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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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, 1996 Commission File No. 33-75758
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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
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
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 amendment to this Form 10-K. ( X )
As of December 31, 1996, there were 4,339,422 shares of $1.00 par value
of Registrants stock outstanding. The aggregate market value of the stock
held by nonaffiliates, based on the average bid and ask prices of such stock
as of December 31, 1996 $30,693,784. 123,822 shares of stock held by
affiliates were valued at $901,548.
Documents Incorporated by Reference: Certain portions of the
Registrant s definitive proxy statement to be filed no later than April 4,
1997 pursuant to Regulation 14A are incorporated by reference in Items 10
through 13 of Part III of this Annual Report on Form 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. During the years ended
December 31, 1996 and 1995, in accordance with Fund guidelines, additional
contributions were received from certain shareholders which were used to
purchase 10,617 and 40,141 additional Fund shares, respectively, used
directly by the Fund. Also, in accordance with Fund guidelines certain
shareholders reinvested their dividends in the Fund, purchasing 74,175 and
45,592 Fund shares issued directly by the Fund in 1996 and 1995,
respectively. These contributions and dividend reinvestments resulted in
total shares issued at December 31, 1996 of 4,339,422 and 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.
At December 31, 1996, the Fund had made ten (10) portfolio investments
aggregating $25,708,570 and is seeking additional investment opportunities.
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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
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, 1996 the Fund's investment assets were classified by
amount as follows:
Classification Cost Percentage
of Investments Assets
-------------- ---- ---------------------
Eligible Portfolio Companies $22,882,471 89%
Other Portfolio Companies $ 2,826,099 11%
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.
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
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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 assets 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,
(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:
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(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 to acquire 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
policies will 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;
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(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.
On September 19, 1996, Renaissance Capital Growth & Income Fund III,
Inc. as the "Company" and Renaissance Capital Group, Inc. as 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 Securities and Exchange
Commission (the "Commission") permitting the Company to co-invest with
companies that are affiliated with the Investment Advisor, including
Renaissance US Growth & Income Trust PLC as "Advisor Affiliate". The order
was granted on December 30, 1996.
In order for the Company and the Investment Advisor to make co-
investments with the same entity, the following conditions apply:
(a) the Investment Advisor will determine if the investment is eligible
for investment by the Company;
(b) the Investment Advisor will determine an appropriate amount that
the Company should invest;
(c) the Investment Advisor will distribute written information,
including the amount of the proposed investment, concerning all co-investment
opportunities to the Company s Independent Directors. The Company will co-
invest only if a required majority of the Company s Independent Directors
conclude, prior to the acquisition of the investment, the investment should
be made;
(d) the Company 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 Company and the Advisor
Affiliate;
(f) the Company 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 Company 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 Company s Independent Directors under section 57(f)(3)
of the Act as if each of the investments permitted under these conditions
were approved by the Company s Independent Directors under section 57(f); and
(h) no Independent Director of the Company will be a director or
general partner of any Advisor Affiliate with the Company co-investors.
On October 30, 1996 the Advisor Affiliate, made an investment of
$1,200,000 in Topro, Inc. Prior to this investment by the Advisor Affiliate,
in February of 1996, the Company had made an original investment of
$2,500,000. This investment was made prior to the entry of an order. At the
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time the original investment was made, an additional loan from the Advisor
Affiliate was not contemplated. Therefore, the investment of the Advisor
Affiliate did not fall within the prohibited transactions and an order of
exemption was not necessary.
After the order was granted by the Commission, the Advisor Affiliate and
the Company made a co-investment into Integrated Security Systems, Inc. of
$2,500,000 each on December 31, 1996.
The Company anticipates making additional investments with the Advisor
Affiliate in the future.
INVESTMENT ADVISERS ACT OF 1940 ("ADVISERS ACT") AND INVESTMENT ADVISER'S
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 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 at all times be construed so as to comply with
the Advisers Act and the 1940 Act.
FUND PORTFOLIO INVESTMENTS
As of December 31, 1996 the Fund has made ten (10) investments in
Portfolio Companies eight of which meet the criteria of investments in
Eligible Portfolio Companies:
Bentley Pharmaceuticals, Inc.
- - -----------------------------
On February 20, 1996, Renaissance Capital Growth & Income Fund III, Inc.
purchased 800 Units of Bentley Pharmaceuticals, Inc., each unit consisting of
a one thousand dollar ($1,000) principal amount 12% Convertible Senior
Subordinated Debenture due February, 2006; and 1,000 Class A Redeemable
Warrants, each to purchase one share of common stock and one Class B
Redeemable Warrant. The Partnership paid $1,000 per unit for a total
investment of $800,000 of which $55,200 was allocable to the Warrants and
$744,800 to the 12% Convertible Subordinated Debentures.
