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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995 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 organization) (I.R.S. Employer Identification No.)
SUITE 210, LB 59,
8080 NORTH CENTRAL EXPRESSWAY,
DALLAS, TEXAS 75206
(Address of principle 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
(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
amendment to this Form 10-K.( X )
As of December 31, 1995 there were 4,244,630 shares of $1.00 par value of
the Registrant s of outstanding. The shares had an initial offering price
of $10.00. There is no market for the Registrant s shares. Based on share
values as reflected in the Registrant s Financial Statements, the aggregate
value of the shares as of December 31, 1995 is $40,500,172. 10,000 shares of
common stock are held by an affiliate.
Documents Incorporated by Reference: Certain portions of the registrant s
definitive proxy statement to be filed no later than March 31, 1996 pursuant
to Regulation 14A are incorporated by reference in Items 10 through 13 of
Part III of this Annual Report of From 10-K.
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Part I
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 ). The
Fund was initially capitalized by Russell Cleveland through his purchase of
10,000 shares of common stock for $10.00 per share. On February 25, 1994 the
Fund filed a registration statement on Form N-2 for the sale of up to
10,000,000 shares of common stock at an offering price of $10.00 per share.
This offering was declared effective on May 25, 1994 at which time the Fund
commenced sales of common stock. The Fund continued the offering until
December 31, 1994 at which time the offering was closed. As a result of the
offering, the Fund sold 4,158,897 shares in 1994 the Fund extended the period
for stock to be sold in 1995 and an additional 40,141 shares were sold. In
accordance with the Fund guidelines, certain shareholders reinvested their
dividends in the Fund during 1995, purchasing an additional 45,592 shares
resulting in total shares issued at December 31, 1995 of 4,244,630.
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 these capacities, Renaissance Group is primarily responsible for the
selection, evaluation, structure, 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, these 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 will be made 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 go public within three to five
years. The terms of the documents evidencing the Fund's investment in
Portfolio Companies generally provide that the Fund will have the right to
convert its securities into or otherwise acquire common stock in exchange for
its preferred stock or debentures.
Accordingly, while such common stock of the Portfolio Company may be
publicly traded, the common stock to be 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.
During 1994 the Fund made one (1) portfolio investment in the amount of
$3,600,000. During 1995 the Fund made investments in four (4) additional
portfolio companies aggregating $9,348,546 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
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diversifying 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
must invest at least 70% of its funds in eligible portfolio investments,
such being generally defined, as direct placements to qualifying companies
and temporary investments in cash items pending other investments.
However, 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
that is, investments that do not qualify as eligible portfolio
investments, such exception allowing, up to the specified maximum amount,
for example, open market purchases or participation in public offerings.
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, 1995 the Fund s investment assets were classified by
amount as follows:
Classification Cost Percentage
of Investments Assets
Eligible Portfolio Companies $12,948,546 33.49%
Short Term Investments and
Cash and Cash Equivalents 24,727,794 66.51%
Other Portfolio Companies none 0%
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
values of the Fund s convertible 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 the 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.
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GENERAL INVESTMENT POLICIES
The Fund will invest in emerging growth company ( 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) generally have a new product or services that
provides 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 will
place an emphasis in 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 asset at the time of the investment.
The Fund's nominees to the boards of directors of Portfolio Companies
will generally be selected from among the officers of Renaissance Group.
When, in 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 had 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 basically:
(1) is a closed-end management company making 70% of its investments only
in certain companies (identified as Eligible Portfolio Companies ),
and in cash items pending other investments. Under the regulations
established by the SEC under the 1940 Act only certain companies may
qualify as Eligible Portfolio Companies. These qualifications are:
(A) it must be organized under the laws of a state or states,
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(B) it may not be an investment company (except for a wholly owned
Small Business Investment Company), and
(C) it must generally fall into one of three following categories:
(1) companies that do not have a class of securities
registered on a national securities exchange or are listed
on the Federal Reserve OTC margin list,
(2) companies that are actively controlled by the BDC
either alone or as part of a group (for this purpose,
control is presumed to exist if the BDC or group in
which the BDC is a member owns 25% or more of the voting
securities), or
(3) it meets such other criteria as established by the SEC.
(2) must be prepared to provide Significant Managerial Assistance to
such Portfolio Companies. Significant Managerial
Assistance means, as to the Fund:
(A) any arrangement whereby the Fund, through its officers,
employees, or the officers or employees of the
Investment Adviser, seeks to provide significant guidance
concerning management, operations, objectives or
policies of the Portfolio Company, or
(B) the exercise of a controlling influence over the Portfolio
Company.
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, the regulations generally provide that the securities must be
obtained in direct transactions with the Portfolio
Company and as such are generally restricted from transferability in the
public markets.
Further, while the 1940 Act allows a BDC to control a Portfolio
Company, it will not be the general policy of the Fund toacquire a
controlling position in its Portfolio Companies. The Fund will only
provide managerial assistance, and will seek 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 will be the Fund's general policies, the application
of these policieswill 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 or
similar contracts and amendments thereto.
