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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal Year Ended December 31, 1997 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 0-38593
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 Id 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:
Name of each exchange
Title of each class 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.
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As of December 31, 1997, there were 43,304 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, 1997 is $14,420,529.
Aggregate value of the Partnership Interests held by affiliates as of
December 31, 1997 is $66,339.
Part I
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, 1993 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
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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 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.
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 eligible companies and
temporary investments in "cash items" pending other investments. However,
under 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 as 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, 1997, the Partnership's investment assets were
classified by amount as follows:
<TABLE>
Percentage of
Classification Cost Investments (at Cost)
<S> <C> <C>
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Eligible Portfolio Companies $22,780,273 100%
Other Portfolio Companies None 0%
</TABLE>
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 through
appreciation in values of convertible debenture securities.
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 are made in such amounts as determined by the Managing General
Partner, and 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.
In 1997, $1,000,000 was distributed to the limited partners. As the
Partnership's investments are liquidated, or other cash resources obtained,
the Partnership expects to continue 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
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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;
(iii) Management - the Partnership seeks 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 seeks
companies that have a recognized market for their products or services in a
stable or growing industry;
(v) Management Involvement - the Partnership seeks 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 is 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 are 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 are generally 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 selects, as alternate nominees, outside consultants who have
had prior experience as an independent outside director of a public company.
REGULATION UNDER THE INVESTMENT COMPANY ACT OF 1940
The 1940 Act was enacted to regulate investment companies. In 1980, the
1940 Act was amended by the adoption of the Small Business Investment
Incentive Act. The purpose of the amendment was to remove regulatory burdens
on professionally managed investment companies engaged in providing capital
to smaller companies. The Small Business Investment Incentive Act
established a new type of investment company specifically identified as a
Business Development Company as a way to encourage financial institutions and
other major investors to provide a new source of capital for small developing
businesses.
BUSINESS DEVELOPMENT COMPANY
A BDC:
(1) is a closed-end management company making 70% of its investments
only in certain companies (identified as "Eligible Portfolio Companies"), and
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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." Qualifications to be met for a company to be an
"Eligible Portfolio Company" are:
(A) it must be organized under the laws of a state or states of the
United 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.
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.
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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.
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
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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. 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 fee thereafter equal to
0.5% of Net Assets, as defined in the Partnership Agreement. For the years
ended December 31, 1997, 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 General Partner elected to calculate
the quarterly fee solely based on Total Assets, the fee would have been
approximately $152,000 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 Interest, 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.
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 lease one Independent General Partner to extend the term for up to two (2)
additional one-year periods.
PARTNERSHIP PORTFOLIO INVESTMENTS
As of December 31, 1997, the Partnership has made ten (10) Portfolio
Investments of which six (6) are active, as follows:
Total Choice, Inc. (formerly AmeriShop, Corp.) (Privately Held)
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Total Choice, Inc. 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, held $2,000,000 in convertible debentures. 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 12.5% short
term promissory note financings in the amount of $225,000, $300,000 and
$300,000, respectively. In 1994 these advances, along with the $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 was payable monthly. The debentures were non-callable for
three years, provided for monthly principal installments commencing on July
1, 1995, which installments would have amortized approximately one/half of
the principal with the balance due at maturity on July 1, 1999. At the
option of the Partnership, the debentures were convertible at any time into
AmeriShop common stock at $0.56 per share. The Partnership had the right to
demand stock registration and certain piggyback stock registration rights,
and after Aril 10, 1995, was 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 resulted in an
aggregate promissory note of $1,728,448. No payments were ever received
under these notes.
As of December 31, 1996, all accrued interest due on the debentures and
notes had been fully reserved. AmeriShop was not in compliance with its loan
covenants, nor was it in compliance with its principal and interest payment
requirements. The Partnership waived default by AmeriShop until March 31,
1997.
Effective June 18, 1997, the Partnership and AmeriShop entered into a
"Surrender Agreement" and "Bill of Sale and Omnibus Assignment" whereby the
Partnership foreclosed on all the assets of the business of AmeriShop, except
for receivables pledged on senior debt and any proceeds thereof, in exchange
for cancellation of All Convertible Debentures and Notes held by the
Partnership.
The Partnership valued the surrendered assets at $700,000 and
transferred them into Total Choice, Inc., a newly formed Texas corporation,
in exchange for a 60% common equity interest in the new entity. The
Partnership recognized a $3,028,448 loss on the foreclosure transaction. In
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July 1997, the Partnership made a $300,000 follow-on investment to Total
Choice in the form of Preferred Stock.
