-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EW2uCqyUsAUskonhnaOE7OK+Sx7UXVHVlTNVdo1GAI9yNw4ObRbcbTsF5VYjJbIL WQUPLmILEtYfPLwv6NwHYA== 0000919567-97-000014.txt : 19970610 0000919567-97-000014.hdr.sgml : 19970610 ACCESSION NUMBER: 0000919567-97-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAISSANCE CAPITAL GROWTH & INCOME FUND III INC CENTRAL INDEX KEY: 0000919567 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 752533518 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11701 FILM NUMBER: 97569153 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPRWY STREET 2: STE 210 LB59 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2148918294 MAIL ADDRESS: STREET 1: 8080 N CENTRAL EXPWY., SUITE 210 LB 59 CITY: DALLAS STATE: TX ZIP: 75206 10-K 1 FORM 10K FOR YEAR ENDED DECEMBER 31, 1996 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 MARK ONE ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Fiscal Year Ended December 31, 1996 Commission File No. 33-75758 ----------------- RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. (Exact name of Registrant as specified in its charter) TEXAS 75-2533518 (State of incorporation or organization)(I.R.S. Employer Identification No.) SUITE 210, LB 59, 8080 NORTH CENTRAL EXPRESSWAY, DALLAS, TEXAS 75206 (Address of principle executive offices) (Zip Code) Registrant's telephone number, including area code (214) 891-8294 ----------------------------------------------------------------- Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- --------------------- None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock ($1.00 par value) (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) Indicate by check mark if disclosure by delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. ( X ) As of December 31, 1996, there were 4,339,422 shares of $1.00 par value of Registrants stock outstanding. The aggregate market value of the stock held by nonaffiliates, based on the average bid and ask prices of such stock as of December 31, 1996 $30,693,784. 123,822 shares of stock held by affiliates were valued at $901,548. Documents Incorporated by Reference: Certain portions of the Registrant s definitive proxy statement to be filed no later than April 4, 1997 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. 2 Part I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF BUSINESS Renaissance Capital Growth & Income Fund III, Inc. (sometimes referred to as the "Fund" or the "Registrant") is a Texas corporation formed January 20, 1994 that has elected to operate as a business development company (sometimes referred to herein as a "Business Development Company" or a "BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund was initially capitalized by Russell Cleveland through his purchase of 10,000 shares of common stock for $10.00 per share. On February 25, 1994 the Fund filed a registration statement on Form N-2 for the sale of up to 10,000,000 shares of common stock at an offering price of $10.00 per share. This offering was declared effective on May 25, 1994 at which time the Fund commenced sales of common stock. The Fund continued the offering until December 31, 1994 at which time the offering was closed. As a result of the offering, the Fund sold 4,158,897 shares in 1994. During the years ended December 31, 1996 and 1995, in accordance with Fund guidelines, additional contributions were received from certain shareholders which were used to purchase 10,617 and 40,141 additional Fund shares, respectively, used directly by the Fund. Also, in accordance with Fund guidelines certain shareholders reinvested their dividends in the Fund, purchasing 74,175 and 45,592 Fund shares issued directly by the Fund in 1996 and 1995, respectively. These contributions and dividend reinvestments resulted in total shares issued at December 31, 1996 of 4,339,422 and total shares issued at December 31, 1995 of 4,244,630. The investment objective of the Fund is to provide its shareholders with current income and long-term capital appreciation by investing primarily in private placement securities of small and medium size public companies ("Portfolio Companies"). Renaissance Capital Group, Inc. ("Renaissance Group" or the "Investment Adviser"), a Texas corporation, serves as the investment adviser to the Fund. In these capacities, Renaissance Group is primarily responsible for the selection, evaluation, structure, and administration of the Fund's investment portfolio. Renaissance Group is a registered investment adviser under the 1940 Act and the Texas Securities Act. However, these activities are subject to the supervision of the board of directors of the Fund ("Board of Directors") who provide guidance with respect to the operations of the Fund. Generally, investments will be made in companies that have their common stock registered for public trading under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or companies that, in the opinion of the Investment Adviser, have the ability to go public within three to five years. The terms of the documents evidencing the Fund's investment in Portfolio Companies generally provide that the Fund will have the right to convert its securities into or otherwise acquire common stock in exchange for its preferred stock or debentures. Accordingly, while such common stock of the Portfolio Company may be publicly traded, the common stock to be acquired by the Fund is generally unregistered. Therefore, such securities are restricted from distribution or sale to the public except in compliance with certain holding periods and exemptions under the Securities Act of 1933, as amended (the "Securities Act"), or after registration pursuant to the Securities Act. At December 31, 1996, the Fund had made ten (10) portfolio investments aggregating $25,708,570 and is seeking additional investment opportunities. 3 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Fund has no concentrated industry segments. The Fund does not contemplate specializing in any particular industry but instead anticipates diversifying its investments to a variety of industries. NARRATIVE DESCRIPTION OF THE BUSINESS The Fund, as a Business Development Company, is engaged primarily in investments in convertible securities of small and medium sized public companies. Under the provisions of the 1940 Act, a Business Development Company must invest at least 70% of its funds in "eligible portfolio investments," such being generally defined as direct placements to qualifying companies and temporary investments in "cash items" pending other investments. However, under and pursuant to the provisions of the 1940 Act, a Business Development Company may invest up to 30% of its funds in "Other Investments" that is, investments that do not qualify as "eligible portfolio investments," such exception allowing up to the specified maximum amount, for example, open market purchases or participation in public offerings. Pending investment in convertible securities of eligible Portfolio Companies or other investments as provided under the 1940 Act, the Registrant's funds are invested in "Short-term Investments" consisting primarily of U.S. Government and agency debt. At December 31, 1996 the Fund's investment assets were classified by amount as follows: Classification Cost Percentage of Investments Assets -------------- ---- --------------------- Eligible Portfolio Companies $22,882,471 89% Other Portfolio Companies $ 2,826,099 11% INVESTMENT OBJECTIVES The investment objective of the Fund is to provide its shareholders with both current income and long-term capital appreciation. The Fund seeks to provide current cash returns to shareholders through a quarterly dividend of current investment interest income while providing opportunities for capital gains appreciation through the appreciation in the values of the Fund's convertible securities. The Fund anticipates paying a quarterly dividend to the shareholders, to be made within 120 days of the end of each quarter. Dividends will be made in such amounts as shall be determined by the Board of Directors and shall generally reflect the earnings from the prior quarter of the Fund. Optionally, in addition to the quarterly dividends, the Fund may make distributions of realized gains or of securities that have appreciated in value. GENERAL INVESTMENT POLICIES The Fund will invest in emerging growth company ("Emerging Growth Company") securities that are generally not available to the public and which typically require substantial financial commitment. An Emerging Growth Company is generally considered to have the following attributes: (1) either 4 a publicly held company with a relatively small market capitalization or a privately held company; (2) an established operating history but of a limited period so as to not have fully developed its market potential for the product or services offered; and (3) generally have a new product or services that provides an opportunity for exceptional growth. However, because the extent and nature of the market for such product or services is not fully known, there is uncertainty as to the rate and extent of growth and also uncertainty as to the capital and human resources required to achieve the goals sought. With respect to investments in Emerging Growth Companies, the Fund will place an emphasis in investing in convertible preferred stock or convertible debentures of publicly held companies that the Fund anticipates will be converted into common stock and registered for public sale within three to five years after the private placement. In addition, the Fund anticipates participating in bridge financings in the form of loans which are convertible into common stock of the issuer or issued together with equity participation, or both, for companies which the Fund anticipates will complete a stock offering or other financing within one to two years from the date of the investment. The Fund will make bridge loans, either secured or unsecured, intended to carry the borrower to a private placement, an initial public offering or a merger and acquisition transaction. The Fund has no fixed policy concerning the types of businesses or industry groups in which it may invest or as to the amount of funds that it will invest in any one issuer. However, the Fund currently intends to limit its investment in securities of any single Portfolio Company to approximately 10% (8% to 12%) of its net assets at the time of the investment. The Fund's nominees to the boards of directors of Portfolio Companies will generally be selected from among the officers of Renaissance Group. When, in the discretion of Renaissance Group, a suitable nominee is not available from among its officers, Renaissance Group will select, as alternate nominees, outside consultants who have had prior experience as an independent outside director of a public company. REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940 The 1940 Act was enacted to regulate investment companies. In 1980, the 1940 Act was amended by the adoption of the Small Business Investment Incentive Act. The purpose of the amendment was to remove regulatory burdens on professionally managed investment companies engaged in providing capital to smaller companies. The Small Business Investment Incentive Act established a new type of investment company specifically identified as a Business Development Company as a way to encourage financial institutions and other major investors to provide a new source of capital for small developing businesses. BUSINESS DEVELOPMENT COMPANY A BDC basically: (1) is a closed-end management company making 70% of its investments only in certain companies (identified as "Eligible Portfolio Companies"), and in "cash items" pending other investments. Under