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Securities and Exchange Commission
Washington, D. C. 20549
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Form 10-K
Mark One
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended
December 31, 1998 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 33-75758
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
(Exact name of Registrant as specified in its charter)
Texas 75-2533518
(State of incorporation (I.R.S. Employer
or organizations) Identification No.)
Suite 210, LB 59, 8080 North Central Expwy., Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214)891-8294
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes(X) No( )
PAGE
Indicate by check mark if disclosure by delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any statement to this
Form 10-K. (X)
As of December 31, 1998 there were 4,143,448 shares of
Registrant's stock outstanding. The aggregate market value of the
stock held by non-affiliates, based on the average bid and ask
prices of such stock as of December 31, 1998 was $26,942,820.
151,920 shares of stock held by affiliates were valued at
$1,025,449.
Documents Incorporated by Reference: Certain portions of the
Registrant's Definitive Proxy Statement (the "Proxy Statement") for
its Annual Meeting of Limited Partners to be held on May 14, 1999
pursuant to Regulation 14A are incorporated by reference in Items
10 through 13 of Part III of this Annual Report on Form 10-K.
Part I
Certain of the statements included below, including those
regarding future financial performance or results that are not
historical facts, contain "forward-looking" information as that
term is defined in the Securities Exchange Act of 1934, as amended.
The words "expect," "believe," "anticipate," "project," "estimate,"
and similar expressions are intended to identify forward-looking
statements. The Company cautions readers that any such statements
are not guarantees of future performance or events and that such
statements involve risks, uncertainties and assumptions, including
but not limited to industry conditions, general economic
conditions, interest rates, competition, ability of the Company to
successfully manage its growth, and other factors discussed or
included by reference in this Annual Report on Form 10-K. Should
one or more of these risks or uncertainties materialize or should
the underlying assumptions prove incorrect, those actual results
and outcomes may differ materially from those indicated in the
forward-looking statements.
Item 1. Business.
GENERAL DEVELOPMENT OF BUSINESS
Renaissance Capital Growth & Income Fund III, Inc. (sometimes
referred to as the "Fund" or the "Registrant") is a Texas
corporation formed January 20, 1994 that has elected to operate as
a Business Development Company (sometimes referred to herein as a
"Business Development Company" or a "BDC") under the Investment
Company Act of 1940, as amended (the "1940 Act"). Through December
31, 1998, the Fund has raised $41,489,500 through capital
contributions and the public sale of its common stock, par value
$1.00 per share.
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The investment objective of the Fund is to provide its
shareholders with current income and long-term capital appreciation
by investing primarily in private placement securities of small and
medium size public companies ("Portfolio Companies").
Renaissance Capital Group, Inc. ("Renaissance Group" or the
"Investment Adviser"), a Texas corporation, serves as the
investment adviser to the Fund. In this capacity, Renaissance
Group is primarily responsible for the selection, evaluation,
structure, valuation, and administration of the Fund's investment
portfolio. Renaissance Group is a registered investment adviser
under the 1940 Act and the Texas Securities Act. However, its
activities are subject to the supervision of the Board of Directors
of the Fund ("Board of Directors") who provide guidance with
respect to the operations of the Fund.
Generally, investments are, and will continue to be, in
companies that have their common stock registered for public
trading under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or companies that, in the opinion of the
Investment Adviser, have the ability to effect a public offering
within three to five years. The Fund generally invests in
preferred stock or debentures of a Portfolio Company, which
securities are convertible into or exchangeable for common stock of
the Portfolio Company. While such common stock of the Portfolio
Company may be publicly traded, the common stock acquired by the
Fund is generally unregistered. Therefore, such securities are
restricted from distribution or sale to the public except in
compliance with certain holding periods and exemptions under the
Securities Act of 1933, as amended ( the "Securities Act"), or
after registration pursuant to the Securities Act.
At December 31, 1998 the Fund had made investments in twenty
(20) portfolio companies having an aggregate cost of $46,242,647.
The Fund has active investments in eighteen (18) portfolio
companies at December 31, 1998, and is seeking additional
investment opportunities.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Fund has no concentrated industry segments. The Fund
does not contemplate specializing in any particular industry but
instead anticipates 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
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placements to eligible 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, 1998, the Fund's investment assets were
classified by amount as follows:
Percentage of
Classification Cost Investments (at cost)
Eligible Portfolio
Investments $33,113,207 79%
(including cash and
cash equivalents)
Other Portfolio
Investments $ 8,711,444 21%
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$41,824,651
INVESTMENT OBJECTIVES
The investment objective of the Fund is to provide its
shareholders with both current income and long-term capital
appreciation.
The Fund seeks to provide current cash returns to
shareholders through a quarterly dividend of current investment
interest income while providing opportunities for capital gains
appreciation through the appreciation in the value of the Fund's
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
investment income and earnings from the prior quarter of the Fund.
Optionally, in addition to the quarterly dividends, the Fund
may make distributions of realized gains or of securities that have
appreciated in value.
GENERAL INVESTMENT POLICIES
The Fund invests in Emerging Growth Company securities that
are generally not available to the public and which typically
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require substantial financial commitment. An Emerging Growth
Company is generally considered to have the following attributes:
(1) either a publicly held company with a relatively small market
capitalization or a privately held company; (2) an established
operating history but of a limited period so as to not have fully
developed its market potential for the product or services offered;
and (3) generally have a new product or service 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 emphasizes investing in convertible preferred stock or
convertible debentures of publicly held companies that the Fund
anticipates will be converted into common stock and registered for
public sale within three to five years after the private placement.
In addition, the Fund anticipates participating in bridge
financings in the form of loans which are convertible into common
stock of the issuer or issued together with equity participation,
or both, for companies which the Fund anticipates will complete a
stock offering or other financing within one to two years from the
date of the investment. The Fund will make bridge loans, either
secured or unsecured, intended to carry the borrower to a private
placement, an initial public offering or a merger and acquisition
transaction.
The Fund has no fixed policy concerning the types of
businesses or industry groups in which it may invest or as to the
amount of funds that it will invest in any one issuer. However,
the Fund currently intends to limit its investment in securities of
any single Portfolio Company to approximately 10% (8% to 12%) of
its net assets at the time of the investment.
The Fund's nominees to the boards of directors of Portfolio
Companies will generally be selected from among the officers of
Renaissance Group. When, at the discretion of Renaissance Group, a
suitable nominee is not available from among its officers,
Renaissance Group will select, as alternate nominees, outside
consultants who have prior experience as an independent outside
director of a public company.
REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
The 1940 Act was enacted to regulate investment companies.
In 1980, the 1940 Act was amended by the adoption of the Small
Business Investment Incentive Act. The purpose of the amendment
was to remove regulatory burdens on professionally managed
investment companies engaged in providing capital to smaller
companies. The Small Business Investment Incentive Act established
a new type of investment company specifically identified as a
Business Development Company as a way to encourage financial
institutions and other major investors to provide a new source of
capital for small developing businesses.
BUSINESS DEVELOPMENT COMPANY
A BDC:
I. is a closed-end management company making 70% of its
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investments only in certain companies (identified as
"Eligible Portfolio Companies"), and in "cash items"
pending other investment. Under the regulations
established by the Securities and Exchange Commission
(the "SEC") under the 1940 Act only certain companies
may qualify as "Eligible Portfolio Companies." 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:
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.
II. 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.
PAGE
Further, while the 1940 Act allows a BDC to "control" a
Portfolio Company, it is not the general policy of the Fund to
acquire a controlling position in its Portfolio Companies. The
Fund only provides managerial assistance, and seeks to limit its
"control" position by requiring only that a designee of the Fund be
elected to the board of directors of the Portfolio Company, or be
selected an advisory director. While these are the Fund's general
policies, the application of these policies, of necessity, vary
with each investment situation.
1940 ACT REQUIREMENTS
The BDC election exempts the Fund from some provisions of the
1940 Act. However, except for those specific provisions, the Fund
will continue to be subject to all provisions of the 1940 Act not
exempted, including the following:
1. restrictions on the Fund from changing the nature of
business so as to cease to be, or to withdraw its
election as, a BDC without the majority vote of the
shares outstanding;
2. restrictions against certain transactions between the
Fund and affiliated persons;
3. restrictions on issuance of senior securities, such not
being prohibited by the 1940 Act but being restricted
as a percentage of capital;
4. compliance with accounting rules and conditions as
established by the SEC, including annual audits by
independent accountants;
5. compliance with fiduciary obligations imposed under the
1940 Act; and
6. requirement that the shareholders ratify the selection
of the Fund's independent public accountants and the
approval of the investment advisory agreement or
similar contracts and amendments thereto.
