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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
MARK ONE
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996 Commission File No. 0- 38593
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RENAISSANCE CAPITAL PARTNERS II, LTD.
(Exact name of registrant as specified in its charter)
TEXAS 75-2407159
(State of incorporation or organization) (I.R.S. Employer Identification No.)
SUITE 210, LB 59,
8080 NORTH CENTRAL EXPRESSWAY,
DALLAS, TEXAS 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 891-8294
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Limited Partnership Interests
Subscription Units of $1,000
(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.( )
State the aggregate market value of the voting stock held by non
affiliates of the registrant.
As of December 31, 1996, there were 43,434.01 Units of Limited
Partnership Interest outstanding. A Unit is an initial offering Subscription
of $1,000. There is no market in the Units. Based on Unit values as
reflected in the Registrant's Financial Statements, the aggregate value of
the Partnership Interests held by non-affiliates as of December 31, 1995 is
$26,634,818. Aggregate value of the Partnership Interests held by affiliates
as of December 31, 1996 is $38,025.
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Part I
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ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Renaissance Capital Partners II, Ltd. (sometimes referred to as the
"Registrant" or the "Partnership") is a Texas limited partnership, (organized
as of January 14, 1991 with commencement of operations on January 6, 1992),
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"). On January 23,
1991, the Partnership filed a registration statement on Form N-2 for the sale
of up to 50,000 Limited Partnership Units at an offering price of $1,000 per
Unit. The Partnership continued the offering until March 31, 1992 at which
time the offering was closed.
The investment objective of the Partnership is to provide investors with
current income and long-term capital appreciation by investing primarily in
private placement convertible debt securities (the "Debentures") of small and
medium size public companies ("Portfolio Companies"). The Partnership's
stated goal is to achieve a 10% annual current return to the holders of
limited partnership interests (the "Interests"); provided, however, that such
current return will be increased or decreased from time to time, dependent
upon the actual operating results of the Partnership.
Renaissance Capital Group, Inc. ("Renaissance Group"), a Texas
corporation, serves as the managing general partner (the "Managing General
Partner") and as investment adviser to the Partnership. In these capacities,
Renaissance Group is primarily responsible for the selection, evaluation,
structure, and administration of the Partnership's investment portfolio.
Renaissance Group is a registered investment adviser under the Investment
Advisers Act of 1940, as amended (the "Advisers Act") and the Texas
Securities Act. However, these activities are subject to the supervision of
two Independent General Partners of the Partnership who provide guidance with
respect to the operations of the Partnership (the "Independent General
Partners") (see "Item 10. Directors and Executive Officers of Registrant").
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 that have made arrangements,
satisfactory to the Partnership, for commencement of such registration in
conjunction with the financing. The terms of the documents evidencing the
Partnership's investment ("Portfolio Investments") in Portfolio Companies
generally provide that the Partnership will have the right to convert its
Debentures into or otherwise acquire common stock in exchange for its
Debentures. Each financing has been, and it is generally contemplated will
continue to be, a direct placement with the Portfolio Company.
Accordingly, while such common stock of the Portfolio Company may be
publicly traded, the common stock to be acquired by the Partnership 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.
On January 6, 1992 the minimum offering requirements had been met and
the first closing of the sale of Units occurred in the amount of $2,808,000.
Following the initial closing, the Partnership commenced carrying forward its
plan of business operations. The Partnership directs its investment efforts
to small and medium sized Portfolio Companies.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Partnership has no concentrated industry segments. The Partnership
does not contemplate specializing in any particular industry but instead has
diversified its investments to a variety of industries.
NARRATIVE DESCRIPTION OF THE BUSINESS
The Partnership, as a Business Development Company under the 1940 Act,
is engaged primarily in investments in convertible debentures 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 debenture securities of eligible
Portfolio Companies or other investments as provided under the 1940 Act, the
Partnership's funds were invested in "Temporary Investments" consisting
primarily of money market funds.
At December 31, 1996 the Partnership's investment assets were classified
by amount as follows:
Classification Cost Percentage
-------------- ---- of Investments
--------------
Eligible Portfolio Companies $23,363,737 100 %
Other Portfolio Companies none 0 %
INVESTMENT OBJECTIVES
The investment objective of the Partnership is to provide its Limited
Partners with both current income and long-term capital appreciation.
The Partnership seeks to provide current cash returns to investors
through a priority distribution on each Limited Partner's Capital
Contribution of current investment interest income (as defined in the
Partnership's Restated Agreement of Limited Partnership) (the "Partnership
Agreement") while providing opportunities for capital gains appreciation
through appreciation in values of convertible debenture securities.
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The Partnership Agreement provides for a quarterly distribution to the
Limited Partners, to be made within 30 days of the end of each quarter.
Distributions will be made in such amounts as shall at the determination of
the Managing General Partner, reflect the current earnings of the
Partnership. Distributions may be made from capital. Distributions are not
required if, after the proposed distribution, the assets would not be
sufficient to pay the debts and obligations of the Partnership.
As a result of decreasing cash resources in 1995 and 1996, the
distributions to the Limited Partners were discontinued. As the
Partnership's investments are liquidated, or other cash resources obtained,
the Partnership expects to reinstate such payments in whole or in part based
upon the cash resources.
Optionally, in addition to the quarterly distributions, the Managing
General Partner may make distributions of realized gains or of securities
that have appreciated in value.
GENERAL INVESTMENT POLICIES
As a general matter, the Partnership has considered, and it is
contemplated will continue to consider, the following factors in deciding
whether to make or to continue holding any investment :
(i) Publicly-held Company - each Portfolio Company should be a
company whose common stock is registered for public trading
under the Exchange Act or that has made arrangements,
satisfactory to the Partnership, for such registration so that
such company meets this criteria at the time the Partnership
acquires common stock upon conversion of the Debentures;
(ii) Earnings History - the Partnership prefers the existence of a
history of profitable operations or, alternatively, a
reasonable expectation that with the contemplated use of the
proceeds, the Portfolio Company's future operations will be
conducted at a level of profitability and cash flow to
satisfactorily service the Partnership's Debentures.
Generally, debt repayment under the Debentures will be geared
to the anticipated earnings ability of the Portfolio Company as
contrasted to a proposed refinancing or sale of assets.
Notwithstanding the foregoing, because of the diversity of
investments to be considered, the Managing General Partner has
not established fixed financial ratios (such as an earnings
coverage, debt to worth, or current assets to current
liabilities ratios) as investment criteria;
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(iii) Management - the Partnership will seek companies with competent
senior managers and ideally, a vested interest in the equity
growth of the company;
(iv) Nature of the business and industry - the Partnership will seek
companies that have a recognized market for their products or
services in a stable or growing industry;
(v) Management Involvement - the Partnership will seek companies
that are willing to permit the Partnership to take a
substantial equity position in the company and have
representation on its board of directors. Generally, each
Portfolio Company will be required to accept either a
Partnership nominee or an advisory director to its Board of
Directors;
(vi) Lack of Investment Concentration - Portfolio Investments must
generally be varied as to both company and industry. As a
general principle, approximately ten percent (10%) (a range of
8% to 12%) of the Portfolio Investments will be invested in any
one Portfolio Company. However, a larger percentage of the
initial capital may be invested in any one company so long as
the General Partners have reason to believe that sufficient
funds will be available to subsequently obtain a spreading of
investment funds.
The Partnership's nominees to the boards of directors of Portfolio
Companies will generally be selected from among the officers of the Managing
General Partner. When, in the discretion of the Managing General Partner, a
suitable nominee is not available from among its officers, the Managing
General Partner 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
940 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.
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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:
(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 Partnership:
(A) any arrangement whereby the Partnership, through its officers,
employees, or General Partners, 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 General Partners believe 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.
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Further, while the 1940 Act allows a BDC to "control" a Portfolio
Company, it will not be the general policy of the Partnership to acquire a
controlling position in its Portfolio Companies. The Partnership will only
provide managerial assistance, and will seek to limit its "control" position
by requiring only that a designee of the Partnership be elected to the board
of directors of the Portfolio Company, or be selected an advisory director.
While these will be the Partnership's general policies, the application of
these policies will of necessity vary with each investment situation.
1940 ACT REQUIREMENTS
The BDC election exempts the Partnership from some provisions of the
1940 Act. However, except for those specific provisions, the Partnership
will continue to be subject to all provisions of the 1940 Act not exempted,
including the following:
(1) restrictions on the Partnership 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 Interests;
(2) restrictions against certain transactions between the Partnership
and affiliated persons;
(3) restrictions on issuance of senior securities, such not being
prohibited by the 1940 Act but being restricted as a percentage of
capital;
(4) compliance with accounting rules and conditions as established by
the SEC, including annual audits by independent accountants;
(5) compliance with fiduciary obligations imposed under the 1940 Act;
(6) requirement that the Limited Partners ratify the selection of the
Partnership's independent public accountants and the approval of
the investment advisory or similar contracts and amendments
thereto; and
(7) restrictions on purchases of Units by the Partnership.
NON-QUALIFYING BDC INVESTMENTS
Further, under the 1940 Act, the Partnership may only acquire qualifying
and certain assets necessary for its operations (such as office furniture,
equipment and facilities) if, at the time of any proposed acquisition, not
less than 70% of the value of the Partnership assets consists of qualifying
assets. Qualifying assets include, inter alia, Eligible Portfolio Companies;
"follow-on" financing to Portfolio Companies in which the BDC is a principal
security holder; cash items; U.S. governmental securities; and high-quality,
short-term debt securities.
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INVESTMENT ADVISERS ACT OF 1940 AND INVESTMENT ADVISERS AGREEMENT
The Managing General Partner is the investment adviser to the
Partnership pursuant to the Investment Advisory Agreement, as amended on
March 7, 1994 and ratified by a majority of the holders of Units on April 22,
1994, (the "Investment Advisory Agreement") and is registered as an
investment adviser under the Advisers Act, 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 the Managing General
Partner is entitled to receive an annual management fee of 2% of the
Partnership's assets, provided, however that to the extent any portion of
such fee is based on an increase in Net Asset Value attributable to non-
realized appreciation of securities or other assets that exceed capital
contributions, such portion of the fee shall be deferred and not earned or
payable until such time as appreciation or any portion thereof is in fact
realized and then such deferred fees shall be earned and paid in proportion
to the gains in fact realized, In addition, the Managing General Partner is
entitled to receive an incentive fee ("Incentive Fee") in an amount equal to
20% of the Partnership's realized capital gains computed net of all realized
capital losses and unrealized depreciation and after the Limited Partners
have received a sum equal to a ten percent (10%) annual return on their
Capital Contributions (as defined in the Restated Partnership Agreement to
mean Limited Partner capital contributions reduced by brokerage commissions
and fees incurred by the Partnership on behalf of such Limited Partner or
Partners). The Managing General Partner is entitled to receive a fee equal
to one-half of one percent (0.5%) of the initial limited partnership
contributions and is entitled to receive a quarterly fees thereafter equal to
0.5% of Net Assets, as defined in the Partnership Agreement. For the years
ended December 31, 1996, 1995 and 1994, the Managing General Partner elected
to calculate the quarterly fees based on the lesser of contributed capital or
Net Assets. Had the Managing Partner elected to calculate the quarterly fee
solely based on Total Assets, the fee would have been approximately $153,000
greater than the cumulative fee charged.
Investment advisory agreements are further subject to the 1940 Act,
which requires that the agreement, in addition to having been approved by the
majority of the outstanding Interests, shall precisely describe all
compensation to be paid; shall be approved annually by a majority vote of
either the Independent General Partners or of the Interests; may be
terminated without penalty on not more than 60 days' notice by a vote of a
majority of the Interests; and shall terminate automatically in the event of
assignment. The Managing General Partner has agreed that the Partnership
Agreement and the Investment Advisory Agreement shall constitute the
Partnership's advisory agreements and shall at all times be construed so as
to comply with the Advisers Act and the 1940 Act.
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PARTNERSHIP TERM
The Partnership Agreement provides for a term of eight (8) years from
the final closing of the initial offering which was March 31, 1993, subject
however to the right of the Managing General Partner with the concurrence of
at least one Independent General Partner to extend the term for up to two (2)
additional one-year periods.
