note is changed into the same or different number of shares of
any other classes of stock by capital reorganization, reclassification, or
otherwise. The Company is entitled to pay the principal amount of the note
without penalty at any time upon sixty days prior notice to the Fund so long as
the average closing price of the common stock for the thirty trading days prior
to the notice is $3.75 and a registration statement is in effect covering the
resale of the underlying shares of common stock. The Fund is entitled to
limited shelf registration rights, and the Company has a duty to use "best
efforts" to register the Fund's underlying shares once a conversion is
effectuated.
In addition to the Fund's investment in the Subordinated Convertible
Promissory Note, the Fund also received warrants to purchase 100,000 shares of
the Company's common stock, which have a cost basis of $2,000. The warrants are
exercisable at $0.60 per share at any time on or before September 30, 2004. The
conversion right is protected by anti-dilution provisions, and the warrants also
contain piggyback and other registration rights. Further, the warrants are
subject to redemption in the event the current market price of a single share of
common stock exceeds $6.00 for a period of at least ten consecutive trading days
proceeding a notice by the Company of redemption, which redemption right may not
be exercised by the Company prior to November 15, 2000.
Communications World International, Inc. provides integrated voice and
data solutions to 50,000 businesses through a nationwide network of 64 dealers,
4 company-owned locations, and a national accounts division. The Company is
positioned in the market between AT&T and the Bell Operating Companies on one
end, and the more than ten thousand small interconnect product providers across
the United States on the other end.
Renaissance US Growth and Income Trust PLC ("RUSGIT") also invested in a
Subordinated Convertible Promissory Note and warrants of the Company. RUSGIT
purchased $500,000 worth of the Notes and warrants to purchase 200,000 shares of
the Company's common stock. Although the value of RUSGIT's investment and the
number of warrants purchased by RUSGIT exceeded that of the Fund, the
investments by RUSGIT were otherwise made under the same terms and conditions as
the Fund's investments.
Dexterity Surgical, Inc. (formerly LifeQuest Medical, Inc.) (DEXT)
In March, 1999, the Company changed its name from LifeQuest Medical, Inc.
to Dexterity Surgical, Inc. and also changed its trading symbol from LQMD to
DEXT. The Company continues to trade on the NASDAQ Small Cap Market. In the
second quarter of 1999, the conversion prices on the Fund's convertible
debenture and convertible preferred stock investments were reduced to $1.60 per
share according to the automatic reset provisions of the respective investment
agreements.
In addition to the Fund's conversion price resets, RUSGIT also had the
conversion prices on its convertible debenture and convertible preferred stock
investments reset to $1.60 per share pursuant to the automatic reset provisions
of the respective investment agreements.
The Company is engaged in the development, manufacture, and distribution of
instruments, equipment and surgical supplies used in minimally invasive surgery.
At December 31, 1999, the Fund owned $1,500,000 of the Company's 9%
Convertible Debentures having a conversion price of $1.60 per share which are
secured by all of the assets of the parent and its subsidiary but which security
is subordinate to certain senior lenders. The debentures have mandatory monthly
principal installments beginning December 19, 2000 which installments continue
on the first day of each successive month thereafter prior to maturity on
December 19, 2004. In addition to the debentures, the Fund owns $1,000,000 of
the Company's Series A Cumulative Convertible Preferred Stock, which has an 8%
cumulative dividend, is payable quarterly, is convertible into the Company's
common stock at $1.60 per share, and has a liquidation preference equal to 100%
of the dollar amount invested by the Fund in the preferred shares. Finally, the
Fund owns 125,000 shares of the Company's common stock which are restricted
pursuant to Rule 144 of the Securities Act of 1933.
In additional to the Fund's investments, at December 31, 1999, RUSGIT had
invested $1,500,000 in Convertible Debentures of the Company, $1,000,000 in the
Company's Series A Cumulative Convertible Preferred Stock, and owned 125,000 of
the Company's common stock. The investments by RUSGIT were made under the same
terms and conditions as the Fund's investments.
Display Technologies, Inc. (DTEK)
In the second quarter of 1999, the Fund purchased an additional 93,200
shares of the Company's common stock on the open market for $378,189, a cost
basis of $4.06 per share. In the third quarter of 1999, the Fund invested an
additional $500,000 into the Company by purchasing 5,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock (the "Preferred"). The
Preferred pays dividends at a rate of 5.25% per year from July 30, 1999, the
date the Preferred was issued, which are payable quarterly on the last day of
March, June, September, and December of each year commencing on the first such
dividend payment following the issuance. The Preferred was initially
convertible into common stock of the Company at the rate of $3.50 per share,
subject to downward adjustments in the event the Company issues, sells,
distributes, or otherwise transfers shares of its common stock, other than the
result of exercise of options, warrants, or conversion rights outstanding on the
original issuance date, for a consideration per share less than the conversion
price in effect immediately prior to such issuance. The conversion price was
reset to $3.33 per share subsequent to the Fund's investment, as discussed
below. The Preferred has a liquidation preference equal to 100% of the dollar
amount invested by the Fund, has voting rights equal to the number of whole
shares of common stock into which the Preferred is convertible at the conversion
price then in effect, and further entitles the Preferred Shareholders to vote as
a single class. The Preferred shall be redeemed on the fifth anniversary date
of issuance or in the event of a "default" as defined in the Certificate of
Designation of Series A Preferred Stock. Finally, the preferred will
automatically be converted into the Company's common stock at the then
prevailing conversion price if the closing price for the Company's common stock
for a period of twenty consecutive trading days following the second anniversary
of the original issuance date exceeds 200% of the conversion price then in
effect. As additional consideration for the Fund's agreement to invest in the
Preferred, the Fund received warrants to purchase 15,000 shares of the Company's
common stock at $3.50 on or before July 30, 2004. The warrant exercise price
was also adjusted downward subsequent to the Fund's investment (see below).
Display Technologies, Inc., through its subsidiaries, designs,
manufactures, installs, and services hi-tech electronic computer-driven video
displays, message centers, scoreboards, and business identity signs, and also
manufactures a line of compressed air filter products. The Company has
customers in the entertainment, institutional, sports, retail, banking,
billboard, and outdoor media industries.
Effective December 3, 1999, the Company effected a 5% stock dividend for
all holders of Display Technologies common stock, which not only affected the
Fund's common stock positions, but also impacted conversion and exercise prices
on the Fund's Convertible Debentures, preferred stock instruments, and stock
purchase warrants pursuant to the anti-dilution provisions of the respective
investment instruments. The conversion price on the Fund's Convertible
Debentures was reduced from $4.52 per share to $4.31 per share; the conversion
price on the Fund's preferred stock position was reduced from $3.50 per share to
$3.33 per share; the exercise price on the March 2, 1998 warrants was adjusted
to $3.92 per share thereby entitling the Fund to 110,250 shares; and the
exercise price on the Fund's July 30, 1999 stock purchase warrant was adjusted
to $3.33 per share thereby entitling the Fund to a total of 31,500 shares of the
Company's common stock. The stock dividend also increased the Fund's common
stock holdings to 266,414 shares.
At December 31, 1999, the Fund had $1,750,000 in the Company's 8.75%
Convertible Debentures, $500,000 worth of Cumulative Convertible Series A
Preferred Stock, 127,604 shares of common stock obtained in the Fund's initial
private placement, 138,810 shares of the Company's common stock purchased on the
open market, warrants to purchase 110,250 shares of common stock at $3.92 on or
before March 2, 2003, and warrants to purchase 15,750 shares of the Company's
common stock at $3.33 on or before July 30, 2004.
The Fund's debentures mature March 2, 2005 and have mandatory monthly
principal repayments beginning March 2, 2001. The debentures are secured by the
assets of the Company and are guaranteed by each of the Company's subsidiaries.
All of the Fund's debenture, preferred stock, and warrant positions have
anti-dilution provisions and certain registration rights.
At December 31, 1999, RUSGIT had investments in the Company identical to
the Fund, with the only exception being that RUSGIT had only purchased 138,075
shares of the Company's common stock on the open market.
Dwyer Group, Inc. (DWYR)
The Dwyer Group, Inc. currently supports over 800 franchises in the United
States and Canada and approximately 200 franchises in twenty-four other
countries. The franchises deliver repair, installation and maintenance services
to both residential and commercial consumers under the concepts Mr. Rooter (R),
Rainbow International (R), Glass Doctor (R), Mr. Electric (R), Mr. Appliance
(R), and Aire Serv (R).
At December 31, 1999, the Fund owned 675,000 shares of the Company's common
stock having a cost basis of $1,966,632.
eOriginal, Inc. (formerly Document Authentication Systems, Inc.) (Private)
In the third quarter, the Company raised sufficient equity capital allowing
it to require the Fund to convert its $219,250 Bridge Loan plus $19,450 in
accrued interest into the Company's Series B-1 Preferred Stock. The Series B-1
Preferred Stock has a stated value of $220 per share, entitles the Fund to a 5%
cumulative dividend, has a liquidation preference equal to 100% of the dollar
amount invested by the Fund, entitles the Fund to voting rights as a class of
Series A and Series B Preferred Shareholders, has an automatic conversion
provision requiring the Fund to convert the shares upon the occurrence of a
qualified initial public offering, contains anti-dilution provisions, and allows
the Company to redeem the Fund's Series B-1 Preferred share position at any time
after December 31, 2002 for an amount equal to 125% of the liquidation
preference for the Series B-1 Preferred Stock.
Effective October 29, 1999, the Fund advanced the Company $154,000 to
purchase an outstanding Promissory Note plus accrued interest which was then
simultaneously converted into 700 shares of the Company's Series B-1 Preferred
Stock.
eOriginal, Inc. has a patented process that provides businesses with a
paperless service for conducting business-to-business transactions over the
Internet.
At December 31, 1999, the Fund owned 1,785 shares of the Series B-1
Convertible Preferred Stock having a cost basis of $392,700, 6,000 shares of the
Company's Series A Preferred Stock having a cost basis of $1,500,000, and
warrants to purchase 659 shares of the Company's common stock at $169.75, which
warrants have a cost basis of $165. The Series A Preferred Stock entitles the
Fund to a 5% cumulative dividend as well as voting rights and a liquidation
preference equal to 100% of the dollar amount invested by the Fund. Like the
Series B-1 Preferred Stock, the Series A entitles the Fund to voting rights,
contains anti-dilution provisions, provides for automatic conversion into the
Company's common stock in the event of a qualified initial public offering, and
may be redeemed by the Company at any time after December 31, 2000 in an amount
equal to 125% of the Fund's liquidation preference on the Series A Preferred
Stock. The warrants are exercisable on or before September 15, 2003 and contain
anti-dilution provisions and certain registration rights.