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The Debentures, which are unsecured, are convertible prior to maturity
beginning their Anniversary date (one year from date of issuance), into
shares of Common stock of Bentley Pharmaceuticals, Inc. at a conversion price
per share which is the lesser of $2.50 or 80% of the average closing price of
the common stock on the American Stock Exchange for the 20 consecutive
trading days immediately preceding the Anniversary date. Interest is payable
quarterly.
Each class A Redeemable Warrant entitles the holder, for a period of
three years, to purchase one share of common stock and one Class B Redeemable
Warrant at a price of $3.00 per share. On 30 days prior written notice, the
Company may redeem all of the warrants for $0.05 per warrant if the per share
closing price for the underlying common stock on the American Stock Exchange
for each of the 20 consecutive trading days immediately preceding the record
date for redemption equals or exceeds 150% of the then exercise price.
On May 28, 1996, the Company announced it would permit public trading of
its debentures and warrants separately. During 1996, the Fund sold 407,000
of the Class A Redeemable Warrants for an aggregate gain of approximately
$406,700. Subsequent to December 31, 1996, the Fund sold its remaining
393,000 Class A Redeemable Warrants for a gain of $419,905.
CONTOUR MEDICAL, INC.
- - ---------------------
The Company is a distributor of medical supplies and prepackaged kits
for medical uses as well as a manufacturer of foam and vinyl based products
for medical applications. It is majority owned by Retirement Care
Associates, an Atlanta-based operator of retirement care centers and nursing
homes.
On July 12, 1996, the Fund invested $2,500,000 in a 9% Convertible
Debenture of Contour Medical, Inc. The Debenture has mandatory monthly
principal installments beginning July 1, 1999, which will amortize
approximately one-half of the principal prior to maturity on July 1, 2003.
The Debentures are callable at 120% of par, once specific earnings per share
and bid price tests of the underlying common stock are met.
At the option of the Fund, in multiples of $100,000, the Debentures are
convertible into Common Stock of Contour at $5.00 per share. The second
conversion price is subject to certain anti-dilution provisions and is
subject to a one-time adjustment in 1997. The adjustment is predicated on
earnings and the bid price of the Company s stock. The Fund has the right to
demand stock registration and certain piggyback stock registration rights.
Costs of two demand registrations are at the Company s expense if commenced
subsequent to July 12, 1998.
In addition to the Fund s investment on July 12, 1996, Renaissance US
Growth & Income Trust PLC ("RUSGIT"), a public limited company registered in
England and Wales, made an identical investment of $2,500,000 in Contour
Medical, Inc. The investment by RUSGIT was made on a pari-passu basis with
the Fund.
On February 18, 1997, Sun Healthcare Group, Inc., an Albuquerque, New
Mexico based operator of nursing homes, announced it would acquire all of the
outstanding publicly held shares of Contour Medical, Inc. as part of its
acquisition of Contour s majority owner, Retirement Care Associates. The
announced purchase price of Contour s shares was $8.50 per share, payable in
cash or Sun Healthcare Group, Inc. stock, at the option of the acquirer. The
Fund' Debenture is convertible into 500,000 shares of Contour s common stock
at a price of $5.00 per share.
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The Fund has a 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.
DWYER GROUP, INC.
- - -----------------
Dwyer Group, Inc. is a holding company for service-based businesses
providing specialty services internally through franchising.
On June 2, 1995 Renaissance purchased in the open market 4,000 shares of
Dwyer Group, Inc 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.
The Fund first acquired 4,000 shares of Dwyer in the open market on June
2, 1995 at a cost of $12,320. Purchases in the market by month have been:
Month No. of Cost of
Purchased Shares Shares
----------- -------- ---------
June, 1995 43,100 $ 135,242
July, 1995 20,000 71,600
November, 1995 33,500 91,474
December, 1995 38,300 105,230
February, 1996 17,000 47,872
March, 1996 54,500 147,839
April, 1996 5,000 13,420
May, 1996 118,600 296,505
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330,000 $909,182
------- ----------
The Partnership does not have a Director Designee on the Board of
Directors of Dwyer Group, Inc.
INTEGRATED SEDURITY SYSTEMS, INC.
- - ---------------------------------
The Company is a holding company which designs, develops, manufactures,
sells and services commercial security and traffic control devices. In
addition, it sells fully integrated turnkey security systems that control and
monitor access to governmental, commercial and industrial sites.