PARTNERSHIP PORTFOLIO INVESTMENTS
As of December 31, 1996 the Partnership has made ten (10) Portfolio
Investments of which seven (7) are active.
AMERISHOP, INC.
AmeriShop provides incentive merchandising and membership buying
programs.
On July 10, 1992, the Partnership invested $750,000 in a 12.5%
convertible debenture issued by AmeriShop, Inc. ("AmeriShop") of Grand
Rapids, Michigan as the first disbursement under a $1,500,000 loan agreement
pursuant to which the Partnership had the option to invest an additional
$750,000 subject to certain conditions. During 1993, the Partnership
advanced additional money in the form of convertible debentures and as of
December 31, 1996, holds $2,000,000 in convertible debentures from AmeriShop.
On January 21, 1994, the Partnership advanced AmeriShop $250,000, which note
was subsequently rolled into a note in the face amount of $410,000. On March
21, 1994, June 7, 1994, and August 17, 1994 the Partnership provided a 12.5%
short term promissory note financing in the amount of $225,000, $300,000 and
$300,000 respectively. These advances, along with $193,448 in unpaid past
due interest, were rolled over into a single 12.5% short term promissory note
in the amount of $1,428,448 due on or before July 1, 1995.
Interest is payable monthly. The debentures are non-callable for three
years, provide for monthly principal installments commencing on July 1, 1995,
which installments will amortize approximately one/half of the principal with
the balance due at maturity on July 1, 1999. At the option of the
Partnership, the debentures are convertible at any time into AmeriShop common
stock at $0.56 per share. The Partnership has the right to demand stock
registration and certain piggyback stock registration rights, and after April
10, 1995, is entitled to at least one such registration at AmeriShop's
expense.
During 1995, the Partnership made additional investments of $125,000 and
$75,000 in the form of 10% promissory notes due March 31, 1996 and on October
4, 1996, the Partnership advanced an additional $100,000 evidenced by a 10%
promissory note due October 5, 1997. This last advance results in an
aggregate promissory note of $1,728,448.
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As of December 31, 1996, all accrued interest due on the debentures and
notes have been fully reserved. AmeriShop is not in compliance with its loan
covenants, nor is it in compliance with its principal and interest payment
requirements. The Partnership has waived default by the Company until March
31, 1997.
The valuation reserve was increased from $500,000 to $1,000,000 at
December 31, 1996.
James Kenney, formerly an officer of the Managing General Partner was
elected to the Board of Directors of AmeriShop as a Partnership Director
Designee. While Mr. Kenney now serves as a consultant to the Partnership
from time to time, the Partnership does not now have a Director Designee on
AmeriShop's Board of Directors.
BIODYNAMICS INTERNATIONAL, INC.
Biodynamics processes, manufactures and distributes worldwide, specialty
surgical products for neuro, orthopedic, cardiovascular, reconstructive and
general surgical applications. Its major business is the processing of
tissue using the "Tutoplast" process, a patented method of sterilizing and
preserving skin and bone tissue for wound-care treatment. The Company is
establishing a tissue processing facility in connection with the University
of Florida Tissue Bank.
On March 29, 1993, the Partnership invested $2,500,000 in a 11%
convertible debenture issued by Biodynamics International, Inc.
("Biodynamics"). On November 11, 1994, the Partnership invested an
additional $1,250,000 and exchanged the convertible debenture holdings along
with accrued interest of $115,274 for 351,388 shares of the Biodynamic's 9%
Series "B" Convertible Preferred Stock. Effective November 30, 1995, the
Partnership exchanged the 351,388 shares of Series "B" 9% Convertible
Preferred Stock along with the accumulated dividends due in the amount of
$299,552 for 32,665 shares of Series "C" 9% Convertible Preferred Stock,
stated value $127.50 per share. This Series "C" Preferred Stock is
convertible into the Company's common stock at a rate of $0.85 per share or
into 4,899,750 shares of common stock. This transaction lowered the
conversion price per share of common stock from $1.10 to $0.85.
In addition to the above stock conversion, under a Senior B Loan
Agreement on November 22, 1995, the Partnership advanced DM271,358 ($189,131)
and on March 22, 1996, and additional DM271,358 ($184,933) was advanced
bringing total mezzanine loans to $374,064. The Notes have a 10% interest
rate and are convertible into Series C Preferred Stock at a rate of DM1.435
per US$1.00.
The Partnership has the right to demand stock registration and certain
piggyback stock registration rights, and after October 9, 1995, is entitled
to at least one such registration at Biodynamic's expense.
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Elroy G. Roelke, Senior Vice President and General Counsel (until his
retirement on December 31, 1996) of the Managing General Partner, and
currently a Director and Shareholder of the Managing General Partner is a
member of the Board of Directors of Biodynamics International, Inc. as the
Partnership's Director Designee.
CODED COMMUNICATIONS, INC.
Coded is a manufacturer of digital transmission systems for mobile fleet
operations.
On October 9, 1992, the Partnership invested $2,500,000 in a 12%
convertible debenture issued by Coded Communications, Inc. ("Coded") of
Carlsbad, California as the first disbursement under a $3,500,000 loan
agreement pursuant to which the Partnership had the option to invest an
additional $1,000,000 subject to certain conditions. This additional
investment of $1,000,000 was made on July 21, 1993 and then a further follow-
on investment of $500,000 was made on September 24, 1993. Additionally, a
$100 option premium was capitalized during 1993. On October, 28, 1994, the
Partnership made a $750,000 Bridge Loan, secured by accounts receivable as
well as by all of the assets of Coded. This loan was due on January 1, 1995.
Interest is payable monthly. The debenture is non-callable for three
years and provides for monthly principal installments commencing on October
1, 1995, which installments will amortize approximately one/half of the
principal with the balance due at maturity on October 1, 1999. At the option
of the Partnership, the Debenture is convertible at any time into Coded
common stock at $1.50 per share.
In connection with a program to down-size operations, the Partnership
advanced an additional $250,000 on April 18, 1995 and extended payment of the
prior bridge loans to April 17, 1996. In connection with this financing, the
Partnership received warrants for 2,000,000 shares at $0.50 per share and a
reduction of the conversion price of the debentures from $1.50 to $0.50 per
share. No cost has been allocated to the Warrants.
As part of a restructuring plan in March 1995, the Company began the
process of completing a non-judicial reorganization with the help of the San
Diego Credit Association. Under the plan, unsecured creditors of the Company
would be termed out over a multi year period and would be paid approximately
$0.50 on the dollar.
On September 27, 1996, final documentation was completed on a March of
1996, agreement with Grupo Information, Satellites and Advertising S.A. de
C.V. ("ISA"), the Bridge Lenders, Renaissance Capital Partners II, Ltd. and
Coded. Pursuant to the terms and conditions, ISA received approximately
49,000,000 shares of Coded Communications, Inc. common stock, representing
approximately 67% ownership in the Company. In return, Coded received (i)
$400,000 in cash; (ii) a guarantee that ISA will place not less than
$10,000,000 in orders for Coded's mobile data communications systems and
products over an 18 month period, secured by 50% of ISA's shares in Coded;
and (iii) a working capital loan from ISA to Coded for $1 million that was
converted into common stock at a price of $0.25 per share.
<PAGE>
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As of September 27, 1996, holders of Coded's $1,800,000 Senior Secured
Bridge Loan, which included the Partnership, delivered all debentures, notes
and derivative shares held in Coded and in return received; 1) $400,000 in
cash, 2) $600,000 6% Promissory Note, interest payable quarterly. The
Promissory Note is due in full the earlier of September 27, 1997, or on the
sale of DeCom Systems. The Promissory Note is due in full the earlier of
September 27, 1997, or on the sale of DeCom Systems. The Note is convertible
into common shares of Coded at a price of $0.25 per share. The conversion
price is protected by limited anti-dilution provisions and the Note is
secured, subject to subordination of up to $5 million of working capital
loans if such are obtained by Coded, and 3) 8,000 shares of Series A
Cumulative Convertible Preferred Stock with a face value of $800,000. The
stock pays an 8% dividend, of which 50% is cash and 50% is common stock of
Coded. The Series A Cumulative Preferred Stock is convertible into 2,400,000
shares of Coded common stock.
The Partnership had a 55.55% interest in the bridge loan and accordingly
was to receive $222,200 of cash; $333,300 of the 6% promissory notes, and
4,445 shares of the Series A Cumulative Convertible Preferred Stock. The
Partnership simultaneously agreed to sell $22,240 of its 6% Promissory Note
to another bridge loan holder and therefore, its amount of cash increased and
its balance due on the notes decreased.
In the September 27, 1996 Agreement, the Partnership exchanged its
$4,000,000, 12% convertible debenture and $800,000 of accrued interest for a
$4,800,000 6% convertible debenture, with interest due semi-annually, payable
50% in cash and 50% in common stock of Coded. The debenture is convertible
into 48,000 shares of new Series B Preferred Stock once vendor claims against
Coded were reduced below $1 million.
On September 27, 1996, the Partnership received 200,000 shares of common
stock as interest from the date of the Agreement in March to September 27,
1997.
The $4,800,000 6% convertible debentures were converted into 48,000
shares of Series B Preferred Stock on December 18, 1996. Simultaneously with
this conversion, the Partnership converted, 1,225 shares of its Series B
Stock into 200,006 shares of common stock of Coded. The remaining 46,775
shares of Series B Preferred Stock may be converted into 7,636,954 shares of
common stock.
In December 1996, in accordance with the agreement with ISA, the
Partnership received 111,000 shares of common stock of Coded applicable to
its bridge loan and 800,000 shares of common stock applicable to its original
debentures. These shares were issued pursuant to a provision in the
Agreement which provides that up to 3 million additional shares of common
stock would be issued if certain market prices were established for Coded's
stock. One million shares were to be issued once the market price of Coded's
stock was $0.25 per share for a period of twenty (20) consecutive trading
days following issuance of Coded's 10Q's or 10K's. One million shares are to
be issued when the price reaches $0.50 and the last one million shares when
the price reaches $1.00. The $0.25 price was established and the shares
issued in 1996. Additional shares may be issued if the $0.50 or $1.00 levels
are reached. On December 18, 1996, the Partnership received 73,585 shares of
common stock representing payment of dividends.
<PAGE> 13
U.S. FAX/COMPUTER AUTOMATION, INC., ACTION FAX, INC. AND PROTECH, INC.
Computer Automation was seeking to develop a facsimile ("fax")
management system to provide lower cost fax management for multinational
companies. Additionally, it provided a maintenance and repair business for
it's installed base of process control computers.
Prior to 1993, the Company also manufactured a line of automatic test
equipment for circuit board manufactures. This product line was discontinued
during the year and was sold to Protech, Inc. of San Antonio, Texas .
On February 10, 1992, the Partnership invested $1,750,000 in a 12.5%
convertible debenture issued by Computer Automation, Inc. ("Computer
Automation") of Richardson, Texas. On July 20, 1992, a $1,000,000 follow on
disbursement was made and the loans were restructured in a new convertible
debenture. Subsequently, in September, October and November, interim loan
financing aggregating $650,000 was provided for a total financing of
$3,400,000 as of December 12, 1992.
During 1993, the Partnership advanced $775,000 of additional convertible
debentures to Computer Automation. Subsequently, the Partnership
restructured its position with Computer Automation. As a result, $3,500,000
of the debentures were converted into 4,000,000 shares of common stock with
an assigned cost of $1,250,000; 40,000 shares of convertible preferred stock
convertible into 4,000,000 shares of common stock with an assigned cost of
$1,250,000; 3,36,123 shares of common stock of a company affiliated with
Computer Automation, Protech, Inc., with an assigned cost of $850,000; a
secured convertible note from Protech, Inc. with an assigned cost of
$150,000, and 356,000 common stock warrants of Protech, Inc. with no cost
assigned. Additionally, $250,000 of accrued interest due to the Partnership
at December 31, 1992 was forgiven.