Subsequent to December 31, 1999, the Fund invested an additional $107,280
to purchase 447 shares of the Company's Series B-3 Cumulative Convertible
Preferred Stock. The Series B-3 Preferred Stock has substantially the same
terms as the Series B-1 Preferred Stock except its stated value is $240 per
share.
In addition to the conversion of the Fund's Bridge Note into Series B-1
Preferred, the Bridge Note and accrued interest of RUSGIT was converted into
Series B-1 Preferred Stock of the Company. At December 31, 1999, RUSGIT owned
1,786 shares of the Company's Series B-1 Cumulative Convertible Preferred Stock,
6,000 shares of the Company's Series A Cumulative Convertible Preferred Stock,
and warrants to purchase 659 shares of the Company's common stock having a cost
basis of $165. Additionally, subsequent to December 31, 1999, RUSGIT invested
an additional $107,040 to purchase 446 shares of the Company's Series B-3
Cumulative Convertible Preferred Stock.
Fortune Natural Resources Corporation (FPXA)
In the second quarter of 1999, the conversion price on the Fund's
convertible debentures was reset to approximately $0.33 per share according to
the provisions of the Convertible Debenture and Loan Agreements.
At December 31, 1999, the Fund owned $350,000 worth of Convertible
Debentures which entitle the Fund to 1,061,728 shares upon full conversion, a
rate of approximately $0.33 per share.
Fortune Natural Resources Corporation is an independent public oil and gas
company whose primary focus is exploration and development of domestic oil and
gas properties located primarily in onshore and offshore areas of Louisiana and
Texas.
Subsequent to December 31, 1999, the Fund agreed to convert all of its
Convertible Debentures into 1,061,728 shares of the Company's common stock. As
additional consideration for the Fund's willingness to convert, it received one
year's worth of future interest payments on the debentures paid in common stock
of the Company at $0.75 per share, giving the Fund an additional 56,000 shares.
Additionally, the Fund agreed to convert interest that had accrued on the
debentures in January 2000 into common stock of the Company at a rate of $0.75
per share giving the Fund another 4,666 shares of common stock.
Subsequent to December 31, 1999, the Fund agreed to invest an additional
$150,000 to purchase 200,000 shares of the Company's common stock at $0.75 per
share, and as additional consideration the Fund received warrants to purchase
200,000 shares of the Company's common stock on or before February 2003.
Warrants on 100,000 shares are exercisable at $1.50 per share, while warrants on
the second tranche of shares are exercisable at $2.25 per share. Following the
Fund's conversion of debentures and follow-on investment in February 2000, the
Fund owned 1,322,394 shares of the Company's common stock, and additionally had
warrants to purchase an additional 200,000 shares.
RUSGIT also participated in the conversion price reset that took place in
the second quarter of 1999 and, subsequent to December 31, 1999, converted its
debenture under identical terms and conditions as the Fund's conversion. RUSGIT
also participated in the Company's February 2000 private placement and received
a like number of shares and warrants as the Fund under identical terms and
conditions as the Fund.
Grand Adventures Tour and Travel Publishing Corp. (GATT)
In the third quarter of 1999, the Fund invested $350,000 into the
Convertible Debentures of the Company. The Debentures accrue interest at 10%
payable quarterly and mature on the fourth anniversary of the date of the
initial closing. The Debentures are convertible into the Company's common stock
at $2.65 per share for any portion of the debentures the Fund converts on or
before September 21, 2000. For any portion of the debentures converted after
September 21, 2000, the Fund's conversion price is $2.50 per share. The
debentures are redeemable by the Company at any time after the later of one year
from the date of the initial closing or the first day after which, at the close
of the trading on the ten preceding days, the per share "bid" price is at least
$7. The debentures allow the Fund demand and piggyback registration rights,
with demand rights only being available if a majority of holders of Debentures
file the requisite registration statement, and also contain some standard
anti-dilution provisions.
In the fourth quarter of 1999, the Fund purchased 45,500 shares of the
Company's common stock on the open market for $130,089, or approximately $2.86
per share.
Grand Adventures is a supplier of leisure travel information and travel-
related services to niche markets that have reaches through the publication of
focused magazine titles and web sites. The Company publishes Interline
Adventures, the premier travel magazine for airline employees, and Destination
Weddings and Honeymoons Magazine. In addition, the Company operates
AgentPerx.com, a web site dedicated to providing discount travel packages to
travel agents for their own travel.
In addition to the Fund's investment in the Convertible Debentures of the
Company, RUSGIT also invested $400,000 in the Company's Convertible Debentures
under the same terms and conditions as the Fund's investment. Also, RUSGIT
purchased 45,500 shares of the Company's common stock on the open market for
$130,089, or approximately $2.86 per share in the fourth quarter of 1999.
Integrated Security Systems, Inc. (IZZI)
As of February 22, 1999, the Fund consolidated its four convertible
promissory notes due February 1, 1999, into a single $375,000 convertible
promissory note. The new convertible note bears interest at 9%, payable
monthly, is payable on demand, is convertible into common stock of the Company
at $0.549 per share, and is secured by all the assets of the Company and its
subsidiaries.
On March 8, 1999, the Fund advanced the Company $200,000 pursuant to a 9%
secured convertible promissory note due and payable within thirty days after
demand by the Fund. The note was secured by all the assets of the Company and
its subsidiaries and was convertible into the Company's common stock at $0.549
per share. As additional consideration for the loan, the Fund received warrants
to purchase 364,299 shares of the Company's common stock at $0.549 per share on
or before March 8, 2004. In June 1999, the Company completed the sale of its
Golston subsidiary for $4.7 million. The Golston subsidiary represented part of
the collateral securing the Fund's convertible debentures and convertible notes.
The Company used $322,601 to repay the Fund for its March 8, 1999 bridge loan of
$200,000 plus $122,601 in accrued interest and overdue advisory fees owed to the
Fund.
In the third quarter of 1999, the Fund advanced $115,000 to the Company
pursuant to a 9% Promissory Note. The principal balance and all accrued unpaid
interest on the Note is due and payable on or before May 12, 2000 and the Note
is secured by the assets of the Company and its subsidiaries, which security is
subordinated to the Company's credit facility with the Frost National Bank.
Effective October 15, 1999, the Fund purchased 7,500 shares of the
Company's Series D Cumulative Convertible Preferred Stock (the "Preferred") for
$150,000. The Preferred accrues dividends cumulatively at a rate of 9% to be
paid on four equal quarterly installment dates of December 31, March 31, June
30, and September 30, beginning with December 31, 1999, and entitles the holder
to voting privileges equal to one vote for each share of common stock into which
the Preferred is convertible. The Preferred converts into common stock at a
rate $0.80 per share, is redeemable by the Company at its option at any time on
or after November 15, 2004, and carries a liquidation preference equal to 100%
of the dollar amount invested by the Fund. As additional consideration for the
Fund's investment in the Preferred Stock, the Fund received warrants to purchase
125,000 shares of the Company's common stock at $1.00 per share on or before
October 11, 2004.
Integrated Security Systems, Inc. is a holding company which designs,
develops, manufactures, sells and services commercial security and traffic
control devices. In addition, the Company sells fully integrated turnkey
security systems that control and monitor access to governmental, commercial and
industrial sites.
At December 31, 1999, the Fund owned the following: $490,000 in 9%
Promissory Notes, of which $115,000 had no convertible feature and $375,000 was
convertible into the Company's common stock at a rate of $0.549 per share; 9%
Convertible Debentures having a cost of $2,084,101 and convertible into the
Company's common stock at $0.549 per share; $150,000 of the Company's Series D
Cumulative Convertible Preferred Stock convertible into common stock at a rate
of $0.80 per share; 393,259 shares of the Company's common stock having a cost
basis of $215,899; warrants to purchase 364,299 shares of the Company's common
stock at $0.549 per share on or before March 8, 2004; warrants to purchase
187,500 shares of the Company's common stock at $0.80 per share on or before
October 1, 2003; warrants to purchase 125,000 shares of the Company's common
stock at $0.80 per share on or before October 2, 2003; warrants to purchase
12,500 shares of the Company's common stock at $1.75 per share on or before
November 17, 2002; and warrants to purchase 125,000 shares of the Company's
common stock at $1.00 per share on or before October 11, 2004.
RUSGIT also invested $115,000 pursuant to a 9% Promissory Note in the third
quarter of 1999 and purchased $150,000 of the Company's Series D Cumulative
Convertible Preferred Stock and received warrants to purchase 125,000 shares of
the Company's common stock at $1.00 per share on or before October 11, 2004. In
addition to these positions, at December 31, 1999 RUSGIT owned the following:
$225,000 in 9% Convertible Notes of the Company, convertible at $0.549 per
share; a Convertible Debenture having a cost basis of $2,084,101 and convertible
into the Company's common stock at a rate of $0.549 per share; 393,259 shares of
the Company's common stock having a cost basis of $215,899; warrants to purchase
181,818 shares of the Company's common stock at $0.549 per share on or before
January 14, 2004; warrants to purchase 364,299 shares of the Company's common
stock at $0.549 per share on or before March 8, 2004; warrants to purchase
125,000 shares of the Company's common stock at $0.80 per share on or before
October 2, 2003; and warrants to purchase 12,500 shares of the Company's common
stock at $1.75 per share on or before November 17, 2002.
Interscience Computer Corporation. (IEIC)
In February 1999, the Company extended the term of the Fund's warrant to
purchase 500,000 shares of the Company's common stock. The warrant was due to
expire April 18, 2000, but has now been extended to April 18, 2001. The
exercise price on the warrant remained fixed at $1.00 per share. The Fund has
entered into an option agreement with S & W Partners, a partnership of Walter
Kornbluh, the Company's Chairman of the Board, President and Chief Executive
Officer, and Stephen Crosson, the Company's Vice President of Operations and
Chief Accounting Officer, whereby S & W has an option to purchase the Fund's
500,000 share warrant at $2.00 per share on or before July 2, 2001.
In the third quarter of 1999, the Fund advanced the Company $500,000
pursuant to an 8% Promissory Note which matures October 31, 2000. The Note is
secured by the assets of the Company and is subordinated only to the Company's
senior lender. As additional consideration for the advance, the Fund received
warrants to purchase 250,000 shares of IEIC common at $0.50 per share on or
before July 3, 2001.