On September 19, 1996, the Fund and the Investment Advisor
filed their Application for an order pursuant to Sections 6(c) and
57(i) of the Investment Company Act of 1940 and Rule 17d-1
thereunder authorizing certain joint transactions otherwise
prohibited by Section 57(a)(4) of the Act requesting an order from
the SEC permitting the Fund to co-invest with companies that are
affiliated with the Investment Advisor, including Renaissance US
Growth & Income Trust PLC ("RUSGIT") as "Advisor Affiliate". The
order was granted on December 30, 1996.
In order for the Fund 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 Fund;
B. the Investment Advisor will determine an appropriate
amount that the Fund should invest;
C. the Investment Advisor will distribute written
information, including the amount of the proposed
investment, concerning all co-investment opportunities
to the Fund's Independent Directors. The Fund will
co-invest only if a required majority of the Fund's
Independent Directors conclude, prior to the
acquisition of the investment, that the investment
should be made;
D. the Fund will not make an investment if any Advisor
Affiliate, the Investment Advisor, or a person
controlling, controlled by, or under common control
with the Advisor is an existing investor in such
issuer;
E. the terms, conditions, price, class of securities,
settlement date, and registration rights shall be the
same for the Fund and the Advisor Affiliate;
F. the Fund's Independent Directors will review quarterly
all information concerning co-investment opportunities
during the preceding quarter to determine whether the
conditions set forth in the application were complied
with;
G. the Fund will maintain the records required by section
57(f)(3) of the Act as if each of the investments
permitted under these conditions were approved by the
Fund's Independent Directors under section 57(f) of the
Act; and
H. no Independent Director of the Fund will be a director
or general partner of any Advisor Affiliate with the
Fund co-investors.
The Fund has made numerous investments with the Advisor
Affiliate and anticipates making additional investments in the
future.
INVESTMENT ADVISERS ACT OF 1940 AND INVESTMENT ADVISER'S AGREEMENT
Renaissance Group is the investment adviser to the Fund
pursuant to the Investment Advisory Agreement dated and approved by
the Board of Directors on February 15, 1994 ( the "Investment
Advisory Agreement") and is registered as an investment adviser
under the Advisers Act and is subject to the reporting and other
requirements thereof. The Advisers Act also provides restrictions
on the activities of registered advisers to protect its clients
from manipulative or deceptive practices, while the Advisers Act
generally restricts performance compensation of up to 20% on
realized capital gains computed net of all realized capital losses
and unrealized capital depreciation.
The Investment Advisory Agreement provides that Renaissance
Group is entitled to receive an annual management fee of 1.75% of
the Fund's assets. In addition to the annual management fee of
1.75% of the fund's assets, Renaissance Group is entitled to
receive an incentive fee (the "Incentive Fee") in an amount equal
to 20% of the Fund's realized capital gains computed net of all
realized capital losses and unrealized depreciation.
PAGE
Investment advisory agreements are further subject to the
1940 Act, which requires that the agreement, in addition to having
to be initially ratified by a majority of the outstanding shares,
shall precisely describe all compensation to be paid; shall be
approved annually by a majority vote of the Board of Directors; may
be terminated without penalty on not more than 60 days notice by a
vote of a majority of the outstanding shares; and shall terminate
automatically in the event of assignment. The Board of Directors
has determined that the Investment Advisory Agreement shall
constitute the Fund's advisory agreements and at all times be
construed so as to comply with the Advisers Act and the 1940 Act.
FUND PORTFOLIO INVESTMENTS
At December 31, 1998 the Fund had active investments in
eighteen (18) Portfolio Companies.
Bentley Pharmaceuticals, Inc. (BNT)
In December, 1998, the Fund purchased 400,000 shares of the
Company's common stock at $1.25 per share. The stock was purchased
in a private sale and is fully registered.
Bentley Pharmaceuticals, Inc. is an emerging international
pharmaceutical company focused on improving drugs through new drug
delivery technologies and commercializing such drugs in the U.S.
and other major markets. Bentley currently manufactures and
markets products in Spain for the treatment of cardiovascular,
gastrointestinal, neurological and infectious diseases.
In addition to the common stock owned by the Fund, the Fund
owns 800 units of the Company's 12% Convertible Senior Subordinated
Debentures due February 2006. The debentures are unsecured and are
convertible into shares of common stock of the Company at $2.50
per share. Interest is payable quarterly. The Fund's cost basis
in the debentures is $744,800.
Display Technologies, Inc. (Formerly La-Man Corp.) (DTEK)
On March 2, 1998, the Fund invested $2,250,000 in the
Company. Of the total amount, $1,750,000 was invested in the
Company's 8.75% Convertible Debentures, maturing March 2, 2005 and
convertible into the Company's common stock at $4.75 per share.
The debentures have mandatory monthly principal repayments
beginning March 2, 2001, are secured by the assets of the Company,
and are guaranteed by each of the Company's subsidiaries. In
addition, the Fund invested $500,000 in the Company's common stock
at a price of $4.32 per share, and received warrants to purchase
100,000 shares common at $4.11 per share on or before March 2,
2003. Subsequent to December 31, 1998, the Company effectuated a
securities registration which registered all of the Fund's
positions.
On October 30, 1998, the Companies' shareholders agreed to
change the Company name from La-Man Corporation to Display
Technologies, Inc., as well as to change the trading symbol for the
Company from LAMN to DTEK.
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Effective November 30, 1998, the Company issued a 5% stock
dividend, which lowered the conversion price of the Fund's
debentures to $4.52 per share, increased the number of common
shares owned by the Fund to 121,528, and increased the number of
warrants owned by the Fund to 105,000.
Display Technologies, Inc. is a leading competitor in the
market for design, manufacture, and placement of large electronic
advertising signs for businesses, entertainment, and sports venues,
as well as signage for schools and churches.
In addition to the Fund's investment, RUSGIT invested
$2,250,000 in the Company by purchasing 8.75% Convertible
Debentures for $1,750,000, and by purchasing $500,000 of the
Company's common stock at $4.32 per share. In addition, RUSGIT
obtained 100,000 Warrants to purchase shares of the Company's
common stock. The investment by RUSGIT was made under the same
terms and conditions as the Fund's investment, and was impacted by
the stock dividend in an identical manner as the Fund's investment.
Document Authentication Systems (Private)
Effective February 5, 1998, the Fund invested $500,000 in the
Series A Cumulative Convertible Preferred Stock of Document
Authentication Systems, Inc. ("DAS"). The preferred is convertible
into shares of common stock of DAS at $250.00 per share. On May
11, 1998, the Fund invested $1 million in the 5% Series A
Cumulative Convertible Preferred Stock of the Company, also
convertible into shares of common stock of DAS at $250 per share.
Both tranches of preferred have a 5% cumulative dividend right and
a liquidation preference of $250 per share.
DAS is currently private, and owns a patented process
covering paperless transactions.
On September 25, 1998, the Fund advanced the Company $219,415
in consideration for a $219,250 Promissory Note and warrants to
purchase 659 shares of the Company's common stock. The note bears
simple interest at 10% per annum and is payable on demand or on the
earlier to occur of August 20, 1999 or the closing of a proposed
equity private placement by the Company in an amount greater than
$5,000,000 of preferred equity securities as may be offered by
Maker, subject to the approval by the Board of Directors of the
Company and majority of the holders of the Series A Preferred
Stock. In the event that the proposed equity private placement by
the Company occurs on or prior to August 20, 1999, the Fund shall
release and convert the full value of its note to the offered
equities at the time the placement is closed in a minimum amount of
$5,000,000. The conversion price for each share of such preferred
equity securities shall be the lesser of $250 or the price of such
preferred equity securities at the time of issuance, including any
additional consideration payable to the Company upon any such
closing. The note is unsecured. The warrant to purchase shares of
the Company's common stock expires September 15, 2003, is
exercisable at $169.75 per share, and has a cost basis of $165.
In addition to the Fund's Investment, Renaissance US Growth
and Income Trust, PLC ("RUSGIT") invested $1,500,000 in the 5%
Series A Cumulative Convertible Preferred Stock of DAS, $219,250 in
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a 10% Promissory Note of the Company, and $165 in Warrants of the
Company. The investment by RUSGIT was made under the same terms
and conditions as the Fund's investments.
Dwyer Group, Inc. (DWYR)
Dwyer Group, Inc. provides, through its wholly owned service-
based franchising subsidiaries, an array of specialty services.
The Company owns six franchising businesses with approximately
1,400 franchises in the U.S., Canada and ten foreign countries.
At December 31, 1998, the Fund owned 675,000 shares of the
Company's common stock having a cost basis of $1,966,644.