As of December 31, 1994, shares and receivables from Computer Automation
were partially reserved and have a fair value of $584,500. In 1993, Protech,
Inc. filed for liquidation pursuant to Chapter 11 of the Bankruptcy Code and
as of December 31, 1994, all shares and receivables have been fully reserved.
As of January 21, 1994, Computer Automation entered into an agreement
with Fax Access Xchange, Inc. ("FAX Inc.") pursuant to which its operating
subsidiaries along with certain operations of FAX, Inc. would be merged to
form Action Fax International, Inc., ("Action Fax") a new company organized
to provide an array of fax services, fax management services and fax
switching systems. Subsequently, the Board of Directors of Computer
Automation approved the dissolution of the Company. In connection with this
re-organization, the Partnership received approximately 675,000 Action Fax
shares now in payment of the principal and interest of the short term notes.
In 1995, prior to the exchange with U.S. Fax, the Partnership advanced
under four separate term notes an additional $350,000 to ActionFax. In May
1995, as part of a recapitalization of the ActionFax investment, the
Partnership exchanged all of its ActionFax Notes and its 675,000 shares of
ActionFax International for 3,547,972 shares in U.S. Fax Inc. with a cost of
$1,625,000. U.S. Fax is a non-reporting public company which anticipates
raising additional capital to execute its business plan.
<PAGE> 14
On October 6, 1995, the Partnership advanced U.S. Fax $100,000 under a
secured loan agreement providing for interest at 12% per annum payable in
monthly installments beginning November 1, 1995.
In July, 1996, U.S. Fax, Inc. notified the Partnership of its
intentions to rescind the May, 1995 agreement with ActionFax, Inc. The
Partnership has fully reserved the investment prior to this notice and has
realized the loss on the investment at December 31, 1996. Any recovery is
anticipated to be nominal.
CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
CHCA operates physical therapy regabilitation centers.
On December 29, 1992, the Partnership invested $2,500,000 in a 11%
convertible debenture issued by Consolidated Health Care Associates,
Inc.("CHCA") of Franklin, Massachusetts. Further, on December 30, 1993, the
Partnership provided an additional $500,000 in convertible debentures and
$500,000 in a 11% promissory note.
On June 30, 1994, as part of an overall restructuring of the investment,
the Partnership converted its $3,000,000 in convertible debentures, $500,000
term note, and accrued interest of approximately $195,984 for 5,000,000
shares of common stock and 1,195,984 shares of Series A Preferred Stock
convertible into 1,594,232 shares of CHCA common stock ($0.75 per share).
The Series A Preferred stock pays a 6% dividend payable quarterly, has a
mandatory conversion feature in the event that CHCA raises at least
$1,500,000 in cash equity at a price greater to or equal to $0.75 per share
and the conversion price is subject to certain anti-dilution rights. As part
of this overall restructuring, the CHCA entered into an agreement to
repurchase or to arrange for the placement of a substantial block of stock as
part of a contract settlement with the CHCA former chairman and CEO. The
Partnership loaned the CHCA $100,000 and agreed to disburse an additional
$400,000, such financing in the aggregate amount of $500,000 to be
consolidated into the issuance of the Series B Convertible Preferred Stock
with a conversion price of $0.33 per share. This final disbursement was made
on October 24, 1994 at which time the Partnership received 500,000 share of
Series B Preferred Stock. The Series B Preferred stock has a 6% coupon
payable quarterly, has a mandatory conversion feature in the event that CHCA
raises at least $1,500,000 in cash equity at a price greater to or equal to
$0.75 per share and the conversion price is subject to certain anti-dilution
rights. The Partnership did not receive dividend payments from CHCA during
the year ended December 31, 1994 or 1995.
During 1995, the Company raised additional capital from another investor
which triggered the anti-dilution protection found in the Convertible
Preferred Stock. The Partnership chose to partially waive those rights for
the transaction and in consideration received a reduction in the conversion
price of the Series A Preferred Stock from $0.75 to $0.57 per share and with
respect to the Series B Preferred Stock a reduction from $0.33 to $0.25 per
share.
<PAGE> 15
During 1996, the Partnership made advances totaling $265,000 under a
multiple advance Promissory Note and Security Agreement dated April 25, 1996,
as amended January 30, 1997. The Note provides for interest at a rate of 10%
payable monthly, and is secured by all assets of the Company, subject to
senior debt. In addition, the Partnership received 6/10ths of a share of
CHCA's common stock for each dollar of principal loaned. The Note is due on
April 17, 1999.
James Kenney, formerly an officer of the Managing General Partner, was
elected to the Board of Directors of CHCA as the Partnership's Director.
While Mr. Kenney now serves as a consultant to the Partnership from time to
time, the Partnership does not now have a Director Designee to the Company's
Board of Directors.
INDUSTRIAL HOLDINGS, INC.
On October 8, 1992, the Partnership invested $2,500,000 in a 12%
convertible debenture issued by Industrial Holdings, Inc. ("IHI") of Houston,
Texas.
IHI is engaged in the manufacture and distribution of industrial
supplies.
Interest is payable monthly. The debenture is non-callable for three
years and provides for monthly principal installments commencing on October
1, 1995, which installments will amortize approximately one/half of the
principal with the balance due at maturity on October 1, 1999. At the option
of the Partnership, the Debenture is convertible at any time into IHI common
stock at $3.26 per share. The Partnership has the right to demand stock
registration and certain piggyback stock registration rights, and after
October 8, 1995, at least one such registration at the Company's expense.
On March 15, 1996, the Company paid $625,000 of principal, leaving a
Debenture principal balance of $1,875,000. At that time, the Partnership
received warrants to purchase 50,000 shares of the Company's common stock at
$4.00 per share. These warrants expire on March 31, 1999. The Partnership
exercised these warrants in December, 1996, and sold the underlying stock at
a gain of $243,750.
In September, 1996, the Partnership converted $815,000 of the 12%
debentures into 250,000 shares of the Company's common stock leaving a
principal balance in debentures of $1,060,000. These shares were sold in
block sales and generated a capital gain of approximately $964,000.
On January 10, 1997, the Partnership converted $360,000 of the
Debentures into 110,429 shares of IHI common stock. The Partnership has
continued to sell this stock in 1997.
James Kenney, formerly an officer of the Managing General Partner was
elected to the Board of Directors of IHI as the Partnership's Director
Designee. While Mr. Kenney now serves as a consultant to the Partnership
from time to time, the Partnership does not now have a Director Designee to
the Company Board of Directors.
<PAGE> 16
PRISM GROUP, INC.
Prism is engaged in the computer disk duplication business.
On November 11, 1992, the Partnership invested $2,500,000 in a 12%
convertible debenture issued by Prism Group, Inc. ("Prism") of Woodinville,
WA. On June 1, 1994, the Partnership invested $1,000,000 in a 12% convertible
debenture.
Interest is payable monthly. The debentures are non-callable for three
years and provide for monthly principal installments commencing on January 1,
1995, which installments will amortize approximately one/half of the
principal with the balance due at maturity on January 1, 2000. At the option
of the Partnership, the $2,500,000 12% convertible debenture is convertible
at any time into Prism common stock at $3.00 per share. The $1,000,000 12%
convertible debenture is convertible at $1.50 per share. The Partnership has
the right to demand stock registration and certain piggyback stock
registration rights, and after November 30, 1995 at least one such
registration at the Company's expense.
During 1995, the Company restructured its secured lending base. As part
of this restructuring, on June 30, 1995, the Partnership converted its
convertible debenture position into 2,500,000 shares of common stock with a
cost basis of $0.50 per share, 12,500 shares of Series A Convertible
Preferred Stock, par value of $100, with a conversion rate of $0.50 and a new
secured convertible debenture in the face amount of $1,288,516, that yields
12% and is also convertible into common stock at $0.50 per share. Both the
debentures and preferred stock have anti-dilution provisions. In addition to
using the face of its existing convertible debentures, the Partnership
capitalized $288,516 of accrued but unpaid interest into the new debenture.
Prism Group, Inc.'s manufacturing subsidiary, Prism Software Production,
L.L.C. (PSP) sold some of its operating assets to PAC Services, Inc. on July
30, 1996, and on August 29, 1996. The balance of the assets were sold at a
public auction and PSP placed in bankruptcy. On October 10, 1996, the
Partnership foreclosed on the assets of Prism Group, Inc. and its
subsidiaries. On December 31, 1996, the Partnership realized its loss on
this investment. At the time of foreclosure, it was estimated a recovery of
approximately $200,000 would be recovered on this investment. As of December
31, 1996, $142,954 in cash had been recovered leaving a balance in foreclosed
assets of $57,046.
SCIENTIFIC SOFTWARE/INTERCOMP, INC.
SSI provides data processing software for the petroleum industry.
On October 30, 1992, the Partnership invested $2,500,000 in a 11%
convertible debenture. Series #A, issued by Scientific Software/Intercomp,
Inc.("SSI") of Denver, Colorado Further, on September 30, 1993, the
Partnership provided an additional $1,000,000 in a 11% convertible
debentures, designated as Series #B.
On June 27, 1994, the Partnership converted $1,750,000 of its $2,500,000
in a 11% convertible debenture Series #A at a conversion price of $2.67.
This conversion netted the Partnership 653,846 shares of common stock, which
the Partnership simultaneously sold as part of a larger secondary offering
completed by SSI at $4.50 per share net to the Partnership. As part of this
<PAGE> 17
transaction, the conversion price of the remaining $1,750,000 in convertible
debentures was changed to $2.39. Interest shall continue to accrue on the
remaining debentures.
Interest is payable monthly. The remaining principal on the Series #A
debentures is non-callable for three years and provides for monthly principal
installments commencing on October 1, 1995, which installments will amortize
approximately one/half of the principal with the balance due at maturity on
October 1, 1999. At the option of the Partnership, the debenture is
convertible at any time into SSI common stock at $2.39 per share. The
Partnership has the right to demand stock registration and certain piggyback
stock registration rights, and after October 30, 1995, at least one such
registration at the SSI's expense. Except for the maturity date of October
1, 2000, the Series #B debentures are on terms equal to the initial
debentures.
Effective April 15, 1996, as part of a capital restructuring which
provided $5,000,000 to the Company, the Partnership entered into an agreement
which restructured the convertible debentures held by the Partnership. In
combination with the new financing and issued on a basis pursuant to the same
terms as all parties, the Partnership's $1,750,000 of convertible debentures
were converted into the following: (i) a non-convertible secured $1,500,000
Promissory Note paying 7% interest, due April 30, 2001; (ii) a warrant to
purchase 450,000 shares of common stock at a price of $3.00 per share on or
before April 30, 2001; and (iii) 282,218 shares of common stock of Scientific
Software, Inc. with a cost assignment of $250,000.
On December 31, 1996, the Partnership purchased an additional 115,000
shares of common stock in the market for $55,610.
Russell Cleveland, the President and director of the Managing General
Partner, has been designated as the Partnership's Director Designee and
serves as an Advisory Director of the Company.
APPOINT TECHNOLOGIES, INC. (formerly Standard Logic, Inc.)
On September 4, 1992, the Partnership invested $1,250,000 in a 12%
convertible debenture issued by Appoint Technologies, Inc. (formerly Standard
Logic, Inc. and herein referred to as "ATI") of Anaheim, California as the
first disbursement under a $3,000,000 loan agreement pursuant to which the
Partnership had a standby commitment to invest an additional $750,000 subject
to certain conditions and a follow-on option to invest a further $1,000,000.
Subsequently, on December 6, 1992, January 21, 1993 and February 11, 1993
disbursements respectively of $250,000, $500,000 and $550,000 respectively,
were made as portions of the follow-on option.
ATI is engaged in the manufacturing of wire wrap assemblies and related
material on a custom basis. In addition, it entered into an agreement to
acquire Appoint, Inc. of Paso Robles, California on a stock acquisition
basis. Appoint, Inc. is a manufacturer of computer data entry devices. This
acquisition was completed on April 15, 1993 and a disbursement of $450,000
was made as the final portion of the initial commitment.