On December 31, 1996, the Fund invested $2,300,000 in a 9% Convertible
Debenture of Integrated Security Systems, Inc. The Debenture has a mandatory
monthly principal installments beginning December 1, 1999, which will
amortize approximately one-half of the principal prior to maturity on
December 1, 2003. The Debentures are callable at 120% of par, once specific
earnings per share and bid price tests of the underlying common stock are
met.
At the option of the Fund and in multiples of $10,000, the Debentures
are convertible into common stock of Integrated Security Systems, Inc. at
$1.05 per share. The conversion price is subject to certain anti-dilution
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provisions and is subject to a one-time adjustment in 1997. The adjustment
is predicated on earnings and the bid price of the Company s stock. The Fund
has the right to demand stock registration and certain piggyback stock
registration rights. Costs of two demand registrations are at the Company s
expense if commenced subsequent to July 12, 1998.
In addition to the Fund s investment on December 31, 1996, RUSGIT made
an identical investment of $2,300,000 in Integrated Security Systems, Inc.
The investment by RUSGIT was made on a pari-passu basis with the Fund.
The Fund has a 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.
INTERSCIENCE COMPUTER CORPORATION.
- - ----------------------------------
Interscience provides third party maintenance to large data centers and
high-speed production printers. Interscience s field engineers provide top
quality on-site care, operational advice and prompt delivery of parts.
Interscience also develops and markets consumable products used in various
printing processes. Interscience experiences a high rate of reoccurring
revenue because of their long- term service contracts.
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.
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 2nd 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
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 $3,600,000). The Conversion Price shall be
subject to further adjustment including anti-dilution provisions.
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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 Stock 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.
On April 4, 1996, the Fund purchased 4,000 shares of Interscience
Computer Corporation s Series B Cumulative Convertible Preferred Stock,
stated value $100 per share for $400,000. The holders of the stock are
entitled to receive dividends at an annual rate of 7.5%, the dividends to be
cumulative. The stock bears voting privileges similar to those of the Series
A stock discussed above. The Series B Preferred stock is convertible into
common at an initial rate of $5.00 per share. The conversion is subject to
anti-dilution provisions. The Series B Preferred stock also carries the
failure to convert or redeem provisions if outstanding after September 23,
2000 as the Series A Preferred stock.
On March 6, 1997, the Company filed a voluntary petition for
reorganization under Chapter 11 of the bankruptcy code.
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.
JAKKS PACIFIC, INC.
- - -------------------
On December 31, 1996, the Fund invested $3,000,000 in a 9% Convertible
Debenture of JAKKS Pacific, Inc. The Debenture has mandatory monthly
principal installments beginning December 31, 1999, which will amortize
approximately one-half of the principal prior to maturity on December 31,
2003. The Fund has the option of redemption in the event of the death or
disability of the Company s CEO, Mr. Jack Friedman. The Loan Agreement
requires key employee insurance on Mr. Friedman s life to meet this
requirement.
At the option of the Fund and in multiples of $10,000, the Debentures
are convertible into common stock of JAKKS at an initial price of $8.50 per
share. The conversion price is subject to certain anti-dilution provisions
and is subject to a one-time adjustment. If the Company has achieved
proforma before tax earnings of $2,928,500 at December 31, 1996, the
conversion price will be adjusted to $9.00. However, if this level is not
achieved, the conversion price will be adjusted to 76% of the average closing
bid price of common stock for the 21 consecutive trading days following the
Company s public press release of its 1996 fiscal year end financial results.
The Fund has the right to demand stock registration and certain piggyback
stock registration rights. Costs of two demand registrations are at the
Company s expense if commenced subsequent to December 31, 1998.
12
The Company is engaged in the development, marketing and distribution of
toys and electronic products for children.
In addition to the Fund s investment on December 31, 1996, RUSGIT made
an identical investment of $3,000,000 in JAKKS Pacific, Inc. The investment
by RUSGIT was made on a pari-passu basis with the Fund.
PACKAGING RESEARCH CORPORATION
- - ------------------------------
Packaging Research Corporation manufactures food processing equipment
and through its subsidiary, Mama Rizzo s, manufactures and distributes
premium pasta sauces.
On March 4, 1997, Packaging Research Corporation filed to reorganize
under Chapter 11. The Company has filed a motion which is pending to sell
substantially all of its operating assets.
The Fund has a right to designate a nominee to the Board of Directors of
the Company, which disignee may serve as a Director or Advisory at his or her
election.