Interscience Computer Corporation, through its Highway Server product,
provides transparent multi-stage migration to optical storage from a variety of
network platforms including Novell Netware, Windows NT, MAC, and Unix. The
Highway Server product can accommodate virtually unlimited volumes of
information including database, image, audio/video conferencing and medical
images.
At December 31, 1999, the Fund owned an 8% $500,000 Promissory Note,
1,750,000 shares of the Company's common stock having a cost basis of
$4,000,000, warrants to purchase 500,000 shares of the Company's common stock at
$1.00 per share on or before April 18, 2001, and warrants to purchase 250,000
shares of the Company's common stock at $0.50 per share on or before July 3,
2001.
Subsequent to December 31, 1999, the Fund exercised its 250,000 share
warrant by paying the Company $125,000 in exchange for 250,000 shares of common
stock. In addition, the Fund participated in a private placement by purchasing
an additional 250,000 shares of common stock for $500,000.
At December 31, 1999, RUSGIT did not have an investment in the Company.
Subsequent to the year end, however, RUSGIT did participate in the Company's
February private placement by investing $1,000,000 to purchase 500,000 shares of
the Company's common stock. With the exception of the amount invested, RUSGIT's
investment was made under identical terms and conditions as the Fund's
investment in the private placement.
Intile Designs, Inc. (IDES)
In the second quarter of 1999, the Fund got formal notice that the Company
had filed for bankruptcy protection pursuant to Chapter 11 of the Bankruptcy
Code. The bankruptcy case was eventually converted to a liquidation pursuant to
Chapter 7 of the Bankruptcy Code. The Fund wrote off the entire investment in
the fourth quarter of 1999.
JAKKS Pacific, Inc. (JAKK)
In the first and second quarters of 1999, the Fund converted its $3 million
in convertible debentures into 521,740 shares of the Company's common stock.
Effective June 29, 1999, the Fund converted its entire $3 million convertible
preferred stock investment into an additional 335,195 shares of the Company's
common stock.
During 1999, the Fund sold 465,370 shares of common stock for total
proceeds of $12,188,838, representing a total gain of $9,512,964. Taking into
account the 3 for 2 stock dividend declared by the Company and payable to
holders of record at October 27, 1999, the Fund had 587,347 shares of JAKKS
remaining at December 31, 1999.
JAKKS Pacific, Inc. is a multi-brand toy company that designs, develops,
produces and markets toys and related products, including: action figures and
accessories featuring licensed characters, principally from the World Wrestling
Federation (R); Flying Colors (R) molded plastic activity sets, clay compound
play sets and lunch boxes; Road Champs (R) die-cast collectible and toy
vehicles; Remco (R) toy vehicles and roll-play toys and accessories; Child
Guidance (R) infant and preschool electronic toys, toy film puzzle mats and
blocks, and activity sets and outdoor products; and fashion and many dolls and
related accessories.
RUSGIT also converted its entire JAKKS investment to common stock and sold
a portion of its position in 1999. At December 31, 1999, RUSGIT owned 576,358
shares of the Company's common stock.
Medical Action Industries, Inc. (MDCI)
In the fourth quarter of 1999, the Fund purchased 103,800 shares of the
Company's common stock for $353,124, or $3.40 per share. The shares were
purchased on the open market. Subsequent to December 31, 1999, the Fund
purchased an additional 56,200 shares of the Company's common stock on the open
market for $202,268, or $3.60 per share.
Medical Action Industries, Inc. is a developer, manufacturer, marketer,
and distributor of disposable surgical-related products. The Company's most
prominent products include sterile disposable laparotomy sponges and disposable
operating room towels, which products are sold to a proprietary direct sales
force, manufacturers representatives, and internal sales departments in the
United States and certain international markets.
RUSGIT also owned 103,800 shares of the Company's common stock at December
31, 1999, which had been purchased on the open market for $353,124, or $3.40 per
share. Subsequent to December 31, 1999, RUSGIT also purchased an additional
56,200 shares of the Company's common stock on the open market for $202,268, or
$3.60 per share.
New Care Health Corp. (NWCA)
At March 31, 1999, the Fund's Board of Directors elected to place a
$200,000 reserve on this investment because the Company had fallen into default
on the Fund's convertible debentures by failing to maintain compliance with all
of its agreed minimum financial ratios and standards and was in arrears on
interest payments and advisory fees owed to the Fund. In the second quarter of
1999, the Company filed for bankruptcy at which point the Fund Manager decided
to immediately place a $1,350,000 reserve on the Fund's position, reducing its
fair value to $1,150,000, which values were subsequently approved by the Fund's
Board of Directors effective June 30, 1999.
In the third quarter, the Fund further reduced the fair value of the
NewCare investment to $250,000 due to events in the bankruptcy. By the fourth
quarter of 1999, it became apparent to the Manager that the Fund's investment
had little or no realizable value, as the Company was not going to be able to
reorganize and emerge from Chapter 11, and the Fund's debenture positions were
unsecured by any collateral of the Company. Consequently, the Fund wrote off
the entire investment in the fourth quarter of 1999.
In addition to the writeoff of the Fund's investment in the Company, RUSGIT
also wrote off its entire investment in NewCare in the fourth quarter of 1999.
Optical Security Group, Inc. (OPSC)
At December 31, 1999, the Fund owned $500,000 in 8% Senior Subordinated
Convertible Debentures of the Company which are convertible into shares of the
Company's common stock at $6.50 per share. In the fourth quarter of 1999, the
Company entered into a definitive agreement to be purchased by a third party for
$7.00 per share. Subsequent to December 31, 1999, the deal closed and the Fund
had its debentures redeemed at 109% of face value. In total, the Fund received
$554,222 from the redemption, of which $545,000 represents principal repayment
at 109%, and $9,222 represents payment for accrued and unpaid interest.
RUSGIT also had its entire investment in the Company redeemed subsequent to
December 31, 1999.
Play By Play Toys & Novelties, Inc. (PBYP)
Effective October 25, 1999, the Company closed on a refinance of its senior
lending facility and simultaneously restructured the terms of the Fund's
Convertible Debentures. As a result of the refinancing, the Fund amended its
debentures so that interest now accrues at 10.5% and the maturity of the
debentures is now December 31, 2000. In addition, the Fund was granted security
interests in all the assets of the Company and its subsidiaries and had the
conversion price on the Debentures reset to $6.00 per share, thereby entitling
the Fund to 416,667 shares of the Company on a fully converted basis. The
amendment also entitles the Fund to a second reset if the Debentures are not
redeemed in full on or before December 31, 2000. The value of the second reset
is determined by the average price of the Company's common stock for the month
of December 2000, and in no circumstance may the conversion price be adjusted
above $6 per share. Although the debentures continue to maintain their standard
anti-dilution provisions, as consideration for the restructuring the Fund agreed
to waive the Company's default position and restructure covenants contained in
the debentures to ensure compliance by the Company at closing.
The Company designs, develops, markets and distributes stuffed toys,
sculpted toy pillows, and other products based upon licenses for children's
entertainment characters and corporate trademarks. The toys are sold into the
indoor and outdoor amusement and entertainment market, as well as the retail
market.
RUSGIT also restructured its Convertible Debentures in the fourth quarter
of 1999 and its restructured Debentures contain terms and conditions identical
to the Fund's.
Poore Brothers, Inc. (SNAK)
Pursuant to a letter agreement between the Fund and the Company dated
November 11, 1999, the Fund agreed to convert half of its position in the
Convertible Debentures of the Company into common stock of the Company, with the
other half of the debentures to be converted on or before December 31, 2000. As
a result of the letter agreement, the Fund converted $859,047 worth of
debentures into 859,047 shares of common stock, a rate of $1.00 per share, and
allowed the Company to refrain from making any mandatory principal redemption
payments to the Fund on its remaining debenture position through December 31,
2000. In addition to the debenture conversion, the Fund agreed to take $90,447
in accrued interest on the debentures through November 15, 1999 in the form of
30,000 shares of common stock and warrants to purchase 60,000 shares of the
Company's common stock at $1.50 per share on or before July 1, 2002.
Poore Brothers, Inc. is a regional salted snack food manufacturer,
marketer, and distributor with manufacturing facilities in Arizona and Indiana.
The Company's primary emphasis is manufacturing unique snack food items
including Poore Brothers (R) brand potato chips, Bob's Texas Style (TM) brand
potato chips, Tato Skins (R) brand potato snacks, O'Boisies (R) brand potato
crisps, Pizzarias (R) brand pizza chips, Braids (R) brand pretzels and Knots (R)
brand pretzels. The Company also manufactures private label potato chips for
major retailers and operates a direct store delivery distribution business and a
snack food merchandising company.
At December 31, 1999, the Fund owned $859,047 in 9% Convertible Debentures
of the Company, which debentures are convertible at $1.00 per share. In
addition to the debenture position, the Fund owned a total of 1,072,310 shares
of the Company's common stock having a cost basis of $1,104,123, warrants to
purchase 60,000 shares of the Company's common stock on or before July 1, 2002
for $1.50 per share, and warrants to purchase 25,000 shares of the Company's
common stock on or before July 1, 2002 for $1.00 per share.
RUSGIT did not have an investment in the Company prior to the fourth
quarter of 1999. In the fourth quarter of 1999, RUSGIT purchased 440,025 shares
of the Company's common stock on the open market for $656,811, or $1.49 per
share.
RailAmerica, Inc. (RAIL)
In the quarter ended September 30, 1999, the Fund invested $500,000 in
Convertible Debentures of RailAmerica, Inc. The Debentures bear interest at 6%,
are due and payable on or before July 31, 2004, and are convertible into the
Company's common stock at $10.00 per share, which conversion price is subject to
certain anti-dilution provisions. The Company may, at its option, redeem the
outstanding principal amount of the Debentures in whole or in part if the
closing price per share of common stock as reported on the NASDAQ National
Market is above 200% of the conversion price for ten consecutive trading days,
subject to adjustment as set forth in the Convertible Debenture Agreement. As
additional consideration for the Fund's investment, the Company granted the Fund
warrants to purchase 15,000 shares of the Company's common stock at $10.50 per
share on or before August 5, 2004.
In addition to the Fund's investment, RUSGIT also invested $500,000 into
the subordinated Convertible Debentures of the Company and also received
warrants to purchase 15,000 shares of the Company's common stock, which
investments were made under the same terms and conditions as the Fund's
investment.
RailAmerica, Inc., the world's largest short line and regional railroad
operator, owns or has equity interests in fifty short line and regional
railroads operating more than 12,500 route miles in the United States, Canada,
Australia, and the Republic of Chile. The Company also owns Kalyn/Siebert, L.P.
and Kalyn/Siebert, Canada, Inc., specialty truck trailer manufacturers with
production facilities in Texas and Canada.