the regulations established by the SEC under the 1940 Act only certain companies may qualify as "Eligible Portfolio Companies." These qualifications are: (A) it must be organized under the laws of a state or states, (B) it may not be an investment company (except for a wholly owned Small Business Investment Company), and (C) it must generally fall into one of three following categories: 5 (1) companies that do not have a class of securities registered on a national securities exchange or are listed on the Federal Reserve OTC margin list, (2) companies that are actively controlled by the BDC either alone or as part of a group (for this purpose, control is presumed to exist if the BDC or group in which the BDC is a member owns 25% or more of the voting securities), or (3) it meets such other criteria as established by the SEC. (2) must be prepared to provide "Significant Managerial Assistance" to such Portfolio Companies. Significant Managerial Assistance means, as to the Fund: (A) any arrangement whereby the Fund, through its officers, employees, or the officers or employees of the Investment Adviser, seeks to provide significant guidance concerning management, operations, objectives or policies of the Portfolio Company, or (B) the exercise of a controlling influence over the Portfolio Company. Therefore, the Investment Adviser believes that "Eligible Portfolio Companies" are, generally, those companies that, while being publicly held, may not have or do not have a broad based market for their securities, or the securities that they wish to offer are restricted from public trading until registered. Further, the regulations generally provide that the securities must be obtained in direct transactions with the Portfolio Company and as such are generally restricted from transferability in the public markets. Further, while the 1940 Act allows a BDC to "control" a Portfolio Company, it will not be the general policy of the Fund to acquire a controlling position in its Portfolio Companies. The Fund will only provide managerial assistance, and will seek to limit its "control" position by requiring only that a designee of the Fund be elected to the board of directors of the Portfolio Company, or be selected an advisory director. While these will be the Fund's general policies, the application of these policies will of necessity vary with each investment situation. 1940 ACT REQUIREMENTS The BDC election exempts the Fund from some provisions of the 1940 Act. However, except for those specific provisions, the Fund will continue to be subject to all provisions of the 1940 Act not exempted, including the following: (1) restrictions on the Fund from changing the nature of business so as to cease to be, or to withdraw its election as, a BDC without the majority vote of the shares outstanding; (2) restrictions against certain transactions between the Fund and affiliated persons; (3) restrictions on issuance of senior securities, such not being prohibited by the 1940 Act but being restricted as a percentage of capital; (4) compliance with accounting rules and conditions as established by the SEC, including annual audits by independent accountants; 6 (5) compliance with fiduciary obligations imposed under the 1940 Act; and (6) requirement that the shareholders ratify the selection of the Fund's independent public accountants and the approval of the investment advisory or similar contracts and amendments thereto. On September 19, 1996, Renaissance Capital Growth & Income Fund III, Inc. as the "Company" and Renaissance Capital Group, Inc. as the "Investment Advisor" filed their Application for an order pursuant to Sections 6(c) and 57(i) of the Investment Company Act of 1940 and Rule 17d-1 thereunder authorizing certain joint transactions otherwise prohibited by Section 57(a)(4) of the Act requesting an order from the Securities and Exchange Commission (the "Commission") permitting the Company to co-invest with companies that are affiliated with the Investment Advisor, including Renaissance US Growth & Income Trust PLC as "Advisor Affiliate". The order was granted on December 30, 1996. In order for the Company and the Investment Advisor to make co- investments with the same entity, the following conditions apply: (a) the Investment Advisor will determine if the investment is eligible for investment by the Company; (b) the Investment Advisor will determine an appropriate amount that the Company should invest; (c) the Investment Advisor will distribute written information, including the amount of the proposed investment, concerning all co-investment opportunities to the Company s Independent Directors. The Company will co- invest only if a required majority of the Company s Independent Directors conclude, prior to the acquisition of the investment, the investment should be made; (d) the Company will not make an investment if any Advisor Affiliate, the Investment Advisor, or a person controlling, controlled by, or under common control with the Advisor is an existing investor in such issuer; (e) the terms, conditions, price, class of securities, settlement date, and registration rights shall be the same for the Company and the Advisor Affiliate; (f) the Company s Independent Directors will review quarterly all information concerning co-investment opportunities during the preceding quarter to determine whether the conditions set forth in the application were complied with; (g) the Company will maintain the records required by section 57(f)(3) of the Act as if each of the investments permitted under these conditions were approved by the Company s Independent Directors under section 57(f)(3) of the Act as if each of the investments permitted under these conditions were approved by the Company s Independent Directors under section 57(f); and (h) no Independent Director of the Company will be a director or general partner of any Advisor Affiliate with the Company co-investors. On October 30, 1996 the Advisor Affiliate, made an investment of $1,200,000 in Topro, Inc. Prior to this investment by the Advisor Affiliate, in February of 1996, the Company had made an original investment of $2,500,000. This investment was made prior to the entry of an order. At the 7 time the original investment was made, an additional loan from the Advisor Affiliate was not contemplated. Therefore, the investment of the Advisor Affiliate did not fall within the prohibited transactions and an order of exemption was not necessary. After the order was granted by the Commission, the Advisor Affiliate and the Company made a co-investment into Integrated Security Systems, Inc. of $2,500,000 each on December 31, 1996. The Company anticipates making additional investments with the Advisor Affiliate in the future. INVESTMENT ADVISERS ACT OF 1940 ("ADVISERS ACT") AND INVESTMENT ADVISER'S AGREEMENT Renaissance Capital Group, Inc. ("Renaissance Group" or "Investment Adviser") is the investment adviser to the Fund pursuant to the Investment Advisory Agreement dated and originally approved by the Board of Directors on February 15, 1994 (the "Investment Advisory Agreement") and is registered as an investment adviser under the Advisers Act and is subject to the reporting and other requirements thereof. The Advisers Act also provides restrictions on the activities of registered advisers to protect its clients from manipulative or deceptive practices. While the Advisers Act generally restricts performance compensation, the Advisers Act was amended to allow an investment adviser to a BDC to receive performance compensation of up to 20% on realized capital gains computed net of all realized capital losses and unrealized capital depreciation. The Investment Advisory Agreement provides that Renaissance Group is entitled to receive, in addition to an annual management fee of 1.75% of the Fund's assets, an incentive fee (the "Incentive Fee") in an amount equal to 20% of the Fund's realized capital gains computed net of all realized capital losses and unrealized depreciation. Investment advisory agreements are further subject to the 1940 Act, which requires that the agreement, in addition to having to be initially ratified by a majority of the outstanding shares, shall precisely describe all compensation to be paid; shall be approved annually by a majority vote of the Board of Directors; may be terminated without penalty on not more than 60 days' notice by a vote of a majority of the outstanding shares; and shall terminate automatically in the event of assignment. The Board of Directors have agreed that the Investment Advisory Agreement shall constitute the Fund's advisory agreements and at all times be construed so as to comply with the Advisers Act and the 1940 Act. FUND PORTFOLIO INVESTMENTS As of December 31, 1996 the Fund has made ten (10) investments in Portfolio Companies eight of which meet the criteria of investments in Eligible Portfolio Companies: Bentley Pharmaceuticals, Inc. - - ----------------------------- On February 20, 1996, Renaissance Capital Growth & Income Fund III, Inc. purchased 800 Units of Bentley Pharmaceuticals, Inc., each unit consisting of a one thousand dollar ($1,000) principal amount 12% Convertible Senior Subordinated Debenture due February, 2006; and 1,000 Class A Redeemable Warrants, each to purchase one share of common stock and one Class B Redeemable Warrant. The Partnership paid $1,000 per unit for a total investment of $800,000 of which $55,200 was allocable to the Warrants and $744,800 to the 12% Convertible Subordinated Debentures. 8 The Debentures, which are unsecured, are convertible prior to maturity beginning their Anniversary date (one year from date of issuance), into shares of Common stock of Bentley Pharmaceuticals, Inc. at a conversion price per share which is the lesser of $2.50 or 80% of the average closing price of the common stock on the American Stock Exchange for the 20 consecutive trading days immediately preceding the Anniversary date. Interest is payable quarterly. Each class A Redeemable Warrant entitles the holder, for a period of three years, to purchase one share of common stock and one Class B Redeemable Warrant at a price of $3.00 per share. On 30 days prior written notice, the Company may redeem all of the warrants for $0.05 per warrant if the per share closing price for the underlying common stock on the American Stock Exchange for each of the 20 consecutive trading days immediately preceding the record date for redemption equals or exceeds 150% of the then exercise price. On May 28, 1996, the Company announced it would permit public trading of its debentures and warrants separately. During 1996, the Fund sold 407,000 of the Class A Redeemable Warrants for an aggregate gain of approximately $406,700. Subsequent to December 31, 1996, the Fund sold its remaining 393,000 Class A Redeemable Warrants for a gain of $419,905. CONTOUR MEDICAL, INC. - - --------------------- The Company is a distributor of medical supplies and prepackaged kits for medical uses as well as a manufacturer of foam and vinyl based products for medical applications. It is majority owned by Retirement Care Associates, an Atlanta-based operator of retirement care centers and nursing homes. On July 12, 1996, the Fund invested $2,500,000 in a 9% Convertible Debenture of Contour Medical, Inc. The Debenture has mandatory monthly principal installments beginning July 1, 1999, which will amortize approximately one-half of the principal prior to maturity on July 1, 2003. The Debentures are callable at 120% of par, once specific earnings per share and bid price tests of the underlying common stock are met. At the option of the Fund, in multiples of $100,000, the Debentures are convertible into Common Stock of Contour at $5.00 per share. The second conversion price is subject to certain anti-dilution provisions and is subject to a one-time adjustment in 1997. The adjustment is predicated on earnings and the bid price of the Company s stock. The Fund has the right to demand stock registration and certain piggyback stock registration rights. Costs of two demand registrations are at the Company s expense if commenced subsequent to July 12, 1998. In addition to the Fund s investment on July 12, 1996, Renaissance US Growth & Income Trust PLC ("RUSGIT"), a public limited company registered in England and Wales, made an identical investment of $2,500,000 in Contour Medical, Inc. The investment by RUSGIT was made on a pari-passu basis with the Fund. On February 18, 1997, Sun Healthcare Group, Inc., an Albuquerque, New Mexico based operator of nursing homes, announced it would acquire all of the outstanding publicly held shares of Contour Medical, Inc. as part of its acquisition of Contour s majority owner, Retirement Care Associates. The announced purchase price of Contour s shares was $8.50 per share, payable in cash or Sun Healthcare Group, Inc. stock, at the option of the acquirer. The Fund' Debenture is convertible into 500,000 shares of Contour s common stock at a price of $5.00 per share. 