Fortune Natural Resources Corporation (FPX)
Fortune Natural Resources Corporation is an independent
public oil and gas company whose primary focus is exploration and
development of domestic oil and gas properties located primarily
onshore and offshore Louisiana and Texas.
The Fund has invested $350,000 in the 12% Convertible
Debentures of the Company which mature on December 31, 2007, and
bear annual interest at the rate of 12%, payable quarterly. The
debentures are unsecured and will be subordinated to the senior
debt of the Company. The debentures are convertible into the
Company's common stock at $3.00 per share, subject to certain anti-
dilution provisions, including a one-time adjustment which becomes
effective May 1, 1999 that allows the debenture holders a one-time
right to adjust the conversion price downward to meet a sixty day
weighted average market price for the Company's shares leading up
to May 1, 1999. The Fund also has limited rights to demand a
registration of its common stock and certain piggyback stock
registration rights.
In addition to the Fund's investment, RUSGIT has invested an
identical amount under identical terms in the Company's Convertible
Debentures. The investment by RUSGIT was made on a pari-passu
basis with the Fund.
Integrated Security Systems, Inc. (IZZI)
Integrated Security Systems, Inc. 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.
Effective March 18, 1998, the conversion price on the Fund's
$2,300,000 Convertible Debentures were reduced from $1.05 per share
to $0.549 per share. The terms of the debentures allowed the Fund
the one-time adjustment when the Company failed to achieve minimum
net sales and net after tax income benchmarks based on 1997 year
end numbers. As a result of the adjustment, the Fund's debentures
became convertible into 4,189,435 shares of the Company's common
stock, of which 1,998,959 shares are considered unregistered, while
the remaining 2,190,476 shares are registered and freely marketable
in the event the Fund converts from debt into equity.
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In the Fund's fourth quarter, the Company sold its MPA
Systems business to a third party. The MPA Systems business was a
unit of the Company's Golston subsidiary, and was part of the
collateral securing the Fund's Debentures. In return for allowing
the Company to sell a portion of the Fund's collateral security,
the Fund received a $75,000 collateral reduction fee.
In October, 1998, the Fund converted $215,899 of its
convertible debentures into 393,259 shares of the Company's common
stock at a rate of $0.549 per share, reducing the value of the
debentures to $2,084,101. On October 1, 1998, the Fund advanced
$150,000 to the Company; on October 26, 1998, the Fund advanced
$75,000 to the Company; on November 6, 1998, the Fund advanced
$100,000 to the Company; and on December 2, 1998, the Fund advanced
$50,000 to the Company. All advances were made pursuant to
Convertible Promissory Notes bearing interest at 9% and convertible
into the Company's common stock at $0.549 per share, and are
secured by all the assets of the Company and its subsidiaries. The
notes mature February 1, 1999. As additional consideration for the
Fund's willingness to make additional investments into the Company,
in 1998 the Fund received warrants to purchase 312,500 shares of
the Company's common stock having an exercise price of $0.80 per
share. The warrants expire on October 2, 2003.
As of February 22, 1999, the Fund consolidated all of its
Promissory Notes due February 1, 1999, into one Promissory Note.
The new $375,000 Promissory Note bears interest at 9%, payable
monthly, is payable on demand, is convertible into common stock of
the Company at $0.549 per share, and continues to be secured by
all the assets of the Company and its subsidiaries.
On March 8, 1999, the Fund advanced the Company $200,000
pursuant to a 9% Secured Convertible Promissory Note due and
payable thirty (30) days after demand by the Fund. The note is
secured by all the assets of the Company and its subsidiaries and
is convertible into the Company's common stock at $0.549 per share.
As additional consideration for the loan, the Fund received
warrants to purchase 364,299 shares of common stock at $0.549 per
share on or before March 8, 2004.
RUSGIT also made several follow-on investments into the
Company in the third and fourth quarters of 1998. At December 31,
1998, RUSGIT owned 9% in Convertible Debentures having a cost basis
of $2,084,101, 393,258 shares of the Company's Common Stock,
$225,000 in 9% Convertible Notes convertible at $0.549 per share,
warrants to purchase 125,000 shares at $0.80, and warrants to
purchase 12,500 common shares at $1.75 per share. In addition,
RUSGIT earned a $75,000 collateral reduction fee as consideration
for allowing the Company to sell a portion of RUSGIT's collateral
security in the MPA Systems/Golston transaction. RUSGIT has also
advanced $200,000 to the Company subsequent to December 31, 1998
under identical terms and for identical considerations as the Fund.
Interscience Computer Corporation. (INTRQ)
In 1998, Interscience effectuated its Chapter XI Plan of
Reorganization and emerged from bankruptcy. As a result of the
reorganization, the Fund converted all of its shares of Series A
and B Preferred Stock into 1,750,000 shares of Interscience common
stock, or 40% of the common shares outstanding, and warrants to
PAGE
purchase 500,000 shares of the Company's common stock at $1.00 per
share.
Interscience provides third party maintenance to large data
centers and high speed production printers. The Company's field
engineers provide top quality onsite care, operational advice and
prompt delivery of parts. In addition, the Company develops and
markets consumable products used in various printing processes.
Intile Designs, Inc. (IDES)
Intile Designs, Inc. is a distributor and importer of ceramic
tile, marble, and related home design products.
The Fund owns 500,000 shares of the Company's common stock,
having a cost basis of $500,000. The stock is unregistered.
JAKKS Pacific, Inc. (JAKK)
On April 1, 1998, the Fund invested $3 million for the
purchase of 600 shares of the Company's Series A Cumulative
Convertible Preferred Stock. The preferred has a 7% cumulative
dividend, payable quarterly, is convertible into the Company's
common stock at a price of $8.95 per share, and has a liquidation
preference of $5,000 per share.
This is the Fund's second investment in JAKK. On December
31, 1996, the Fund invested $3,000,000 in 9% Convertible
Debentures. The debentures have mandatory monthly principal
installments beginning December 31, 1999, which will amortize
approximately one-half the principal prior to maturity on December
31, 2003. The Fund has the option to redeem the stock in the event
of the death or disability of the Company's CEO 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 at a price of $5.75 per share, subject to certain anti-
dilution provisions.
The Company is engaged in the development, marketing and
distribution of toys and electronic products for children.
In addition to the Fund's investment in the Company's
debentures, RUSGIT owns $3,000,000 in the Company's Convertible
Debentures under the same terms and conditions as the Fund's
debenture investment. The investment by RUSGIT was made on a pari-
passu basis with the Fund's debenture investment.
LifeQuest Medical, Inc. (LQMD)
On August 11, 1998, the Fund invested $500,000 to purchase
500 shares of the Company's Series A Cumulative Convertible
Preferred Stock. On November 19, 1998, the Fund invested another
$500,000 to purchase an additional 500 shares of the Company's
Series A Cumulative Convertible Preferred Stock. Both tranches of
the Series A Preferred Stock (the "Preferred") have identical
terms. The Preferred has an 8% cumulative dividend, payable
quarterly, is convertible into the Company's common stock at a
price of $2.00 per share, and has a liquidation preference of
$1,000 per share.
PAGE
The Preferred investments were made after the Fund's initial
investment in the Company in December, 1997. On December 19, 1997,
the Fund invested $1,500,000 in 9% Convertible Debentures of
LifeQuest Medical, Inc. ("LifeQuest"). In addition, the Fund
purchased 125,000 shares of the Company's common stock for
$500,000, or $4.00 per share. The debentures have mandatory
monthly principal installments beginning December 19, 2000 and
continuing on the first day of each successive month thereafter
prior to maturity on December 19, 2004, and is secured by
substantially all assets of the Company and its subsidiaries. As
consideration for the Fund's August 1998 Preferred Stock
investment, the conversion price of the Fund's debentures were
adjusted from $4.00 to $2.00 per share.
The Company and its four subsidiaries, LifeQuest Endoscopic
Technologies Inc., KleinMedical Inc., Val-U-Med Inc., and ValQuest
Medical Inc., are engaged in the development, manufacture, and
distribution of instruments, equipment and surgical supplies used
in minimally invasive surgery.
In addition to the Fund's investment in the Company's
debentures, the Preferred, and common stock, RUSGIT has invested
$1,500,000 in 9% Convertible Debentures of the Company, $1,000,000
in the Company's Series A Cumulative Convertible Preferred Stock,
and $500,000 to purchase 125,000 shares of the Company's common
stock. The investments by RUSGIT were made under the same terms
and conditions as the Fund's investments, and were made on a pari-
passu basis with the Fund.