Simtek Corporation (SRAM)
In the second quarter of 1999, the Fund had the conversion price on its
convertible debentures in the Company reset from $0.35 per share to $0.195 per
share according to the automatic reset provisions of the Convertible Debenture
Agreement. The reset became available when the Company failed to meet its
projected target of $700,000 in pretax income excluding extraordinary items and
interest on the Fund's debentures for the one year period ended December 31,
1998.
RUSGIT also had its convertible debenture conversion price reset to $0.195
according to the automatic reset provisions of its Convertible Debenture
Agreement.
Simtek Corporation develops, produces, and markets the world's fastest
reprogrammable nonvolatile static random access memory chips. The Company
markets its products through an international network of distributors and sales
representatives.
At December 31, 1999, the Fund's investment in the Company consisted of
$750,00 worth of 9% Convertible Debentures, convertible at $0.195 per share.
The debentures mature June 12, 2005 and require mandatory monthly principal
repayments beginning June 12, 2001. The Fund's position is secured by all the
assets of the Company, but is subordinate to previously existing security
interests granted to other lending institutions.
At December 31, 1999, RUSGIT owned $750,000 in 9% Convertible Debentures of
the Company, which investment bears the same terms and conditions as the Fund's
investment.
SiVault, Inc. (Private)
In the fourth quarter of 1999, the Fund purchased 140,000 shares of the
Company's common stock for $350,000. The common stock position has restricted
transferability under Rule 144 of the Securities Act of 1933, but the Fund is
entitled to piggyback and shelf registration rights. The Fund is also subject
to a lockup agreement in the event the Company registers for an initial public
offering.
SiVault, Inc. is a service bureau that specializes in the value loading of
applications software and other programs onto "Smart Cards" for a variety of
clientele.
RUSGIT also invested $350,000 to purchase 140,000 shares of the Company's
common stock under the same terms and conditions as the Fund's investment.
TAVA Technologies, Inc. (TAVA)
In the first quarter of 1999, the Fund converted its remaining convertible
debentures into 666,667 shares of the Company's common stock, which debentures
had a cost basis of $1,000,000, or $1.50 per share. In the second quarter of
1999, the Fund exercised its warrants, enabling the Fund to purchase 25,000
shares of the Company's common stock at $1.50 per share. In addition, the Fund
exercised option rights on 20,851 shares, which shares were purchased for a
total of $126,447, or $6.06 per share.
On April 21, 1999, the Company announced that Real Software Group, a
Belgian software company, had entered into an agreement to acquire the Company
for approximately $190 million, or $8.00 per share. On July 20, 1999, the Real
Software transaction closed and the Fund received total proceeds of $5,700,144,
representing a gain of $4,536,197. Since the Fund's initial investment in TAVA
Technologies, Inc. in February 1996, a total of $4,413,947 was invested in the
Company and total proceeds from stock sales of $18,423,859 were realized,
representing a gain of $14,009,912 to the Fund.
RUSGIT also converted all of its investments in TAVA to common stock in
1999, and sold all of its remaining investment in the Real Software transaction.
ThermoView Industries, Inc. (TVII)
Effective December 31, 1999, the Fund converted all of its 10% Series A
Cumulative Convertible Preferred Stock of the Company into 16,667 shares of the
Company's common stock, a rate of $15 per share. The conversion rate on the
preferred stock was adjusted in the first week of December when the Company
effectuated a one-for-three reverse stock split. At December 31, 1999, the Fund
owned 37,500 shares of the Company's common stock, having a cost basis of
$500,000.
ThermoView Industries, Inc. is a strategic early-stage consolidator of
companies which manufacture, design, market, and install custom vinyl new and
replacement windows and doors, primarily for the existing home market.
RUSGIT also converted its preferred stock investment into common stock of
the Company effective December 31, 1999.
Voice It Worldwide, Inc. (MEMO)
The Company filed for bankruptcy in November 1998 causing the Fund's Board
of Directors to establish a reserve of $983,525, reducing the fair value of the
investment to $1,818,975 at December 31, 1998. Throughout 1999, the Fund
continued to place additional reserves against the fair value of the investment
so that the entire investment was valued at $750,000 on December 31, 1999.
It has now become clear that the Company will be unable to reorganize and
emerge from bankruptcy, as the Court approved a Joint Liquidation Plan in
January 2000. The Fund's status as the largest unsecured creditor, however,
coupled with other factors favorable to a recovery for unsecured creditors gives
the Manager and the Board a reasonable basis for expecting some recovery. At
December 31, 1999, the Manager and the Board estimated that recovery to be
$750,000, which estimation has not changed due to the approval of the Joint
Liquidation Plan. We will continue to closely monitor the situation and
reassess the value of the Fund's position as new events arise in the bankruptcy.
Valuation of Investments
The Prospectus and original offering documents specify that the securities
held by the Fund are to be valued as follows:
On a quarterly basis, Renaissance Group prepares a valuation of the assets
of the Fund including Temporary Investments, Eligible Portfolio Investments, and
Other Portfolio Investments, subject to the approval of the Board of Directors.
The applicable methods prescribed by such principles are described below.
Generally, pursuant to the procedures established by the Investment
Adviser, the fair value of each investment is initially based upon its original
cost to the Fund. Costs are the primary factor used to determine fair value
until significant developments affecting the Portfolio Company (such as results
of operations or changes in general market conditions) provide a basis for use
in the fair value determination.
Generally, the fair value of debt securities and preferred securities
convertible into common stock is the sum of (a) the value of such securities
without regard to the conversion feature, and (b) the value, if any, of the
conversion feature. The fair value of debt securities without regard to
conversion features is determined on the basis of the terms of the debt
security, the interest yield and the financial condition of the issuer. The
fair value of preferred securities without regard to conversion features is
determined on the basis of the terms of the preferred security, its dividend,
and its liquidation and redemption rights. The fair value of the conversion
features of a security, 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.
Portfolio investments for which market quotations are readily available and
which are freely transferable are valued as follows: (i) securities traded on a
securities exchange or the NASDAQ are valued at the closing price on, or the
last trading day prior to, the date of valuation and (ii) securities traded in
the over-the-counter market are valued at the average of the closing bid and ask
price for the last trading day on, or prior to, the date of valuation.
Securities for which market quotations are readily available but are restricted
from free trading in the public securities markets (such as Rule 144 stock) are
valued by discounting the closing price or the closing bid and ask prices, as
the case may be, for the last trading day on, or prior to, the date of valuation
to reflect the liquidity caused by such restriction, but taking into
consideration the existence, or lack thereof, of any contractual right to have
the securities registered and freed from such trading restrictions. The fair
value of investments for which no market exists are determined on the basis of
appraisal procedures established in good faith by the Investment Adviser. Fair
value determinations are based upon such factors as the Portfolio Company's
earnings and net worth, market prices for similar securities of comparable
companies and an assessment of the Portfolio Company's future financial
prospectus. In the case of unsuccessful operations, the appraisal may be based
upon liquidation value. Appraisal valuations are necessarily subjective.
Competition for Investments
The Fund has significant competition for investment proposals. Competitive
sources for growth capital for the industry include insurance companies, banks,
equipment leasing firms, investment bankers, venture capital and private equity
funds, money managers and private investors. Many of these sources have
substantially greater financial resources than is contemplated will be available
to the Fund. Therefore, the Fund will have to compete for investment
opportunities based on its ability to respond to the needs of the prospective
company and its willingness to provide management assistance. In some
instances, the Fund's requirements as to provision of management assistance will
cause it to be non-competitive.
Personnel
The Fund has no direct employees, but instead has contracted Renaissance
Group pursuant to the Investment Advisory Agreement to provide all management
and operating activities. Renaissance Group currently has eight employees who
are engaged in performing the duties and functions required by the Fund. At the
present time, a substantial portion of Renaissance Group's staff time is devoted
to activities of the Fund. However, because of the diversity of skills
required, the Fund cannot afford to employ all these persons solely for its own
needs, and therefore, these employees are not engaged solely in activities of
the Fund.
The Investment Advisor currently serves as Managing General Partner to
Renaissance Capital Partners, Ltd. ("Renaissance I") and as the Investment
Advisor to RUSGIT. Renaissance I is a BDC with investment objectives similar
to those of the Registrant. Renaissance I is not actively seeking additional
investments. RUSGIT is a public limited company registered in England and
Wales, listed on the London Stock Exchange, which invests in privately placed
convertible debentures issued by companies similar to the investments of the
Fund. RUSGIT will invest primarily pari-passu with the Fund. In 1996, RUSGIT
raised net investment capital of approximately $30,789,000. From inception to
December 31, 1999, RUSGIT had made investments in twenty four (24) portfolio
companies, having an aggregate cost value of $35,649,673. Twenty (20) of the
investments were active at December 31, 1999. In addition, Renaissance Group
may, from time to time, provide investment advisory services, management
consulting services and investment banking services to other clients.
No accurate data or estimate is available as to the percentage of time,
individually or as a group, that will be devoted to the affairs of the Fund.
Initially, and while the Fund's assets are in the process of being invested, a
majority of the staff time of Renaissance Group is employed in functions and
activities of the Fund. Thereafter, the officers and employees have and will
devote such time as is required, in their sole discretion, for the conduct of
business, including the provision of management services to Portfolio Companies.
Item 2. Properties
The Fund's business activities are conducted from the offices of
Renaissance Group, which offices are currently leased until July 31, 2005 in a
multi-story general office building in Dallas, Texas. The use of such office
facilities, including office furniture, phone services, computer equipment, and
files are provided by Renaissance Group at its expense pursuant to the
Investment Advisory Agreement.
Item 3. Legal Proceedings
There are no legal proceedings currently pending with regard to the Fund.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
TRADING
As of December 31,1995 there was no trading in the shares of the Fund and
no established market existed for those shares. On April 30, 1996, the Fund's
common stock began trading on the NASDAQ National Market under the trading
symbol RENN.
The following table sets forth, for the periods indicated, certain high and
low prices for the Common Stock as quoted on the NASDAQ National Market.
High Low
---- ---
Year ended December 31, 1998
First quarter $9.75 $8.25
Second quarter $9.38 $8.31
Third quarter $9.38 $8.00
Fourth quarter $8.88 $5.88
Year ended December 31, 1999
First quarter $8.38 $6.69
Second quarter $9.88 $7.06
Third quarter $10.88 $8.75
Fourth quarter $10.25 $8.81
NUMBER OF HOLDERS
As of December 31, 1999, there were approximately 1,087 beneficial holders
of common stock.