9 The Fund has a right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. DWYER GROUP, INC. - - ----------------- Dwyer Group, Inc. is a holding company for service-based businesses providing specialty services internally through franchising. On June 2, 1995 Renaissance purchased in the open market 4,000 shares of Dwyer Group, Inc s common stock at a cost of $12,320. On June 9, 1995, the Fund and the Company entered into a Stock Purchase Agreement in which the Fund agreed to purchase from the Company 70,000 shares of common stock at $3.50 per share for a total aggregate consideration of $245,000. Also on June 9, 1995, the Fund entered into a Stock Purchase Agreement with the Estate of Donald J. Dwyer, Deceased pursuant to which the Fund agreed to purchase from the Estate 300,000 shares of common stock at $3.00 per share for a total consideration of $900,000. The stock purchased pursuant to the Stock Purchase Agreements is covered by a Demand Registration Rights Agreement. The Fund first acquired 4,000 shares of Dwyer in the open market on June 2, 1995 at a cost of $12,320. Purchases in the market by month have been: Month No. of Cost of Purchased Shares Shares ----------- -------- --------- June, 1995 43,100 $ 135,242 July, 1995 20,000 71,600 November, 1995 33,500 91,474 December, 1995 38,300 105,230 February, 1996 17,000 47,872 March, 1996 54,500 147,839 April, 1996 5,000 13,420 May, 1996 118,600 296,505 ------- ---------- 330,000 $909,182 ------- ---------- The Partnership does not have a Director Designee on the Board of Directors of Dwyer Group, Inc. INTEGRATED SEDURITY SYSTEMS, INC. - - --------------------------------- The Company is a holding company which designs, develops, manufactures, sells and services commercial security and traffic control devices. In addition, it sells fully integrated turnkey security systems that control and monitor access to governmental, commercial and industrial sites. On December 31, 1996, the Fund invested $2,300,000 in a 9% Convertible Debenture of Integrated Security Systems, Inc. The Debenture has a mandatory monthly principal installments beginning December 1, 1999, which will amortize approximately one-half of the principal prior to maturity on December 1, 2003. The Debentures are callable at 120% of par, once specific earnings per share and bid price tests of the underlying common stock are met. At the option of the Fund and in multiples of $10,000, the Debentures are convertible into common stock of Integrated Security Systems, Inc. at $1.05 per share. The conversion price is subject to certain anti-dilution 10 provisions and is subject to a one-time adjustment in 1997. The adjustment is predicated on earnings and the bid price of the Company s stock. The Fund has the right to demand stock registration and certain piggyback stock registration rights. Costs of two demand registrations are at the Company s expense if commenced subsequent to July 12, 1998. In addition to the Fund s investment on December 31, 1996, RUSGIT made an identical investment of $2,300,000 in Integrated Security Systems, Inc. The investment by RUSGIT was made on a pari-passu basis with the Fund. The Fund has a right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. INTERSCIENCE COMPUTER CORPORATION. - - ---------------------------------- Interscience provides third party maintenance to large data centers and high-speed production printers. Interscience s field engineers provide top quality on-site care, operational advice and prompt delivery of parts. Interscience also develops and markets consumable products used in various printing processes. Interscience experiences a high rate of reoccurring revenue because of their long- term service contracts. On September 22, 1994, the Fund purchased 36,000 shares of Interscience Computer Corporation s ("Interscience") Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock") with a stated value of $100 per share for a purchase price of $3,600,000. The holders of the Series A Preferred Stock shall be entitled to receive, when, as and if declared by the board of directors of Interscience, out of funds legally available therefor, cumulative dividends at the annual rate of 7.5% of the stated value of the 2nd Series A Preferred Stock. In addition, Interscience shall pay the Fund a 1.5% management fee per year. The holders of Series A Preferred Stock shall be entitled to vote upon all matters presented to the stockholders, together with the holders of common stock as one class, except (i) as otherwise required by law and (ii) with respect to the election of directors to the Interscience s board of directors. Each share of Series A Preferred Stock shall entitle the holder thereof to that number of votes equal to the number of shares of common stock into which one share of Series A Preferred Stock would have been convertible, if such conversion had taken place on the record date set for determining stockholders entitled to vote at a meeting or the date of the consent of stockholders if action is being taken by written consent. At any meeting of the shareholders of Interscience at which directors are elected to Interscience s board of directors, the holders of shares of Series A Preferred Stock shall have the right, voting separately as a class, to elect one director to the board of directors. To date, the Investment Adviser has not exercised this right and has attended board meetings only as an advisory director. In addition, if Interscience defaults under the purchase agreement with the Fund, the Fund has the right to elect a majority to the board of directors of Interscience. Each share of Series A Preferred Stock shall be convertible into a number of shares of Common Stock determined by dividing (i) $100 by (ii) the conversion price in effect on the Conversion Date. The conversion price at which shares of common stock shall initially be issuable upon conversion of the shares of Series A Preferred Stock shall be $6.00 (initially, 600,000 shares of common stock for $3,600,000). The Conversion Price shall be subject to further adjustment including anti-dilution provisions. 11 Shares of the Series A Preferred Stock may be redeemed, in whole or in part at any time at the option of Interscience (subject, however, to the Fund s right to convert), for cash at $120 per share beginning September 23, 1994 plus, in each case, all unpaid dividends thereon, including accrued dividends, whether or not declared, to the redemption date. However, Interscience may not redeem the Series A Preferred unless all of the following are satisfied: (1) Interscience's Common Stock has had a Trading Price of not less than 300% of the conversion price; (2) Interscience shall have earned at least $1.20 per share in the aggregate for the last four consecutive fiscal quarters preceding the date of notice, and (3) the shares to be issued on conversion shall have been registered or shall be exempted from registration and such shares shall be freely tradable when issued. If any of the Series A Preferred Stock remains outstanding on or after September 23, 2000 then at any time thereafter during the period that any shares of the Series A Preferred Stock remain outstanding, the remaining holders of the Series A Preferred Stock shall have the right to elect the smallest number of directors constituting a majority of the authorized number of directors of Interscience, and the holders of the Common Stock shall have the right to elect the remaining directors. On April 4, 1996, the Fund purchased 4,000 shares of Interscience Computer Corporation s Series B Cumulative Convertible Preferred Stock, stated value $100 per share for $400,000. The holders of the stock are entitled to receive dividends at an annual rate of 7.5%, the dividends to be cumulative. The stock bears voting privileges similar to those of the Series A stock discussed above. The Series B Preferred stock is convertible into common at an initial rate of $5.00 per share. The conversion is subject to anti-dilution provisions. The Series B Preferred stock also carries the failure to convert or redeem provisions if outstanding after September 23, 2000 as the Series A Preferred stock. On March 6, 1997, the Company filed a voluntary petition for reorganization under Chapter 11 of the bankruptcy code. The Fund has the right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. JAKKS PACIFIC, INC. - - ------------------- On December 31, 1996, the Fund invested $3,000,000 in a 9% Convertible Debenture of JAKKS Pacific, Inc. The Debenture has mandatory monthly principal installments beginning December 31, 1999, which will amortize approximately one-half of the principal prior to maturity on December 31, 2003. The Fund has the option of redemption in the event of the death or disability of the Company s CEO, Mr. Jack Friedman. The Loan Agreement requires key employee insurance on Mr. Friedman s life to meet this requirement. At the option of the Fund and in multiples of $10,000, the Debentures are convertible into common stock of JAKKS at an initial price of $8.50 per share. The conversion price is subject to certain anti-dilution provisions and is subject to a one-time adjustment. If the Company has achieved proforma before tax earnings of $2,928,500 at December 31, 1996, the conversion price will be adjusted to $9.00. However, if this level is not achieved, the conversion price will be adjusted to 76% of the average closing bid price of common stock for the 21 consecutive trading days following the Company s public press release of its 1996 fiscal year end financial results. The Fund has the right to demand stock registration and certain piggyback stock registration rights. Costs of two demand registrations are at the Company s expense if commenced subsequent to December 31, 1998. 