INVESTMENT ADVISERS ACT OF 1940 ("ADVISERS ACT") AND INVESTMENT ADVISERS
AGREEMENT
Renaissance Capital Group, Inc. ( Renaissance Group or Investment
Adviser ) is the investment adviser to the Fund pursuant to the Investment
Advisory Agreement dated and originally 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, the Advisers Act was amended to allow
an investment adviser to a BDC to receive performance compensation of up to 20%
on realized capital gains
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computed net of all realized capital losses and unrealized capital
depreciation.
The Investment Advisory Agreement provides that Renaissance Group is
entitled to receive, in addition to an annual management fee of 1.75% of
the Fund's assets, 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.
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 have agreed that the Investment Advisory Agreement shall
constitute the Fund's advisory agreements and shall at all
times be construed so as to comply with the Advisers Act and the 1940 Act.
The Investment Advisory Agreement, which incorporates the material
investment advisory terms of the Fund, was approved for
the fiscal year ending December 31, 1996 by the Board of Directors on
January 16, 1996, and a vote by the shareholders on
ratification of said agreement shall be held at the Annual Meeting on
April 26, 1996. A more detailed discussion of the
Investment Advisory Agreement can be found in Fund s 1996 Proxy Statement.
FUND PORTFOLIO INVESTMENTS
As of December 31, 1995 the Fund has made five (5) investments in
Portfolio Companies all of which meet the criteria of investments in
Eigible Portfolio Companies:
DWYER GROUP, INC.
On June 2, 1995 Renaissance purchased, the open market, 4,000 shares of
the Company s common stock at a cost of $12,320. On
June 9, 1995, the Fund and the Company entered into a Stock Purchase
Agreement in which the Fund agreed to purchase from the
Company 70,000 shares of common stock at $3.50 per share for a total
aggregate consideration of $245,000. Also on June 9, 1995
the Fund entered into a Stock Purchase Agreement with the Estate of Donald
J. Dwyer, Deceased pursuant to which the Fund agreed to
purchase from the Estate 300,000 shares of common stock at $3.00 per share
for a total consideration of $900,000. The stock
purchased pursuant to the Stock Purchase Agreements is covered by a Demand
Registration Rights Agreement.
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In addition, the Fund has purchased in the open market, the following shares of
stock:
DATE NO. SHARES COST DATE NO. SHARES COST
---- ---------- ---- ---- ---------- ----
June 09, 1995 3,400 $10,685 November 20, 1995 13,500 $36,187
June 14, 1995 3,200 10,056 November 24, 1995 6,000 16,887
June 20, 1995 5,000 15,850 November 28, 1995 14,000 38,400
June 22, 1995 5,000 15,937 December 04, 1995 10,300 28,346
June 23, 1995 11,000 34,403 December 08, 1995 7,000 19,293
June 28, 1995 6,500 20,329 December 21, 1995 12,000 32,244
June 30, 1995 5,000 15,662 December 29, 1995 9,000 25,347
July 05, 1995 20,000 71,600
Dwyer Group, Inc. is a holding company for service-based businesses
providing specialty services internally through franchising.
The Partnership does not have a Director Designee on the Board of
Directors of Dwyer Group, Inc.
INTERSCIENCE COMPUTER CORPORATION.
On September 22, 1994, the Fund purchased 36,000 shares of Interscience
Computer Corporation s ( Interscience ) Series A Cumulative Convertible
Preferred Stock ( Series A Preferred Stock ) with a stated value of $100 per
share for a purchase price of $3,600,000. Interscience provides third party
maintenance to large data centers and high-speed production printers.
Interscience s field engineers provide top quality on-site care, operation
advice and prompt delivery of parts. Interscience also develops and markets
consumable products used in various printing processes. Interscience enjoys
a high rate of reoccurring revenue because of their long term service
contracts.
The holders of the Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the board of directors of Interscience,
out of funds legally available therefor, cumulative dividends at the annual
rate of 7.5% of the stated value of the Series A Preferred Stock. In
addition, Interscience shall pay the Fund a 1.5% management fee per year.
The holders of Series A Preferred Stock shall be entitled to vote upon
all matters presented to the stockholders, together with the holders of
common stock as one class, except (i) as otherwise required by law and (ii)
with respect to the election of directors to the Interscience s board of
directors. Each share of Series A Preferred Stock shall entitle the holder
thereof to that number of votes equal to the number of shares of common stock
into which one share of Series A Preferred Stock would have been convertible,
if such conversion had taken place on the record date set for determining
stockholders entitled to vote at a meeting or the date of the consent of
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stockholders if action is being taken by written consent. At any meeting of
the shareholders of Interscience at which directors are elected to
Interscience s board of directors, the holders of shares of Series A
Preferred Stock shall have the right, voting separately as a class, to elect
one director to the board of directors. To date, the Investment Adviser has
not exercised this right and has attended board meetings only as an advisory
director. In addition, if Interscience defaults under the purchase agreement
with the Fund, the Fund has the right to elect a majority to the board of
directors of Interscience.
Each share of Series A Preferred Stock shall be convertible into a
number of shares of Common Stock determined by dividing (i) $100 by (ii) the
conversion price in effect on the Conversion Date. The conversion price at
which shares of common stock shall initially be issuable upon conversion of
the shares of Series A Preferred Stock shall be $6.00 (initially, 600,000
shares of common stock for the $3,600,000). The Conversion Price shall be
subject to further adjustment including anti-dilution provisions.