New Care Health Corp. (NWCA)
On January 27, 1998, the Fund invested $2,500,000 for the
purchase of 8.50% Convertible Debentures of NewCare Health
Corporation ("NewCare"). The debentures mature in seven years, are
convertible into shares of NewCare's common stock at $3.81 per
share, and although unsecured, have guarantees from certain of the
Company's subsidiaries. In addition, the Fund has options to
purchase 100,000 shares of NewCare's common stock at a price of
$4.19 per share.
Subsequent to December 31, 1998, the Company fell into
default on the debentures by failing to maintain compliance with
all of its agreed minimum financial ratios and standards. The
Company is current, however, on principal and interest obligations.
NewCare is a fast growing provider of senior residential care
services, including long-term care, assisted living and independent
living services. NewCare also owns and manages hospitals.
In addition to the Fund's investment, RUSGIT invested
$2,500,000 in 8.50% Convertible Debentures of NewCare, and also
received options on 100,000 shares of NewCare's common stock. The
investment by RUSGIT was made under the same terms and conditions
as the Fund's investment.
Optical Security Group, Inc. (OPSC)
On June 18, 1998, the Fund invested $500,000 in the 8% Senior
Subordinated Convertible Debentures of Optical Security Group, Inc.
PAGE
("OPSC"). The debentures are convertible into shares of OPSC
common stock at $6.50 per share and are subordinate to all senior
indebtedness of the Company, which is defined to include both
secured and unsecured obligations of the Company. In addition, the
debentures provide for the establishment of a sinking fund whereby
the Company will make payments into the Fund to cover the
debentures' obligations beginning on July 1, 2002, with payments to
be made every July 1 thereafter until July 1, 2004.
OPSC utilizes its diffractive coating, holographic, and other
proprietary imaging technologies to provide tamper-evident
packaging labels, authenticating labels, and tags for consumer
product protection, and security foils for protection against
counterfeiting of checks, cards and any other documents of value.
In addition to the Fund's investment, RUSGIT invested
$500,000 in the 8% Senior Subordinated Convertible Debentures of
OPSC. The investment by RUSGIT was made under the same terms and
conditions as the Fund's investment.
Play By Play Toys & Novelties, Inc. (PBYP)
The Fund has invested $2,500,000 in 8% Convertible Debentures
of the Company which mature June 30, 2004, are convertible into
shares of common stock of the Company at $16.00 per share, and have
mandatory monthly principal installments beginning June 30, 2000.
The debentures are callable by the Company at 101% of par so long
as the closing bid price for the common stock averages at least
$25.50 per share for the twenty consecutive trading days prior to
the call, the Company has filed a registration statement covering
the shares of common stock issuable upon conversion of the
debentures, and the Company achieves certain benchmarks with
respect to trading volume and price to earnings ratios.
Subsequent to December 31, 1998, the Company fell into
default on the debentures by failing to maintain compliance with
all of its agreed minimum financial ratios and standards. The
Company is current, however, on principal and interest obligations.
The Company designs, develops, markets and distributes
stuffed toys and sculpted toy pillows based upon licenses for
children's entertainment characters and corporate trademarks. The
toys are sold into the indoor and outdoor amusement and
entertainment market. The Company is also a participant in the
retail market with a line of interactive and talking toys.
In addition to the Fund's investment, RUSGIT made an
identical investment of $2,500,000 in Convertible debentures of
Play By Play. The investment by RUSGIT was made under the same
terms and conditions as the Fund's investment and was made on a
pari-passu basis with the Fund.
Poore Brothers, Inc. (POOR)
In the third quarter, the Company began repayment of its
principal obligations under the Fund's 9% Convertible Debentures.
In the Fund's third quarter, the Company repaid $70,477 in
principal owed under the debentures, reducing the Fund's cost basis
from $1,788,571 to $1,718,094.
In the fourth quarter, the Fund agreed to freeze all
principal repayments from November 1, 1998 until October 31, 1999
and to take payment in kind for $154,628 in interest obligations of
the Company at $0.8438 per share, giving the Fund 183,263 shares of
common stock. The stock is unregistered and represents payment of
the Company's interest obligations for the period from November 1,
1998 through October 31, 1999. In addition, the Fund agreed to
modify the Financial Ratio Covenants in the Loan Agreement so that
the Company now has a minimum net working capital requirement of
$500,000, a minimum shareholders equity requirement of $4,500,000
and minimum interest coverage ratios of 1:1 until December 31, 1999
and 2:1 thereafter. As consideration for the above, the conversion
price on the Fund's debentures was reduced from $1.09 to $1.00 per
share.
In addition to the debentures and common stock, the Fund owns
warrants to purchase 25,000 shares of common stock at $1.00 per
share. The warrants expire July 1, 2002.
The Company manufactures and distributes a line of potato
chips and popcorn in the Phoenix, Arizona and Nashville, Tennessee
areas and distributes and sells branded products and other products
in the Phoenix and Houston areas. In addition, through the
Company's purchase of "Bob's of Texas" in the Fund's fourth
quarter, the Company has added manufacturing and distribution
capacity throughout Texas.
Simtek Corporation (SRAM)
On June 12, 1998, the Fund invested $750,000 in 9%
Convertible Debentures of Simtek Corporation. The debentures are
convertible into the Company's common stock at $0.35 per share,
mature June 12, 2005, and require mandatory monthly principal
repayments beginning June 12, 2001. The Fund's position is secured
by all the assets of the Company, but is subordinate to previously
existing security interests granted to other lending institutions.
Simtek designs and markets non-volatile static random access
memory chips in an all-silicon (and non-battery driven) package,
that enables the computer to retain data even after the power is
shut off to the device.
In addition to the Fund's investment, RUSGIT invested
$750,000 in 9% Convertible Debentures of the Company. The
investment by RUSGIT was made under the same terms and conditions
as the Fund's investment.
TAVA Technologies, Inc. (TAVA)
During the Quarter ended June 30, 1998, the Fund converted
Debenture Nos. 4 - 8, which Debentures had a cost basis of
$500,500, into 333,664 shares of TAVA common stock, and
subsequently sold these shares for $3,631,244, recording a
realized gain of $3,130,743.
At December 31, 1998, the Fund's remaining investment in the
Company was a $1,000,000 investment in the 9% Convertible
Debentures of the Company and a warrant to purchase 25,000 shares
of the Company's common stock at $1.50 per share. Subsequent to
PAGE
December 31, 1998, the Fund converted its remaining debentures into
666,667 shares of the Company's common stock. The warrants expire
March 31, 2006.
TAVA provides control system integration products and
services including Y2K remediation services for manufacturing
processes and systems. It also is a distributor and manufacture
representative of component devices used in control applications.
ThermoView Industries, Inc. (TVII)
On August 21, 1998, the Fund invested $250,000 for 250 shares
of the 10% Series A Cumulative Convertible Preferred Stock of
ThermoView Industries, Inc. The preferred is convertible into
shares of the Company's common stock at $5.00 per share, has a 10%
quarterly cumulative dividend, and has a liquidation preference of
$5.00 per share. In December, 1998, the Fund invested $250,000 in
the Company's common stock. The stock was purchased from certain
members of management in a private sale for $4.00 per share. The
stock is unregistered and subject to Rule 144 of the Securities and
Exchange Act of 1934.
ThermoView Industries, Inc. is a strategic early-stage
consolidator of companies which manufacture, design, market, and
install custom vinyl new & replacement windows and doors, primarily
for the existing home market.
Voice It Worldwide, Inc. (MEMO)
On November 3, 1998, the Company announced that it had
voluntarily filed a petition for protection under the
reorganization provisions of Chapter 11 of the Bankruptcy Reform
Act. The Company is continuing operations as a debtor-in-
possession. At the time the bankruptcy was filed, the Fund owned
$2,450,000 in unsecured Convertible Debentures convertible at $0.95
per share, 940,000 shares of the company's common stock, and
warrants to purchase 500,000 shares of the Company's common stock
at $1.60 per share. The debentures bear interest at 8%, payable
monthly, and are due and payable on or before November 1, 2002.
The debentures provide for mandatory principal installments
beginning November 1, 1998, which will amortize approximately one-
half of the principal prior to maturity. Because of the Bankruptcy
filing, all payments due under the debentures are stayed pending
the outcome of the reorganization.
The Company designs, develops and markets the Voice It
Personal Note Recorder line and also the Voice It Digital Voice
Recorder. The Note Recorder line allows the user to verbalize
reminders and short messages without paper or pencil. The Digital
Voice Recorder utilizes flash memory and other software to enable
an end user to have voice-to-text capabilities through a handheld
dictation device.