12 The Company is engaged in the development, marketing and distribution of toys and electronic products for children. In addition to the Fund s investment on December 31, 1996, RUSGIT made an identical investment of $3,000,000 in JAKKS Pacific, Inc. The investment by RUSGIT was made on a pari-passu basis with the Fund. PACKAGING RESEARCH CORPORATION - - ------------------------------ Packaging Research Corporation manufactures food processing equipment and through its subsidiary, Mama Rizzo s, manufactures and distributes premium pasta sauces. On March 4, 1997, Packaging Research Corporation filed to reorganize under Chapter 11. The Company has filed a motion which is pending to sell substantially all of its operating assets. The Fund has a right to designate a nominee to the Board of Directors of the Company, which disignee may serve as a Director or Advisory at his or her election. On December 14, 1995 the Fund invested $3,200,000 in a 9% Convertible Debenture issued by Packaging Research Corporation (PRC) of Englewood, Colorado and its subsidiary, Mama Rizzo s, Inc. The debentures are callable at 120% of par after January 1, 1996, once specific earnings per share and bid price tests have been met. The debentures provide for mandatory principal installments beginning January 1, 1999 which installments will amortize approximately one-half of the principal prior to maturity on January 1, 2003. At the option of the Fund, the $3,200,000 Convertible Debenture is convertible into common stock of PRC at $1.50 per share. This conversion price is subject to a one time adjustment at January 1, 1997, if the average closing bid price of the common stock for the 20 consecutive trading days prior to January 1, 1997 is less than $1.50 per share. If an adjustment is triggered, the conversion price shall be reduced to eighty percent (80%) of the average closing bid price of the Company s common stock for the 20 consecutive trading days prior to January 1, 1997. The Fund has the right to demand stock registration and certain piggyback stock registration rights and at least two registrations at the Company s expense. On August 23, 1996, Mama Rizzo s, Inc. ("MRI") the Company s wholly owned subsidiary, filed a voluntary petition seeking relief under Chapter 11 of the Bankruptcy Code. Subsequent to that filing, the Fund advanced $93,900, with court approval, in order to facilitate the orderly completion of inventory and to pay administrative costs. MRI has sold its equipment and inventories as well as all intangibles. A sale of the remaining office equipment is currently being planned. PRC s bank and first lien holder has notified PRC it is in default and is demanding payment. The Company has suffered from an inability to obtain the working capital necessary to complete its orders. The Independent Directors of the Fund have elected to provide a reserve for valuation on this investment in order to reflect the Fund s estimate of recoverable value. 13 PORE BROTHERS, INC. - - -------------------- Poore Brothers manufactures and distributes a line of potato chips and popcorn in the Phoenix, Arizona and Nashville, Tennessee areas and distributes its own branded products and other products in the Phoenix and Houston areas. On May 31, 1995 the Fund advanced Poore Brothers, Inc. $2,100,000 under terms of a 9% Convertible Debenture. The Debenture is secured by a lien on the Company s intangible assets and trademarks; however, the Company s other assets are pledged to senior secured lenders. The total amount of borrowings issued under the loan agreement is $2,700,000 with First Interstate Equity Corporation advancing $600,000. The Debenture is convertible into common stock of the Company at a ratio equal to 1,926,606 shares of common stock of the Company for $2,100,000 (initially $1.09 per share); provided, however, that the conversion price shall be subject to adjustment at times and in accordance with the anti- dilution provisions of the debenture. The debenture, at the option of the Company may be redeemed in whole, but not in part, at 120% of par, provided the following has occurred: (i) the Company has completed an initial public offering of its securities; (ii) the closing bid price for the company s common stock averages at least $4.00 for a period of 30 consecutive trading days and the stock is listed on NASDAQ, AMEX or NYSE; (iii) the $4.00 call price is supported by a minimum of $0.20 annual earnings per share fully diluted for the immediately preceding fiscal year; and (iv) the shares of common stock underlying the debenture are fully registered. Interest is payable monthly commencing July 1, 1995. Monthly principal payments are scheduled to begin July 1, 1998 which installments will amortize approximately one-half of the principal prior to maturity on July 1, 2002. The Fund has the right to demand stock registration and certain piggyback stock registration rights, and at least two registrations will be at the Company s expense. The Fund has the right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. On December 11, 1996, the Fund converted $311,429 of its debentures into 285,715 shares of the Company s common stock which were sold on that date as part of the Company s initial public offering. The Fund received $900,002 for the stock resulting in a gain of $588,573. The Fund has agreed not to proceed with any additional conversion or sale without the agreement of the Company s underwriter until January 1, 1998. TOPRO, INC. - - ----------- Topro, Inc. provides control system integration products and services. It also is a distributor and manufacturer s representative of component devises used in control applications. On February 21, 1996, the Fund invested $1,500,000 in a 9% convertible debenture of Topro, Inc. The Debenture has mandatory monthly principal installments beginning March 1, 1999, which will amortize approximately one- half of the principal prior to maturity on March 1, 2003. The Debentures are callable at 120% of par, once specific earnings per share and bid price tests of the underlying common stock are met. The Fund received Warrants to purchase 225,000 shares of the Company s stock on February 21, 1996. These Warrants are exercisable at a price of $2.00 per share and expire on March 31, 1999. 14 On March 5, 1996, the Fund invested in Topro, Inc. Debenture No. 2 in the amount of $1,000,000. This Debenture contains substantially the same covenants and terms as Debenture No. 1. The Fund received Warrants to purchase 150,000 shares of the Company s stock on March 5, 1996. These Warrants are exercisable at a price of $2.00 per share and will expire on March 31, 1999. On June 17, 1996, the Fund invested in Topro, Inc. Debenture No. 3 in the amount of $1,000,000. This Debenture contains substantially the same covenants and terms as Debenture No. 1 and No. 2, and is included by amendment to the original Loan Agreement. The terms and conditions of this Debenture No. 3 were substantially the same as the first two Debentures, except for the initial conversion price being set at $2.25 per share in Debenture No. 3 and a maturity date of June 1, 2003. The initial conversion price of Debenture No. 3 was reduced to $1.50 by subsequent agreement. In addition to the Fund s investments in Debenture No. s 1, 2 and 3 discussed above, RUSGIT made an identical investment of $1,200,000 in Convertible Debentures of Topro, Inc. on October 30, 1996. The investment by RUSGIT was under the same terms and conditions as the Fund s investment with the exception of timing. The conversion rate of the RUSGIT investment is at $1.50 per share, The Fund has a right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. VOICE IT WORLDWIDE, INC. - - ------------------------ On October 27, 1995 the Fund advanced Voice It Worldwide, Inc. of Fort Collins, Colorado, $2,450,000 under terms of an 8% Convertible Debenture due November 1, 2002. Interest is payable monthly beginning December 1, 1995. The Debentures provide for mandatory principal installments beginning November 1, 1998, which installments will amortize approximately one-half of the principal prior to maturity on November 1, 2002. The Debenture is convertible into common stock of the Company initially at $2.625 per share, provided that the conversion price shall be subject to a one-time adjustment at the time of filing its 1996 Form 10KSB and additional adjustments at times and in accordance with the anti-dilution provisions of the debenture. In addition to the Debentures, the Fund, on October 27, 1995 purchased for $50,000 Warrants to purchase 915,000 shares of common stock from Voice It Worldwide, Inc. at a purchase price of $2.75 per share. The Warrants are exercisable on the date of purchase and are void after October 27, 1998. The Warrants are subject to anti-dilution provisions. If after October 27, 1996, the closing bid price of the Company s common stock averages greater than $6.00 per share for twenty consecutive trading days prior to notice to call, the Warrants may be redeemable for $45,750. Effective December 31, 1996, the conversion rate on the Debentures was reset from $2.625 per share to $0.95 per share and the Warrant price was reset at $1.25 per share. The Company designs, develops and markets the "Voice It" personal note recorder which allows the user to verbalize reminders and short messages without paper or pencil. The products utilize computer chips and are the size of credit cards one-quarter inch thick. 15 The Fund has the right to demand stock registration and certain piggyback stock registration rights, and at least two registrations will be at the Company s expense. The Fund has the right to designate a nominee to the Board of Directors of the Company, which designee may serve as a Director or Advisory Director at his or her election. VALUATION OF INVESTMENTS The Prospectus and original offering documents specify that the securities held by the Fund are to be valued as follows: On a quarterly basis, Renaissance Group will prepare a valuation of the assets of the Fund including Temporary Investments, Eligible Portfolio Investments, and Other Portfolio Investments, subject to the approval of the Board of Directors. Valuations of portfolio securities will be done in accordance with generally accepted accounting principles and the financial reporting policies of the SEC. The applicable methods prescribed by such principles are described below. Generally, pursuant to the procedures established by the Investment Adviser, the fair value of each investment will be initially based primarily upon its original cost to the Fund. Costs will be the primary factor used to determine fair value until significant developments affecting the Portfolio Company (such as results of operations or changes in general market conditions) provide a basis for use in the fair value determination. Portfolio investment for which market quotations are readily available and which are freely transferable will be valued as follows: (i) securities traded on a securities exchange or the NASDAQ will be valued at the closing price on, or the last trading day prior to, the date of valuation and (ii) securities traded in the over-the-counter market will be valued at the average of the closing bid and asked priced for the last trading day on, or prior to, the date of valuation. Securities for which market quotations are readily available but are restricted from free trading in the public securities markets (such as Rule 144 stock) will be valued by discounting the closing price or the closing bid and asked prices, as the case may be, for the last trading day on, or prior to, the date of valuation to reflect the liquidity caused by such restriction, but taking into consideration the existence, or lack thereof, or any contractual right to have the securities registered and freed from such trading restrictions. The fair value of investments for which no market exists will be determined on the basis of appraisal procedures established in good faith by the Investment Adviser. Fair value determinations will be based upon such factors as the Portfolio Company s earnings and net worth, market prices for similar securities of comparable companies and an assessment of the Portfolio Company s future financial prospectus. In the case of unsuccessful operations, the appraisal may be based upon liquidation value. Appraisal valuations are necessarily subjective. COMPETITION FOR INVESTMENTS The Fund has significant competition for investment proposals. Competitive sources for growth capital for the industry include insurance companies, banks, equipment leasing firms, investment bankers and private investors. Many of these sources have substantially greater financial resources than is contemplated will be available to the Fund. Therefore, the Fund will have to compete for investment opportunities based on its ability to respond to the needs of the prospective company and its willingness to provide management assistance. In some instances, the Fund's requirements as to provision of management assistance will cause it to be non-competitive. 