DIVIDEND POLICY
The investment objective of the Fund is current income and long term
capital appreciation. The Fund has elected to be treated as a regulated
investment company" under Subchapter M of the Internal Revenue Code and will,
on a quarterly basis, distribute substantially all current income in the form of
a dividend. Since the Fund was in an offering phase for all of 1994, no
dividends were paid; however, shareholders received a dividend on April 30,
1995, representing their pro rata portion of income earned by the Fund in 1994.
Thereafter, the Fund has paid out dividends on a quarterly basis. In 1999, the
Fund paid out $2.19 per share in income and capital gains distributions.
Item 6. Selected Financial Data. (unaudited)
The following selected financial data for the period from January 1, 1995
through December 31, 1999, should be read in conjunction with the Fund's
Financial Statements and notes thereto and "Management's discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 of this
Annual Report on Form 10-K.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Gross Income,
(including
realized gain) $12,768,575 $5,956,344 $8,512,374 $3,843,726 $3,070,938
Net Unrealized
Appreciation
(Depreciation)
on Investments 4,465,591 (1,222,151) (4,832,658) 7,779,315 698,270
Net Income 13,535,928 2,794,004 1,146,733 10,060,620 2,503,034
Net Income per
share 3.27 0.66 0.26 2.32 0.59
Total Assets 46,725,122 42,322,725 48,356,570 50,688,180 41,995,915
Net Assets 45,934,306 41,475,701 44,497,360 49,130,320 40,500,172
Net Assets Per
Share 11.09 10.01 10.25 11.32 9.54
Item 7. Management's discussion and Analysis of Financial Condition and Results
of Operations
General
The purpose of the Fund is to provide growth capital to small and medium
size public companies whose ability to service the securities is sufficient to
provide a quarterly return to the shareholders and whose growth potentials are
sufficient to provide opportunity for above average capital appreciation.
Sources of Operating Income
Generally, the major source of operating income for the Fund is investment
income, either in the form of interest on debentures, dividends on stock, or
interest on securities held pending investment in Portfolio Companies. However,
the Fund also anticipates generating income through capital gains. The Fund
will generally structure investments to obtain a current return that is
competitive with other long term finance sources available to potential
Portfolio Companies. Further, the Fund may in some cases receive placement
fees, draw-down fees and similar types of income. It might also receive
management fee income.
Generally, management fees received by Renaissance Group (or its personnel)
for services to a Portfolio Company will be paid to the account of the Fund.
The exception to this rule would apply to payments to Renaissance Group or
affiliate or designee thereof for unusual services performed for the Portfolio
Company, which are unrelated to and not required by the Portfolio Investment in
such Portfolio Company and that are beyond the Fund's contemplated management
assistance to Portfolio companies (i.e., beyond providing for director designees
and limited consultation services in connection therewith). These payments
would be made to Renaissance Group or such other person only with the approval
of the Board of Directors based, in part, on the determination that payments for
such services are no greater than fees for comparable services charged by
unaffiliated third parties, and subject to limitations and requirements imposed
by the 1940 Act.
While it will be the general principle that Renaissance Group and its
officers and directors occupy a fiduciary relationship to the Fund and shall not
receive outside compensation or advantage in conflict with that relationship,
neither Renaissance Group nor its officers and directors are prohibited from
receiving other income from non-conflicting sources.
Other Investment Funds
Renaissance Group has formed other investment funds to make investments in
similar Portfolio Companies and may, in the future, form additional similar
investment funds. Specifically, Renaissance Group formed Renaissance I and
raised net capital contributions of approximately $12.9 million in a private
placement offering for the purpose of making primarily convertible debentures
investments in small and medium size public companies. Renaissance I is
currently fully invested and is not making new investments.
In the Spring of 1996, Renaissance Group formed RUSGIT, which invests in
privately placed convertible debentures issued by companies similar to the
investments of the Fund. RUSGIT will invest primarily pari-passu with the Fund.
In 1996, RUSGIT raised investment capital of approximately $30.8 million, and as
of December 31, 1999, had made twenty four (24) total investments having an
aggregate cost value of $35,649,673. Twenty (20) of the investments were active
at December 31, 1999.
The determination regarding the existence of conflict of interest between
these affiliated investment funds and the Registrant, and the resolution of any
such conflict, vests in the discretion of the Board of Directors, subject to
the requirements and resolution of the 1940 Act.
Regular Quarterly Dividends
It is intended that cash dividends from operations be made to all
shareholders each quarter to provide a cash return and also to enable the Fund
to maintain its registered investment company status. Generally, this dividend
is made from profits and investment income from the previous quarter. However,
in the event that net profits are not adequate from time to time, the dividends
may be made from capital, so long as capital is sufficient to assure repayment
of all obligations of the Fund and such capital distributions are permitted by
applicable corporate law and the 1940 Act.
Quarterly dividends may be increased or decreased from time to time to
reflect increases or decreases in current rates of investment income. The
Fund's intention is to provide each shareholder a current return compatible
with the then present economic condition of the Fund.
The accounting records are maintained on a calendar quarter basis with the
fiscal year ending on December 31. Accordingly, quarterly distributions will be
made to shareholders of record as of the end of each quarter and mailed to each
shareholders address of record within 120 days of the end of the quarter.
Optional Distributions of Capital Gains
In addition to the regular quarterly dividends, it is intended that on an
annual basis the Fund shall dividend out net realized capital gains. Also,
capital gains dividends may replace the regular quarterly dividend where the
Investment Adviser deems appropriate. Further, when deemed appropriate by the
Board of Directors and subject to registration requirements, the Fund may make
in-kind distribution of securities of Portfolio Companies. The timing and
payment of distributions, including in-kind distributions, is at the discretion
of the Board of Directors. In 1999, the Fund distributed $2.11 per share in
capital gains to the Shareholders and $0.08 per share in regular quarterly
dividends.
Pursuant to its Investment Advisory Agreement and the amendments thereto
(which are discussed fully in Item 1), Renaissance Group shall be paid quarterly
and at the final dissolution or liquidation of the Fund, a management incentive
fee of 20% of the realized capital gains net of realized and unrealized losses.
Notwithstanding the foregoing, no payment of the management incentive fee shall
be made which is not permitted by the Securities Act or other applicable law.
The performance distributions cannot be adjusted without the consent of all
of the shareholders, except if required by order of a regulatory agency.
Liquidity and Capital Resources
During the year ended December 31, 1999, the Fund invested $5,263,278 in
five (5) new portfolio investments and in twelve (12) follow-on investments.
Dividends paid to investors in 1999 amounted to $9,073,042. Net income from
operating activities and interest income on funds invested in U.S. Government
and agency obligations, pending investment in portfolio companies, net of
operating expenses and management fees, amount to $13,535,928. The net cash
used in operating activities was $(1,880,612). The Fund also received
$18,683,236 upon the sale of portfolio investments. Dividend reinvestments were
zero. The Fund issued no shares for the dividend reinvestment plan. All
dividend reinvestment shares were purchased in the open market.
Generally, investments in Portfolio Companies will have an initial fixed
term of seven years, with payments of interest or dividends for that period.
Further, 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 Portfolio Investment will generally
be considered non-liquid.
Another possible source of available capital is debt, however, the Fund
does not presently intend to make leveraged investments. Therefore, a lack of
liquidity will generally only affect the ability to make new investments and
make distributions to shareholders.
RESULTS OF OPERATIONS
1999 Compared to 1998
During the year ended December 31, 1999, the Fund made additional portfolio
investments aggregating $5,263,278 compared to $13,094,416 in 1998. The Fund's
1999 total income was $17,234,166 consisting of the following components:
(i) interest income of $1,362,167; (ii) dividend income of $381,498;
(iii) fee income of $(24,251); (iv) realized gains on investments of
$11,049,161; and (v) unrealized appreciation on investments of $4,465,591.
Interest income decreased 40% in comparison to 1998 due primarily to
conversions of debenture instruments into common stock. Although the
conversions lowered the Fund's interest income, it enabled the Fund to increase
net realized gains on investments by 253% from $3,130,743 in 1998 to $11,049,161
in 1999. Dividend income in 1999 rose 1,227% to $381,498 in comparison to the
1998 period, due primarily to a higher concentration of preferred stock
instruments held by the fund. Fee income decreased from $511,988 in 1998 to
$(24,251) in 1999 primarily as a result of a reduction in the dollar value of
new investments.
Aggregate 1999 income of $17,234,166 rose 264% in comparison to aggregate
1998 income of $4,734,193, primarily as a result of unrealized appreciation in
the invested portfolio and capital gains realized on some investments in 1999.
The Fund's operating expenses incurred in 1999 were $3,698,238, an increase of
91% as compared to $1,940,189 in 1998. Operating expenses increased almost
exclusively due to the incentive fee paid to the Manager due to the success of
the Fund in realizing gains on portfolio investments. In total, operating
expense increased by a value of $1,758,049, of which $1,687,692, or 96% of the
increase, was attributable to the incentive fee. General and administrative
expenses rose less than 1% in 1999 relative to the 1998 period, and management
fees rose 8% to $878,987, due to the increase in the value of the overall
portfolio.
1998 Compared to 1997
During the year ended December 31, 1998, the Fund made additional portfolio
investments aggregating $13,094,416 compared to $7,100,150 in 1997. As a result
of these investments and earnings held for future investments, the Fund's 1998
total income was $4,734,193 consisting of the following components:
(i) interest income of $2,284,873; (ii) dividend income of $28,740;
(iii) fee income of $511,988; (iv) realized gains on investments of
$3,130,743; and (v) unrealized depreciation on investments of $(1,222,151).
The aggregate 1998 income of $4,734,193 was less than the aggregate 1997
income of $3,679,716 primarily as a result of lower unrealized depreciation and
an increase in investment closing fees in 1998. The Funds operating expenses
incurred in 1998 were $1,940,189 as compared to $2,532,983 in 1997. During
1998, an incentive fee of $626,149 was paid to the Investment Advisor
representing 20% of the Funds realized capital gains, net of any realized
capital losses and cumulative unrealized depreciation, compared to $1,196,366
paid in 1997. In addition, the management fees decreased $4,688 in 1998. As a
result, the Funds net income increased to $2,794,004 in 1998 as compared to
$1,146,733 in 1997.
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expensed approximately $3,000 during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise
are addressed promptly.