<PAGE> 18
Subsequently, on June 1, June 30, June 30, August 10, and September 27,
1993 further debenture investments of $1,100,000, $150,000, $250,000,
$150,000 and $350,000, respectively were made under the convertible debenture
Loan Agreement as amended.
At December 31, 1993, ATI was in default on payment of accrued interest
and was not in compliance with certain loan covenants. By agreement with the
Company, the Partnership foreclosed on certain collateral relating to its
Appoint subsidiary and sold such collateral to the management of the
subsidiary in consideration of 2,000,000 shares of ATI stock and 4,558,875
shares of preferred stock which in convertible into common stock at $0.20 per
share. This resulted in $3,625 reduction of the principal obligation due to
the Partnership from ATI.
On August 10, 1994, a term loan of $150,000 was made secured by a lien
on certain receivables. Subsequently, the Company determined to seek a
reorganization pursuant to Chapter 11 of the Bankruptcy Code.
On September 30, 1995, the Partnership realized a loss on its investment
in Appoint Technologies, Inc. and its related investment in ATI. Both of
these investments were fully reserved in 1994. The Partnership has received
$169,769 of Appoint foreclosed assets. As of December 31, 1996, the
Partnership realized the balance of its loss on this investment, after
converting all remaining foreclosed assets to cash with the exception of
stock held in Starcom Communications, Inc., valued at $30,000.
TRICOM CORP.
Tricom is engaged in LAN construction, telephone line construction
auditing, parking meter auditing and the provision of coin box services for
the pay telephone and parking meter industries.
On November 11, 1992, the Partnership invested $1,000,000 in a 12%
convertible debenture issued by Tricom Corp. ("Tricom") of Santa Monica,
California. as the first disbursement under a $2,000,000 loan agreement
pursuant to which the Partnership has the follow-on option to invest a
further $1,000,000. An initial follow on disbursement of $500,000 was made
on March 26, 1993. Subsequently, on June 27, 1994 and December 30, 1994,
further disbursements of $200,000 and $50,000 respectively were completed.
Interest is payable monthly. The debentures are non-callable for three
years and provide for monthly principal installments commencing on November
1, 1995 which installments will amortize approximately one/half of the
principal with the balance due at maturity on November 1, 1999. At the
option of the Partnership, the debenture is convertible at any time into
Tricom common stock at $0.50 per share. The Partnership has the right to
demand stock registration and certain piggyback stock registration rights,
and after November 11, 1995, at least one such registration at the Company's
expense.
During 1995, additional funds were advanced in the amounts of $54,000,
$30,000 and $150,000. In connection with the loan of $150,000 in December,
1995, the Partnership received 100,002 warrants to purchase the Company's
common stock at $1.50 per share and will be reduced to $1.00 per share should
the Company not complete an IPO by November 15, 1996.
<PAGE> 19
The Partnership, other bridge loan holders, new investors and the
Company have entered into n tentative agreement in 1997, to recapitalize the
Company. It is anticipated the Partnership will exchange its 12% $1,500,000
debentures and the unpaid interest on all debt totaling $403,600, for 21,536
shares of Tricom preferred stock, par value $100 ($2,153,600). This
capitalized the interest of $403,600.
In addition, the plan calls for the Partnership to exchange its $54,000
Note and $30,000 Note for 186,667 shares of Tricom common stock. The bridge
loan of $150,000 debentures and the 1994 promissory notes of $200,000 and
$50,000 together with accrued and unpaid interest on all debt totaling
$403,600 for 21,536 shares of Tricom preferred stock, par value $100
($2,153,600). This capitalized the interest of $403,600.
In addition, the plan calls for the Partnership to exchange its $54,000
Note and $30,000 Note for 186,667 shares of Tricom common stock. The bridge
loan of $150,000 will be converted into 333,333 shares of Tricom common stock
and earlier warrants canceled. The Partnership would waive its right to
anti-dilution protection with the execution of the Agreement. For this,
Tricom will issue a three year Warrant to purchase 250,000 shares at $2.00
per share. If the Company has not raised more than $2,000,000 in new equity
capital by December 31, 1998, the Warrant shall be exercisable by tendering
5,000 shares of preferred stock on that date.
The preferred stock, at the option of holder, is to be convertible at
any time into common stock at $4.00 per share. A one time conversion price
adjustment to $2.00 per share will be made if Tricom has not raised more than
$2,000,000 by December 31, 1998. The common stock underlying the preferred
stock shall have one demand registration right and certain anti-dilution
provision.
The Partnership agreed to purchase 35,555 shares of common stock for
$16,000 in January 1997.
James Kenney, formerly an officer of the Managing General Partner was
initially elected to the Board of Directors of ATI as a Partnership Director
Designee. Elroy G. Roelke, the Vice President, General Counsel and a
Director of the Managing General Partner was also elected to the Board of
Directors of Tricom as a Partnership Director Designee. Subsequently, Mr.
Roelke resigned from the Tricom Board of Directors. Further, while Mr.
Kenney now serves as a consultant to the Partnership from time to time, the
Partnership does not now have a Director Designee to the Company Board of
Directors.
COMPETITION FOR INVESTMENTS
The Partnership 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 Partnership.
Therefore, the Partnership will have to compete for investment
opportunities based on its ability to respond to the needs of the prospective
borrower and its willingness to provide management assistance.
In some instances, the Partnership's requirements as to provision of
management assistance will cause it to be non-competitive.
<PAGE> 20
PERSONNEL
The Partnership has no direct employees but instead has contracted with
the Managing General Partner pursuant to the Partnership Agreement and the
Investment Advisory Agreement to provide all management and operation
activities. The Managing General Partner currently employs twelve persons
who are engaged in performing the duties and functions required by the
Partnership. At the present time, a substantial portion of the Managing
General Partner's staff time is devoted to activities of the Partnership.
However, because of the diversity of skills required, the Partnership cannot
afford to employ all these persons solely for its own needs, and therefore,
these employees are not engaged solely in activities of the Partnership.
The Investment Advisor currently serves as General Partner and manager
to Renaissance Capital Partners, Ltd. ("Renaissance I") and as the Investment
Advisor to Renaissance Capital Growth & Income Fund III, Inc. ("Renaissance
III") and Renaissance U.S. Growth & Income Trust PLC ("RUSGIT"). Renaissance
I is a BDC with investment objectives similar to those of the Partnership.
Renaissance I is not actively seeking additional investments. Renaissance
III is also a BDC operating as a Registered Investment Company with
investment objectives similar to those of the Partnership. It completed an
offering in 1994, that raised approximately $39,352,000. As of December 31,
1996, Renaissance III had completed ten investments totaling approximately
$25,709,000 and is actively seeking additional investment opportunities.
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 on a pari-passu with Renaissance III. In 1996,
RUSGIT raised a net investment of approximately $30,789,000 and invested in
four companies totaling $9,000,000. In addition, Renaissance Capital Group,
Inc. and its subsidiary may, from time to time, provide investment advisory
services, management consulting services and investment banking services to
other clients.
No accurate data or estimate is available as to the percentage of time,
individually or as a group, that will be devoted to the affairs of the
Partnership. Initially, and while the Partnership funds are in the process
of being invested, a majority of the staff time of the Managing General
Partner is employed in functions and activities of the Partnership.
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 Partnership does not contemplate making a substantial portion of its
investments in foreign operations.
ITEM 2. PROPERTIES.
The Partnership's business activities are conducted from the offices of
the Managing General Partner, 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
<PAGE> 21
services, computer equipment, and files are provided by the Managing General
Partner at its expense pursuant to the Investment Advisory Agreement
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings currently pending with regard to the
Partnership.
ITEM 4. SUMBISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of Limited Partners, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES.
TRADING
There is no trading in the Interests and no established market exists.
Interests are restricted from transfer except in the event of death or by
action of law or except with the prior approval of the Managing General
Partner.
NUMBER OF HOLDERS
As of December 31, 1996, there were approximately 1,800 beneficial
holders of Limited Partners Interest; one holder of a Managing General
Partner Interest; and two holders of Independent General Partners Interest.
DIVIDEND POLICY
The Partnership Agreement provided for an initial distribution to be
made to the Limited Partners within 30 days after the end of the first
quarter following closing of the offering, and thereafter, within 30 days of
he end of each subsequent quarter, with the amount of the distributions to be
determined at the discretion of the General Partners. It is generally the
intention of the General Partners to distribute investment income net of
expenses on a quarterly basis. Further, distributions of capital gains will
be made as realized.
As the result of decreasing cash resources in 1995 and 1996, the
distributions to the limited partners were discontinued. as the
Partnership's investments are liquidated, or other cash resources obtained,
the Partnership expects to reinstate such payments in whole or in part based
upon the cash resources.
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992 through
December 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Income (loss)
(including realized losses) $(3,098,478) $(3,349,784) $47,215 $3,200,659 $2,028,177
Net unrealized appreciation
(depreciation) on investments 1,049,091 1,443,065 (12,650,369) 10,132,217 705,102
Net income (loss) (3,000,121) (2,825,200) (13,814,448) 12,309,013 2,353,425
Income (loss) per limited partnership unit (68)(64) (315) 313 152
Total assets 26,933,422 29,892,591 33,772,316 50,911,023 24,518,720
Distributions to partners -- 600,000 3,100,000 2,506,708 1,200,000
Distributions per limited partnership unit -- 14 71 64 78
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The purpose of the Partnership is to provide growth capital to small and
medium size public companies whose ability to service debt is sufficient to
provide a quarterly return to the Limited Partners and whose growth potential
is sufficient to provide opportunity for above average capital appreciation.
SOURCES OF OPERATING INCOME
Generally, the major source of operating income for the Partnership is
investment income, either in the form of interest on debentures or dividends
on stock. However, the majority of income is derived from interest and
capital gains. The Partnership will generally structure investments to
obtain an interest return competitive with current long-term financing rates
available from other sources.
Further, the Partnership may, in some cases, receive placement fees,
draw-down fees and similar types of income. It might also receive management
fee income, although it doe not generally require such for services on the
board of a Portfolio Company.
<PAGE> 23
Generally, management fees received by the Managing General Partner (or
its personnel) for services to a Portfolio Company will be paid to the
account of the Partnership. The exception to this rule would apply to
payments to the Managing General Partner 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 Partnership'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 the Managing General Partner or such other person only with the
approval of the Independent General Partners 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 the Managing General Partner
and its officers and directors occupy a fiduciary relationship to the
Partnership and shall not receive outside compensation or advantage in
conflict with that relationship, neither the Managing General Partner nor its
officers and directors are prohibited from receiving other income from non-
conflicting sources.
The Managing General Partner 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, a limited partnership, and raised net capital contributions of
approximately $12,100,000 in a private placement offering for the purpose of
making primarily convertible debenture investments in small and medium size
public companies. Renaissance I is currently fully invested. The Managing
General Partner has also formed Renaissance III, which is also a BDC with
investment objectives similar to those of the Partnership and completed an
offering in 1994, that raised approximately $39,352,000, available for
investment. As of December 31, 1996, Renaissance Capital Growth & Income
Fund III, Inc. has made ten investments, aggregating $25,709,000 and is
actively seeking additional investment opportunities. In the Spring of 1996,
Renaissance Capital Group, Inc. formed Renaissance U.S. Growth & Income Trust
PLC ("RUSGIT") 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 on a pari-passu with Renaissance
III. In 1996, RUSGIT raised a net 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 General
Partners, subject to the requirements and resolution of the 1940 Act.
REGULAR QUARTERLY PAYMENTS TO PARTNERS -- PRIORITY DISTRIBUTIONS
QUARTERLY PAYMENTS TO LIMITED PARTNERS
It is intended that cash payments from operations be made to all Limited
Partners each quarter to provide them a cash return. Generally, this cash
<PAGE> 24
distribution will be made from profits and investment income. However, in
the event that net profits are not adequate from time to time, the quarterly
distributions may be made from capital, so long as capital is sufficient to
assure repayment of all obligations of the Partnership and such capital
distributions are permitted by applicable partnership law and the 1940 Act.