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
demand stock registration and certain piggyback stock registration rights and
at least two registrations at the Company s expense.
On August 23, 1996, Mama Rizzo s, Inc. ("MRI") the Company s wholly
owned subsidiary, filed a voluntary petition seeking relief under Chapter 11
of the Bankruptcy Code. Subsequent to that filing, the Fund advanced
$93,900, with court approval, in order to facilitate the orderly completion
of inventory and to pay administrative costs. MRI has sold its equipment and
inventories as well as all intangibles. A sale of the remaining office
equipment is currently being planned.
PRC s bank and first lien holder has notified PRC it is in default and
is demanding payment. The Company has suffered from an inability to obtain
the working capital necessary to complete its orders. The Independent
Directors of the Fund have elected to provide a reserve for valuation on this
investment in order to reflect the Fund s estimate of recoverable value.
13
PORE BROTHERS, INC.
- - --------------------
Poore Brothers 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.
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 intangible assets 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 Fund has the right to demand stock registration and certain
piggyback stock registration rights, and at least two registrations will be
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.
On December 11, 1996, the Fund converted $311,429 of its debentures into
285,715 shares of the Company s common stock which were sold on that date as
part of the Company s initial public offering. The Fund received $900,002
for the stock resulting in a gain of $588,573. The Fund has agreed not to
proceed with any additional conversion or sale without the agreement of the
Company s underwriter until January 1, 1998.
TOPRO, INC.
- - -----------
Topro, Inc. provides control system integration products and services.
It also is a distributor and manufacturer s representative of component
devises used in control applications.
On February 21, 1996, the Fund invested $1,500,000 in a 9% convertible
debenture of Topro, Inc. The Debenture has mandatory monthly principal
installments beginning March 1, 1999, which will amortize approximately one-
half of the principal prior to maturity on March 1, 2003. The Debentures are
callable at 120% of par, once specific earnings per share and bid price tests
of the underlying common stock are met.
The Fund received Warrants to purchase 225,000 shares of the Company s
stock on February 21, 1996. These Warrants are exercisable at a price of
$2.00 per share and expire on March 31, 1999.
14
On March 5, 1996, the Fund invested in Topro, Inc. Debenture No. 2 in
the amount of $1,000,000. This Debenture contains substantially the same
covenants and terms as Debenture No. 1.
The Fund received Warrants to purchase 150,000 shares of the Company s
stock on March 5, 1996. These Warrants are exercisable at a price of $2.00
per share and will expire on March 31, 1999.
On June 17, 1996, the Fund invested in Topro, Inc. Debenture No. 3 in
the amount of $1,000,000. This Debenture contains substantially the same
covenants and terms as Debenture No. 1 and No. 2, and is included by
amendment to the original Loan Agreement. The terms and conditions of this
Debenture No. 3 were substantially the same as the first two Debentures,
except for the initial conversion price being set at $2.25 per share in
Debenture No. 3 and a maturity date of June 1, 2003. The initial conversion
price of Debenture No. 3 was reduced to $1.50 by subsequent agreement.
In addition to the Fund s investments in Debenture No. s 1, 2 and 3
discussed above, RUSGIT made an identical investment of $1,200,000 in
Convertible Debentures of Topro, Inc. on October 30, 1996. The investment by
RUSGIT was under the same terms and conditions as the Fund s investment with
the exception of timing. The conversion rate of the RUSGIT investment is at
$1.50 per share,
The Fund has a 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 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.
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 Warrants may be redeemable for $45,750. Effective December 31, 1996, the
conversion rate on the Debentures was reset from $2.625 per share to $0.95
per share and the Warrant price was reset at $1.25 per share.
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 one-quarter inch thick.
15
The Fund has the right to demand stock registration and certain
piggyback stock registration rights, and at least two registrations will be
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 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 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
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.
16
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 twelve 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 General Partner and manager
to Renaissance Capital Partners, Ltd. ("Renaissance I") and Renaissance
Capital Partners II, Ltd. ("Renaissance II") as well as the Investment
Advisor to Renaissance U.S. Growth & Income Trust PLC ("RUSGIT").
Renaissance I and Renaissance II are BDC s with investment objectives similar
to those of the Registrant. Renaissance I and Renaissance II are 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 Partnership. RUSGIT will invest primarily
pari-passu with Renaissance III. In 1996, RUSGIT raised a net investment of
approximately $30,789,000 and invested in four investments totaling
$9,000,000. In addition, Renaissance Capital Group, Inc. 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.
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 1996.