16 PERSONNEL The Fund has no direct employees, but instead has contracted Renaissance Group pursuant to the Investment Advisory Agreement to provide all management and operating activities. Renaissance Group currently has twelve employees who are engaged in performing the duties and functions required by the Fund. At the present time, a substantial portion of Renaissance Group s staff time is devoted to activities of the Fund. However, because of the diversity of skills required, the Fund cannot afford to employ all these persons solely for its own needs, and therefore, these employees are not engaged solely in activities of the Fund. The Investment Advisor currently serves as General Partner and manager to Renaissance Capital Partners, Ltd. ("Renaissance I") and Renaissance Capital Partners II, Ltd. ("Renaissance II") as well as the Investment Advisor to Renaissance U.S. Growth & Income Trust PLC ("RUSGIT"). Renaissance I and Renaissance II are BDC s with investment objectives similar to those of the Registrant. Renaissance I and Renaissance II are not actively seeking additional investments. RUSGIT is a public limited company registered in England and Wales, listed on the London Stock Exchange, which invests in privately placed convertible debentures issued by companies similar to the investments of the Partnership. RUSGIT will invest primarily pari-passu with Renaissance III. In 1996, RUSGIT raised a net investment of approximately $30,789,000 and invested in four investments totaling $9,000,000. In addition, Renaissance Capital Group, Inc. may, from time to time, provide investment advisory services, management consulting services and investment banking services to other clients. No accurate data or estimate is available as to the percentage of time, individually or as a group, that will be devoted to the affairs of the Fund. Initially, and while the Fund s assets are in the process of being invested, a majority of the staff time of Renaissance Group is employed in functions and activities of the Fund. Thereafter, the officers and employees have and will devote such time as is required, in their sole discretion, for the conduct of business, including the provision of management services to Portfolio Companies. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS The Fund does not contemplate making a substantial portion of its investments in foreign operations. ITEM 2. PROPERTIES. The Fund's business activities are conducted from the offices of Renaissance Group, which offices are currently leased until December 31, 1997 in a multi-story general office building in Dallas, Texas. The use of such office facilities, including office furniture, phone services, computer equipment, and files are provided by Renaissance Group at its expense pursuant to the Investment Advisory Agreement. ITEM 3. LEGAL PROCEEDINGS. There are no legal proceedings currently pending with regard to the Fund. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 1996. 17 PART II ITEM 5. MARKET FOR REGISTRATN S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TRADING As of December 31, 1995 there was no trading in the shares of the Fund and no established market exists for those shares. Pursuant to the prospectus dated May 25, 1994 transfers of the shares shall be restricted during the offering period and for six (6) months following termination of the offering. On April 30, 1996, the Fund s common stock began trading on the Nasdaq National Market under the trading symbol RENN. NUMBER OF HOLDERS As of December 31, 1996 there were approximately 2,000 beneficial holders of common stock. DIVIDEND POLICY The investment objective of the Fund is current income and long term capital appreciation. The Fund has elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code and will, on a quarterly basis, distribute substantially all current income in the form of a dividend. Since the Fund was in an offering phase for all of 1994, no dividends were paid; however, shareholders received a dividend on April 30, 1995, representing their pro rata portion of income earned by the Fund in 1994. Thereafter, the Fund has paid out dividends on a quarterly basis. ITEM 6. SELECTED FINANCIAL DATA. As of December 31, 1996, 1995 and 1994 and for the year ended December 31, 1995 and the period from January 20, 1994 (inception) through December 31, 1994: 1996 1995 1994 ---- ---- ---- Gross Income, (including realized gain) $ 3,843,726 $ 3,070,938 $ 573,868 Net Unrealized Appreciation on Investments 7,779,315 698,270 0 Net Income 10,060,620 2,503,034 206,970 Net Income Per Share 2.32 0.59 0.08 Total Assets 50,688,180 41,995,915 39,476,579 Net Assets 49,130,320 40,500,172 39,182,585 Net Assets Per Share 11.32 9.54 9.42 ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The purpose of the Fund is to provide growth capital to small and medium size public companies whose ability to service the securities is sufficient to provide a quarterly return to the shareholders and whose growth potentials are sufficient to provide opportunity for above average capital appreciation. SOURCES OF OPERATING INCOME Generally, the major source of operating income for the Fund is investment income, either in the form of interest on debentures, dividends on stock, or interest on securities held pending investment in Portfolio 18 companies. However, the Fund also anticipates generating income through capital gains. The Fund will generally structure investments to obtain a current return that is competitive with other long term finance sources available to potential Portfolio Companies. Further, the Fund may in some cases receive placement fees, draw-down fees and similar types of income. It might also receive management fee income. Generally, management fees received by Renaissance Group (or its personnel) for services to a Portfolio Company will be paid to the account of the Fund. The exception to this rule would apply to payments to Renaissance Group or affiliate or designee thereof for unusual services performed for the Portfolio Company, which are unrelated to and not required by the Portfolio Investment in such Portfolio Company and that are beyond the Fund's contemplated management assistance to Portfolio Companies (i.e., beyond providing for director designees and limited consultation services in connection therewith). These payments would be made to Renaissance Group or such other person only with the approval of the Board of Directors based, in part, on the determination that payments for such services are no greater than fees for comparable services charged by unaffiliated third parties, and subject to limitations and requirements imposed by the 1940 Act. While it will be the general principle that Renaissance Group and its officers and directors occupy a fiduciary relationship to the Fund and shall not receive outside compensation or advantage in conflict with that relationship, neither Renaissance Group nor its officers and directors are prohibited from receiving other income from non-conflicting sources. OTHER INVESTMENT FUNDS Renaissance Group has formed other investment funds to make investments in similar Portfolio Companies and may, in the future, form additional similar investment funds. Specifically, Renaissance Group formed Renaissance I and raised net capital contributions of approximately $12,100,000 in a private placement offering for the purpose of making primarily convertible debentures investments in small and medium size public companies. Renaissance I is currently fully invested. Renaissance Group also formed Renaissance II and raised net capital contributions of approximately $39,065,000 in a public offering for the purpose of making primarily convertible debenture investments in small and medium size public companies. Renaissance II is currently fully invested. In the Spring of 1996, Renaissance Capital Group, Inc. formed RUSGIT, which invests in privately placed convertible debentures issued by companies similar to the investments of the Partnership. RUSGIT will invest primarily pari-passu with Renaissance III. In 1996, RUSGIT raised a new investment of approximately $30,789,000, and as of December 31, 1996, invested in four investments totaling $9,000,000. The determination regarding the existence of conflict of interest between these affiliated investment funds and the Registrant, and the resolution of any such conflict, shall vest in the discretion of the Board of Directors, subject to the requirements and resolution of the 1940 Act. REGULAR QUARTERLY DIVIDENDS It is intended that cash dividends from operations be made to all shareholders each quarter to provide a cash return and also to enable the Fund to maintain its registered investment company status. Generally, this dividend will be made from profits and investment income from the previous quarter. However, in the event that net profits are not adequate from time to time, the dividends may be made from capital, so long as capital is sufficient to assure repayment of all obligations of the Fund and such capital distributions are permitted by applicable corporate law and the 1940 Act. 19 Quarterly dividends may be increased or decreased from time to time to reflect increases or decreases in current rates of investment income. The intention will be to provide each shareholder a current return compatible with the then present economic condition of the Fund. The accounting records are maintained on a calendar quarter basis with the fiscal year ending on December 31. Accordingly, quarterly distributions will be made to shareholders or record as of the end of each quarter and mailed to each shareholders address of record within 120 days of the end of the quarter. OPTIONAL DISTRIBUTIONS OF CAPITAL GAINS In addition to the regular quarterly dividends, it is intended that on an annual basis the Fund shall dividend out net realized capital gains. Further, when deemed appropriate by the Board of Directors and subject to registration requirements, the Fund may make in kind distribution of portfolio companies securities. However, the timing and payment of distributions, including in-kind distributions, is at the discretion of the Board of Directors. Pursuant to its Investment Advisory Agreement, Renaissance Group shall be paid annually and at the final dissolution or liquidation of the Fund, a management incentive fee of 20% of the realized capital gains net of realized and unrealized losses. Notwithstanding the foregoing, no payment of the management incentive fee shall be made which is not permitted by the Securities Act or other applicable law. The performance distributions cannot be adjusted without the consent of all of the shareholders, except if required by order of a regulatory agency. LIQUIDITY AND CAPITAL RESOURCES Through 1994, the Fund raised gross initial capital of approximately $42,213,000 in the offering and after administrative and offering expenses, brokers' commissions and management fees had a net available capital for investments of approximately $38,975,000. During the year 1995, the Fund invested in four additional portfolio companies with cost aggregating $9,348,546 