Shares of the Series A Preferred Stock may be redeemed, in whole or in
part at any time at the option of Interscience (subject, however, to the
Fund s right to convert), for cash at $120 per share beginning September 23,
1994 plus, in each case, all unpaid dividends thereon, including accrued
dividends, whether or not declared, to the redemption date. However,
Interscience may not redeem the Series A Preferred unless all of the
following are satisfied: (1) Interscience's Common Stock has had a Trading
Price of not less than 300% of the conversion price; (2) Interscience shall
have earned at least $1.20 per share in the aggregate for the last four
consecutive fiscal quarters preceding the date of notice, and (3) the shares
to be issued on conversion shall have been registered or shall be exempted
from registration and such shares shall be freely tradable when issued.
If any of the Series A Preferred remains outstanding on or after
September 23, 2000 then at any time thereafter during the period that any
shares of the Series A Preferred Stock remain outstanding, the remaining
holders of the Series A Preferred Stock shall have the right to elect the
smallest number of directors constituting a majority of the authorized number
of directors of Interscience, and the holders of the Common Stock shall have
the right to elect the remaining directors.
The Fund has the right to designate a nominee to the Board of Directors of
the Company, which designee may serve as a Director or Advisory Director at
his or her election.
PACKAGING RESEARCH CORPORATION
On December 14, 1995 the Fund invested $3,200,000 in a 9% Convertible
Debenture issued by Packaging Research Corporation (PRC) of Englewood,
Colorado and its subsidiary, Mama Rizzo s, Inc. The debentures are callable
at 120% of par after January 1, 1996, once specific earnings per share and
bid price tests have been met. The debentures provide for mandatory
principal installments beginning January 1, 1999 which installments will
amortize approximately one-half of the principal prior to maturity on January
1, 2003.
At the option of the Fund, the $3,200,000 Convertible Debenture is
convertible into common stock of PRC at $1.50 per share. This conversion
price is subject to a one time adjustment at January 1, 1997, if the average
closing bid price of the common stock for the 20 consecutive trading days
prior to January 1, 1997 is less than $1.50 per share. If an adjustment is
triggered, the conversion price shall be reduced to eighty percent (80%) of
the average closing bid price of the Company s common stock for the 20
consecutive trading days prior to January 1, 1997. The Fund has the right to
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demand stock registration and certain piggyback stock registration rights and
at least two registrations at the Company s expense.
Packaging Research Corporation manufactures food processing equipment
and through its subsidiary, Mama Rizzo s it manufactures and distributes
premium pasta sauses.
The Fund has the right to designate a nominee to the Board of Directors of
the Company, which designee may serve as a Director or Advisory Director at
his or her election.
POORE BROTHERS, INC.
On May 31, 1995 the Fund advanced Poore Brothers, Inc. $2,100,000 under
terms of a 9% Convertible Debenture. The Debenture is secured by a lien on
the Company s intangibles and trademarks; however, the Company s other assets
are pledged to Senior Secured Lenders. The total amount of borrowings issued
under the Loan Agreement is $2,700,000 with First Interstate Equity
Corporation advancing $600,000.
The Debenture is convertible into common stock of the Company at a ratio
equal to 1,926,606 shares of common stock of the Company for $2,100,000
(initially $1.09 per share); provided however that the conversion price shall
be subject to adjustment at times and in accordance with the anti-dilution
provisions of the debenture. The debenture, at the option of the Company may
be redeemed in whole, but not in part, at 120% of par, provided the following
has occurred: (i) The Company has completed an initial public offering of its
securities; (ii) the closing bid price for the company s common stock
averages at least $4.00 for a period of 30 consecutive trading days and the
stock is listed on NASDAQ, AMEX or NYSE; (iii) the $4.00 call price is
supported by a minimum of $0.20 annual earnings per share fully diluted for
the immediately preceding fiscal year; and (iv) the shares of common stock
underlying the debenture are fully registered. Interest is payable monthly
commencing July 1, 1995. Monthly principal payments are scheduled to begin
July 1, 1998 which installments will amortize approximately one-half of the
principal prior to maturity on July 1, 2002.
The Company manufactures and distributes a line of potato chips and
popcorn in the Phoenix, Arizona and Nashville, Tennessee areas and
distributes its own branded products and other products in the Phoenix and
Houston areas.
The Fund has the right to demand stock registration and certain piggyback
stock registration rights, and at least two registrations at the Company s
expense. The Fund has the right to designate a nominee to the Board of
Directors of the Company, which designee may serve as a Director or Advisory
Director at his or her election.
VOICE IT WORLDWIDE, INC.
On October 27, 1995 the Fund advanced Voice It Worldwide, Inc. of Fort
Collins, Colorado, $2,450,000 under terms of an 8% Convertible Debenture due
November 1, 2002. Interest is payable monthly beginning December 1, 1995.
The Debentures provide for mandatory principal installments beginning
November 1, 1998, which installments will amortize approximately one-half of
the principal prior to maturity on November 1, 2002.
The Debenture is convertible into common stock of the Company initially
at $2.625 per share; provided however, that the conversion price shall be
subject to a one time adjustment at the time of filing its 1996 Form 10KSB
and additional adjustments at times and in accordance with the anti-dilution
provisions of the debenture.