17
PART II
ITEM 5. MARKET FOR REGISTRATN 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 exists for those shares. 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. On April 30, 1996, the Fund s common stock began trading on
the Nasdaq National Market under the trading symbol RENN.
NUMBER OF HOLDERS
As of December 31, 1996 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
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, 1996, 1995 and 1994 and for the year ended December
31, 1995 and the period from January 20, 1994 (inception) through December
31, 1994:
1996 1995 1994
---- ---- ----
Gross Income, (including
realized gain) $ 3,843,726 $ 3,070,938 $ 573,868
Net Unrealized Appreciation
on Investments 7,779,315 698,270 0
Net Income 10,060,620 2,503,034 206,970
Net Income Per Share 2.32 0.59 0.08
Total Assets 50,688,180 41,995,915 39,476,579
Net Assets 49,130,320 40,500,172 39,182,585
Net Assets Per Share 11.32 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
18
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 $12,100,000 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 Spring of 1996, Renaissance Capital Group, Inc. formed RUSGIT,
which invests in privately placed convertible debentures issued by companies
similar to the investments of the Partnership. RUSGIT will invest primarily
pari-passu with Renaissance III. In 1996, RUSGIT raised a new investment of
approximately $30,789,000, and as of December 31, 1996, invested in four
investments totaling $9,000,000.
The determination regarding the existence of conflict of interest
between these affiliated investment funds and the Registrant, and the
resolution of any such conflict, shall vest 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 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.
19
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
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 four additional portfolio
companies with cost aggregating $9,348,546 after doing intensive due
diligence on a total of fifteen 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 Fund Guidelines of $376,082. No capital gains were realized by
the Fund during 1995 and no capital gain dividend payments were made.
During the year ended December 31, 1996, the Fund invested $13,099,536
in six new portfolio investments and in follow-on investments. Dividends
paid to investors in 1996 amounted to $2,406,381 including 1995 accrued
dividends paid in 1996 and shares purchased for reinvestment amounted to
$100,217. 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 amounted
to $10,060,620. The net cash provided by operating activities was
$4,498,954. The Fund also received $1,334,808 upon the sale of portfolio
20
investments and $357,250 was received from additional investments in the
Fund s stock while dividend reinvestments were $685,416.
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
1995 Compared to 1996
- - ---------------------
During 1996, the Fund made additional portfolio investments aggregating
$13,099,536 compared to $9,348,546 in 1995. As a result of these investments
and earnings held for future investments, the Fund s 1996 total income was
$11,623,041, consisting of the following components: (i) interest income of
$2,182,594; (ii) dividend income of $306,190; (iii) fee income of $359,323;
(iv) realized gains on investments of $995,296; and (v) unrealized
appreciation on investments of $7,779,315.
The aggregate 1996 income of $11,623,041 exceeded the aggregate 1995
income of $3,769,208 primarily as a result of the realized gains of $995,296
and an increase in unrealized appreciation to $7,779,315 in 1996 as compared
to $698,270 in 1995. The Fund s operating expenses incurred in 1996 were
$1,562,421 as compared to $1,266,174 in 1995. During 1996, an incentive fee
of $199,039 was paid to the Investment Advisor representing 20% of the Fund s
realized capital gains, net of any realized capital losses. In addition, the
management fees increased $69,798 in 1996.
As a result, the Fund s net income increased to $10,060,620 in 1996 as
compared to $2,503,034 in 1995.
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 four 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.
21
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.
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.
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 April 4, 1997
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 April 4, 1997
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 April 4, 1997
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 Capital Group, Inc. will perform
professional services for the Registrant and be compensated therefor. In
that regard, Mr. Roelke, who served as Senior Vice President, General Counsel
and Director for Renaissance Capital Group, Inc. and as General Counsel and
Director of the Fund, until his retirement on December 31, 1996, has been
primarily responsible for SEC filings, and for legal matters related to the
22
formation and operation of Registrant, including the preparation of
investment documents and review of legal matters relating to the Fund s
investment program.
Included in general and administrative expenses of the Fund for 1996 was
an aggregate of approximately $17,810 paid to Renaissance Capital Group as
reimbursement for legal services provided to the Fund by Elroy G. Roelke, as
General Counsel for the Fund. In 1995, in addition to charges by Elroy G.
Roelke, the Fund incurred similar charges from Mr. Thomas J. Spackman, Jr.,
who was Associate General Counsel, until his resignation on September 15,
1995, when he entered private practice. Charges of this nature included in
1995 were $83,318.