Such distributions are currently permitted under the Revised Texas
Limited Partnership Act and under the 1940 Act, provided, that under the
Revised Texas Limited Partnership Act, distributions cannot be made if
Partnership assets are not sufficient to pay Partnership obligations and
Limited Partners may be liable for the repayment of distributions, if any
received in contravention of this restriction.
Further, quarterly distributions 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 Limited Partner a current
return compatible with then present economic conditions.
As the result of decreasing cash resources in 1995 and 1996, the
distributions to the Limited Partners were discontinued. As the
Partnership's investments are liquidated, or other cash resources obtained,
the Partnership expects to reinstate such payments in whole or in part based
upon the cash resources.
The accounting records will be maintained on a calendar quarter basis
with the fiscal year ending on December 31. Accordingly, quarterly
distributions will be made to Limited Partners of record as of the end of
each quarter and mailed to each Limited Partner's address of record within 30
days of the end of the quarter.
To the extent that officers of the Managing General Partner are holders
of Partnership interests they will be the recipient of such distributions.
OPTIONAL DISTRIBUTIONS OF OPERATING PROFITS AND CAPITAL GAINS
In addition to the regular quarterly distributions, it is intended that,
as the Partnership achieves operating profits and net capital gains or
realizes increased portfolio values such as through stock distributions or
exchanges, such increased values, profits and gains will be available for
distribution to the Partners in cash or assets.
So long as the Limited Partners have received distributions sufficient
to provide them a cumulative simple annual return of at least ten percent
(10%) on their Capital Contributions in the Units (the "10% Performance
Base"), the Managing General Partner also will become eligible for capital
gains performance distributions. The Managing General Partner's performance
distribution on net capital gains ("Performance Distributions") will be
twenty percent (20%), once the Partnership's distributions to the Limited
Partners exceed the 10% Performance Base.
No Performance Distributions shall be paid to the Managing General
Partner unless the Partnership has increased in value and such increase in
value has been realized and is paid out to the Limited Partners or is
<PAGE> 25
distributed to the Limited Partners. Further, no Performance Distributions
shall be paid to the Managing General Partner unless adequate provision has
been made for any unrealized depreciation with respect to the Portfolio
Investments and adequate reserves are established for payment of all
obligations of the Partnership. Moreover, no Performance Distributions shall
be paid to the Managing General Partner to the extent that, making such
distributions would result in the Managing General Partner's receiving
cumulative Performance Distributions in excess of twenty percent (20%) of the
cumulative net capital gains realized by the Partnership (net of realized
capital losses and unrealized net capital depreciation) in accordance with
the 1940 Act.
The Performance Distributions cannot be adjusted without the consent of
all of the Limited Partners, except if required by order of a regulatory
agency.
LIQUIDITY AND CAPITAL RESOURCES
Through 1992, the Partnership raised gross initial capital of
approximately $24,876,000 in the offering and after administrative and
offering expenses, brokers' commissions and management fees had a net
available capital for investments of approximately $22,596,000.
In 1993, the Partnership raised additional gross capital of
approximately $17,998,000 for an aggregate of $42,874,000 in the offering and
after administrative and offering expenses, brokers' commissions and
management fees had a net available capital for investments of approximately
$39,075,000.
Pending selection of investments in Portfolio Investments, the
Partnership's available capital was invested in U.S. government obligations.
During the year 1992, the Partnership invested in nine Portfolio Investments
with cost aggregating $19,400,000. Cash Distributions to Limited Partners
amounted to $697,016 in 1992 while cash provided by operating activities in
1992 amounted to $1,758,515.
During the year 1993, the Partnership invested in two additional
Portfolio Investments and made follow-on investments to existing Portfolio
Companies with cost aggregating $12,055,100. Cash Distributions to Limited
Partners amounted to $2,309,692 in 1993 while cash provided by operating
activities in 1993 amounted to $1,743,370.
During the year 1994, the Partnership made no additional Portfolio
Investments but made follow-on investments to existing Portfolio Companies
with cost aggregating $5,978,281. Cash Distributions to Limited Partners
amounted to $3,500,000 in 1994, while cash provided by operating activities
in 1993 amounted to $1,023,535.
During 1995, the Partnership made no additional portfolio investments
but made follow-on investments to existing portfolio companies of $1,073,132.
Cash Distributions to Limited Partners amounted to $899,862 in 1995, while
operations for the year resulted in a cash deficit of $465,256.
<PAGE> 26
During 1996, the Partnership made no additional portfolio investments
but made follow-on investments to existing portfolio companies of $605,543.
Cash distributions of $138 were made to Limited Partners and operations for
the year resulted in a cash deficit of $107,890. Cash was provided from the
sale of stock and from the repayment of principal on investments of
$2,267,284 and $651,541 respectively.
Without the liquidation of Partnership investments, it may become
necessary for the Managing General Partner to make cash advances to meet
future partnership obligations.
The Partnership's other sources of available capital for investment will
be interest income and transactional fees charged by the Partnership with
respect to the Portfolio Investments, and director fees paid by Portfolio
Companies to the Partnership's director designees (although it is likely that
most of the Portfolio Companies will not pay director fees). Other potential
sources of available capital include gains from capital transactions.
However, as discussed above, generally the Portfolio Investments will
have an initial fixed term of seven years, with payments of interest only for
an initial term of three to five years. Further, Portfolio Investments 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, and it is not
contemplated that such gains will be realized in the near future.
Additionally, when investments are converted into common stock,
generally no dividends are paid. Further, when exchanged or converted into
preferred stock, while usually a preferred dividend payment will be provided
in the security, yet the ability of the Portfolio Company to meet such
requirement is subject to availability of current earnings or earned surplus
for dividend payments. As the result of decreasing cash resources in 1995
and 1996, the distributions to the Limited Partners were discontinued. As
the Partnership's investments are liquidated, or other cash resources
obtained, the Partnership expects to reinstate such payments in whole or in
part based upon the cash resources.
Another possible source of available capital is debt; however, the
Partnership 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 Limited Partners.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
During 1996, the Partnership made no additional portfolio investments
but made follow-on investments of $605,543. As a result of prior investments
and these follow-on investments, the Partnership's income totaled $923,885
consisting of four net components: interest income aggregating $902,771 and
fee income of $18,000. As a result of converting debentures to equity
investments, and the necessity of reserving interest accruals, interest
income continues to decline. Dividends are down as there are dependent on
<PAGE> 27
the availability of portfolio companies earnings for distribution. The
estimated value of portfolio investments, as determined by the Managing
General Partner, indicate an increase of $1,049,091 in fair value during
1996. The Partnership realized a loss of $3,536,975 and $1,733,422 on the
charge-off of its investment in Prism Group, Inc. and US Fax, Inc.,
respectively. These combined losses were reduced to $4,054,232 after
considering gains on the sale of Industrial Holdings, Inc. stock. Because of
the inherent uncertainty of valuations, the Estimated Fair Value as
determined by the Managing General Partner may vary significantly from the
values that would have been used had a ready market for the securities
existed, and the differences could be material. (See Item 1. "Business, -
Narrative Description of Business - Partnership Portfolio Investments" and
ITEM 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - VALUATION OF
INVESTMENTS").
The Partnership incurred obligations in 1996, for the quarterly
management fees to the Partnership's investment advisor, the Managing General
Partner of $559,571 and the Independent General Partners of $65,710. In
addition, the Partnership reimbursed the Managing General Partner $176,256
for expenses in accordance with the Investment Advisory Agreement.
No distributions to Limited Partners or the General Partners were made
in 1996.
1995 COMPARED TO 1994
During 1995, the Partnership made no additional portfolio investments
but made follow-on investments to existing portfolio companies of $1,073,132.
As a result of these follow-on and prior investments, the Partnership's
income for 1995 totaled $1,646,611 consisting of four components: interest
income aggregating $1,172,775, dividends of $449,816 and fee income and other
of $24,020. As a result of the conversion of debentures to equity
investments, and the necessity to reserve accrued interest, interest income
is declining. A continuation of dividend income will be dependent of the
performance of portfolio companies and the availability of earnings to
distribute to the Partnership. In addition, the estimated value of
portfolio investments, as determined by the Managing General Partner,
indicated an increase of $1,443,065 in fair value during 1995. The
Partnership realized a loss of $4,996,375 on the charge-off of its investment
in Appoint Technologies, Inc. during the year. Because of the inherent
uncertainty of valuations, the Estimated Fair Value as determined by the
Managing General Partner may vary significantly from the values that would
have been used had a ready market for the securities existed, and the
differences could be material. (See Item -1- "Business, - Narrative
Description of the Business - Partnership Portfolio Investments" and Item -
13-"Certain Relationships and Related Transactions - Valuation of
Investments").
The Partnership incurred obligations in 1995, for the quarterly
management fees to the Partnership's investment advisor, the Managing General
Partner of $562,063 and the Independent General Partners of $65,710. In
addition, the Partnership reimbursed the Managing General Partner $290,728
for expenses in accordance with the Investment Advisory Agreement.
<PAGE> 28
Distributions were declared to the Limited Partners in the amount of
$600,000 in 1995, while no distributions were made to the General Partner.
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
GENERAL PARTNERS
Management of the Partnership is the responsibility of the General
Partners. In order to meet the requirements of the 1940 Act, the General
Partners are divided into two classes:
(1) a Managing General Partner, and
(2) two or more Independent General Partners.
MANAGING GENERAL PARTNER--RENAISSANCE CAPITAL GROUP, INC.
The Managing General Partner is Renaissance Group. Russell Cleveland,
the principal shareholder of Renaissance Group, has, through it and its
predecessor, for the past 17 years, been engaged in the business of
investment management for a series of limited partnership investment funds.
These partnerships generally acquired equity positions through open-market
stock purchases in small and medium sized companies after having conducted
independent investment research of the prospective portfolio acquisition.
Occasionally, these partnerships sought a director designee position on the
board of directors of the Portfolio Companies. Generally, there was not a
plan to acquire a controlling ownership or a principal management role in the
Portfolio Companies.
The principals and management of Renaissance Group, Inc. are:
Russell Cleveland, age 58, is the President, principal founder and the
majority shareholder of Renaissance Group. He is a Chartered Financial
Analyst who has, for over 25 years, specialized in investing in smaller
capitalization companies. Mr. Cleveland also served as a director of Greiner
Engineering, Inc., a consulting engineering firm, which company was a former
portfolio investment of a prior Renaissance Group investment partnership.
Mr. Cleveland serves as the Investment Company director designee for the
following companies associated with Renaissance Group: Biopharmaceutics,
Inc., Global Environmental, Inc., International Movie Group, Inc., and UNICO,
<PAGE> 29
Inc. He has served as President of the Dallas Association of Investment
Analysts. Mr. Cleveland is a graduate of the Wharton School of Business.
Vance M. Arnold, age 53 the Executive Vice President of Renaissance
Capital Group is a Chartered Financial Analyst with extensive experience
investing in emerging growth companies over the last 28 years. He has been
associated with three bank trust investment departments in Dallas and
conducted original research on emerging growth companies leading to
investment recommendations for a major southwestern regional brokerage firm.
He also managed a substantial emerging growth mutual fund for six years and
private accounts for two investment counseling firms. Mr. Arnold holds a
B.B.A. from the University of Texas at Austin and an M.B.A. from East Texas
State University.
Elroy G. Roelke, age 66, was the Senior Vice President, General Counsel
until his retirement on December 31, 1996. He is a shareholder in
Renaissance Group since January, 1989. Mr. Roelke serves as the Investment
Company director designee for the following companies associated with
Renaissance Group: Tricom Corporation, and Biodynamics International, Inc.
He is the principal shareholder and Chairman of the Knollwood Mercantile
Company, a family owned retail convenience store and liquor store business.
Mr. Roelke is a graduate of Valparaiso University with degrees in business
and law and is admitted to the practice of law in the states of Texas and
Minnesota.
Barbe Butschek, age 42, is Senior Vice President and a shareholder of
Renaissance Group and has been associated with Renaissance Group and its
predecessor companies since 1977. She has been responsible for office
management, accounting management and records management of the series of
investor limited partnerships, including preparation and maintenance of
investor tax and information reports. Ms. Butschek has responsibility for
investor records and information with respect to the Partnership. Ms.