after doing intensive due diligence on a total of fifteen potential companies. Dividends paid to investors in 1995 amounted to $798,050. Net income in 1995 from operating activities and interest income on funds invested in U.S. government and agency obligations pending investment in portfolio companies, net of operating expenses and management fees, amounted to $2,503,034. Cash used by operating activities in 1995 amounted to $1,234,699. The Fund's other potential sources of available capital include gains from capital transactions and additional investments made pursuant to the Fund's Dividend Reinvestment Plan. In 1995, the Fund received reinvested dividends in the amount of $424,717 and additional investments as provided for in the Fund Guidelines of $376,082. No capital gains were realized by the Fund during 1995 and no capital gain dividend payments were made. During the year ended December 31, 1996, the Fund invested $13,099,536 in six new portfolio investments and in follow-on investments. Dividends paid to investors in 1996 amounted to $2,406,381 including 1995 accrued dividends paid in 1996 and shares purchased for reinvestment amounted to $100,217. Net income from operating activities and interest income on funds invested in U.S. government and agency obligations, pending investment in portfolio companies, net of operating expenses and management fees amounted to $10,060,620. The net cash provided by operating activities was $4,498,954. The Fund also received $1,334,808 upon the sale of portfolio 20 investments and $357,250 was received from additional investments in the Fund s stock while dividend reinvestments were $685,416. Generally, investments in Portfolio Companies will have an initial fixed term of seven years, with payments of interest or dividends for that period. Further, investments in Portfolio Companies will be individually negotiated, non-registered for public trading, and will be subject to legal and contractual investment restrictions. Accordingly, the Portfolio Investment will generally be considered non-liquid. Another possible source of available capital is debt; however, the Fund does not presently intend to make leveraged investments. Therefore, a lack of liquidity will generally only affect the ability to make new investments and make distributions to shareholders. RESULTS OF OPERATIONS 1995 Compared to 1996 - - --------------------- During 1996, the Fund made additional portfolio investments aggregating $13,099,536 compared to $9,348,546 in 1995. As a result of these investments and earnings held for future investments, the Fund s 1996 total income was $11,623,041, consisting of the following components: (i) interest income of $2,182,594; (ii) dividend income of $306,190; (iii) fee income of $359,323; (iv) realized gains on investments of $995,296; and (v) unrealized appreciation on investments of $7,779,315. The aggregate 1996 income of $11,623,041 exceeded the aggregate 1995 income of $3,769,208 primarily as a result of the realized gains of $995,296 and an increase in unrealized appreciation to $7,779,315 in 1996 as compared to $698,270 in 1995. The Fund s operating expenses incurred in 1996 were $1,562,421 as compared to $1,266,174 in 1995. During 1996, an incentive fee of $199,039 was paid to the Investment Advisor representing 20% of the Fund s realized capital gains, net of any realized capital losses. In addition, the management fees increased $69,798 in 1996. As a result, the Fund s net income increased to $10,060,620 in 1996 as compared to $2,503,034 in 1995. 1994 Compared to 1995 - - --------------------- The Fund became operational in January 20, 1994 and had no significant operations prior to that time. The Registration Statement became effective on May 25, 1994. The offering was closed on December 31, 1994. At the close of the offering the Fund had raised net capital of approximately $38,975,000. During 1995, the Fund made four additional Portfolio investments with an aggregate cost of $9,348,546 compared to one such investment in 1994 with an aggregate cost of $3,600,000. As a result of the new and prior Portfolio investments and earnings on funds held for future investments, the Fund's 1995 income totaled $3,769,208, consisting of the following components: (i) interest income of $2,587,738; (ii) dividend income of $256,521 (iii) fee income of $226,679 and (iv) unrealized appreciation on investments of $698,270. 21 In the aggregate, 1995 income of $3,769,208 exceeded 1994 income of $573,868 by $3,195,340 due to the increased number of Portfolio investments at higher rates of return than investments in government securities, having funds invested for the entire year 1995 as opposed to only part of the year 1994, and the unrealized appreciation on investments. There was no increase or decrease in the value of the Fund's Portfolio investments in 1994. The Fund's operating expenses, including management fees of $709,381 paid to the Investment Advisor, were $1,266,174 in 1995, an increase from the 1994 expenses of $366,898 due to the full year operations. As a result, the Fund's net income increased in 1995 to $2,503,034 as compared to $206,970 in 1994. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. For the Index to Financial Statements, see "Index to Financial Statements" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this item is incorporated by reference from the Fund s definitive proxy statement to be filed no later than April 4, 1997 pursuant to regulation 14A of the General Rules and Regulations under the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION. Information required by this item is incorporated by reference from the Fund s definitive proxy statement to be filed no later than April 4, 1997 pursuant to regulation 14A of the General Rules and Regulations under the Exchange Act. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is incorporated by reference from the Fund s definitive proxy statement to be filed no later than April 4, 1997 pursuant to regulation 14A of the General Rules and Regulations under the Exchange Act, and amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. TRANSACTIONS WITH MANAGEMENT AND OTHERS. Transactions, including operational responsibility, duties and compensation, are governed by the Investment Advisory Agreement. PAYMENTS TO OFFICERS OF RENAISSANCE GROUP Certain officers of Renaissance Capital Group, Inc. will perform professional services for the Registrant and be compensated therefor. In that regard, Mr. Roelke, who served as Senior Vice President, General Counsel and Director for Renaissance Capital Group, Inc. and as General Counsel and Director of the Fund, until his retirement on December 31, 1996, has been primarily responsible for SEC filings, and for legal matters related to the 22 formation and operation of Registrant, including the preparation of investment documents and review of legal matters relating to the Fund s investment program. Included in general and administrative expenses of the Fund for 1996 was an aggregate of approximately $17,810 paid to Renaissance Capital Group as reimbursement for legal services provided to the Fund by Elroy G. Roelke, as General Counsel for the Fund. In 1995, in addition to charges by Elroy G. Roelke, the Fund incurred similar charges from Mr. Thomas J. Spackman, Jr., who was Associate General Counsel, until his resignation on September 15, 1995, when he entered private practice. Charges of this nature included in 1995 were $83,318. In addition, under certain circumstances, officers of Renaissance Group may receive compensation directly from the Portfolio Companies for the provision of services for such Portfolio Companies. All such compensation is subject to the prior approval of the independent Board of Directors and to compliance with the requirements of the 1940 Act. During the period ended December 31, 1995 while in some circumstances services were provided, no officer requested such compensation. AFFILIATED INVESTMENT COMPANIES Renaissance Group has formed other investment funds to make investments in similar portfolio companies and may, in the future, form additional similar funds. Specifically, Renaissance Group has formed Renaissance Capital Partners, Ltd. ("Renaissance I") and raised net capital contributions of approximately $12,100,000 in a private placement offering and Renaissance Capital Partners II, Ltd. ("Renaissance II") and raised net capital contributions of approximately $39,065,000. Both Renaissance I and Renaissance II are fully invested. The determination of whether a conflict of interest does, or does not exist between any party and the Fund in the future, and the methods of resolution of any such conflict, shall vest in the discretion of the Board of Directors, subject to the requirements and restrictions of the 1940 Act. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. DOCUMENTS FILED AS PART OF THIS FORM 10-K Financial Statements: The financial statements filed as part of this report are listed in "Index to Financial Statements" on page F-1 hereof. FINANCIAL SCHEDULES: There are no schedules presented since none are applicable. REPORTS ON FORM 8-K The Fund did not file a report on Form 8 K during the fourth quarter of 1996. 23 EXHIBITS 3.1 Renaissance Capital Growth & Income Fund Amended Articles of Incorporation and By-laws (1) 10.1 Investment Advisory Agreement as of February 15, 1994 (1) 10.2 Dividend Reinvestment Plan (1) ----- (1) Incorporated by reference from Form N-2 as filed with the Securities and Exchange Commission on February 25, 1994 (Registration No. 33-75758). 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 29, 1997 Renaissance Capital Growth & Income Fund III, Inc. (Registrant) /s/ Russell Cleveland By: ______________________________ Russell Cleveland, President and Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Fund in the capacities and on the date indicated Signatures. Signature Capacity in Which Signed Date - - ---------- ------------------------ ----- /s/ Russell Cleveland - - --------------------- Russell Cleveland Chairman, President and Director March 28, 1997 of the Fund /s/ Barbe Butschek - - -------------------- Barbe Butschek Senior Vice President, Secretary March 28, 1997 and Treasurer and Chief Financial Officer /s/ Ernest C. Hill - - -------------------- Ernest C. Hill Director of the Fund March 28, 1997 /s/ Thomas W. Pauken - - -------------------- Thomas W. Pauken Director of the Fund March 28, 1997 /s/ Peter Collins - - -------------------- Peter Collins Director of the Fund March 28, 1997 /s/ Richard W. Snyder - - --------------------- Richard W. Snyder Director of the Fund March 28, 1997 25 INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report F-2 Statements of Financial Condition F-3 December 31, 1996 and 1995 Statements of Investments- F-4 through F-6 December 31, 1996 and 1995 Statements of Operations - F-7 Years ended December 31, 1996, 1995 and January 20, 1994 (inception) through December 31, 1994 Statements of Changes in Net Assets F-8 Years ended December 31, 1996, 1995 and January 20, 1994 (inception) through December 31, 1994 Statements of Cash Flows - F-9 Years ended December 31, 1996, 1995 and January 20, 1994 (inception) through December 31, 1994 Notes to Financial Statements F-10 through F-14 26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Renaissance Capital Growth & Income Fund III, Inc.: We have audited the accompanying statements of financial condition of Renaissance Capital Growth & Income Fund III, Inc., including the statements of investments, as of December 31, 1996 and 1995, and the related statements of operations, changes in net assets, and cash flows for each of the years in the two-year period ended December 31, 1996 and