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 funds. Specifically, Renaissance Group has formed Renaissance
Capital Partners, Ltd. ("Renaissance I") and raised net capital contributions
of approximately $12,100,000 in a private placement offering and Renaissance
Capital Partners II, Ltd. ("Renaissance II") and raised net capital
contributions of approximately $39,065,000. Both Renaissance I and
Renaissance II are fully invested.
The determination of whether a conflict of interest does, or does not
exist between any party and the Fund in the future, and the methods of
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 10-K
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 8-K
The Fund did not file a report on Form 8 K during the fourth quarter of
1996.
23
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).
24
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 29, 1997
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
/s/ Russell Cleveland
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 Capacity in Which Signed Date
- - ---------- ------------------------ -----
/s/ Russell Cleveland
- - ---------------------
Russell Cleveland Chairman, President and Director March 28, 1997
of the Fund
/s/ Barbe Butschek
- - --------------------
Barbe Butschek Senior Vice President, Secretary March 28, 1997
and Treasurer and Chief Financial
Officer
/s/ Ernest C. Hill
- - --------------------
Ernest C. Hill Director of the Fund March 28, 1997
/s/ Thomas W. Pauken
- - --------------------
Thomas W. Pauken Director of the Fund March 28, 1997
/s/ Peter Collins
- - --------------------
Peter Collins Director of the Fund March 28, 1997
/s/ Richard W. Snyder
- - ---------------------
Richard W. Snyder Director of the Fund March 28, 1997
25
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Statements of Financial Condition F-3
December 31, 1996 and 1995
Statements of Investments- F-4 through F-6
December 31, 1996 and 1995
Statements of Operations - F-7
Years ended December 31, 1996, 1995 and
January 20, 1994 (inception) through December 31, 1994
Statements of Changes in Net Assets F-8
Years ended December 31, 1996, 1995 and
January 20, 1994 (inception) through December 31, 1994
Statements of Cash Flows - F-9
Years ended December 31, 1996, 1995 and
January 20, 1994 (inception) through December 31, 1994
Notes to Financial Statements F-10 through F-14
26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
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, 1996 and 1995, 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, 1996 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, 1996 and 1995, 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, 1996 and 1995, and the results of
its operations and its cash flows for each of the years in the two-year
period ended December 31, 1996 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 7, 1997
27
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Financial Condition
December 31, 1996 and 1995
Assets 1996 1995
-------- ---- ----
Cash and cash equivalents $ 15,841,272 $ 3,378,905
Short term investments at quoted
market value, cost of $21,348,889
at December 31, 1995 (note 5) - 21,550,005
Investments at fair value, cost of
$25,708,570 and $12,948,546
at December 31, 1996 and 1995,
respectively (note 4) 34,186,155 13,445,700
Receivable from sale of investment (note 6) - 2,500,000
Accounts receivable 169,486 119,003
Interest receivable 158,029 544,356
Organization costs, net of accumulated
amortization 333,238 457,946
---------- ----------
$ 50,688,180 $ 41,995,915
========== ==========
Liabilities and Net Assets
--------------------------
Liabilities:
Accounts payable $ 36,077 $ -
Accounts payable-affiliate (note 3) 523,923 307,607
Dividends payable 997,860 1,188,136
--------- ---------
1,557,860 1,495,743
--------- ---------
Net assets (note 7):
Common stock, $1 par value; authorized
20,000,000 shares; 4,339,422 and 4,244,630
shares issued and outstanding at December 31,
1996 and 1995, respectively (note 3) 4,339,422 4,244,630
Additional paid-in capital 36,222,567 35,531,724
Undistributed net investment income 8,568,331 723,818
---------- ----------
Net assets, equivalent to $11.32
and $9.54 per share on the 4,339,422
and 4,244,630 shares outstanding
at December 31, 1996 and 1995,
respectively 49,130,320 40,500,172
Commitments and contingencies (notes 3 and 4)
---------- ----------
$ 50,688,180 $ 41,995,915
========== ==========
See accompanying notes to financial statements.