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In addition to the Debentures, the fund, on October 27, 1995 purchased
for $50,000 Warrants to purchase 915,000 shares of common stock from Voice It
Worldwide, Inc. at a purchase price of $2.75 per share. The warrants are
exercisable on the date of purchase and are void after October 27, 1998. The
Warrants are subject to anti-dilution provisions. If after October 27, 1996,
the closing bid price of the Company s common stock averages greater than
$6.00 per share for twenty consecutive trading days prior to notice to call,
the Warrant may be redeemable for $45,750.
The Company designs, develops and markets the Voice It personal note
recorder which allows the user to verbalize reminders and short messages
without paper or pencil. The products utilize computer chips and are the
size of credit cards 1/4 inch thick.
The Fund has the right to demand stock registration and certain
piggyback stock registration rights, and at least two registrations at the
Company s expense. The Fund has the right to designate a nominee to the
Board of Directors of the Company, which designee may serve as a Director or
Advisory Director at his or her election.
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 will prepare 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. Valuations of portfolio securities will be done in
accordance with generally accepted accounting principles and the financial
reporting policies of the SEC. 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 will be initially based primarily
upon its original cost to the Fund. Costs will be 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.
Portfolio investment for which market quotations are readily available and
which are freely transferable will be value at 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 priced 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) 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
liquidity caused by such restriction, but taking into consideration the
existence, or lack thereof, or any contractual right to have the securities
registered and freed from such trading restrictions. The fair value of
investments for which no market exists will be determined on the basis of
appraisal procedures established in good faith by the Investment Adviser.
Fair value determinations will be 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
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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 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 employs 14 persons 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.
Renaissance Group currently serves as investment adviser for two other
affiliated investment partnerships, Renaissance Capital Partners, Ltd.
( Renaissance I ) and Renaissance Capital Partners II, Ltd. ( Renaissance
II ). Renaissance I and Renaissance II are both BDC s with investment
objectives similar to those of the Fund. In addition, the Renaissance Group
is the parent of RenCap Securities, Inc., a registered Broker/Dealer.
Renaissance Group and its subsidiary 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.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Fund does not contemplate making a substantial portion of its investments
in foreign operations.
12
ITEM 2. PROPERTIES.
The Fund's business activities are conducted from the offices of
Renaissance Group, which offices are currently leased until December 31, 1997
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.
No matter was submitted to a vote of shareholders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1995.
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 and no
established market exists. Pursuant to the prospectus dated May 25, 1994
transfers of the shares shall be restricted during the offering period and
for six (6) months following termination of the offering (December 31, 1994).
On or around June 1, 1995, the Fund shall seek to have its shares listed for
market quotation on a national exchange or on the NASDAQ stock quotation
system.
NUMBER OF HOLDERS
As of December 31, 1995 there were approximately 2,000 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
13
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.
ITEM 6. SELECTED FINANCIAL DATA.
As of December 31, 1995 and 1994 and for the year ended December 31,
1995 and the period from January 20, 1994 (inception) through December 31,
1994:
1995 1994
---- ----
Investment Income $ 3,070,938 $ 573,868
Net Unrealized Appreciation
(Depreciation) on Investments 698,270 0
Net Income 2,503,034 206,970
Net Income Per Share 0.59 0.08
Total Assets 41,995,915 39,476,579
Net Assets 40,500,172 39,182,585
Net Assets Per Share 9.54 9.42
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.
14
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 $12,100,000 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. Renaissance Group also formed
Renaissance II and raised net capital contributions of approximately
$39,065,000 in a public offering for the purpose of making primarily
convertible debenture investments in small and medium size public companies.
Renaissance II is currently fully invested. In the event that further
investments are considered by Renaissance I or Renaissance II, or any other
affiliated fund, the determination of whether a conflict of interest does, or
does not, exist between any party and the Fund, and the methods of the
resolution of any such conflict, shall vest in the discretion of the Board of
Directors, subject to the requirements and restrictions 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 will be 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
intention will be 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 or 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.
Further, when deemed appropriate by the Board of Directors and subject to
registration requirements, the Fund may make in kind distribution of
portfolio companies securities; however, the timing and payment of
distributions, including in-kind distributions, is at the discretion of the
Board of Directors.
Pursuant to its Investment Advisory Agreement, Renaissance Group shall
be paid annually and at the final dissolution or liquidation of the Fund, a
management incentive fee of 20% of the realized capital gains net of realized
15
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
Through 1994, the Fund raised gross initial capital of approximately
$42,213,000 in the offering and after administrative and offering expenses,
brokers' commissions and management fees had a net available capital for
investments of approximately $38,975,000.
During the year 1995, the Fund invested in 4 additional portfolio
companies with cost aggregating $9,348,546 after doing intensive due
diligence on a total of 15 potential companies. Dividends paid to investors
in 1995 amounted to $798,050. Net income in 1995 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, amounted to $2,503,034. Cash used by operating
activities in 1995 amounted to $1,234,699.