the period January 20, 1994 (inception) through December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included verification and confirmation of investments owned as of December 31, 1996 and 1995, by examination of securities held in safekeeping for the Company and correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Renaissance Capital Growth & Income Fund III, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1996 and the period January 20, 1994 (inception) through December 31, 1994, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas February 7, 1997 27 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Financial Condition December 31, 1996 and 1995 Assets 1996 1995 -------- ---- ---- Cash and cash equivalents $ 15,841,272 $ 3,378,905 Short term investments at quoted market value, cost of $21,348,889 at December 31, 1995 (note 5) - 21,550,005 Investments at fair value, cost of $25,708,570 and $12,948,546 at December 31, 1996 and 1995, respectively (note 4) 34,186,155 13,445,700 Receivable from sale of investment (note 6) - 2,500,000 Accounts receivable 169,486 119,003 Interest receivable 158,029 544,356 Organization costs, net of accumulated amortization 333,238 457,946 ---------- ---------- $ 50,688,180 $ 41,995,915 ========== ========== Liabilities and Net Assets -------------------------- Liabilities: Accounts payable $ 36,077 $ - Accounts payable-affiliate (note 3) 523,923 307,607 Dividends payable 997,860 1,188,136 --------- --------- 1,557,860 1,495,743 --------- --------- Net assets (note 7): Common stock, $1 par value; authorized 20,000,000 shares; 4,339,422 and 4,244,630 shares issued and outstanding at December 31, 1996 and 1995, respectively (note 3) 4,339,422 4,244,630 Additional paid-in capital 36,222,567 35,531,724 Undistributed net investment income 8,568,331 723,818 ---------- ---------- Net assets, equivalent to $11.32 and $9.54 per share on the 4,339,422 and 4,244,630 shares outstanding at December 31, 1996 and 1995, respectively 49,130,320 40,500,172 Commitments and contingencies (notes 3 and 4) ---------- ---------- $ 50,688,180 $ 41,995,915 ========== ========== See accompanying notes to financial statements. 28 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Investments December 31, 1996 and 1995 1996 ----------------------------------------- Eligible Portfolio Investments- Convertible Debentures and Interest Due Fair Notes Receivable rate date Cost Value ---------------- ------- ----- ----- ------ Valued at fair value as determined by the Investment Advisor (note 4): Voice It Worldwide, Inc. - Convertible debenture 8.0% 11/1/02 $ 2,450,000 $2,828,750 Packaging Research Corporation (1): Convertible debenture 9.0 1/1/03 33,200,000 800,000 Note receivable 15.0 2/28/97 93,900 Poore Brothers, Inc. - Convertible debenture 9.0 7/1/02 1,788,571 5,926,945 Contour Medical, Inc. - Convertible debenture 9.0 7/1/03 2,500,000 2,500,000 Topro, Inc. - Convertible debenture 9.0 varies 3,500,000 5,707,500 Jakks Pacific, Inc. - Convertible debenture 9.0 12/31/03 3,000,000 3,000,000 Integrated Securities Systems - Convertible debenture 9.0 12/31/03 2,300,000 7,414,047 ---------- ---------- 18,832,471 28,177,242 Other Portfolio Investments - Convertible Debenture --------------------- Valued at fair value as determined by the Investment Advisor (note 4): Bentley Pharmaceuticals, Inc. - Convertible debenture 12.0 2/13/06 744,800 1,040,000 -------- ---------- 744,800 1,040,000 ------- ---------- (1) Interest payments under the terms of the convertible debenture or note receivable are delinquent as of December 31, 1996. (Continued) 29 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Investments, Continued 1996 ------------------------------------- Eligible Portfolio Investments - Common Stock, Preferred Stock Fair and Warrants Shares Cost Value ------------ ------ ---- ----- Valued at fair value as determined by the Investment Advisor (note 4): Interscience Computer Corporation: Series A, cumulative convertible redeemable preferred stock 36,000 $ 3,600,000 2,600,000 Series B, cumulative convertible preferred stock 4,000 400,000 400,000 Topro, Inc. - warrants to purchase 375,000 shares of Topro, Inc. common stock 375,000 - 220,313 Voice It Worldwide, Inc. - warrants to purchase 25,000 shares of Voice It Worldwide, Inc. common stock 25,000 - - Voice It Worldwide, Inc. - warrant to purchase 915,000 shares of Voice It Worldwide, Inc. common stock 1 50,000 50,000 --------- --------- 4,050,000 3,270,313 --------- --------- Other Portfolio Investments - Common Stock and Warrants ------------------------- Dwyer Group, Inc. - common stock 700,000 2,054,182 1,305,600 Bentley Pharmaceuticals, Inc. - warrants to purchase 393,000 shares of Bentley Pharmaceuticals, Inc. common stock 393,000 27,117 393,000 ---------- ---------- 2,081,299 1,698,600 ---------- ---------- $ 25,708,570 34,186,155 ========== ========== (Continued) 30 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Investments, Continued 1995 ------------------------------- Eligible Portfolio Investments - Common Stock, Preferred Stock and Fair Warrants Shares Cost Value --------- ------ ---- ------ Valued at fair value as determined by the Investment Advisor (note 4): Dwyer Group, Inc. - common stock 504,900 $ 1,548,546 1,435,700 Interscience Computer Corporation- Series A, cumulative convertible redeemable preferred stock 36,000 3,600,000 3,600,000 Voice It Worldwide, Inc. - warrant to purchase 915,000 shares of Voice It Worldwide, Inc. common stock 1 50,000 50,000 --------- --------- 5,198,546 5,085,700 --------- --------- Eligible Portfolio Investments - Interest Due Convertible Debentures Rate Date ---------------------- ---- ---- Valued at fair value as determined by the Investment Advisor (note 4): Packaging Research Corporation - Convertible debenture 9.0% 1/1/03 3,200,000 3,810,000 Poore Brothers, Inc. - Convertible debenture 9.0 7/1/02 2,100,000 2,100,000 Voice It Worldwide, Inc.- Convertible debenture 8.0 11/1/02 2,450,000 2,450,000 --------- --------- 7,750,000 8,360,000 --------- --------- $ 12,948,546 13,445,700 ========== ========== See accompanying notes to financial statements. 31 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Operations Years ended December 31, 1996 and 1995 and the period January 20, 1994 (inception) through December 31, 1994 1996 1995 1994 ---- ---- ---- Income: Interest $ 2,182,917 2,587,738 412,890 Dividend income 306,190 256,521 74,157 Commitment and other fees 359,323 226,679 86,821 --------- --------- ------- 2,848,430 3,070,938 573,868 --------- --------- ------- Operating expenses (note 3): General and administrative 584,183 556,793 135,928 Incentive fee 199,059 - - Management fees 779,179 709,381 230,970 --------- --------- ------- 1,562,421 1,266,174 366,898 --------- --------- ------- Operating income 1,286,009 1,804,764 206,970 Investment income: Net unrealized appreciation on investments 7,779,315 698,270 - Net realized gain on investments 995,296 - - --------- -------- ------- Investment income 8,774,611 698,270 - --------- -------- ------- Net income $ 10,060,620 2,503,034 206,970 ========== ========= ======= Net income per share (note 1(d)) $ 2.32 .59 .08 ========== ========= ======= See accompanying notes to financial statements. 32 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Changes in Net Assets Years ended December 31, 1996 and 1995 and the period January 20, 1994 (inception) through December 31, 1994 Proceeds from issuance of 4,158,897 shares, net of syndication fees and brokers commissions of $3,237,438 (note 3) $ 38,975,555 Net income 206,970 ---------- Net assets, December 31, 1994 39,182,525 Net income 2,503,034 Dividends (1,986,186) Proceeds from issuance of 40,141 shares (note 7) 376,082 Reinvested dividends to purchase 45,592 shares (note 7) 424,717 ---------- Net assets, December 31, 1995 40,500,172 Net income 10,060,620 Dividends (2,216,105) Proceeds from issuance of 10,617 shares (note 7) 100,217 Reinvested dividends to purchase 74,175 shares (note 7) 685,416 ---------- Net assets, December 31, 1996 $ 49,130,320 ========== See accompanying notes to financial statements. 33 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Statements of Cash Flows Years ended December 31, 1996 and 1995 and the period January 20, 1994 (inception) through December 31, 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 10,060,620 2,503,034 206,970 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net unrealized appreciation on investments (7,779,315) (698,270) - Net realized gain on investments (995,296) - - Discount accretion on short-term investments - (107,973) (16,272) Amortization of organization costs 124,708 124,709 40,889 Increase (decrease) in receivable from sale of investment 2,500,000 (2,500,000) Increase in accounts receivable (50,483) (25,396) (93,607) Decrease (increase) in interest receivable 386,327 (544,356) - Increase in organization costs - - (623,544) Increase in accounts payable 36,077 - - Increase in accounts payable- affiliate 216,316 13,553 294,054 --------- ---------- ------- Net cash provided by (used in) operating activities 4,498,954 (1,234,699) (191,510) --------- ---------- ------- Cash flows used in investing activities : Purchases of investments (13,099,536) (9,348,546) (3,600,000) Proceeds from sale of investments 1,334,808 - - Decrease in short term investments, net 21,348,889 460,823 (21,685,467) ---------- ---------- ---------- Net cash provided by (used in) investing activities 9,584,161 (8,887,723)(25,285,467) ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of shares 100,217 808,257 38,543,380 Reinvested dividends to purchase shares 685,416 424,717 - Cash dividends (2,406,381) (798,050) - --------- ---------- ---------- Net cash provided by (used in) financing activities (1,620,748) 434,924 38,543,380 --------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 12,462,367 (9,687,498) 13,066,403 Cash and cash equivalents at beginning of the period 3,378,905 13,066,403 - ---------- ---------- ---------- Cash and cash equivalents at end of the period $ 15,841,272 3,378,905 13,066,403 ========== ========= ========== Noncash financing activities: The fourth quarter dividends of $997,860 and $1,188,136 were accrued as of December 31, 1996 and 1995, respectively. As of December 31, 1994, $432,175 in subscriptions receivable were held in escrow by a bank. See accompanying notes to financial statements. 