28
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1996 and 1995
1996
-----------------------------------------
Eligible Portfolio Investments-
Convertible Debentures and Interest Due Fair
Notes Receivable rate date Cost Value
---------------- ------- ----- ----- ------
Valued at fair value as determined
by the Investment Advisor (note 4):
Voice It Worldwide, Inc. -
Convertible debenture 8.0% 11/1/02 $ 2,450,000 $2,828,750
Packaging Research Corporation (1):
Convertible debenture 9.0 1/1/03 33,200,000 800,000
Note receivable 15.0 2/28/97 93,900
Poore Brothers, Inc. -
Convertible debenture 9.0 7/1/02 1,788,571 5,926,945
Contour Medical, Inc. -
Convertible debenture 9.0 7/1/03 2,500,000 2,500,000
Topro, Inc. -
Convertible debenture 9.0 varies 3,500,000 5,707,500
Jakks Pacific, Inc. -
Convertible debenture 9.0 12/31/03 3,000,000 3,000,000
Integrated Securities Systems -
Convertible debenture 9.0 12/31/03 2,300,000 7,414,047
---------- ----------
18,832,471 28,177,242
Other Portfolio Investments -
Convertible Debenture
---------------------
Valued at fair value as determined by
the Investment Advisor (note 4):
Bentley Pharmaceuticals, Inc. -
Convertible debenture 12.0 2/13/06 744,800 1,040,000
-------- ----------
744,800 1,040,000
------- ----------
(1) Interest payments under the terms of the convertible debenture or note
receivable are delinquent as of December 31, 1996.
(Continued)
29
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments, Continued
1996
-------------------------------------
Eligible Portfolio Investments
- Common Stock, Preferred Stock Fair
and Warrants 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 2,600,000
Series B, cumulative convertible
preferred stock 4,000 400,000 400,000
Topro, Inc. - warrants to purchase
375,000 shares of Topro, Inc.
common stock 375,000 - 220,313
Voice It Worldwide, Inc. - warrants
to purchase 25,000 shares of
Voice It Worldwide, Inc. common
stock 25,000 - -
Voice It Worldwide, Inc. - warrant
to purchase 915,000 shares of
Voice It Worldwide, Inc.
common stock 1 50,000 50,000
--------- ---------
4,050,000 3,270,313
--------- ---------
Other Portfolio Investments -
Common Stock and Warrants
-------------------------
Dwyer Group, Inc. - common stock 700,000 2,054,182 1,305,600
Bentley Pharmaceuticals, Inc. -
warrants to purchase 393,000
shares of Bentley Pharmaceuticals,
Inc. common stock 393,000 27,117 393,000
---------- ----------
2,081,299 1,698,600
---------- ----------
$ 25,708,570 34,186,155
========== ==========
(Continued)
30
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments, Continued
1995
-------------------------------
Eligible Portfolio Investments -
Common Stock, Preferred Stock and Fair
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.-
Convertible debenture 8.0 11/1/02 2,450,000 2,450,000
--------- ---------
7,750,000 8,360,000
--------- ---------
$ 12,948,546 13,445,700
========== ==========
See accompanying notes to financial statements.
31
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Operations
Years ended December 31, 1996 and 1995 and the
period January 20, 1994 (inception) through December 31, 1994
1996 1995 1994
---- ---- ----
Income:
Interest $ 2,182,917 2,587,738 412,890
Dividend income 306,190 256,521 74,157
Commitment and other fees 359,323 226,679 86,821
--------- --------- -------
2,848,430 3,070,938 573,868
--------- --------- -------
Operating expenses (note 3):
General and administrative 584,183 556,793 135,928
Incentive fee 199,059 - -
Management fees 779,179 709,381 230,970
--------- --------- -------
1,562,421 1,266,174 366,898
--------- --------- -------
Operating income 1,286,009 1,804,764 206,970
Investment income:
Net unrealized appreciation
on investments 7,779,315 698,270 -
Net realized gain on investments 995,296 - -
--------- -------- -------
Investment income 8,774,611 698,270 -
--------- -------- -------
Net income $ 10,060,620 2,503,034 206,970
========== ========= =======
Net income per share (note 1(d)) $ 2.32 .59 .08
========== ========= =======
See accompanying notes to financial statements.
32
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Changes in Net Assets
Years ended December 31, 1996 and 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 of 40,141 shares (note 7) 376,082
Reinvested dividends to purchase 45,592 shares (note 7) 424,717
----------
Net assets, December 31, 1995 40,500,172
Net income 10,060,620
Dividends (2,216,105)
Proceeds from issuance of 10,617 shares (note 7) 100,217
Reinvested dividends to purchase 74,175 shares (note 7) 685,416
----------
Net assets, December 31, 1996 $ 49,130,320
==========
See accompanying notes to financial statements.