The Fund's other potential sources of available capital include gains
from capital transactions and additional investments made pursuant to the
Fund's Dividend Reinvestment Plan. In 1995, the Fund received reinvested
dividends in the amount of $424,717 and additional investments as provided
for in the Plan of $376,082. No capital gains were realized by the Fund
during 1995 and no capital gain dividend payments were made.
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
1994 Compared to 1995
The Fund became operational in January 20, 1994 and had no significant
operations prior to that time.
The Registration Statement became effective on May 25, 1994. The
offering was closed on December 31, 1994. At the close of the offering the
Fund had raised net capital of approximately $38,975,000.
During 1995, the Fund made 4 additional Portfolio investments with an
aggregate cost of $9,348,546 compared to one such investment in 1994 with an
aggregate cost of $3,600,000. As a result of the new and prior Portfolio
investments and earnings on funds held for future investments, the Fund's
1995 income totaled $3,769,208, consisting of the following components: (i)
interest income of $2,587,738; (ii) dividend income of $256,521 (iii) fee
income of $226,679 and (iv) unrealized appreciation on investments of
$698,270.
16
In the aggregate, 1995 income of $3,769,208 exceeded 1994 income of
$573,868 by $3,195,340 due to the increased number of Portfolio investments
at higher rates of return than investments in government securities, having
funds invested for the entire year 1995 as opposed to only part of the year
1994, and the unrealized appreciation on investments. There was no increase
or decrease in the value of the Fund's Portfolio investments in 1994. The
Fund's operating expenses, including management fees of $709,381 paid to the
Investment Advisor, were $1,266,174 in 1995, an increase from the 1994
expenses of $366,898 due to the full year operations.
As a result, the Fund's net income increased in 1995 to $2,503,034 as
compared to $206,970 in 1994.
JANUARY 20 (INCEPTION) THROUGH DECEMBER 31, 1994
The Fund became operational on January 20, 1994 and had no significant
operations prior to that time.
The Registration Statement became effective on May 25, 1994 and the Fund
commenced offering of the shares through the efforts of RenCap Securities,
Inc. RenCap Securities is a wholly owned subsidiary of Renaissance Group and
acted as the Dealer/Manager of the underwriting. The offering was closed on
December 31, 1994. At the close of the offering, the Fund had raised net
capital of approximately $38,975,000.
Pending selection of investments in Portfolio Companies, the Fund's
available capital was invested in U.S. government and agency obligations in
1994.
During 1994, the Fund made one investment with an aggregate cost of
$3,600,000. As a result of this investment in convertible preferred stock
and U.S. Government and agency obligations, the Fund's 1994 income totaled
approximately $574,000 consisting of three components: (i) interest income in
the aggregate amount of approximately $413,000; (ii) dividend income of
approximately $74,000; and (iii) fee income of approximately $87,000. The
estimated value of the Portfolio investments, as determined by Renaissance
Group, did not change in 1994 because the one investment in a Portfolio
Company was valued at its cost pursuant to the valuation methods specified in
the Prospectus.
The Fund incurred obligations in 1994 for the quarterly management fees
to the Fund's investment advisor, Renaissance Group, of approximately
$231,000 and to the independent Board of Directors of approximately $8,184
each. In addition, the Fund reimbursed Renaissance Group approximately
$20,346 for expenses incurred in accordance with the Investment Advisory
Agreement.
No dividends were paid to the shareholders in 1994.
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.
None.
17
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
Fund s definitive proxy statement to be filed no later than March 31, 1996
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
Fund s definitive proxy statement to be filed no later than March 31, 1996
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
Fund s definitive proxy statement to be filed no later than March 31, 1996
pursuant to regulation 14A of the General Rules and Regulations under the
Exchange Act, and amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with management and others.
Transactions, including operational responsibility, duties and
compensation, are governed by the Investment Advisory Agreement.
PAYMENTS TO OFFICERS OF RENAISSANCE GROUP
Certain officers of Renaissance Group will perform professional services
for the Fund and be compensated therefor. In that regard, Mr. Gene Roelke,
who serves as Senior Vice President, Director and General Counsel for
Renaissance Group and as General Counsel and Director of the Fund, and Mr.
Thomas Spackman, Jr., who served as Vice President and Associate General
Counsel for Renaissance Group and as Associate General Counsel of the Fund
until his resignation on September, 1995 to enter private practice, along
with their staffs, have been primarily responsible for SEC filings, and for
legal matters related to the formation and operation of the Fund, including
the preparation of investment documents and review of legal matters relating
to the Fund s investment program.
Further, Mr. Roelke will be primarily responsible for legal matters
relative to the investment activities of the Fund, including the preparation,
negotiation and closing of investment commitments and for providing
assistance in legal matters relative to the administration, collection and
sale or distribution of the investments. In connection with investment
closings, the Fund will seek to obtain reimbursement of closing costs
incurred, including legal costs from the Portfolio Company. Expenses
incurred for legal matters that relate to the administration, collection,
sale or distribution of the investments of the Fund will be charged to the
Fund, provided that in those circumstances where appropriate, the Fund will
also seek to recover such costs from the Portfolio Company. Expenses
incurred for legal matters that relate to administration of the Fund will be
charged to the Fund.