34 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements December 31, 1996, 1995 and 1994 (1) Organization and Business Purpose --------------------------------- Renaissance Capital Growth & Income Fund III, Inc. (the Fund), a Texas corporation, was formed on January 20, 1994. The Fund offered to sell shares in the Fund until closing of the offering on December 31, 1994. The Prospectus of the Fund required minimum aggregate capital contributions by shareholders of not less than $2,500,000 and allowed for maximum capital contributions of $50,000,000. The Fund seeks to achieve current income and capital appreciation potential by investing primarily in unregistered equity investments and convertible issues of small and medium size companies which are in need of capital and which Renaissance Capital Group, Inc. (Investment Advisor) believes offer the opportunity for growth. The Fund has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (1940 Act). (2) Summary of Significant Accounting Policies ------------------------------------------ (a) Valuation of Investments ------------------------ Portfolio investments are stated at quoted market or fair value as determined by the Investment Advisor (note 4). The securities held by the Fund are primarily unregistered and their value does not necessarily represent the amounts that may be realized from their immediate sale or disposition. (b) Statements of Cash Flows ------------------------ The Fund considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (c) Federal Income Taxes -------------------- The Fund has to elected the special income tax treatment available to "regulated investment companies" under Subchapter M of the Internal Revenue Code (IRC) in order to be relieved of federal income tax on that part of its net investment income and realized capital gains that it pays out to its shareholders. The Fund's policy is to comply with the requirements of the IRC that are applicable to regulated investment companies. Such requirements include, but are not limited to certain qualifying income tests, asset diversification tests and distribution of substantially all of the Fund s investment company taxable income to its shareholders. It is the intent of management to distribute all of its investment company taxable income and long term capital gains within the defined period under the IRC to qualify as a regulated investment company. Therefore, no federal income tax provision is included in the accompanying financial statements. (Continued) 35 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC Notes to Financial Statements (d) Net Income Per Share -------------------- Net income per share is based on the weighted average of shares outstanding during 1996, 1995 and the period January 20, 1994 (inception) through December 31, 1994 of 4,332,390, 4,217,428 and 2,674,060, respectively. (e) Management Estimates -------------------- The financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of the accompanying financial statements requires estimates and assumptions made by management of the Fund that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and income and expenses for the period. Actual results could differ significantly from those estimates. (f) Organization Costs ------------------ Costs of organizing the Fund were capitalized and are being amortized on a straight-line basis over five years beginning with the commencement of the Fund's activities. (g) Financial Instruments --------------------- In accordance with the reporting requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the Fund calculates the fair value of its financial instruments and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. When the fair value reasonably approximates the carrying value, no additional disclosure is made. (3) Management and Organization Fees -------------------------------- Pursuant to the Prospectus, an initial share purchase of $100,000 was made by the Investment Advisor. Upon admission of additional shareholders at the closing of the offering described in Note 1 above, the Investment Advisor had the right to withdraw from the Fund and was entitled to receive a return of initial capital of $100,000 without interest. The right by the Investment Advisor to withdraw from the Fund was not elected and the initial capital contribution was retained by the Fund, therefore, increasing the shares issued by 10,000 in 1996. (Continued) 36 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC Notes to Financial Statements The Investment Adviser for the Fund is registered as an investment adviser under the Investment Advisers Act of 1940. Pursuant to an Investment Advisory Agreement, the Investment Advisor performs certain services, including certain management, investment advisory and administrative services necessary for the operation of the Fund. In addition, under this agreement the Investment Advisor is reimbursed by the Fund for certain administrative expenses. A summary of fees and reimbursements paid by the Fund under the Investment Advisory Agreement, the Prospectus and the original offering document are as follows: In connection with the offering of the shares, the Fund paid the Investment Advisor and an affiliate of the Investment Advisor $3,237,438 in 1994. Such fees were for performance of organizational, offering and marketing services by the Investment Advisor and an affiliate in connection with the offering. The Investment Advisor receives a fee equal to .4375% (1.75% annually) of the Net Assets each quarter. The Fund paid, during the years ended December 31, 1996, 1995 and the period ended December 31, 1994, $779,179, $709,381 and $230,790, respectively, for such operational management fees. Amounts payable for such fees at December 31, 1996 and 1995 were $523,923 and $307,607, respectively. The Investment Advisor was reimbursed by the Fund for administrative expenses paid by the Investment Advisor on behalf of the Fund. Such reimbursements were $219,758, $295,641 and $20,346, for the years ended December 31, 1996 and 1995 and the period ended December 31, 1994, respectively, and are included in general and administrative expenses in the accompanying statements of operations. The Investment Advisor is to receive an incentive fee in an amount equal to 20% of any of the Fund's realized capital gains computed net of all realized capital losses and unrealized depreciation. The Fund paid, during the year ended 1996, $199,059, for such incentive fee. For the year ended December 31, 1995 and the period ended December 31, 1994, no incentive fees were incurred. (4) Investments ----------- The Fund invests primarily in convertible securities and equity investments of companies that qualify as Eligible Portfolio Companies as defined in Section 2(a)(46) of the 1940 Act or in securities that otherwise qualify for investment as permitted in Section 55(a)(1) through (5) (note 5). Under the provisions of the 1940 Act at least 70% of the Fund's assets must be invested in Eligible Portfolio Companies. These investments are carried in the statements of financial condition as of December 31, 1996 and 1995, at fair value, as determined in good faith by the Investment Advisor. The investments held by the Fund are generally convertible after five years into the common stock of the issuer at a set conversion price. The common stock acquired upon exercise of the conversion feature is generally unregistered and is thinly to moderately traded, but is not otherwise restricted. The Fund may register and sell such securities at any time with the Fund paying the costs of registration. Dividends or interest on the convertible securities is generally payable monthly. The investments often have call options, usually commencing three years subsequent to issuance, at prices specified in the investment agreements. The Prospectus and the original offering document specify that securities held by the Fund shall be valued as follows: (Continued) 37 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements Generally, pursuant to procedures established by the Investment Advisor, the fair value of each investment will be initially based upon its original cost to the Fund. Costs will be the primary factor used to determine fair value until significant developments affecting the investee company (such as results of operations or changes in general market conditions) provide a basis for use in an appraisal valuation. Portfolio investments for which market quotations are readily available and which are freely transferable will be valued as follows: (i) securities traded on a securities exchange or the NASDAQ will be valued at the closing price on, or the last trading day prior to, the date of valuation and (ii) securities traded in the over-the-counter market (pink sheets) will be valued at the average of the closing bid and asked prices for the last trading day on, or prior to, the date of valuation. Securities for which market quotations are readily available but are restricted from free trading in the public securities markets (such as Rule 144 stock) will be valued by discounting the closing price or the closing bid and asked prices, as the case may be, for the last trading day on, or prior to, the date of valuation to reflect the illiquidity caused by such restrictions, but taking into consideration the existence, or lack thereof, of any contractual right to have the securities registered and freed from such trading restrictions. For this purpose, an investment that is convertible into a security for which market quotations are readily available or otherwise contains the right to acquire such a security will be deemed to be an investment for which market quotations are readily available. The fair value of investments for which no market exists will be determined on the basis of appraisal procedures established in good faith by the Investment Advisor. Appraisal valuations will be based upon such factors as the company's earnings and net worth, the market prices for similar securities of comparable companies and an assessment of the company's future financial prospectus. In the case of unsuccessful operations, the appraisal may be based upon liquidation value. Appraisal valuations are necessarily subjective. (Continued) 38 RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC. Notes to Financial Statements The financial statements include investments valued at $34,186,155 (67% of total assets) and $13,445,700 (32% of total assets) as of December 31, 1996 and 1995, respectively, whose value has been estimated by the Investment Advisor in the absence of a readily ascertainable market values. Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. As of December 31, 1996 and 1995, the net unrealized appreciation associated with investments held by the Fund was $8,477,585 and $698,270, respectively. (5) Short Term Investments ---------------------- Short term investments were comprised of U.S. Government and Agency obligations bearing interest at ranges of 5.47% to 5.48% with maturities between March 28, 1996 and April 25, 1996 as of December 31, 1995. Such investments qualify for investment as permitted in Section 55(a)(1) through (5) of the 1940 Act. (6) Receivable from Sale of Investment ---------------------------------- As of December 31, 1995, the Fund had advanced $2,500,000 to a portfolio company. The Fund, however rescinded its investment and the proceeds were due from the portfolio company as of December 31, 1995. The entire $2,500,000 was reimbursed in full to the Fund during 1996. (7) Purchase of Additional Shares ----------------------------- During the years ended December 31, 1996 and 1995, in accordance with Fund guidelines, additional contributions were received from certain shareholders which were used to purchase 10,617 and 40,141 additional Fund shares, respectively, issued directly by the Fund. As summarized in note 3, the Investment Advisor exercised its right to convert its initial share purchase to 10,000 shares in 1996. Also, in accordance with Fund guidelines, certain shareholders reinvested their dividends in the Fund, purchasing 74,175 and 45,592 Fund shares issued directly by the Fund in 1996 and 1995, respectively. EX-27 2 FINANCIAL DATA SCHEDULE FOR 1996 FORM 10K
6 12-MOS 9-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1996 25,708,570 33,248,818 34,186,155 34,001,181 327,515 369,074 333,238 364,671 15,841,272 7,527,529 50,688,180 42,262,455 0 0 0 0 1,557,860 609,935 1,557,860 609,935 0 0 40,561,989 40,561,318 4,339,422 4,339,353 4,244,630 4,244,630 90,746 338,839 0 0 0 0 0 0 8,477,585 752,363 49,130,320 41,652,520 306,190 231,190 2,182,917 1,697,980 359,323 203,823 1,562,421 994,685 1,286,009 1,138,308 995,296 398,400 7,779,315 48,722 10,060,620 1,585,430 0 0 1,220,809 819,646 995,296 398,400 0 0 20,617 20,617 0 0 74,175 74,106 8,630,148 1,152,348 25,548 25,548 0 0 0 0 0 0 779,179 558,605 0 0 1,562,421 994,685 44,815,246 41,076,346 9.54 9.54 0.297 0.33 2.025 0.01 0.512 0.28 0 0 0 0 11.32 9.60 .035 .024 0 0 0 0
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