33
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Cash Flows
Years ended December 31, 1996 and 1995 and the period
January 20, 1994 (inception) through December 31, 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 10,060,620 2,503,034 206,970
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Net unrealized appreciation
on investments (7,779,315) (698,270) -
Net realized gain on investments (995,296) - -
Discount accretion on short-term
investments - (107,973) (16,272)
Amortization of organization costs 124,708 124,709 40,889
Increase (decrease) in receivable
from sale of investment 2,500,000 (2,500,000)
Increase in accounts receivable (50,483) (25,396) (93,607)
Decrease (increase) in interest
receivable 386,327 (544,356) -
Increase in organization costs - - (623,544)
Increase in accounts payable 36,077 - -
Increase in accounts payable-
affiliate 216,316 13,553 294,054
--------- ---------- -------
Net cash provided by (used in)
operating activities 4,498,954 (1,234,699) (191,510)
--------- ---------- -------
Cash flows used in investing activities :
Purchases of investments (13,099,536) (9,348,546) (3,600,000)
Proceeds from sale of investments 1,334,808 - -
Decrease in short term investments,
net 21,348,889 460,823 (21,685,467)
---------- ---------- ----------
Net cash provided by (used in)
investing activities 9,584,161 (8,887,723)(25,285,467)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of shares 100,217 808,257 38,543,380
Reinvested dividends to purchase
shares 685,416 424,717 -
Cash dividends (2,406,381) (798,050) -
--------- ---------- ----------
Net cash provided by (used in)
financing activities (1,620,748) 434,924 38,543,380
--------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents 12,462,367 (9,687,498) 13,066,403
Cash and cash equivalents at
beginning of the period 3,378,905 13,066,403 -
---------- ---------- ----------
Cash and cash equivalents at
end of the period $ 15,841,272 3,378,905 13,066,403
========== ========= ==========
Noncash financing activities:
The fourth quarter dividends of $997,860 and $1,188,136 were accrued as of
December 31, 1996 and 1995, respectively.
As of December 31, 1994, $432,175 in subscriptions receivable were held in
escrow by a bank.
See accompanying notes to financial statements.
34
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1996, 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 primarily 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 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 investment company
taxable income to its shareholders. 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.
(Continued)
35
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC
Notes to Financial Statements
(d) Net Income Per Share
--------------------
Net income per share is based on the weighted average of shares
outstanding during 1996, 1995 and the period January 20, 1994
(inception) through December 31, 1994 of 4,332,390, 4,217,428 and
2,674,060, respectively.
(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 Fund 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
shareholders at the closing of the offering described in Note 1 above,
the Investment Advisor had the right to withdraw from the Fund and was
entitled to receive a return of initial capital of $100,000 without
interest. The right by the Investment Advisor to withdraw from the Fund
was not elected and the initial capital contribution was retained by the
Fund, therefore, increasing the shares issued by 10,000 in 1996.
(Continued)
36
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC
Notes to Financial Statements
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.
The Investment Advisor receives a fee equal to .4375% (1.75% annually) of
the Net Assets each quarter. The Fund paid, during the years ended
December 31, 1996, 1995 and the period ended December 31, 1994, $779,179,
$709,381 and $230,790, respectively, for such operational management fees.
Amounts payable for such fees at December 31, 1996 and 1995 were $523,923
and $307,607, 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 $219,758, $295,641 and $20,346, for the years ended
December 31, 1996 and 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. The Fund paid, during
the year ended 1996, $199,059, for such incentive fee. 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, 1996 and 1995, 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:
(Continued)
37
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
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.
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.
(Continued)
38
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
The financial statements include investments valued at $34,186,155 (67% of
total assets) and $13,445,700 (32% of total assets) as of December 31, 1996
and 1995, respectively, whose value has been estimated by the Investment
Advisor in the absence of a 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.
As of December 31, 1996 and 1995, the net unrealized appreciation associated
with investments held by the Fund was $8,477,585 and $698,270, respectively.
(5) Short Term Investments
----------------------
Short term investments were comprised of U.S. Government and Agency
obligations bearing interest at ranges of 5.47% to 5.48% with maturities
between March 28, 1996 and April 25, 1996 as of December 31, 1995. 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 Fund during 1996.
(7) Purchase of Additional Shares
-----------------------------
During the years ended December 31, 1996 and 1995, in accordance with Fund
guidelines, additional contributions were received from certain shareholders
which were used to purchase 10,617 and 40,141 additional Fund shares,
respectively, issued directly by the Fund. As summarized in note 3, the
Investment Advisor exercised its right to convert its initial share purchase
to 10,000 shares in 1996.
Also, in accordance with Fund guidelines, certain shareholders reinvested
their dividends in the Fund, purchasing 74,175 and 45,592 Fund shares issued
directly by the Fund in 1996 and 1995, respectively.