Butschek is Secretary of RenCap Securities.
DUTIES OF THE MANAGING GENERAL PARTNER
The Managing General Partner is charged with the responsibility and
authority to handle all daily activities of the Partnership, including
commitments for and management of long-term Portfolio Investments, of short-
term investments, and, in general, daily operations.
INDEPENDENT GENERAL PARTNERS
Under the provisions of the 1940 Act creating BDCs, a majority of the
general partners of a partnership (or directors of a corporation) that desire
to qualify as a BDC must be "disinterested" or "non-affiliated" general
partners (or directors in the case of a corporation). By definition, the
Managing General Partner as well as any officer or director or other
affiliated person of the Managing General Partner, any investment adviser,
any accountant for the Partnership, and any legal adviser is considered an
"interested" party. Therefore, the majority of the general partners must be
individuals who are not involved in the daily activities of the business.
<PAGE> 30
The Independent General Partners provide overall guidance and
supervision with respect to the operations of the Partnership and perform
various duties imposed on the directors of business development companies
under the 1940 Act. The Independent General Partners supervise the Managing
General Partner and serve as advisers, providing counseling services to the
Partnership in regularly scheduled meetings and study sessions.
Background and experience of the Independent General Partners:
Mr. Ernest C. Hill, age 57, has a broad background in convertible
securities analysis with major NYSE brokerage and institutional investors.
His specialty is computer-aided investment analysis and administrative
procedures. Mr. Hill was awarded a Ford Fellowship to Stanford School of
Business where he received an MBA in Investment and Finance with honors.
Prior experience includes service as Assistant Professor of Finance, Southern
Methodist University, and Associate Director of the Southwestern Graduate
School of Banking.
Mr. Thomas W. Pauken, age 53, has experience both as a corporate
executive officer and as the head of an independent federal agency.
Professionally qualified as an attorney, he currently is the President of
TWP, Inc. From 1985 to 1991, Mr. Pauken was Vice President and Corporate
Counsel of Garvon, Inc. From 1981 to 1985, Mr. Pauken served on President
Reagan's transition team as a White House staff assistant. Later, he was
appointed by President Reagan to the office of Director of ACTION, an
independent federal agency that encourages volunteerism. He also served as a
White House staff assistant and as Associate Director of the White House
Fellowship program from 1970 to 1971. Mr. Pauken served from 1986 to 1991 as
Director of 50-Off Stores, Inc. He holds a BA in Political Science from
Georgetown University and a JD degree from Southern Methodist University
School of Law.
ITEM 11. EXECUTIVE COMPENSATION.
During 1996, the following payments were made to General Partners of the
Partnership:
CASH COMPENSATION
Name Capacity Compensation
---- -------- ------------
Renaissance Group Managing General Partner
and Investment Adviser
Management fees $559,571
Expense reimbursement $176,256
Ernest C. Hill Independent $32,855
General Partner
<PAGE> 31
Thomas W. Pauken Independent $32,855
General Partner
Quarterly Compensation Payments to Independent General Partners
In return for their services to the Partnership, the Independent General
Partners are paid a regular quarterly cash payment from the Partnership in
the amount of $0.24 cents per Unit for the first 25,000 Units ($6,000) and
$0.12 per Unit for all Units in excess of 25,000, such fees being payable at
the end of the quarter. The Independent General Partners will be entitled to
full reimbursement of all reasonable expenses relative to their services on
behalf of the Partnership. During the year, payments of $65,710 were made to
each of the Independent General Partners Quarterly Compensation Payment to
Managing General Partner
The Managing General Partner received the following compensation
payments from the Partnership:
OPERATIONAL MANAGEMENT FEES
The Managing General Partner will be paid a management fee of 0.5% per
quarter of assets under management as compensation for its fee for operating
the Partnership. In addition, the Partnership will pay any direct costs,
such as fees of any legal, accounting, or other professional advisors, and
any travel, phone and other allocated expenses incurred on behalf of the
Partnership, or will reimburse the Managing General Partner for any such.
The quarterly management fee cannot be increased without the affirmative
vote of a majority of the Limited Partnership Interests. Further, the
Managing General Partners has agreed that it will reduce its fees, if and to
the extent necessary on a yearly basis, to seek to limit the total annual
expense of the Partnership to an amount not greater than 2.75% of assets.
The Partnership incurred during the years ended December 31, 1996, 1995
and 1994; $559,571, $562,063 and $857,478, respectively for management fees.
For the years ended December 31, 1996, 1995 and 1994, the Managing General
Partner elected to calculate the quarterly fee based on the lesser of
contributed capital or Net Assets. If the Managing General Partner had
elected to calculate the fee solely on Net Assets, the fee would have been
approximately $153,000 greater than the cumulative fee charged.
COMPENSATION PURSUANT TO PLANS
The Partnership does not have any employee benefit plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
LIMITED PARTNERS UNITS
At December 31, 1996 neither the Managing General Partner nor the
Independent General Partners own any Interests. The following table sets
forth information concerning the number of Limited Partnership Units (an
Initial Limited Partnership Unit equals $1,000 of Interest) of the
Partnership beneficially owned at December 31, 1994, by (i) the persons who,
to the knowledge of the Partnership, beneficially owned more than 5% of the
<PAGE> 32
outstanding Units, (ii) each director or executive officer of the Managing
General Partner and (iii) the directors and executive officers of the
Managing General Partner as a group:
Amount
Name and Address Beneficially Percent of
of Beneficial Owner Owned Class
------------------- ------------ ----------
HEB Investment
and Retirement Plan Trust
P.O. Box 839999
San Antonio, Texas 78212 3,000 7.15%
Russell Cleveland
8080 North Central Expressway, Suite 210
Dallas, Texas 75206 125 0.23%
All directors and executive
officers of the Managing General
Partner as a group (1 person) 125 0.23%
SECURITIES OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT BY THE MANAGING
GENERAL PARTNER
The following table sets forth information concerning the number of
shares of common stock (the "Common Stock") of the Managing General Partner
beneficially, owned at December 31, 1996 by (i) the persons who, to the
knowledge of the Partnership, beneficially owned more than 5% of the
outstanding shares of Common Stock, (ii) each director or executive officer
of the Managing General Partner and (iii) the directors and executive
officers of the Managing General Partner as a group:
Number of
Name and Address Shares Percent of Participation
of Beneficial Owner Owned Class Interest *
------------------- -------- ---------- -------------
Russell Cleveland
8080 North Central Expressway,
Suite 210
Dallas, Texas 75206 720,000 66.66% 57.16%
Elroy G. Roelke
8080 North Central Expressway,
Suite 210
Dallas, Texas 75206 180,000 16.67% 14.28%
James Kenney
8080 North Central Expressway,
Suite 210
Dallas, Texas 75206 0 0.0%* 14.28%
Barbe Butschek
8080 North Central Expressway,
Suite 210
Dallas, Texas 75206 180,000 16.67% 14.28%
<PAGE> 33
All directors and
executive officers of the
Managing General Partner
as a group (3 persons) 1,080,000 100.00% 100.00%
* Mr. Kenney a former officer and director of the Managing General Partner
owns no stock in the Managing General Partner but has a 14.3% interest in the
Managing General Partner's Performance Distribution.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MANAGEMENT AND OTHERS.
Transactions, including operational responsibility, duties and
compensation, are governed by the Restated Partnership Agreement and the
Investment Advisory Agreement. See also "Item 10. Directors and Executive
Officers of Registrant -- Managing General Partner - Renaissance Capital
Group, Inc. While the full wording of the agreement is controlling, these
agreements provide for the following:
VALUATION OF INVESTMENTS
The Partnership Agreement and the original offering documents specify
that the securities held by the Partnership are to be valued as follows:
On a quarterly basis, the Managing General Partner will prepare a
valuation of the assets of the Partnership including Temporary Investments,
Eligible Portfolio Investments, and Other Portfolio Investments, subject to
the approval of the Independent General Partner. 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.
As a general principle, the current "fair value" of an investment being
valued by the Managing General Partner would be the amount which the
Partnership might reasonably expect to receive for it upon its current sale.
There is a range of values that are reasonable for such investments at any
particular time.
Generally, pursuant to procedures established by the Independent General
Partners, the fair value of each such investment will be initially based
primarily upon its original cost to the Partnership. Cost 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 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 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
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 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.
<PAGE> 34
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.
Convertible preferred stock convertible into common stock 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 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.
Convertible preferred stock convertible into common stock for which no market
exists will be determined on the basis of appraisal procedures established in
good faith by the Independent General Partners.
Debt securities with maturities of 60 days or less remaining will be
valued under the amortized cost method. The amount to be amortized will be
the value on the 61st day if the security was obtained with more than 60 days
remaining to maturity. Securities with maturities of more than 60 days
remaining will be valued at the most recent bid price or yield equivalent as
obtained from dealers that make markets in such securities. Certificates of
deposit purchased by the Partnership generally will be valued at their face
value, plus interest accrued to the date of valuation.
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 Independent General Partners. Appraisal valuations will be based upon
such factors as the Portfolio Company's earnings and net worth, the market
prices for similar securities of comparable companies and an assessment of
the company's future financial prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Appraisal
valuations are necessarily subjective.
The Partnership may also use, when available, third-party transactions
in a Portfolio Company's securities as the basis of valuation (the "private
market method"). The private market method will be used only with respect to
completed transactions or firm offers made by sophisticated, independent
investors. Securities with legal, contractual or practical restrictions on
transfer may be valued at a discount from their value determined by the
foregoing methods to reflect such restrictions.
The Independent General Partners will review and approve the valuation
policies from time to time to determine their appropriateness. The
Independent General Partners may also hire independent firms to review the
Managing General Partner's methodology of valuation or to conduct a
valuation, which shall be binding and conclusive.
PAYMENTS TO OFFICERS OF THE MANAGING GENERAL PARTNER
In addition, under certain circumstances, officers of the Managing
General Partner 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 General
Partners and to compliance with the requirements of the 1940 Act. During the
year ended December 31, 1996, while in some circumstances services were
provided, no officer requested compensation.
<PAGE> 35
AFFILIATED INVESTMENT COMPANIES
The Managing General Partner has formed, and plans to form other
investment partnerships to make investments in similar Portfolio Companies.
Specifically, Renaissance Group formed Renaissance Capital Partners, Ltd.,
("Renaissance I") a Texas limited partnership, and raised approximately
$12,100,000 in a private offering for the purpose of making primarily
convertible debenture investments in small and medium size public companies.
During 1994, the Managing General Partner formed Renaissance Capital
Growth & Income Fund III, Inc. a closed end investment company with
investment objectives comparable to the Partnership's and filed a
registration statement and raised approximately $39,352,000 for the purpose
of making convertible securities investment in small to medium size public
companies.
In the Spring of 1996, the Managing General Partner formed Renaissance
U.S. Growth & Income Trust PLC ("RUSGIT") 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.
The determination of whether a conflict of interest does, or does not,
exist between any party and the Partnership in the future, and the methods of
the resolution of any such conflict, shall vest in the discretion of the
Independent General Partners, 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:
None are presented as none are applicable
REPORTS ON FORM 8-K
The Registrant did not file a report on Form 8 K during the fourth
quarter of 1996.
EXHIBITS
3.1 Renaissance Capital Partners II, Ltd. Amended and Restated Agreement
and Articles of Limited Partnership dated as of September 30, 1991.
(1)
10.1 Investment Advisory Agreement as of May 30, 1990, as amended and
restated on September 30, 1991 and March 7, 1994. (1) (2)
<PAGE> 36
(1) Incorporated by reference from Form N-2 as filed with the
Securities and Exchange Commission on October 21, 1991
(Registration No. 33-38593).
(2) Incorporated by reference from the Registrant's 1996 Proxy filed
with Securities and Exchange Commission on or around April 4, 1997.
<PAGE> 37
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 28, 1997
Renaissance Capital Partners II, Ltd.-
(Registrant)
By: Renaissance Capital Group, Inc.
Managing General Partner
/s/ Russell Cleveland
By: ______________________________________
Russell Cleveland, President
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
registrant in the capacities and on the date indicated Signatures.