Item 7A. 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 good portion of the Fund's investment in portfolio securities consists of
fixed rate convertible debentures and other debt instruments. 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 portion of the Fund's portfolio consists of equity investments in
private companies. The Fund would anticipate no impact on this investment 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 this investment.
A portion of the Fund's investment portfolio also consists of common stocks
and warrants 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.
Item 8. Financial Statements and Supplementary Data.
For the Index to Financial Statements, see "Index to Financial Statements"
on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 30, 1999, the Audit Committee of the Board of Directors of
Registrant approved the appointment of Ernst & Young LLP ("Current Auditor") as
the Registrant's independent auditor.
Registrant has provided the Current Auditor with a copy of the disclosures
being reported in the report on Form 8K prior to its filing with the Commission.
The Current Auditor had no additional information or comments to address to the
Commission in response to this item.
Prior to the engagement of the Current Auditor, KPMG LLP ("Former Auditor")
had served as the Company's independent auditor for the years ended December 31,
1998 and 1997. On August 23, 1999, the Former Auditor resigned. The Former
Auditor's reports for the fiscal years ended December 31, 1997 and December 31,
1998 contained no adverse opinion, disclaimer of opinion or modification as to
uncertainty, audit scope or accounting principles. During Registrant's two most
recent fiscal years and any subsequent interim periods through the date of
resignation, there have been no disagreements between the Company and the Former
Auditor on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to their satisfaction, would have caused such firm to make reference to the
subject matter of the disagreement in connection with its report.
Part III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the Registrant will file its definitive Proxy Statement
(the "Proxy Statement") for its Annual Meeting of Limited Partners to be held on
May 19, 2000 pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of Registrant.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by reference from the
Proxy Statement pursuant to Regulation 14A of the General Rules and Regulations
under the Exchange Act.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.
DOCUMENTS FILED AS PART OF THIS FORM 10K
Financial Statements: The financial statements filed as part of this
report are listed in "Index to Financial Statements" on page F-1 hereof.
Financial Schedules
There are no schedules presented since none are applicable.
REPORTS ON FORM 8K
The Fund filed a report on Form 8K on September 30, 1999 to reflect a
change in independent auditors.
EXHIBITS
3.1 Renaissance Capital Growth & Income Fund Amended Articles of
Incorporation and By-laws (1)
10.1 Investment Advisory Agreement as of February 15, 1994 (1)
10.2 Dividend Reinvestment Plan (1)
10.3 Amendment No. 1 to Investment Advisory Agreement
- ----------------
(1) Incorporated by reference from Form N-2 as filed with the Securities and
Exchange Commission on February 25, 1994 (Registration No. 33-75758).
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
Date: March 30, 2000
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
By: /S/
-----------------------------------------
Russell Cleveland, President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Fund in the
capacities and on the date indicated Signatures.
Signature Capacity in Which Signed Date
/S/
- -----------------------
Russell Cleveland Chairman, President and director March 30, 2000
/S/
- ----------------------- Senior Vice President, Secretary March 30, 2000
Barbe Butschek and Treasurer and Chief Financial
Officer
/S/
- -----------------------
Ernest C. Hill Director March 30, 2000
/S/
- -----------------------
C. A. Rundell, Jr. Director March 30, 2000
/S/
- -----------------------
Peter Collins Director March 30, 2000
/S/
- -----------------------
Edward O. Boshell, Jr. Director March 30, 2000
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Reports F-2 through F-3
Statements of Assets and Liabilities F-4
December 31, 1999 and 1998
Statements of Investments- F-5 through F-12
December 31, 1999 and 1998
Statements of Operations- F-13
Years ended December 31, 1999, 1998, and 1997
Statements of Changes in Net Assets F-14
Years ended December 31, 1999, 1998, and 1997
Statements of Cash Flows- F-15 through F-16
Years ended December 31, 1999, 1998, and 1997
Notes to Financial Statements F-17 through F-21
Independent Auditors' Report
The Board of Directors and Stockholders
Renaissance Capital Growth & Income Fund III, Inc.:
We have audited the statement of assets and liabilities of Renaissance Capital
Growth & Income Fund III, Inc., including the statement of investments, as of
December 31, 1999, and the related statement of operations, changes in net
assets, and cash flows for the year then ended. These financial statements are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of Renaissance Capital Growth & Income Fund III, Inc. for the years
ended December 31, 1998 and December 31, 1997, were audited by other auditors
whose report dated February 12, 1999, expressed unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Renaissance Capital Growth
& Income Fund III, Inc. as of December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
ERNST & YOUNG LLP
Dallas, Texas
February 18, 2000
Independent Auditors' Report
The Board of Directors and Stockholders
Renaissance Capital Growth & Income Fund III, Inc.:
We have audited the accompanying statement of assets and liabilities of
Renaissance Capital Growth & Income Fund III, Inc., including the statement of
investments, as of December 31, 1998, and the related statements of operations,
changes in net assets, and cash flows for each of the years in the two-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included verification and confirmation of investments owned as of December 31,
1998, by examination of securities held in safekeeping for the Company. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renaissance Capital Growth &
Income Fund III, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for each of the years in the two-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Dallas, Texas
February 12, 1999
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Assets and Liabilities
December 31, 1999 and 1998
Assets 1999 1998
---- ----
Cash and cash equivalents $ 5,086,040 $ 2,573,144
Investments at fair value, cost of $34,457,935
and $36,828,731 in 1999 and 1998 respectively
(note 4) 41,346,302 39,251,507
Interest receivable 224,283 361,374
Organization costs, net of accumulated
amortization - 83,820
Other assets 68,497 52,880
----------- -----------
46,725,122 42,322,725
=========== ===========
Liabilities and Net Assets
Liabilities:
Accounts payable 111,708 214,100
Accounts payable - affiliate (note 3) 213,390 218,079
Dividends payable 465,718 414,845
----------- -----------
790,816 847,024
=========== ===========
Net assets (note 6):
Common stock, $1 par value; authorized 20,000,000
shares; 4,342,942 issued in 1999 and 1998
respectively; 4,142,942 shares outstanding in
1999 and 4,143,448 shares outstanding in 1998 4,342,942 4,342,942
Additional paid-in-capital 36,258,896 36,258,896
Treasury stock at cost, 200,000 shares at
December 31, 1999, and 199,494 at
December 31, 1998 (1,665,220) (1,661,439)
Undistributed net investment income 6,997,688 2,535,302
Net assets, equivalent to $11.09 and $10.01 ----------- -----------
per share on the shares outstanding in 1999
and 1998, respectively 45,934,306 41,475,701
Commitments and contingencies (notes 3 and 4) - -
----------- -----------
$46,725,122 $42,322,725
=========== ===========
See accompanying notes to financial statements.
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments
December 31, 1999 and 1998
1999
-------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
-------- ---- ---- ----- --------
Eligible Portfolio
Investments - Convertible
Debentures and Promissory
Notes (1)
Communications World Intl.,
Inc. -
Convertible debentures (2) 8.00% 9/30/02 $ 250,000 $ 250,000 .54
Dexterity Surgical, Inc. -
Convertible debentures (2) 9.00 12/19/04 1,500,000 1,500,000 3.27
Display Technologies, Inc. -
Convertible debentures 8.75 3/2/05 1,750,000 1,750,000 3.81
Fortune Natural Resources
Corp. -
Convertible debentures 12.00 12/31/07 350,000 656,847 1.43
Integrated Security Systems,
Inc. -
Convertible debentures 9.00 12/1/03 2,084,101 2,263,051 4.93
Convertible promissory
note 9.00 5/12/00 115,000 115,000 .25
Convertible promissory
note (2) 9.00 On demand 375,000 403,802 .88
Interscience Computer Corp. -
Convertible promissory
note (2) 8.00 10/31/00 500,000 500,000 1.09
Poore Brothers, Inc. -
Convertible debentures (2) 9.00 7/1/02 859,047 1,186,062 2.58
Simtek Corp. -
Convertible debentures (2) 9.00 6/12/05 750,000 893,615 1.95
Voice It Worldwide, Inc. -
Convertible debentures (2) 8.00 11/1/02 2,450,000 750,000 1.63
----------- ----------- -----
$10,983,148 $10,268,377 22.36
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1999
--------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
-------- ---- ---- ----- --------
Other Portfolio Invest-
ments - Convertible
Debentures and
Promissory Notes (1)
Bentley Pharmaceuticals,
Inc. -
Convertible debentures 12.00% 2/13/06 $ 744,800 $ 1,896,840 4.13
Grand Adventures Tour &
Travel -
Convertible debentures (2) 10.00 9/27/03 350,000 373,000 .81
Optical Security Group,
Inc. -
Convertible debentures (2) 8.00 5/31/05 500,000 500,000 1.09
Play By Play Toys &
Novelties (3) -
Convertible debentures (2 10.50 12/31/00 2,500,000 2,500,000 5.44
RailAmerica, Inc. -
Convertible debentures (2) 6.00 7/31/04 500,000 500,000 1.09
----------- ----------- -----
$ 4,594,800 $ 5,769,840 12.56
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
(3) Interest payments under the terms of the convertible debenture are
delinquent as of December 31, 1999.