Included in expense reimbursements from the Fund in 1995 was an
aggregate of approximately $83,318 paid to Renaissance Group as reimbursement
for legal services provided to the Fund by Elroy G. Roelke as General Counsel
for the Fund and for Mr. Thomas Spackman, Jr. as Associate General Counsel,
prior to his resignation, of which $40,500 has been received from the Fund s
14
portfolio companies.
In addition, under certain circumstances, officers of Renaissance Group
may receive compensation directly from the Portfolio Companies for the
provision of services for such Portfolio Companies. All such compensation is
subject to the prior approval of the independent Board of Directors and to
compliance with the requirements of the 1940 Act. During the period ended
December 31, 1995 while in some circumstances services were provided, no
officer requested such compensation.
AFFILIATED INVESTMENT COMPANIES
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 $12,100,000 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. Renaissance Group also formed
Renaissance II and raised net capital contributions of approximately
$39,065,000 in a public offering for the purpose of making primarily
convertible debentures investments in small and medium size public companies.
Renaissance II is currently fully invested. In the event that further
investments are considered by Renaissance I or Renaissance II, or any other
affiliated fund, the determination of whether a conflict of interest does, or
does not, exist between any party and the Fund, and the methods of the
resolution of any such conflict, shall vest in the discretion of the Board of
Directors, subject to the requirements and restrictions of the 1940 Act.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 K.
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 did not file a report on Form 8 K during the fourth quarter of
1995.
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)
______
(1) Incorporated by reference from Form N-2 as filed with the Securities
and Exchange Commission on February 25, 1994 (Registration No. 33-75758).
15
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, thereunto duly authorized.
Date: March ____, 1996
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
By: ______________________________
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 Capicity in Which Signed Date
--------- ------------------------ ----
/s/Russell Cleveland
- ------------------------
Russell Cleveland Chairman, President and Director March 29,
1996
of the Fund
/s/Elroy G. Roelke
- ------------------------ Senior Vice President, General March 29,
1996
Elroy G. Roelke Counsel and Director of the Fund
/s/Barbe Butschek
- ----------------------- Senior Vice President, Secretary March 29,
1996
Barbe Butschek and Treasurer and Chief Financial
Officer
/s/Ernest C. Hill
- ---------------------- Director of the Fund March 29,
1996
Ernest C. Hill
/s/Thomas W. Pauken
- ---------------------- Director of the Fund March 29,
1996
Thomas W. Pauken
/s/Peter Collins
- ---------------------- Director of the Fund March 29,
1996
Peter Collins
16
NOTES TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Statements of Assets, Liabilities and Net Assets- F-3
December 31, 1995 and 1994
Statements of Investments- F-4 through F-6
December 31, 1995 and 1994
Statements of Operations- F-7
Years ended December 31, 1995 and 1994
Statements of Changes is Net Assets- F-8
Years ended December 31, 1995 and 1994
Statements of Cash Flows- F-9
Years ended December 31, 1995 and 1994
Notes to Financial Statements F-10 through F-14
17
INDEPENDENT AUDITORS' REPORT
The Partners
Renaissance Capital Growth & Income Fund III, Inc.:
We have audited the accompanying statements of financial condition of
Renaissance Capital Growth & Income Fund III, Inc.,
including the statements of investments, as of December 31, 1995 and 1994,
and the related statements of operations, changes in
net assets and cash flows for the year ended December 31, 1995 and the
period January 20, 1994 (inception) through December 31,
1994. 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, 1995 and 1994, by examination of
securities held in safekeeping for the Company and correspondence with
the custodian. 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, 1995
and 1994, and the results of its operations and its
cash flows for the year ended December 31, 1995 and the period
January 20, 1994 (inception) through December 31, 1994, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 9, 1996
18
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Financial Condition
December 31, 1995 and 1994
Assets 1995 1994
------ ---- ----
Cash and cash equivalents $ 3,378,905 13,066,403
Short term investments at quoted market value, cost of
$21,348,889 and $21,701,739 at December 31, 1995
and 1994, respectively (note 5) 21,550,005 21,701,739
Investments at fair value, cost of $12,948,546 and
$3,600,000 at December 31, 1995 and 1994,
respectively (note 4) 13,445,700 3,600,000
Receivable from sale of investment (note 6) 2,500,000 --
Subscriptions receivable held by escrow agent -- --
Accounts receivalbe 119,003 93,607
Interest receibale 544,356 --
Organization costs, net of accumulated amortization 457,946 582,655
---------- ----------
$41,995,915 39,476,579
Liabilities and Net Assets
---------------------------
Liabilities:
Accounts payable to Investment Advisor (note 3) $ 307,607 294,054
Dividends payable 1,188,136 --
---------- --------
1,495,743 294,054
Net assets (note 7):
Common stock, $1 par value: authorized 10,000,000
shares; 4,244,630 and 4,158,897 shares issued and
outstanding at December 31, 1995 and 1994,
respectively 4,244,630 4,158,897
Additional paid-in capital 35,531,724 34,816,658
Undistributed net investment income 723,818 206,970
---------- ----------
Net assets, equivalent to 49.54 and $9.42
per share on the 4,244,630 and 4,158,897
shares outstanding at December 31, 1995
and 1994, respectively 40,500,172 39,182,525
Commitments and contingencies (notes 3 and 4) ---------- ----------
$41,995,915 39,476,579
========== ==========
See accompanying notes to financial statements.