Signature Title Date
- --------- ----- ----
/s/ Russell Cleveland March 28, 1997
- ------------------------
Russell Cleveland Chairman, President and
Director of the Managing
General Partner of the
Registrant (Principal
Executive Officer and
Principal Operating Officer)
/s/ Barbe Butschek March 28, 1997
- ------------------------
Barbe Butschek Senior Vice President,
Secretary and Treasurer
of the Registrant of
the Managing General Partner
of the Registrant
/s/ Ernest C. Hill
- ------------------------
Ernest C. Hill Independent General March 28, 1997
Partner of the Registrant
/s/ Thomas W. Pauken
- ------------------------
Thomas W. Pauken Independent General March 28, 1997
Partner of the Registrant
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Statements of Assets, Liabilities and Partners' Equity F-3
December 31, 1996 and 1995
Statements of Investments- F-4 through F7
December 31, 1996 and 1995
Statements of Operations - F-8
Years ended December 31, 1996, 1995 and 1994
Statements of Partners' Equity - F-9
Years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows - F-10 through F-11
Years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements F-12 through F-17
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Partners
Renaissance Capital Partners II, Ltd.:
We have audited the accompanying statements of assets, liabilities and
partners' equity of Renaissance Capital Partners II, Ltd., including the
statements of investments, as of December 31, 1996 and 1995, and the related
statements of operations, partners' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Partnership'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 of investments owned as of December 31,
1996 and 1995, by examination of securities held in safekeeping for the
Partnership. 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 Partners
II, Ltd. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 7, 1997
<PAGE> 40
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Assets, Liabilities
and Partners' Equity
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Cash and cash equivalents $ 2,673,170 467,916
Investments at fair value, cost of
$23,363,737 in 1996 and $28,968,505
in 1995 (note 4) 24,042,843 28,598,520
Interest receivable 114,157 695,365
Other assets 103,252 130,790
------------ ----------
$ 26,933,422 29,892,591
============ ==========
Liabilities and Partners' Equity
--------------------------------
Liabilities:
Accounts payable $ 57,217
Accounts payable - affiliate (note 3) 203,362 219,489
Distributions payable to limited partners 138
------------ ----------
260,579 219,627
============ ==========
Partners' equity (note 5):
General partner (56,010) (26,009)
Limited partners (43,434.01 units
outstanding) 26,728,853 29,698,973
------------- ----------
Total partners' equity 26,672,843 29,672,964
Commitments and contingencies
(notes 3 and 4) 26,933,422 29,892,591
============= ==========
Limited partners' equity per limited
partnership unit $ 615 684
See accompanying notes to financial statements.
<PAGE> 41
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments
December 31, 1996 and 1995
1996
--------------------------------
Eligible Portfolio Investments -
Convertible Debentures and Notes Interest Due Fair
Receivable rate date cost value
---------- -------- ---- -------- ---------
Valued at fair value as determined
by the General Partners (note 4):
Amerishop, Inc. - premium incentive
fulfillment company: 1
Convertible debenture 12.5% 7/1/99 $ 2,000,000 2,000,000
Note receivable varies varies 1,728,448 728,448
Biodynamics International Inc. -
specialty surgical products:
Note receivable 10 12/31/99 374,0644 26,598
Coded Communications, Inc. -
digital data transmission
equipment manufacturers:
Note receivable 6 9/27/97 311,060 417,834
Consolidated Health Care
Associates, Inc. - physical
therapy rehabilitation centers:1
Note receivable 10 4/17/99 265,000 265,000
Industrial Holdings, Inc. - holding
company for light manufacturing
companies:
Convertible debentures 12 10/1/99 1,060,000 3,581,158
Scientific Software, Inc. - software
and pipeline monitoring:
Note receivable 7 4/30/01 1,500,000 1,500,000
Tricom Corp. - telecommunications
network construction: 1
Convertible debentures 12 11/1/99 1,500,000 1,500,000
Notes receivable varies varies 484,000 484,000
Protech, Inc. - telecommunications:
Convertible debenture 11 09/30/99 67,500
--------- --------
9,290,072 10,903,038
========= ==========
(Continued)
<PAGE> 42
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
1996
--------------------------------------
Eligible Portfolio
Investments - Common Fair
and Preferred Stock Shares Cost value
------------------- ------ ---- -----
Valued at fair value as determined
by the General Partners (note 4):
Biodynamics International Inc. -
specialty surgical products: 1
Series C convertible preferred 32,665 $ 4,164,826 4,699,739
Coded Communications, Inc. -
digital data transmission
equipment manufacturers:
Series A convertible preferred 4,445 410,343 501,396
Series B convertible preferred 46,775 4,244,245 4,244,245
Common 1,384,591 722,657 520,606
Consolidated Health Care
Associates, Inc. - physical
therapy rehabilitation centers: 1
Common 5,159,000 2,500,000 1,617,002
Series A preferred 1,195,984 1,195,984 677,986
Series B preferred 500,000 500,000 646,250
Scientific Software Inc. - software
and pipeline monitoring:
Common 397,218 305,610 202,581
StarComm Products, Inc. -
input devices for personal computers:
Common 8,333 30,000 30,000
--------- --------- --------
14,073,665 13,139,805
---------- ----------
$ 23,363,737 24,042,843
============ ==========
1 - Interest or dividend payments under the terms of the convertible
debenture, note receivable or preferred stock are delinquent as of December
31, 1996.
(Continued)
<PAGE> 43
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------
Eligible Portfolio Investments -
Convertible Debentures and Notes Interest Due Fair
Receivable rate date Cost value
-------------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
Valued at fair value as determined by the
General Partners (note 4):
AmeriShop, Inc. - premium incentive fulfillment
company: 1
Convertible debenture 12.5% 7/1/99 $ 2,000,000 2,000,000
Note receivable varies 7/1/96 1,628,448 1,128,448
Coded Communications, Inc. -
digital data transmission
equipment manufacturers: 1
Convertible debenture 12 10/1/99 4,000,100 2,500,100
Note receivable varies 4/17/96 1,000,000 1,000,000
Industrial Holdings, Inc. -
holding company for light
manufacturing companies:
Convertible debenture 12 10/1/99 2,475,000 2,943,808
Prism Group, Inc. - duplication
and packaging of software: 1
Convertible debenture 12 1/1/00 1,288,516 1,288,516
Protech, Inc. - telecommunications:
Convertible debenture 10 9/30/99 67,500 67,500
Biodynamics International Inc. -
specialty surgical products: 1
Note receivable 10 12/31/99 189,131 189,131
U.S. Fax, Inc. - digital data
transmission equipment
manufacturer:
Note receivable 12 1/1/96 100,000 100,000
Scientific Software/Intercomp,
Inc. - software and pipeline
monitoring: 1
Convertible debentures:
Series #A 11 10/1/99 750,000 884,937
Series #B 11 10/1/00 1,000,000 1,179,916
Tricom Corp. -
telecommunications network
construction: 1
Convertible debenture 12 11/1/99 1,500,000 1,500,000
Notes receivable 12.5 varies 484,000 484,000
--------- ---------
16,482,695 15,266,356
---------- ----------
</TABLE>
(Continued)
<PAGE> 44
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
<TABLE>
<CAPTION>
1995
---------------------------------------------
Eligible Portfolio Investments - Fair
Common and Preferred Stock Shares Cost Value
-------------------------- ------ ---- -----
<S> <C> <C> <C>
Valued at fair value as determined by the
General Partners (note 4):
Prism Group, Inc. - duplication and
packaging software:
Common stock 2,500,000 $ 1,250,000 709,375
Preferred stock 12,500 1,250,000 709,375
Biodynamics International, Inc. -
specialty surgical products: 1
Preferred Stock 32,665 4,164,826 3,116,492
Consolidated Health Care
Associates, Inc. - physical therapy
rehabilitation centers: 1
Common stock 5,000,000 2,500,000 1,271,875
Preferred stock 1,695,984 1,695,984 1,695,984
U.S. Fax, Inc. - digital data
transmission equipment
manufacturer:
Common stock 3,547,972 1,625,000 5,829,063
---------- ----------
12,485,810 13,332,164
---------- ----------
$28,968,505 28,598,520
========== ==========
</TABLE>
1 - Interest or dividend payments under the terms of the convertible
debenture, note receivable or preferred stock are delinquent as of December
31, 1995.
See accompanying notes to financial statements.
<PAGE> 45
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
[CAPTION]
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income:
Interest $ 902,771 1,172,775 2,329,300
Dividends 34,983 449,816 240,424
Loss on short term investments
(note 2) - - (325,873)
Commitment, closing and management fees 18,000 24,000 96,953
---------- --------- ---------
955,754 1,646,591 2,340,894
---------- --------- ---------
Expenses (note 3):
General and administrative 391,163 356,418 353,816
Management fees 559,571 562,063 857,478
--------- --------- ---------
Investment income (loss):
Net unrealized appreciation
(depreciation) on investments
(note 4) 1,049,091 1,443,065 (12,650,379)
Net realized loss on investments (4,054,232) (4,996,375) (2,293,679)
---------- --------- ----------
Investment loss (3,005,141) (3,553,310) (14,944,048)
----------- --------- ----------
Net loss $(3,000,121) (2,825,200) (13,814,448)
========== ========= ==========
Limited Partners' share of net loss
($(68.38), $(64.40), and
$(314.76) per unit for 1996, 1995
and 1994, respectively) $(2,970,120) (2,796,948) (13,676,304)
General Partner's share of net loss (30,001) (28,252) (138,144)
---------- --------- ----------
Net loss $(3,000,121) (2,825,200) (13,814,448)
========== ========= ==========
See accompanying notes to financial statements.
<PAGE> 46
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Partners' Equity
Years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
------- -------- -----
Balance, December 31, 1993 $ 140,387 49,883,890 50,024,277
Net loss
Distributions (note 5) (138,144) (13,676,304) (13,814,448)
- (3,100,000) (3,100,000)
------- ---------- ----------
Balance, December 31, 1994 2,243 33,107,586 33,109,829
Redemption of 15 limited
partnership units - (11,665) (11,665)
Net loss (28,252) (2,796,948) (2,825,200)
Distributions (note 5) - (600,000) (600,000)
------- --------- ---------
Balance, December 31, 1995 (26,252) 29,698,973 29,672,964
Net loss (30,001) (2,970,120) (3,000,121)
------- ---------- ----------
Balance, December 31, 1996 $(56,010) 26,728,853 26,972,843
======= ========== ==========
See accompanying notes to financial statements.
<PAGE> 47
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
</TABLE>
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,000,121) (2,825,200) (13,814,448)
Adjustment to reconcile net loss
to net cash (used in) provided by
operating activities:
Net unrealized (appreciation)
depreciation on investments (1,049,091) (1,443,065) 12,650,369
Net realized loss on investments 4,054,232 4,996,375 2,293,679
Decrease in other assets 197,538 - -
Increase in interest receivable (351,538) (1,050,368) (281,806)
Increase in accounts payable 57,217 - -
Increase (decrease) in accounts payable-
affiliate (16,127) (142,998) (175,741)
Net cash (used in) provided by
operating activities (107,890) (465,256) 1,023,535
Cash flows from investing activities:
Purchase of investments (605,543) (1,073,132) (5,978,281)
Investments in short term investments, net - - 7,821,007
Proceeds from sale of investments 2,267,284 19,210 3,024,743
Repayment of principal on investments 651,541 25,000 165,000
--------- --------- ---------
Net cash provided by (used in)
investing activities 2,313,282 (1,028,922) 5,032,469
--------- --------- ---------
Cash flows from financing activities:
Redemption of limited partnership units - (11,665) -
Distributions to limited partners (138) (899,862) (3,500,000)
--------- --------- ---------
Net cash used in finaning
activities 2,313,282 (1,028,922) 5,032,469
--------- --------- ---------
Cash flows from financing activities:
Redemption of limited partnership units - (11,665) -
Distributions to limited partners (138) (899,862) (3,500,000)
--------- --------- ---------
Net cash used in financing
activities (138) (911,527) (3,500,000)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 2,205,254 (2,405,705) 2,556,004
Cash and cash equivalents at beginning
of the year 467,916 2,873,621 317,617
--------- --------- ---------
Cash and cash equivalents at end of the year $2,673,170 467,916 2,873,621
========= ========= =========
</TABLE>
<PAGE> 48
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Cash Flows, Continued
Noncash investing transactions:
During 1996 and 1995, $932,746 and $838,067 of interest receivable was
capitalized to convertible debentures, notes receivable or common stock,
respectively.