1999
--------------------------------------------
Fair % of Net
Shares Cost Value Assets
------ ---- ----- --------
Eligible Portfolio Investments
- Common Stock, Preferred Stock,
and Miscellaneous Securities (1)
Bentley Pharmaceuticals,
Inc. -
Common stock 400,000 $ 500,000 $ 2,450,250 5.33
Dexterity Surgical, Inc. -
Common stock (2) 125,000 500,000 162,422 .35
Preferred stock-A (2) 500 500,000 492,188 1.07
Preferred stock-B (2) 500 500,000 492,188 1.07
Display Technologies, Inc. -
Common stock 127,604 500,000 509,266 1.11
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1999
-------------------------------------------
Fair % of Net
Shares Cost Value Assets
------ ---- ----- --------
Eligible Portfolio Investments
- Common Stock, Preferred Stock,
and Miscellaneous Securities (1)
eOriginal, Inc. -
Series A, preferred stock 6,000 1,500,000 1,500,000 3.27
Series B-1, preferred stock 1,785 392,700 392,700 .85
Integrated Security Systems,
Inc. -
Preferred stock (2) 7,500 150,000 141,503 .31
Common stock 393,259 215,899 244,848 .53
Interscience Computer Corpora-
tion -
Common stock 1,750,000 4,000,000 1,949,063 4.25
JAKKS Pacific, Inc. -
Common stock 587,347 3,324,126 10,866,287 23.67
Poore Brothers, Inc. -
Common stock (2) 1,072,310 1,104,123 1,430,508 3.11
SiVault, Inc. -
Common stock 140,000 350,000 350,000 .76
ThermoView Industries, Inc. -
Common stock (2) 37,500 500,000 103,383 .23
Voice It Worldwide, Inc. -
Common stock (2) 940,000 1,046,400 - .00
Miscellaneous Securities 5,915 236,041 .51
----------- ----------- -----
$15,089,163 $21,320,647 46.42
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1999
--------------------------------------------
Fair % of Net
Shares Cost Value Assets
------ ---- ----- --------
Other Portfolio Investments -
Common Stock, Preferred stock,
and Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 145,100 $ 291,229 $ 888,828 1.93
Display Technologies, Inc. -
Preferred stock (2) 5,000 500,000 518,982 1.13
Common stock 138,810 549,741 553,989 1.21
Dwyer Group, Inc. -
Common stock 675,000 1,966,644 1,503,563 3.27
Grand Adventures Tour & Travel -
Common stock 45,500 130,086 152,027 .33
Medical Action Industries, Inc. -
Common stock 103,800 353,124 359,667 .78
Miscellaneous Securities - 10,382 .02
----------- ----------- -----
$ 3,790,824 $ 3,987,438 8.67
----------- ----------- -----
$34,457,935 $41,346,302 90.01
=========== =========== =====
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1998
---------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
-------- ---- ---- ----- --------
Eligible Portfolio
Investments - Convertible
Debentures and Promissory
Notes (1)
Voice It Worldwide, Inc. (3) -
Convertible debentures (2) 8.00% 11/1/02 $ 2,450,000 $ 1,470,000 3.54
Display Technologies, Inc. -
Convertible debentures (2) 8.75 3/2/05 1,750,000 2,706,789 6.53
Document Authentication
Systems -
Convertible promissory note 10.00 8/20/99 219,250 219,250 .53
JAKKS Pacific, Inc. -
Convertible debentures (2) 9.00 12/31/03 3,000,000 5,552,609 13.39
Poore Brothers, Inc. -
Convertible debentures (2) 9.00 7/1/02 1,718,094 1,718,094 4.14
TAVA Technologies, Inc. -
Convertible debentures 9.00 6/1/03 1,000,000 5,032,500 12.13
Integrated Security Systems,
Inc. (3) -
Convertible promissory
notes (2) 9.00 2/1/99 375,000 375,000 .90
Convertible debentures (2) 9.00 12/1/03 2,084,101 2,084,101 5.03
Fortune Natural Resources
Corp. -
Convertible debentures (2) 12.00 12/31/07 350,000 350,000 .84
LifeQuest Medical, Inc. -
Convertible debentures (2) 9.00 12/19/04 1,500,000 1,500,000 3.62
NewCare Health Corp. -
Convertible debentures (2) 8.50 1/27/05 2,500,000 2,500,000 6.03
Simtek Corporation -
Convertible debentures (2) 9.00 6/12/05 750,000 750,000 1.81
----------- ----------- -----
$17,696,445 $24,258,343 58.49
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
(3) Interest payments under the terms of the convertible debenture are
delinquent as of December 31, 1998.
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1998
-----------------------------------------------------
Interest Due Fair % of Net
Rate Date Cost Value Assets
-------- ---- ---- ----- --------
Other Portfolio Investments -
Convertible Debentures (1)
Bentley Pharmaceuticals,
Inc. -
Convertible debentures 12.00% 2/13/06 $ 744,800 $ 839,520 2.02
Optical Security Group,
Inc. -
Convertible debentures (2) 8.00 5/31/05 500,000 500,000 1.21
Play by Play Toys and
Novelties, Inc. -
Convertible debentures (2) 8.00 6/30/04 2,500,000 2,500,000 6.03
----------- ----------- -----
$ 3,744,800 $ 3,839,520 9.26
----------- ----------- -----
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
1998
-------------------------------------------
Fair % of Net
Shares Cost Value Assets
------ ---- ----- --------
Eligible Portfolio Investments -
Common Stock, Preferred Stock
and Miscellaneous Securities (1)
Bentley Pharmaceuticals, Inc. -
Common stock 400,000 $ 500,000 $ 594,000 1.42
Display Technologies, Inc. -
Common stock (2) 121,528 500,000 799,633 1.93
Document Authentication Systems -
Series A, cumulative convertible
preferred stock 6,000 1,500,000 1,500,000 3.61
Interscience Computer Corporation -
Common stock 1,750,000 4,000,000 703,915 1.70
ThermoView industries, Inc. -
Series A, cumulative convertible
preferred stock (2) 250 250,000 250,000 .60
Common stock (2) 62,500 250,000 262,109 .63
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(2) Restricted securities under Rule 144 (note 5).
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Investments (continued)
December 31, 1999 and 1998
1998
------------------------------------------
Fair % of Net
Shares Cost Value Assets
------ ---- ----- --------
Eligible Portfolio Investments -
Common Stock, Preferred Stock
and Miscellaneous Securities (1)
Voice It Worldwide, Inc. -
Common stock (2) 940,000 1,046,400 348,975 .84
Integrated Security Systems, Inc. -
Common stock 393,259 215,899 218,996 .53
Intile Designs, Inc. -
Common stock (2) 500,000 500,000 50,000 .12
Poore Brothers, Inc. -
Common stock (2) 183,263 154,628 52,293 .13
LifeQuest Medical, Inc. -
Common stock (2) 125,000 500,000 216,563 .52
Series A, convertible
preferred stock (2) 500 500,000 500,000 1.21
Series B, convertible
preferred stock (2) 500 500,000 500,000 1.21
Miscellaneous Securities 3,915 483,509 1.17
----------- ----------- -----
$10,420,842 $ 6,479,993 15.62
----------- ----------- -----
Other Portfolio Investments -
Common stock and preferred stock (1)
Dwyer Group, Inc. -
Common stock 675,000 $ 1,966,644 $ 1,336,500 3.22
JAKKS Pacific, Inc. -
Series A, cumulative convertible
preferred stock (2) 600 3,000,000 3,337,151 8.05
----------- ----------- -----
4,966,644 4,673,651 11.27
----------- ----------- -----
$36,828,731 $39,251,507 94.64
=========== =========== =====
(1) Valued at fair value as determined by the Investment Advisor (note 4).
(1) Restricted securities under Rule 144 (note 5).
See accompanying notes to financial statements.
Renaissance Capital Growth & Income Fund III, Inc.
Statements of Operations
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
Income:
Interest $ 1,362,167 $2,284,873 $2,423,380
Dividend Income 381,498 28,740 68
Commitment and other fees (24,251) 511,988 107,085
----------- ---------- ----------
1,719,414 2,825,601 2,530,533
----------- ---------- ----------
Expenses (note 3):
General and administrative 505,410 501,984 519,873
Incentive fee 2,313,841 626,149 1,196,366
Management fees 878,987 812,056 816,744
----------- ---------- ----------
3,698,238 1,940,189 2,532,983
----------- ---------- ----------
Net investment income (loss) (1,978,824) 885,412 (2,450)
Realized and unrealized gain
(loss) on investments:
Net unrealized appreciation
(depreciation) on investments 4,465,591 (1,222,151) (4,832,658)
Net realized gain on investments 11,049,161 3,130,743 5,981,841
----------- ---------- ----------
Net gain on investments 15,514,752 1,908,592 1,149,183
----------- ---------- ----------
Net income $13,535,928 $2,794,004 $1,146,733
=========== ========== ==========
Net income per share (note 2(e)) $ 3.27 $ 0.66 $ 0.26
=========== ========== ==========
See accompanying notes to financial statements.
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Changes in Net Assets
Years ended December 31, 1999, 1998 and 1997
Net assets, December 31, 1996 $49,130,320
Net income 1,146,733
Dividends (5,819,542)
Reinvested dividends to purchase 3,520 shares
(note 6) 39,849
-----------
Net assets, December 31, 1997 44,497,360
Purchase of 199,494 shares of treasury stock (1,661,439)
Net income 2,794,004
Dividends (4,154,224)
-----------
Net assets, December 31, 1998 41,475,701
Purchase of 506 shares of treasury stock (3,781)
Net income 13,535,928
Dividends (9,073,542)
-----------
Net assets, December 31, 1999 $45,934,306
===========
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $13,535,928 $ 2,794,004 $ 1,146,733
Adjustments to reconcile net income
to net cash provided by (used in)
operation activities:
Net unrealized (appreciation)
depreciation on investments (4,465,591) 1,222,151 4,832,658
Net realized gain on investments (11,049,161) (3,130,743) (5,981,841)
Purchase of investments (5,263,278) (13,094,416) (7,100,150)
Proceeds from sale of investments 18,683,236 3,631,244 10,401,150
Repayment of debentures - 70,477 -
Amortization of organization cost 83,820 124,709 124,709
Decrease in receivable from sale of
investment - 4,200,000 -
Decrease in accounts receivable - - 169,486
(Increase) decrease in interest
receivable 137,090 (374,723) 16,750
Increase in other assets (15,617) (14,134) -
Increase (decrease) in accounts
payable (102,392) 182,902 (4,879)
Increase (decrease) in accounts
payable - affiliate (4,689) (1,222,810) 916,966
----------- ----------- -----------
Net cash provided by (used in)
operating activities 11,539,346 (5,611,339) 4,521,582
Cash flows from financing activities:
Net proceeds from issuance of shares - - -
Reinvested dividends to purchase
shares - - 39,849
Purchase of treasury shares (3,781) (1,661,439) -
Cash dividends (9,022,669) (6,126,502) (4,430,279)
----------- ----------- -----------
Net cash used in financing
activities (9,026,450) (7,787,941) (4,390,430)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 2,512,896 (13,399,280) 131,152
Cash and cash equivalents at
beginning of the year 2,573,144 15,972,424 15,841,272
----------- ----------- -----------
Cash and cash equivalents at
end of the year $ 5,086,040 $ 2,573,144 $15,972,424
=========== =========== ===========
Renaissance Capital Growth & Income Fund III, Inc.
Statement of Cash Flows (continued)
Years ended December 31, 1999, 1998 and 1997
Noncash investing and financing activities:
Fourth quarter dividends of $465,718, $414,845, and $2,387,123 were accrued
as of December 31, 1999, 1998, and 1997 respectively.
During 1999, the Fund received common stock in settlement of amounts due
from interest totaling $19,450 and received common stock in prepayment of
interest totaling $90,447.
During 1999, the Fund wrote down two portfolio investments in the amount of
$3,000,000.