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
19
December 31, 1995 and 1994
--------------------------------------
Eligible Portfolio Investments - Fair
Common, Preferred Stock and Warrants Shares Cost Value
------------------------------------
Valued at fair value as determined by
the Investment Advisor (note 4):
Dwyer Group, Inc. - Common stock 504,900 $ 1,548,546 1,435,700
Interscience Computer Corporation -
Series A, cumulative convertible
redeemable preferred stock 36,000 3,600,000 3,600,000
Voice It Worldwide, Inc. - Warrant
to purchase 915,000 shares of
Voice It Worldwide, Inc.-
Common stock 1 50,000 50,000
5,198,546 5,085,700
--------- ---------
Eligible Portfolio Investments - Interest Due
Convertible Debentures Rate Date
---------------------- ---- ----
Valued at fair value as determined by
the Investment Advisor (note 4):
Packaging Research Corporation -
Convertible Debenture 9.0% 1/1/03 3,200,000 3,810,000
Poore Brothers, Inc. -
Convertible Debenture 9.0 7/1/02 2,100,000 2,100,000
Voice It Worldwide, Inc. - 8.0 11/1/02 2,450,000 2,450,000
---------- ---------
7,750,000 8,360,000
---------- ----------
$12,948,546 13,445,700
========== ==========
(Continued)
20
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments, Continued
1994
-----------------------------------
Eligible Portfolio Investments- Fair
Preferred Stock Shares Cost Value
--------------- ------ ---- -----
Valued at fair value as determined by
the Investment Advisor (note 4):
Interscience Computer Corporation -
Series A, cumulative convertible
redeemable preferred stock 36,000 $ 3,600,000 3,600,000
========= =========
See accompanying notes to financial statements.
21
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Operations
Year ended December 31, 1995 and the period
January 20, 1994 (inception) through December 31, 1994
1995 1994
---- ----
Income:
Interest $ 2,587,738 412,890
Dividend income 256,521 74,157
Commitment and other fees 226,679 86,821
--------- -------
3,070,938 573,868
--------- -------
Operating expenses (note 3):
General and administrative 556,793 135,928
Management fees 709,381 230,970
--------- -------
1,266,174 366,898
--------- -------
Operating income 1,804,764 206,970
Investment income:
Net unrealized appreciation on investments 698,270 --
--------- -------
Net income $ 2,503,034 206,970
========= =======
Net income per share $ .59 .08
========= =======
See accompanying notes to financial statements.
22
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Changes in Net Assets
Year ended December 31, 1995 and the period
January 20, 1994 (inception) through December 31, 1994
Proceeds from issuance of 4,158,897 shares, net of
syndication fees and brokers' commissions of
$3,237,438 (note 3) $ 38,975,555
Net income 206,970
----------
Net assets, December 31, 1994 39,182,525
Net income 2,503,034
Dividends (1,986,186)
Proceeds from issuance of40,141 shares (note 7) 376,082
Reinvested dividends to purchase 45,592 shares (note 7) 424,717
---------
Net assets, December 31, 1995 $ 40,500,172
==========
See accompanying notes to financial statements.
23
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Cash Flows
Years ended December 31, 1995 and the period
January 20, 1994 (inception) through December 31, 1994
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 2,503,034 206,970
Adjustments to reconcile net income
to net cash used in operating activities:
Net unrealized appreciation on investments (698,270) --
Discount accretion on short term investments (107,973) (16,272)
Amortization of organization costs 124,709 40,889
Increase in receivable from sale of investment (2,500,000) --
Increase in accounts receivable (25,396) (93,607)
Increase in interest receivable (544,356) --
Increase in organization costs -- (623,544)
Increase in accounts payable
to Investment Advisor 13,553 294,054
--------- -------
Net cash used in operating activities (1,234,699) (191,510)
--------- -------
Cash flows used in investing activities:
Investments in portfolio investments (9,348,546) (3,600,000)
Decrease (increase) in short term investments, net 460,823 21,685,467)
Net cash used in investing activities (8,887,723) (25,285,467)
Cash flows from financing activities -
Net proceeds from issuance of shares 808,257 38,543,380
Reinvested dividends to purchase shares 424,717 --
Cash dividends (798,050) --
--------- ---------
Net cash provided by financing activities 434,924 38,543,380
--------- ----------
Net increase (decrease) in cash and cash equivalents (9,687,498) 13,066,403
Cash and cash equivalents at beginning of the period 13,066,403 --
---------- ----------
Cash and cash equivalents at end of the period $ 3,378,905 13,066,403
========== ==========
Noncash financing activities:
As of December 31, 1994, $432,175 in subscriptions receivable was held in
escrow by a bank.
The fourth quarter dividends for 1995 of $1,188,136 were accrued as of
December 31, 1995.
24
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1995 and 1994
(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 $50,000,000. 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 offer the opportunity for growth. The Fund has elected to
be treated as a business development company under the Investment Company Act
of 1940, as amended (1940 Act).
(2) 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
unregistered and their value does not necessarily represent the amounts that
may be realized from their immediate sale or disposition.