During 1996 the Partnership received 8,333 shares of StarComm Products,
Inc. common stock (value of $30,000) as settlement on foreclosed assets
(included in other assets) with a book value of $66,068. The Partnership
realized a loss of $35,477, net of transaction costs in the accompanying
financial statements on such settlement.
During 1996, the Partnership wrote off its investment in Prism Group,
Inc. The Partnership acquired $200,000 of foreclosed assets in settlement
which are included in other assets in the accompanying financial statements.
The fourth quarter partnership distributions of $138 and $300,000 were
accrued as of December 31, 1995 and 1994, respectively.
During 1995, certain investments were exchanged for other assets
totaling $130,790.
See accompanying notes to financial statements.
<PAGE> 49
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) ORGANIZATION AND BUSINESS PURPOSE
Renaissance Capital Partners II, Ltd. (the "Partnership"), a Texas limited
partnership, was formed in 1991. The Partnership offered to sell units of
limited partners' interest ("Units") in the Partnership. Net contributions
of $39,064,847 from sale of Units had been received upon final closing of the
Partnership on March 31, 1993. The Partnership seeks to achieve current
income and capital appreciation potential by investing primarily in private
placement convertible debt investments of small and medium size companies
which are in need of capital and which the Managing General Partner believes
offer the opportunity for growth. The Partnership has elected to be treated
as a business development company under the Investment Company Act of 1940,
("1940 Act"), as amended. The Partnership will terminate upon liquidation of
all of its investments, but no later than March 31, 2001, subject to the
right of the Managing General Partner with the concurrence of at least one of
the two independent general partners (the "Independent General Partners") to
extend the term for up to two additional one-year periods if they determine
that such extension is in the best interest of the Partnership.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) VALUATION OF INVESTMENTS
Portfolio investments are stated at quoted market or fair value as determined
by the Managing General Partner and approved by the Independent General
Partners (note 4). Most securities held by the Partnership are unregistered
and their value does not necessarily represent the amounts that may be
realized from their immediate sale or disposition.
(b) STATEMENTS OF CASH FLOWS
The Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(c) NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Net income (loss) per limited partnership unit is based on the weighted
average number of limited partnership Units outstanding during the year. The
weighted average limited partnership Units outstanding were 43,434.01 during
1996 and 1995 and 43,449.01 during 1994.
(d) FEDERAL INCOME TAXES
In accordance with Federal income tax regulations, no income taxes are levied
in a partnership, but rather on the individual partners. Consequently, no
Federal income taxes have been reflected in the accompanying financial
statements.
<PAGE> 50
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(e) SHORT TERM INVESTMENTS
Short term investments represented money market and mutual fund investments
of excess cash. Such investments were valued at quoted market value.
Realized and unrealized gains (losses) on such investments were recorded as
loss on short term investments in the accompanying statements of operations
and amounted to ($325,783) in realized losses in 1994.
(f) COMMITMENT, CLOSING AND MANAGEMENT FEES
Commitment, closing and management fees represent amounts charged to Eligible
Portfolio Companies for commitments to fund additional amounts under
convertible debenture agreements, closing of convertible debenture agreements
and management services provided by the Managing General Partner to Eligible
Portfolio Companies. Such fees are recognized as income based on the terms
of the underlying convertible debenture agreements and management agreements.
(g) 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 Partnership that affect the reported amounts of assets and liabilities as
of the date of the statements of assets, liabilities and partners' equity and
income and expenses for the years. Actual results could differ significantly
from those estimates.
(h) FINANCIAL INSTRUMENTS
In accordance with the reporting requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," the Partnership 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
Renaissance Capital Group, Inc. (the "Managing General Partner"), serves as
the investment adviser for the Partnership. The Managing General Partner is
registered as an investment adviser under the Investment Advisers Act of
1940. Pursuant to an Investment Advisory Agreement, the Managing General
Partner performs certain services, including certain management, investment
advisory and administrative services necessary for the operation of the
Partnership. In addition, under this agreement the Managing General Partner
is reimbursed by the Partnership for certain administrative expenses. A
summary of fees and reimbursements paid by the Partnership under the
Investment Advisory Agreement and the original offering document are as
follows:
<PAGE> 51
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The Managing General Partner received a fee equal to one-half of one percent
(0.5%) of the Net Assets after the initial closing date of the Partnership
and is entitled to receive quarterly fees thereafter equal to 0.5% of Net
Assets, as defined in the Partnership Agreement. The Partnership incurred,
during the years ended December 31, 1996, 1995 and 1994, $559,571, $562,063
and $857,478, respectively, for such management fees. For the years ended
December 31, 1996, 1995 and 1994, the Managing General Partner elected to
calculate the quarterly fee based on the lesser of contributed capital or Net
Assets. If the Managing General Partner had elected to calculate the
quarterly fee solely based on Net Assets, the fee would have been
approximately $153,000 greater than the cumulative fee charged.
The Managing General Partner was reimbursed by the Partnership for
administrative expenses incurred by the Managing General Partner on behalf of
the Partnership. Such reimbursements were $176,256, $290,728 and $108,489
for the years ended December 31, 1996, 1995 and 1994, respectively, and are
included in general and administrative expenses in the accompanying
statements of operations.
Each of the Independent General Partners receives a quarterly fee of $.24 per
unit for the first 25,000 units and $.12 per unit for all units in excess of
25,000 and reimbursement of expenses incurred on behalf of the Partnership.
Such amounts totaled $65,710 in 1996, 1995 and 1994 and are included in
general and administrative expenses in the accompanying statements of
operations.
(4) INVESTMENTS
The Partnership invests in convertible debentures and other securities 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) of the 1940 Act.
Under the provisions of the 1940 Act, as a business development company, at
least 70% of the Partnership's funds must be invested in Eligible Portfolio
Companies. Investments of the Partnership are carried in the statements of
assets, liabilities, and partners' equity as of December 31, 1996 and 1995 at
quoted market or fair value, as determined in good faith by the Managing
General Partner and approved by the Independent General Partners.
The debentures and preferred stock held by the Partnership are convertible,
at any time, 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 Partnership generally may register and sell such
securities at any time with the Partnership paying the costs of registration.
Interest is generally payable monthly, and all debentures have sinking fund
provisions beginning three to four years from issue date. The debentures
generally have call options, usually commencing three years subsequent to
issuance, at prices specified in the debenture agreements.
The Partnership Agreement and the original offering document specify that
securities held by the Partnership shall be valued as follows:
<PAGE> 52
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The Managing General Partner will, on a quarterly basis, prepare a valuation
of the Partnership assets, including the investment portfolio and any other
investments.
For securities that are publicly traded and for which quotations are
available, the Partnership will value the investments based on the closing
sale as of the last day of the fiscal quarter, or in the event of an interim
valuation, as of the date of the valuation. If no sale is reported on such
date, the securities will be valued at the average of the closing bid and
asked prices.
Initially the investments will be primarily in nonpublicly-traded convertible
debentures, and in other instances the Partnership will hold restricted
securities. Therefore, market quotations will not always be available for
investment valuation. In such cases, the securities will be valued by the
Managing General Partner at estimated fair value pursuant to the following
standards:
Generally, debt securities will be valued at their face value. However, if
the debt is impaired, an appropriate valuation reserve will be established or
the investment discounted to estimated realizable value. For securities that
are in a class of publicly traded securities that are restricted from free
trading (such as Rule 144 securities), valuation will be established by
appropriately discounting the closing sales or bid price to reflect the
illiquidity caused by such restriction. Conversely, if the underlying stock
has appreciated in value and the conversion feature justifies a premium
value, such premium will of necessity be recognized. Further, if the known
market value of a stock holding indicates that an appreciated value may be
realized on sale of a restricted stock, such investment may be valued at such
appreciated value regardless of the fact that certain open-market sale
restrictions apply. The Managing General Partner, subject to the approval
and supervision of the Independent General Partners, will be responsible for
determining fair value. In the event that the Independent General Partners
do not agree with the valuations established by the Managing General Partner,
they may retain independent firms to review the Managing General Partner's
methodology of valuation or to conduct a valuation, and such appraisal shall
be binding on the Partnership.
As of December 31, 1996 and 1995, the Partnership held Eligible Portfolio
Investments with a market or fair value, as determined in good faith by the
Managing General Partner and approved by the Independent General Partners, of
$24,042,843 and $28,598,520 , respectively. Such values were determined
using the methodology noted above. The valuation methods, approved by the
Independent General Partners, specifically include the following.
* Original cost
* Quoted market value
* The quoted market value of the underlying class of common stock that
the convertible debt or preferred stock may be converted into, less
estimated costs to sell and register the common stock
* Original cost less a valuation reserve for collectibility concerns
<PAGE> 53
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1996, 1995 and 1994
The financial statements include unregistered securities of publicly-held
companies valued at $24,042,843 (89% of total assets) and $28,598,520 (96% of
total assets) as of December 31, 1996 and 1995, respectively, whose values
have been estimated by the Managing General Partner and approved by the
Independent General Partners in the absence of readily ascertainable market
values. Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had
a ready market for the securities existed, and the differences could be
material.
As of December 31, 1996 and 1995, the net unrealized appreciation
(depreciation) associated with investments held by the Partnership was
$679,106 and $(369,985), respectively.
(5) PARTNERS' EQUITY
Pursuant to the terms of the Partnership Agreement, all items of income,
gain, loss and deduction of the Partnership, other than any Capital
Transaction, as defined in the Partnership Agreement, are allocated 1% to the
Managing General Partner and 99% to the Limited Partners, except prior to the
initial closing date when all items were allocated 99% to the Managing
General Partner and 1% to the Initial Limited Partner. All items of net gain
of the Partnership resulting from a Capital Transaction, defined in the
Partnership Agreement as a sale or disposition of any portfolio investment
(defined under the 1940 Act), are allocated such that first the Limited
Partners receive a cumulative simple annual return of 10% on their gross
capital contributions and any remaining capital gains (net of capital losses
and unrealized depreciation) are allocated 20% to the Managing General
Partner and 80% to the Limited Partners. All items of net capital loss
resulting from Capital Transactions are allocated 1% to the Managing General
Partner and 99% to the Limited Partners. As of December 31, 1996 ,1995 and
1994, the net unrealized appreciation or depreciation was allocated 99% to
the Limited Partners. If the investments in convertible debentures had been
disposed of at their estimated fair values, as determined by the Managing
General Partner and approved by the Independent General Partners, there would
have been no additional allocation to the Managing General Partner under the
terms of the Partnership Agreement and Investment Advisory Agreement.
Distributions to the Limited Partners are made at the discretion of the
Managing General Partner, in accordance with the Partnership Agreement. As a
result of decreasing cash resources in 1996 and 1995, the distributions to
the limited partners were discontinued. As the Partnership's investments are
liquidated or other cash resources are obtained, the Partnership expects to
reinstate such payments in whole or in part based upon Capital Transactions
and the cash resources available. In addition, the Managing General Partner
has the discretion to discontinue payment of the management fees or expense
reimbursements if cash resources are further limited.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996
<INVESTMENTS-AT-COST> 23,363,737 28,492,357
<INVESTMENTS-AT-VALUE> 24,042,843 25,895,444
<RECEIVABLES> 114,157 2,031,661
<ASSETS-OTHER> 103,252 86,366
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<APPREC-INCREASE-CURRENT> 1,049,091 (2,226,927)
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<ACCUMULATED-GAINS-PRIOR> (7,290,054) (7,290,054)
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<PER-SHARE-NII> .114 6.198
<PER-SHARE-GAIN-APPREC> (68.497) (28.786)
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</TABLE>