Valuation of Investments
The Prospectus and original offering documents specify that
the securities held by the Fund are to be valued as follows:
PAGE
On a quarterly basis, Renaissance Group prepares a valuation
of the assets of the Fund including Temporary Investments, Eligible
Portfolio Investments, and Other Portfolio Investments, subject to
the approval of the Board of Directors. Valuations of portfolio
securities are 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 is initially
based upon its original cost to the Fund. Costs are the primary
factor used to determine fair value until significant developments
affecting the Portfolio Company (such as results of operations or
changes in general market conditions) provide a basis for use in
the fair value determination. Portfolio investment for which
market quotations are readily available and which are freely
transferable are valued as follows: (i) securities traded on a
securities exchange or the NASDAQ are valued at the closing price
on, or the last trading day prior to, the date of valuation and
(ii) securities traded in the over-the-counter market are valued at
the average of the closing bid and ask price for the last trading
day on, or prior to, the date of valuation. Securities for which
market quotations are readily available but are restricted from
free trading in the public securities markets (such as Rule 144
stock) are valued by discounting the closing price or the closing
bid and ask prices, as the case may be, for the last trading day
on, or prior to, the date of valuation to reflect the liquidity
caused by such restriction, but taking into consideration the
existence, or lack thereof, of any contractual right to have the
securities registered and freed from such trading restrictions.
The fair value of investments for which no market exists are
determined on the basis of appraisal procedures established in good
faith by the Investment Adviser. Fair value determinations are
based upon such factors as the Portfolio Company's earnings and net
worth, market prices for similar securities of comparable companies
and an assessment of the Portfolio Company's future financial
prospectus. In the case of unsuccessful operations, the appraisal
may be based upon liquidation value. Appraisal valuations are
necessarily subjective.
Competition for Investments
The Fund has significant competition for investment
proposals. Competitive sources for growth capital for the industry
include insurance companies, banks, equipment leasing firms,
investment bankers and private investors. Many of these sources
have substantially greater financial resources than is contemplated
will be available to the Fund. Therefore, the Fund will have to
compete for investment opportunities based on its ability to
respond to the needs of the prospective company and its willingness
to provide management assistance. In some instances, the Fund's
requirements as to provision of management assistance will cause it
to be non-competitive.
Personnel
The Fund has no direct employees, but instead has contracted
Renaissance Group pursuant to the Investment Advisory Agreement to
provide all management and operating activities. Renaissance Group
PAGE
currently has eight employees who are engaged in performing the
duties and functions required by the Fund. At the present time, a
substantial portion of Renaissance Group's staff time is devoted to
activities of the Fund. However, because of the diversity of
skills required, the Fund cannot afford to employ all these persons
solely for its own needs, and therefore, these employees are not
engaged solely in activities of the Fund.
The Investment Advisor currently serves as General Partner
and manager to Renaissance Capital Partners, Ltd. ("Renaissance I")
and as the Investment Advisor to RUSGIT. Renaissance I is a BDC
with investment objectives similar to those of the Registrant.
Renaissance I is not actively seeking additional investments.
RUSGIT is a public limited company registered in England and Wales,
listed on the London Stock Exchange, which invests in privately
placed convertible debentures issued by companies similar to the
investments of the Fund. RUSGIT will invest primarily pari-passu
with the Fund. In 1996, RUSGIT raised net investment capital of
approximately $30,789,000. As of December 31, 1998, RUSGIT had
made investments in seventeen (17) portfolio companies, having an
aggregate cost value of $28,301,665. Sixteen (16) of the
investments were active at December 31, 1998. In addition,
Renaissance Group may, from time to time, provide investment
advisory services, management consulting services and investment
banking services to other clients.
No accurate data or estimate is available as to the
percentage of time, individually or as a group, that will be
devoted to the affairs of the Fund. Initially, and while the
Fund's assets are in the process of being invested, a majority of
the staff time of Renaissance Group is employed in functions and
activities of the Fund. Thereafter, the officers and employees
have and will devote such time as is required, in their sole
discretion, for the conduct of business, including the provision of
management services to Portfolio Companies.
Item 2. Properties
The Fund's business activities are conducted from the offices
of Renaissance Group, which offices are currently leased until July
31, 1999 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
At the Annual Meeting held May 29, 1998, the Fund's
shareholders approved an amendment to the Investment Advisory
Agreement which restated the description of the management fee to
provide for quarterly determination and payment of the management
incentive fee. The purpose of the restatement was to insure that
the Investment Advisory Agreement conformed to the description of
PAGE
the management fee in the Fund's Prospectus.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
TRADING
As of December 31,1995 there was no trading in the shares of
the Fund and no established market existed for those shares. On
April 30, 1996, the Fund's common stock began trading on the NASDAQ
National Market under the trading symbol RENN.
The following table sets forth, for the periods indicated,
certain high and low prices for the Common Stock as quoted on the
NASDAQ National Market.
High Low
Year ended December 31, 1997
First quarter $9.41 $7.25
Second quarter $8.75 $6.75
Third quarter $9.13 $6.63
Fourth quarter $10.38 $8.88
Year ended December 31, 1998
First quarter $9.75 $8.25
Second quarter $9.38 $8.31
Third quarter $9.38 $8.00
Fourth quarter $8.88 $5.88
NUMBER OF HOLDERS
As of December 31, 1998, there were approximately 942
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.
The following selected financial data for the period from
January 20, 1994 (inception) through December 31, 1998, should be
read in conjunction with the Partnership's Financial Statements and
notes thereto and "Management's discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7
of this Annual Report on Form 10-K.
1998 1997 1996 1995 1994
Gross Income,
(including
realized gain) $5,956,344 $8,512,374 $3,843,726 $3,070,938 $573,868
Net Unrealized
Appreciation
(Depreciation)
on Investments (1,222,151) (4,832,658) 7,779,315 698,270 0
Net Income 2,794,004 1,146,733 10,060,620 2,503,034 206,970
Net Income
per share 0.66 0.26 2.32 0.59 0.08
Total Assets 42,322,725 48,356,570 50,688,180 41,995,915 39,476,579
Net Assets 41,475,701 44,497,360 49,130,320 40,500,172 39,182,585
Net Assets Per
Share 10.01 10.25 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 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
PAGE
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 $12,886,000 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 and is not making new investments.
In the Spring of 1996, Renaissance Group formed RUSGIT, which
invests in privately placed convertible debentures issued by
companies similar to the investments of the Fund. RUSGIT will
invest primarily pari-passu with the Fund. In 1996, RUSGIT raised
investment capital of approximately $30,789,000, and as of December
31, 1998, had made seventeen (17) total investments having an
aggregate cost value of $28,301,665. Sixteen (16) of the
investments were active at December 31, 1997.
The determination regarding the existence of conflict of
interest between these affiliated investment funds and the
Registrant, and the resolution of any such conflict, vests in the
discretion of the Board of Directors, subject to the requirements
and resolution of the 1940 Act.
Regular Quarterly Dividends
It is intended that cash dividends from operations be made to
all shareholders each quarter to provide a cash return and also to
enable the Fund to maintain its registered investment company
status. Generally, this dividend is made from profits and
investment income from the previous quarter. However, in the event
that net profits are not adequate from time to time, the dividends
may be made from capital, so long as capital is sufficient to
assure repayment of all obligations of the Fund and such capital
distributions are permitted by applicable corporate law and the
1940 Act.
Quarterly dividends may be increased or decreased from time
to time to reflect increases or decreases in current rates of
investment income. The Fund's intention is to provide each
shareholder a current return compatible with the then present
economic condition of the Fund.
The accounting records are maintained on a calendar quarter
basis with the fiscal year ending on December 31. Accordingly,
quarterly distributions will be made to shareholders of record as
of the end of each quarter and mailed to each shareholders address
of record within 120 days of the end of the quarter.
PAGE
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 securities of Portfolio
Companies. However, the timing and payment of distributions,
including in-kind distributions, is at the discretion of the Board
of Directors. In 1998, the Fund distributed $0.59 per share in
capital gains to the Shareholders and $0.41 per share in regular
quarterly dividends.
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
During the year ended December 31, 1998, the Fund invested
$13,094,416 in six (6) new portfolio investments and in four (4)
follow-on investments. Dividends paid to investors in 1998
amounted to $6,126,502 including 1997 accrued dividends paid in
1998. 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 $2,794,004. The net cash provided by
operating activities was $3,781,356. The Fund also received
$3,631,244 upon the sale of portfolio investments. Dividend
reinvestments were zero. The Fund issued no shares for the
dividend reinvestment plan. All dividend reinvestment shares were
purchased in the open market. Finally, pursuant to the Fund's
share repurchase program announced April 6, 1998, $1,661,439 was
used to repurchase 199,494 shares at cost.
During the year ended December 31, 1997, the fund invested
$7,100,150 in four new portfolio investments and in follow-on
investments. Dividends paid to investors in 1997 amounted to
$4,430,279 including 1996 accrued dividends paid in 1997. 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 $1,146,733. The net cash provided by
operating activities was $1,220,582. The Fund also received
$10,401,150 upon the sale of portfolio investments and dividend
reinvestments were $39,849.