(b) Statements of Cash Flows
The Fund considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(c) Federal Income Taxes
The Fund has to 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 it pays out to its
stockholders. 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 funds
investment company taxable income to its stockholders. It is the intent of
management to distribute all of its investment company taxable 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.
(d) Net income per share
Net income per share is based on the weighted average of shares outstanding
during 1995 and the period January 20, 1994 (inception) through December 31,
1994 of 4,217,428 and 2,674,060, respectively.
25
(2) Summary of Significant Accounting Policies, Continued
(e) Management Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles. The preparation of the accompanying
financial statements requires estimates and assumptions made by management of
the Fund that affect the reported amounts of assets and liabilities as of the
date of the statements of financial condition and income and expenses for the
period. Actual results could differ significantly from those estimates.
(f) Organization Costs
Costs of organizing the Fund were capitalized and are being amortized on a
straight-line basis over five years beginning with the commencement of the
Fund's activities.
(g) Financial Instruments
In accordance with the reporting requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," the Company calculates the fair value of its financial
instruments and includes this additional information in the notes to the
financial statements when the fair value is different than the carrying value
of those financial instruments. When the fair value reasonably approximates
the carrying value, no additional disclosure is made.
(3) Management and Organization Fees
Pursuant to the Prospectus, an initial share purchase of $100,000 was made by
the Investment Advisor. Upon admission of additional stockholders at the
closing of the offering described in note 1 above, the Investment Advisor has
the right to withdraw from the Fund and shall be entitled to receive a return
of initial capital of $100,000 without interest.
The Investment Adviser for the Fund is registered as an investment adviser
under the Investment Advisers Act of 1940. Pursuant to an Investment
Advisory Agreement, the Investment Advisor performs certain services,
including certain management, investment advisory and administrative services
necessary for the operation of the Fund. In addition, under this 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
Investment Advisory Agreement, the Prospectus and the original offering
document are as follows:
In connection with the offering of the shares, the Fund paid the Investment
Advisor and an affiliate of the Investment Advisor $3,237,438 in 1994. Such
fees were for performance of organizational, offering and marketing services
by the Investment Advisor and an affiliate in connection with the offering.
26
(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 paid, during the year ended December 31,
1995 and the period ended December 31, 1994, $709,381 and $230,970,
respectively for such operational management fees.
The Investment Advisor was reimbursed by the Fund for administrative expenses
paid by the Investment Advisor on behalf of the Fund. Such reimbursements
were $295,641 and $20,346, for the year ended December 31, 1995 and the
period ended December 31, 1994, 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 unrealized depreciation. For the year ended December 31,
1995 and the period ended December 31, 1994 no incentive fees were incurred.
(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) (note 5). Under the
provisions of the 1940 Act at least 70% of the Fund's assets must be invested
in Eligible Portfolio Companies. These investments are carried in the
statements of financial condition as of December 31, 1995 and 1994, at fair
value, as determined in good faith by the Investment Advisor. The
investments held by the Fund are generally convertible after five years into
the common stock of the issuer at a set conversion price. The common stock
acquired upon exercise of the conversion feature is generally unregistered
and is thinly to moderately traded, but is not otherwise restricted. The
Fund may register and sell such securities at any time with the Fund paying
the costs of registration. Dividends or interest on the convertible
securities is generally payable monthly. The investments often have call
options, usually commencing three years subsequent to issuance, at prices
specified in the investment agreements.
The Prospectus and the original offering document specify that securities
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 (pink sheets) 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.
27
(4)Investments, Continued
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.
For this purpose, an investment that is convertible into a security for which
market quotations are readily available or otherwise contains the right to
acquire such a security will be deemed to be an investment for which market
quotations are readily available.
The fair value of investments for which no 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 prospectus. In the case of unsuccessful operations, the appraisal
may be based upon liquidation value. Appraisal valuations are necessarily
subjective.
The financial statements include investments valued at $13,445,700 (32% of
total assets) and $3,600,000 (9% of total assets) as of December 31, 1995 and
1994 respectively, whose value has been estimated by the Investment Advisor
in the absence of a readily ascertainable market value. Because of the
inherent uncertainty of valuation, the estimated value may differ
significantly from the value that would have been used had a ready market for
the investments existed, and the difference could be material.
(5)Short term Investments
Short term investments are comprised of U.S. Government and Agency
obligations bearing interest at ranges of 5.47% to 5.48% and maturities
between March 28, 1996 and April 25, 1996 as of December 31, 1995 and at 7.5%
maturing between March 3, 1995 and December 14, 1995 as of December 31, 1994.
Such investments qualify for investment as permitted in Section 55(a)(1)
through (5) of the 1940 Act.
(6)Receivable from Sale of Investment
As of December 31, 1995, the Fund had advanced $2,500,000 to a portfolio
company. The Fund, however rescinded its investment and the proceeds were
due from the portfolio company as of December 31, 1995. The entire
$2,500,000 was reimbursed in full to the Partnership subsequent to
December 31, 1995.
(7)Purchase of Additional Shares
During the year ended December 31, 1995, the Fund extended the period in
which stock could be sold resulting in an additional 40,141 shares sold in
1995.
Also, in accordance with Fund guidelines, certain shareholders reinvested
their dividends in the Fund, purchasing 45,592 shares of stock in 1995.