During 1998, the Fund received common stock in settlement of amounts due
from interest totaling $154,628.
During 1997, the Fund recorded a receivable from the sale of an investment
amounting to $4,200,000.
See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(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 offered to sell
shares in the Fund until closing of the offering on December 31, 1994. The
Prospectus of the Fund required minimum aggregate capital contributions by
shareholders of not less than $2,500,000 and allowed for maximum capital
contributions of $100,000,000. 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 close-end investment company and has elected to
be treated as a business development company under the Investment Company
Act of 1940, as amended (1940 Act).
(2) Summary of Significant Accounting Policies
(a) Valuation of Investments
Portfolio investments are stated at quoted market or fair value as
determined by the Investment Advisor (note 4). The securities held by
the Fund are primarily unregistered and their value does not
necessarily represent the amounts that may be realized from their
immediate sale or disposition.
(b) Other
The Fund follows industry practice and records security transactions
on the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded as earned on the accrual basis.
(c) Cash and Cash Equivalents
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(d) Federal Income Taxes
The Fund has elected the special income tax treatment available to
"regulated investment companies" 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
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
December 31, 1999, 1998 and 1997
(2) Summary of Significant Accounting Policies (continued)
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
distribute all of its taxable investment income and long term capital
gains within the defined period under the IRC to qualify as a
regulated investment company. Therefore, no federal income tax
provision is included in the accompanying financial statements.
(e) Net income per share
Net income per share is based on the weighted average of shares
outstanding of 4,143,040 during 1999, 4,246,163 during 1998 and
4,342,062 during 1997.
(f) Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions as to the valuation of
investments that effect the amounts and disclosures in the financial
statements. Actual results could differ from these estimates.
(g) Organization Costs
Costs of organizing the Fund were capitalized and were being amortized
on a straight-line basis over five years beginning with the
commencement of the Fund's activities. These costs were fully
amortized as of December 31, 1999.
(h) Changes in Presentation
Certain presentations from prior years have changed to conform with
the current year.
(3) Management and Organization Fees
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement (the Agreement), the Investment Advisor 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 Advisor is reimbursed by the
Fund for certain administrative expenses. A summary of fees and
reimbursements paid by the Fund under the Agreement, the Prospectus and the
original offering document are as follows:
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
December 31, 1999, 1998 and 1997
(3) Management and Organization Fees (continued)
The Investment Advisor receives a fee equal to .4375% (1.75% annually) of
the Net Assets each quarter. The Fund incurred $878,987, $812,056, and
$816,744 for 1999, 1998 and 1997, respectively, for such management fees.
Amounts payable for such fees at December 31, 1999 and 1998 were $204,030
and $184,076, respectively.
The Investment Advisor was reimbursed by the Fund for administrative
expenses paid by the Investment Advisor on behalf of the Fund. Such
reimbursements were $130,679, $187,988 and $220,077, for 1999, 1998 and
1997, respectively, and are included in general and administrative expenses
in the accompanying statements of operations.
The Investment Advisor is to receive an incentive fee in an amount equal to
20% of any of the Fund's realized capital gains computed net of all
realized capital losses and cumulative unrealized depreciation. At the
Annual Shareholders' Meeting for the Fund held in May 1999, the
shareholders approved an amendment to the Investment Advisory Agreement
allowing the incentive fee to be accrued and paid on a quarterly basis in
an effort to better reflect the operating results and financial position of
the Fund on a quarterly basis. The Fund incurred $2,313,841, $626,149 and
$1,196,366 during the years ended 1999, 1998 and 1997, respectively, for
such incentive fees.
(4) 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. These investments are carried
in the statements of assets and liabilities as of December 31, 1999 and
1998, 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, but is not otherwise restricted. The Fund may
register and sell such securities at any time with the Fund paying the
costs of registration. Interest on the convertible securities are
generally payable monthly. The convertible debt securities generally
contain embedded call options giving the issuer the right to call the
underlying issue. In these instances, the Fund has the right of redemption
or conversion. The embedded call option will generally not vest until
certain conditions are achieved by the issuer. Such conditions may require
that minimum thresholds be met relating to underlying market prices,
liquidity, and other factors.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
December 31, 1999, 1998 and 1997
(4) Investments (continued)
The Prospectus and the original offering document specify that investments
held by the Fund shall be valued as follows:
Generally, pursuant to procedures established by the Investment Advisor,
the fair value of each investment will be initially 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 (such as results of operations or changes in general
market conditions) provide a basis for use in an appraisal valuation.
Portfolio investments for which market quotations are readily available
and which are freely transferable will be valued as follows:
(i) securities traded on a securities exchange or the NASDAQ will be
valued at the closing price on, or the last trading day prior to, the
date of valuation and (ii) securities traded in the over-the-counter
market will be valued at the average of the closing bid and asked prices
for the last trading day on, or prior to, the date of valuation.
Convertible debt and/or warrants associated with such investments will be
deemed to be investments for which market quotations are readily
available and priced accordingly.
Securities for which market quotations are readily available but are
restricted from free trading in the public securities markets (such as
Rule 144 stock) will be valued by discounting the closing price or the
closing bid and asked prices, as the case may be, for the last trading
day on, or prior to, the date of valuation to reflect the illiquidity
caused by such restrictions, but taking into consideration the existence,
or lack thereof, of any contractual right to have the securities
registered and freed from such trading restrictions.
The fair value of investments for which no ready market exists will be
determined on the basis of appraisal procedures established in good faith
by the Investment Advisor. Appraisal valuations will be based upon such
factors as the company's earnings and net worth, the market prices for
similar securities of comparable companies and an assessment of the
company's future financial prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Appraisal
valuations are necessarily subjective.
At December 31, 1999 and 1998, all the Fund's investments, totaling
$41,346,302 (88% of total assets) and $39,251,507 (93% of total assets),
respectively, have been valued by the Investment Advisor in the absence
of readily ascertainable market values. Because of the inherent
uncertainty of valuation, those estimated values may differ significantly
from the values that would have been used had a ready market for the
investments existed, and the differences could be material.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements (continued)
December 31, 1999, 1998 and 1997
(4) Investments (continued)
As of December 31, 1999 and 1998, the net unrealized appreciation
associated with investments held by the Fund was $6,888,367 and
$2,422,776, respectively. For 1999, the Fund had gross unrealized gains
of $12,907,099 and gross unrealized losses of ($6,018,732). For 1998,
the Fund had gross unrealized gains of $8,862,204 and gross unrealized
losses of ($6,439,428).
(5) Restricted Securities
As indicated on the statement of investments as of December 31, 1999 and
1998, the Fund holds investments in shares of common stock, the sale of
which is restricted. These securities have been valued by the Investment
Advisor after considering certain pertinent factors relevant to the
individual securities (note 4).
(6) Purchase of Additional Shares
In accordance with Fund guidelines, certain shareholders reinvested their
dividends in the Fund, purchasing 3,520 Fund shares issued directly by the
Fund in 1997. The Fund issued no shares in 1999 or 1998 under the dividend
reinvestment plan.
(7) Impact of Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expensed approximately $3,000 during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise
are addressed promptly.
Exhibit 10.3
AMENDMENT NO. 1
TO
INVESTMENT ADVISORY AGREEMENT
THIS AMENDMENT NO. 1 (the "Amendment"), dated as of March 24, 1998, to the
Investment Advisory Agreement (the "Agreement"), dated as of February 15, 1994,
between Renaissance Capital Growth & Income Fund III, Inc., a Texas corporation
(the "Fund"), and Renaissance Capital Group, Inc., a Texas corporation (the
"Adviser").
RECITALS
A. The Fund and the Adviser desire to amend the Agreement, as set forth in this
Amendment.
B. The amendments to the Agreement set forth herein have been approved by the
Fund's Independent Outside Directors and the shareholders of the Fund, in
accordance with Section 18 of the Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereby agree to amend the Agreement as follows:
1. Section 7(a)(ii) is hereby amended and restated to read as follows:
"following the Final Closing, for all subsequent quarters, at a
quarterly rate of 0.4375% of Net Assets, as determined at the end of
such quarter, and each such payment to be due as of the last day of the
calendar quarter during the term of this Agreement. The Management Fee
shall be payable no later than the day after which filings with the
Securities and Exchange Commission are made by the Fund for such prior
calendar quarter (the "Payment Date")."
2. Section 7(d) is hereby amended and restated to read as follows:
"Management Incentive Fee. The Fund agrees, in addition to the
Management Fee, to pay the Adviser quarterly and at the final
dissolution or liquidation of the Fund, as additional compensation for
the services to be provided under this Agreement, an incentive fee (the
"Management Incentive Fee") in an amount (the "Payment Amount") equal to
twenty percent (20%) of any realized capital gains in excess of realized
capital losses of the Fund after allowance for any unrealized capital
losses in excess of unrealized capital gains on the portfolio
investments of the Fund, calculated on a quarterly basis. The
Management Incentive Fee shall be paid to the Adviser in cash (or in the
event of a distribution of securities, in kind concurrent with
distributions to the Shareholders). Any portion of the Management
Incentive Fee not paid in any quarter because of regulatory restrictions
shall accumulate and be paid at such time as such restriction is no
longer applicable. Notwithstanding the foregoing, no payment shall be
made of the Management Incentive Fee which is not permitted by the Act
or other applicable law. In the event that a payment of the Management
Incentive Fee is determined to have been made in excess of that
permitted by the Act or in excess of that provided herein, such excess
Management Incentive Fee payments shall be repaid to the Fund, and
repayment will be due, in cash (or in the event of a distribution of
securities, at the option of the Adviser, in kind) on or before 30 days
of the date of receipt of notice by the Adviser from the Fund that such
over payment occurred."
3. Section 7(f) is hereby amended and restated to read as follows:
"Effect of Termination. If this Agreement is terminated as of any date
not the last day of a calendar quarter, the Management Fee and the
Management Incentive Fee shall be calculated as of the effective date of
termination and shall be paid as soon as possible after such date of
termination. All unrealized capital gains in excess of unrealized
capital losses on the portfolio investments of the Fund at the date of
termination of this Agreement shall be deemed realized on such date and
shall be valued and paid in accordance with Section 12 and 13."
4. Except as expressly amended by this Amendment, all provisions of the
Agreement shall remain in full force and effect. IN WITNESS WHEREOF,
the parties have duly executed this Amendment as of the date written
hereinabove.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
By: /s/ Russell Cleveland
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Russell Cleveland, President
RENAISSANCE CAPITAL GROUP, INC.
By: /s/ Russell Cleveland
---------------------
Russell Cleveland, President