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
PAGE
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
1998 Compared to 1997
During the year ended December 31, 1998, the Fund made
additional portfolio investments aggregating $13,094,416 compared
to $7,100,150 in 1997. As a result of these investments and
earnings held for future investments, the Fund's 1998 total income
was $4,734,193 consisting of the following components: (i)
interest income of $2,284,873; (ii) dividend income of $28,740;
(iii) fee income of $511,988; (iv) realized gains on investments
of $3,130,743; and (v) unrealized depreciation on investments of
$(1,222,151).
The aggregate 1998 income of $4,734,193 was less than the
aggregate 1997 income of $3,679,716 primarily as a result of lower
unrealized depreciation and an increase in investment closing fees
in 1998. The Funds operating expenses incurred in 1998 were
$1,940,189 as compared to $2,532,983 in 1997. During 1998, an
incentive fee of $626,149 was paid to the Investment Advisor
representing 20% of the Funds realized capital gains, net of any
realized capital losses and cumulative unrealized depreciation,
compared to $1,196,366 paid in 1997. In addition, the management
fees decreased $4,688 in 1998. As a result, the Funds net income
increased to $2,794,004 in 1998 as compared to $1,146,733 in 1997.
1997 Compared to 1996
During the year ended December 31, 1997, the Fund made
additional portfolio investments aggregating $7,100,150 compared to
$13,099,536 in 1996. As a result of these investments and earnings
held for future investments, the Fund's 1997 total income was
$3,679,716 consisting of the following components: (i) interest
income of $2,423,380; (ii) dividend income of $68; (iii) fee income
of $107,085; (iv) realized gains on investments of $5,981,841; and
(v) unrealized depreciation on investments of $4,832,658.
The aggregate 1997 income of $3,679,716 was less than the
aggregate 1996 income of $11,623,041 primarily as a result of the
1997 realized gains increasing to $5,981,841 being offset by
unrealized depreciation of $4,832,658 in 1997 as compared to an
unrealized appreciation in 1996 of $7,779,315. The Funds operating
expenses incurred in 1997 were $2,532,983 as compared to $1,562,421
in 1996. During 1997, an incentive fee of $1,196,366 was paid to
the Investment Advisor representing 20% of the Funds realized
capital gains, net of any realized capital losses and unrealized
depreciation, compared to $199,059 paid in 1996. In addition, the
management fees increased $37,565 in 1997. As a result, the Funds
net income decreased to $1,146,733 in 1997 as compared to
$10,060,620 in 1996.
PAGE
YEAR 2000
Many computer software systems in use today cannot process
date-related information from and after January 1, 2000. The
Investment Advisor has taken steps to review and modify its
computer systems as necessary and is prepared for the Year 2000.
In addition, the Fund has inquired of its major service providers
as well as its portfolio companies to determine if they are in the
process of reviewing their systems with the same goals. The
majority of all providers and portfolio companies have represented
that they are either taking the necessary steps to be prepared or
are currently prepared for the Year 2000. Should any of the
computer systems employed by the major service providers, or
companies in which the Fund has an investment, fail to process this
type of information properly, that could have a negative impact on
the Fund's operations and the services provided to the Fund's
stockholders. It is anticipated that the Fund will incur no
material expenses related to the Year 2000 issues.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Fund is subject to financial market risks, including
changes in market interest rates as well as changes in marketable
equity security prices. The Fund does not use derivative financial
instruments to mitigate any of these risks. The return on the
Fund's investments is generally not affected by foreign currency
fluctuations.
A good portion of the Fund's investment in portfolio
securities consists of fixed rate convertible debentures and other
debt instruments. Since these instruments are generally priced at
a fixed rate, changes in market interest rates do not directly
impact interest income, although they could impact the Fund's yield
on future investments in debt instruments. In addition, changes in
market interest rates are not typically a significant factor in the
Fund's determination of fair value of its debt instruments, as they
are generally held to maturity and their fair values are determined
on the basis of the terms of the particular instrument and the
financial condition of the issuer.
A portion of the Fund's portfolio consists of debt and equity
investments in a private company. The Fund would anticipate no
impact on this investment from modest changes in public market
equity prices. However, should significant changes in market
prices occur, there could be a longer-term effect on valuations of
private companies which could affect the carrying value and the
amount and timing of proceeds realized on this investment.
A portion of the Fund's investment portfolio also consists of
common stocks and warrants to purchase common stock in publicly
traded companies. These investments are directly exposed to equity
price risk, in that a percentage change in these equity prices
would result in a similar percentage change in the fair value of
these securities.
Item 8. Financial Statements and Supplementary Data.
For the Index to Financial Statements, see "Index to
Financial Statements" on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Part III
Certain information required by Part III is omitted from this
Annual Report on Form 10-K in that the Registrant will file its
definitive Proxy Statement (the "Proxy Statement") for its Annual
Meeting of Limited Partners to be held on May 14, 1999 pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended,
not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy
Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of Registrant.
Information required by this item is incorporated by
reference from the Proxy Statement pursuant to Regulation 14A of
the General Rules and Regulations under the Exchange Act.
Item 11. Executive Compensation.
Information required by this item is incorporated by
reference from the Proxy Statement pursuant to Regulation 14A of
the General Rules and Regulations under the Exchange Act.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information required by this item is incorporated by
reference from the Proxy Statement pursuant to Regulation 14A of
the General Rules and Regulations under the Exchange Act.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is incorporated by
reference from the Proxy Statement pursuant to Regulation 14A of
the General Rules and Regulations under the Exchange Act.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8 K.
DOCUMENTS FILED AS PART OF THIS FORM 10K
Financial Statements: The financial statements filed as part
of this report are listed in "Index to Financial Statements" on
page F-1 hereof.
Financial Schedules
There are no schedules presented since none are applicable.
PAGE
REPORTS ON FORM 8K
The Fund did not file a report on Form 8 K during the fourth
quarter of 1998.
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).
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, there
unto duly authorized.
Date: March 31, 1999
Renaissance Capital Growth & Income Fund III, Inc.
(Registrant)
By: \S\
-----------------------------------------
Russell Cleveland, President and Chairman
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Fund in the capacities and on the date indicated
Signatures.
Signature Capacity in Which Signed Date
\S\
- -----------------
Russell Cleveland Chairman, President
and Director March 31, 1999
\S\ Senior Vice President,
- -----------------
Barbe Butschek Secretary and Treasurer
and Chief Financial
Officer March 31, 1999
\S\
- -----------------
Ernest C. Hill Director March 31, 1999
PAGE
\S\
- -----------------
Thomas W. Pauken Director March 31, 1999
\S\
- -----------------
Peter Collins Director March 31, 1999
\S\
- -----------------
Edward O. Boshell, Jr. Director March 31, 1999
PAGE
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Statements of Financial Condition F-3
December 31, 1998 and 1997
Statements of Investments- F-4 through F-7
December 31, 1998 and 1997
Statements of Operations- F-8
Years ended December 31, 1998, 1997, and 1996
Statements of Changes in Net Assets F-9
Years ended December 31, 1998, 1997, and 1996
Statements of Cash Flows- F-10
Years ended December 31, 1998, 1997, and 1996
Notes to Financial Statements F-11 through F-14
PAGE
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, 1998 and 1997,
and the related statements of operations, changes in net assets,
and cash flows for each of the years in the three-year period ended
December 31, 1998. These financial statements are the
responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included verification and confirmation of investments
owned as of December 31, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Dallas, Texas
February 12, 1999
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Financial Condition
December 31, 1998 and 1997
Assets 1998 1997
Cash and Cash equivalents $ 2,573,144 $15,972,424
Investments at fair value,
cost of $36,828,731 and
$24,150,665 in 1998 and
1997, respectively (note 4) 39,251,507 27,795,592
Receivable from sale of
investment (note 5) - 4,200,000
Interest receivable 361,374 141,279
Organization costs, net of
accumulated amortization 83,820 208,529
Other assets 52,880 38,746
----------- -----------
$42,322,725 $48,356,570
=========== ===========
Liabilities and Net Assets
Liabilities:
Accounts payable $ 214,100 31,198
Accounts payable - affiliate
(note 3) 218,079 1,440,889
Dividends payable 414,845 2,387,123
----------- -----------
847,024 3,859,210
Net assets (note 6):
Common stock, $1 par value;
authorized 20,000,000 shares;
4,342,942 issued in 1998 and
1997, respectively; 4,143,448
shares outstanding in 1998 and
4,342,942 shares outstanding
in 1997 4,342,942 4,342,942
Additional paid-in capital 36,258,896 36,258,896
Treasury stock at cost, 199,494
shares at December 31, 1998 (1,661,439) -
Undistributed net investment
income 2,535,302 3,895,522
----------- -----------
Net assets, equivalent
to $10.01 and $10.25
per share on the shares
outstanding in 1998
and 1997, respectively 41,475,701 44,497,360
Commitments and contingencies
(notes 3 and 4) - -
----------- -----------
$42,322,725 $48,356,570
See accompanying notes to financial statements.
/TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1998
----------------------------------------
Interest Due Fair
rate date Cost value
----------------------------------------
Eligible Portfolio
Investments -
Convertible
debentures and
Promissory Notes (1)
Voice it Worldwide,
Inc. (2) -
Convertible debentures 8.0% 11/1/02 $ 2,450,000 1,470,000
Display Technologies,
Inc. -
Convertible debentures 8.75 3/2/05 1,750,000 2,706,789
Document Authentication
Systems -
Convertible promissory
note 10.0 8/20/99 219,250 219,250
JAKKS Pacific, Inc. -
Convertible debentures 9.0 12/31/03 3,000,000 5,552,609
Poore Brothers, Inc.-
Convertible debentures 9.0 7/1/02 1,718,094 1,718,094
TAVA Technologies, Inc. -
Convertible debentures 9.0 6/1/03 1,000,000 5,032,500
Integrated Security
Systems, Inc. (2) -
Convertible promissory
notes 9.0 2/1/99 375,000 375,000
Convertible debentures 9.0 12/1/03 2,084,101 2,084,101
Fortune Natural Resources
Corp. -
Convertible debentures 12.0 12/31/07 350,000 350,000
LifeQuest Medical, Inc. -
Convertible debentures 9.0 12/19/04 1,500,000 1,500,000
NewCare Health Corp. -
Convertible debentures 8.5 1/27/05 2,500,000 2,500,000
(1) Valued at fair value as determined by the Investment
Advisor (note 4).
(2) Interest payments under the terms of the convertible debenture
are delinquent as of December 31, 1998./FN>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1998
----------------------------------------
Interest Due Fair
rate date Cost value
----------------------------------------
Eligible Portfolio
Investments -
Convertible
debentures and
Promissory Notes (1)
Simtek Corporation -
Convertible debentures 9.0 6/12/05 750,000 750,000
---------- ----------
17,696,445 24,258,343
---------- ----------
1998
----------------------------------------
Interest Due Fair
rate date Cost value
----------------------------------------
Other Portfolio
Investments -
Convertible deben-
tures (1)
Bentley Pharmaceuticals,
Inc. (2) -
Convertible debentures 12.0% 2/13/06 $ 744,800 839,520
Optical Security Group,
Inc. -
Convertible debentures 8.0 5/31/05 500,000 500,000
Play by Play Toys and
Novelties, Inc. -
Convertible debentures 8.0 6/30/04 2,500,000 2,500,000
---------- ----------
3,744,800 3,839,520
---------- ----------
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
(2) Interest payments under the terms of the convertible debenture
are delinquent as of December 31, 1998.
/FN>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1998
-------------------------------------
Fair
Shares Cost value
-------------------------------------
Eligible Portfolio
Investments - Common
Stock, Preferred Stock
and Warrants (1)
Bentley Pharmaceuticals,
Inc. -
Common stock 400,000 $ 500,000 594,000
Display Technologies,
Inc. -
Common stock 121,528 500,000 799,633
Warrants to purchase
105,000 shares of
common stock 105,000 - 328,000
Document Authentication
Systems -
Series A, cumulative
convertible preferred
stock 6,000 1,500,000 1,500,000
Warrants to purchase
659 shares of common
stock 659 165 165
Interscience Computer
Corporation -
Common stock 1,750,000 4,000,000 703,915
Warrants to purchase
500,000 shares of
common stock 500,000 - -
TAVA Technologies, Inc. -
Warrants to purchase
25,000 shares of common
stock 25,000 - 151,594
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
(2) Dividend payments under the terms of the preferred stock are
delinquent as of December 31, 1998.
/TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1998
-------------------------------------
Fair
Shares Cost value
-------------------------------------
Eligible Portfolio
Investments - Common
Stock, Preferred Stock
and Warrants (1)
ThermoView Industries,
Inc. -
Series A, cumulative
convertible preferred
stock 250 250,000 250,000
Common stock 62,500 250,000 262,109
Voice It Worldwide, Inc. -
Warrants to purchase
500,000 shares of common
stock 500,000 - -
Common stock 940,000 1,046,400 348,975
NewCare Health Corp. -
Options to purchase 100,000
shares of common stock 100,000 - -
Integrated Security Systems,
Inc. -
Warrants to purchase
325,000 shares of common
stock 325,000 3,750 3,750
Common stock 393,259 215,899 218,996
Intile Designs, Inc. -
Common stock 500,000 500,000 50,000
Poore Brothers, Inc. -
Common stock 183,263 154,628 52,293
Warrants to purchase 25,000
shares of common stock 25,000 - -
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
/TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1998
---------------------------------------
Fair
Shares Cost value
---------------------------------------
Eligible Portfolio
Investments - Common
Stock, Preferred Stock
and Warrants (1)
LifeQuest Medical, Inc. -
Common stock 125,000 500,000 216,563
Series A, convertible
preferred stock 500 500,000 500,000
Series B, convertible
preferred stock 500 500,000 500,000
---------- ----------
10,420,842 6,479,993
---------- ----------
1998
-------------------------------------
Fair
Shares Cost value
-------------------------------------
Other Portfolio
Investments - Common
Stock and Warrants (1)
Dwyer Group, Inc. -
Common stock 675,000 1,966,644 1,336,500
JAKKS Pacific, Inc. -
Series A, cumulative
convertible preferred
stock 600 3,000,000 3,337,151
----------- -----------
4,966,644 4,673,651
----------- -----------
$36,828,731 39,251,507
=========== ===========
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
/TABLE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1997
----------------------------------------
Interest Due Fair
rate date Cost value
----------------------------------------
Eligible Portfolio
Investments -
Convertible
debentures and
Promissory Notes (1)
Voice it Worldwide,
Inc. -
Convertible debentures 8.0% 11/1/02 $ 2,450,000 3,031,875
Poore Brothers, Inc.-
Convertible debentures 9.0 7/1/02 1,788,571 1,788,571
Topro, Inc. -
Convertible debentures 9.0 various 1,500,500 6,437,145
JAKKS Pacific Inc. -
Convertible debentures 9.0 12/31/03 3,000,000 3,873,478
Integrated Security
Systems, Inc. (2)
Convertible debentures 9.0 12/1/03 2,300,000 2,575,178
Fortune Natural Resources
Corp.
Convertible promissory
note 12.0 12/31/07 350,000 350,000
LifeQuest Medical, Inc.-
Convertible debentures 9.0 12/19/04 1,500,000 1,500,000
---------- ----------
12,889,071 19,556,247
---------- ----------
Other Portfolio
Investments- Convertible
Debentures (1)
Bentley Pharmaceuticals,
Inc.-
Convertible debentures 12.0 2/13/06 744,800 1,080,000
Play by Play Toys and
Novelties, Inc.
Convertible debentures 8.0 6/30/04 2,500,000 2,621,289
---------- ----------
3,244,800 3,701,289
---------- ----------
(1) Valued at fair value as determined by the Investment
Advisor (note 4).
(2) Interest payments under the terms of the convertible debenture
are delinquent as of December 31, 1997./FN>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1997
-------------------------------------
Fair
Shares Cost value
-------------------------------------
Eligible Portfolio
Investments - Common
Stock, Preferred Stock
and Warrants (1)
Interscience Computer
Corporation (2):
Series A, cumulative
convertible redeemable
preferred stock 36,000 $ 3,600,000 1,400,000
Series B, cumulative
convertible preferred
stock 4,000 400,000 -
Topro, Inc. -
Warrants to purchase
25,000 shares of common
stock 25,000 - 123,750
Voice It Worldwide, Inc. -
Warrants to purchase
500,000 shares of common
stock 500,000 - -
Common stock 940,000 1,046,400 1,105,088
Integrated Security Systems,
Inc. -
Warrants to purchase
12,500 shares of common
stock 12,500 3,750 3,750
Intile Designs, Inc. -
Common stock 500,000 500,000 185,000
LifeQuest Medical, Inc.-
Common stock 125,000 500,000 412,657
---------- ----------
6,050,150 3,230,245
---------- ----------
(FN>
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
(2) Dividend payments under the terms of the preferred stock are
delinquent as of December 31, 1997.
/TABLE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Investments
December 31, 1998 and 1997
1997
---------------------------------------
Fair
Shares Cost value
---------------------------------------
Other Portfolio
Investments - Common
Stock and Warrants (1)
Dwyer Group, Inc. -
common stock 675,000 1,966,644 1,307,811
----------- -----------
$24,150,665 $27,795,592
=========== ===========
(1) Valued at fair value as determined by the Investment Advisor
(note 4).
(2) Dividend payments under the terms of the preferred stock are
delinquent as of December 31, 1997.
See accompanying notes to financial statements.
/TABLE>
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Income:
Interest $2,284,873 2,423,380 2,182,917
Dividend Income 28,740 68 306,190
Commitment and other fees 511,988 107,085 359,323
---------- ---------- ----------
2,825,601 2,530,533 2,848,430
---------- ---------- ----------
Operating Expenses (note 3):
General and administrative 501,984 519,873 584,183
Incentive fee 626,149 1,196,366 199,059
Management fees 812,056 816,744 779,179
---------- ---------- ----------
1,940,189 2,532,983 1,562,421
---------- ---------- ----------
Operating income (loss) 885,412 (2,450) 1,286,009
Investment income:
Net unrealized appreciation
(depreciation) on
investments (1,222,151) (4,832,658) 7,779,315
Net realized gain on
investments 3,130,743 5,981,841 995,296
---------- ---------- ----------
Investment income 1,908,592 1,149,183 8,774,611
---------- ---------- ----------
Net income $2,794,004 1,146,733 10,060,620
========== ========== ==========
Net income per share
(note 2(d)) $ .66 .26 2.32
========== ========== ==========
See accompanying notes to financial statements.
/TABLE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Changes in Net Assets
Years ended December 31, 1998, 1997 and 1996
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 6) 100,217
Reinvested dividends to purchase 74,175
shares (note 6) 685,416
Net assets, December 31, 1996 49,130,320
Net income 1,146,733
Dividends (5,819,542)
Reinvested dividends to purchase 3,520
shares (note 6) 39,849
Net assets, December 31, 1997 44,497,360
Purchase of 199,494 shares of treasury
stock (1,661,439)
Net income 2,794,004
Dividends (4,154,224)
Net assets, December 31, 1998 $41,475,701
See accompanying notes to financial statements.
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating
activities:
Net income $ 2,794,004 1,146,733 10,060,620
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net unrealized
(appreciation)
depreciation on
investments 1,222,151 4,832,658 (7,779,315)
Net realized gain on
investments (3,130,743) (5,981,841) (995,296)
Amortization of
organization costs 124,709 124,709 124,708
Decrease in receivable
from sale of investment 4,200,000 - 2,500,000
(Increase) decrease in
accounts receivable - 169,486 (50,483)
(Increase) decrease in
interest receivable (374,723) 16,750 386,327
Increase in other assets (14,134) - -
Increase (decrease) in
accounts payable 182,902 (4,879) 36,077
Increase (decrease)in
accounts payable-
affiliate (1,222,810) 916,966 216,316
---------- ---------- ----------
Net cash provided
by operating
activities 3,781,356 1,220,582 4,498,954
---------- ---------- ----------
Cash flows from investing
activities:
Purchase of investments (13,094,416) (7,100,150) (13,099,536)
Proceeds from sale of
investments 3,631,244 10,401,150 1,334,808
Repayment of debentures 70,477 - -
Decrease in short term
investments, net - - 21,348,889
---------- ---------- ----------
Net cash provided by
(used in) investing
activities (9,392,695) 3,301,000 9,584,161
---------- ---------- ----------
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from financing
activities:
Net proceeds from
issuance of shares - - 100,217
Reinvested dividends to
purchase shares - 39,849 685,416
Purchase of treasury
shares (1,661,439) - -
Cash dividends (6,126,502) (4,430,279) (2,406,381)
---------- ---------- ----------
Net cash used in
financing
activities (7,787,941) (4,390,430) (1,620,748)
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents (13,399,280) 131,152 12,462,367
Cash and cash equivalents
at beginning of the year 15,972,424 15,841,272 3,378,905
---------- ---------- ----------
Cash and cash equivalents
at end of the year $ 2,573,144 15,972,424 15,841,272
=========== ========== ==========
Noncash investing and financing activities:
The fourth quarter dividends of $414,845, $2,387,123, and $997,860
were accrued as of December 31, 1998, 1997 and 1996, respectively.
During 1998, the Fund received common stock in settlement of
amounts due from interest totaling $154,628.
During 1997, the Fund recorded a receivable from the sale of an
investment amounting to $4,200,000.
During 1997, the Fund recorded a receivable from the liquidation of
an investment. At December 31, 1997, the receivable amounted to
$38,746 and is included in other assets in the accompanying
statement of financial condition.
See accompanying notes to financial statements.
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(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 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
(Continued) PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
provision is included in the accompanying financial
statements.
(d) Net income per share
Net income per share is based on the weighted average of
shares outstanding of 4,246,163 during 1998, 4,342,062
during 1997 and 4,332,390 during 1996.
(e) Management Estimates
Management of the Fund has made a number of estimates and
assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities to prepare these financial settlements in
conformity with generally accepted accounting principles.
Actual results could differ from these 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.
(3) Management and Organization Fees
The Investment Adviser for the Fund is registered as an
investment adviser under the Investment Advisers Act of 1940.
Pursuant to an Investment Advisory Agreement (the Agreement),
the Investment Advisor performs certain services, including
certain management, investment advisory and administrative
services necessary for the operation of the Fund. In addition,
under the Agreement the Investment Advisor is reimbursed by the
Fund for certain administrative expenses. A summary of fees
and reimbursements paid by the Fund under the Agreement, the
Prospectus and the original offering document are as follows:
The Investment Advisor receives a fee equal to .4375% (1.75%
annually) of the Net Assets each quarter. The Fund incurred
$812,056, $816,744, and $779,179 for 1998, 1997 and 1996,
respectively, for such operational management fees. Amounts
payable for such fees at December 31, 1998 and 1997 were
$184,076 and $221,781, 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 $187,988,
$220,077 and $219,758, for 1998, 1997 and 1996,
respectively, and are included in general and administrative
expenses in the accompanying statements of operations.
(Continued)
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
The Investment Advisor is to receive an incentive fee in an
amount equal to 20% of any of the Fund's realized capital
gains computed net of all realized capital losses and
cumulative unrealized depreciation. The Fund incurred
$626,149, $1,196,366 and $199,059 during the years ended
1998, 1997 and 1996, respectively, for such incentive fee.
(4) Investments
The Fund invests primarily in convertible securities and equity
investments of companies that qualify as Eligible Portfolio
Companies as defined in Section 2(a)(46) of the 1940 Act or in
securities that otherwise qualify for investment as permitted
in Section 55(a)(1) through (5). Under the provisions of the
1940 Act at least 70% of the Fund's assets, as defined under
the 1940 Act, must be invested in Eligible Portfolio Companies.
These investments are carried in the statements of financial
condition as of December 31, 1998 and 1997, 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
investments held by the Fund shall be valued as follows:
Generally, pursuant to procedures established by the
Investment Advisor, the fair value of each investment will
be initially based upon its original cost to the Fund.
Costs will be the primary factor used to determine fair
value until significant developments affecting the investee
company (such as results of operations or changes in general
market conditions) provide a basis for use in an appraisal
valuation.
Portfolio investments for which market quotations are
readily available and which are freely transferable will be
valued as follows: (i) securities traded on a securities
exchange or the NASDAQ will be valued at the closing price
on, or the last trading day prior to, the date of valuation
and (ii) securities traded in the over-the-counter market
will be valued at the average of the closing bid and asked
prices for the last trading day on, or prior to, the date of
valuation.
(Continued)
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
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.
At December 31, 1998 and 1997, all the Fund's investments,
totaling $39,251,507 (93% of total assets) and $27,795,592
(57% of total assets), respectively, have been valued 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, 1998 and 1997, the net unrealized
appreciation associated with investments held by the Fund was
$2,422,776 and $3,644,927, respectively.
(5) Receivable from Sale of Investment
During 1997, the Fund sold an investment in a portfolio company
for $4,200,000. The proceeds from this sale were received in
1998.
(6) Purchase of Additional Shares
In accordance with Fund guidelines, certain shareholders
reinvested their dividends in the Fund, purchasing 3,520 and
(Continued)
PAGE
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
74,175 Fund shares issued directly by the Fund in 1997 and
1996, respectively. No dividends were reinvested during
1998.
During 1996, in accordance with Fund guidelines, additional
contributions were received from certain shareholders which
were used to purchase 10,617 additional Fund shares, issued
directly by the Fund.