A valuation reserve of $196,065 has been placed on this investment
representing the Partnership's 60% share of the Company's $326,775 loss for
1997. To date, the Company is not generating positive cash flow.
Biodynamics International, Inc.
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. 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. Biodynamics is establishing a tissue processing facility in
connection with the University of Florida Tissue Bank.
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 was convertible into Biodynamic's common stock at a rate of
$0.85 per share or into 4,889,750 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 US $189,131 (DM
271,358) and on March 22, 1996, an additional US $184,933 (DM 271,358) was
advanced bringing total mezzanine loans to $374,064. The Notes had a 10%
interest rate and were convertible into Series C Preferred Stock at a rate of
DM 1.435 per US $1.00.
On May 1, 1997, the Partnership advanced $500,000 to Biodynamics under
terms of a 12% Promissory Note due June 30, 1997. Effective June 30, 1997,
the Partnership advanced an additional $500,000 upon execution of a "New Note
and Security Agreement" which modified, extended, and substituted for the
April 29, 1997 Promissory Note of $500,000 and accrued interest thereon of
$10,027.40. The June 30 Note for $1,010,027.40 bore interest at 12% per
annum, with principal and interest due September 30, 1997, and was secured by
a lien on substantially all of Biodynamic's assets.
On September 15, 1997, Biodynamics issued to the Partnership a 12%
Promissory Note in the amount of $2,035,928.32 due on or before December 31,
1997. This Note modified and renewed the June 30 Note in the principal
amount of $1,010,027.40 which, together with accrued interest thereon in the
amount of $25,900.92 and a cash follow-on investment of $1,000,000 made by
the Partnership, represent the principal amount of the September 15, 1997
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Note. The September 15 Note was also secured by a lien on substantially all
of Biodynamics' assets.
On March 28, 1997, Biodynamics announced that the Japanese Ministry of
Health was banning all use of human dura mater, including Biodynamics'
Tutoplast dura mater, in response to a recommendation from the United Nations
World Health Organization ("WHO"). On May 20, 1997, Biodynamics announced
that the Italian Government imposed a moratorium on all shipments of human
dura mater, including Tutoplast dura mater, pending investigation by the
European Health Authorities into the safety of dura mater transplants for
neurosurgical procedures. Due to the loss of the Japanese and Italian
markets, Biodynamics' revenue base eroded.
Effective November 11, 1997, the Company, its Series C Preferred
Shareholders, and its Mezzanine Debt Holders entered into an agreement to
recapitalize Biodynamics. Under the plan of recapitalization, all Series C
Preferred Shareholders and Mezzanine Debt Holders agreed to convert their
positions into common stock. The recapitalization agreement also provides
for the conversion of the September 15, 1997 Note held by the Partnership
into a five year convertible debenture, convertible into sufficient shares of
Biodynamics' common stock which, when added to the common stock to be issued
to the Partnership for its Series C Preferred Stock, constitute 51% of the
issued and outstanding common stock of Biodynamics. According to the
recapitalization agreement, the Partnership is also to receive sufficient
warrants issued in connection with the Series C Preferred Stock conversion,
so as to maintain its aggregate 51% ownership percentage.
To effectuate the recapitalization agreement, the Partnership converted
its two Deutsch Mark notes totaling U.S. $374,064 (DM 542,716), together with
accrued interest if U.S. $115,385 (DM 159,473), into 3,839 of Series C
Preferred Stock having a value of $489,446. Upon converting the Deutsch Mark
notes, the Partnership held a total of 36,504 shares of the Series C
Preferred Stock having a combined cost of $4,654,272. The Partnership's
Series C Preferred Stock was then converted into 5,475,600 shares of common
stock. In addition, the Partnership received warrants to purchase an
additional 5,475,600 shares of stock at a price of $0.25 per share, which
warrants expire December 31,2000.
At a special meeting of Shareholders on November 10, 1997, Biodynamics
adopted a reverse split in which each holder of common stock received one
share of common for every ten shares held. This action adjusts the shares of
common stock held by the Partnership from 5,475,600 to 547,560, with the cost
basis remaining at $4,654,272. The total number of shares issuable upon
exercise of warrants after considering the reverse split is 1,353,956.
Effective November 11, 1997, the Partnership rolled the September 15,
1997 Note along with accrued interest of $38,153 thereon, into a 9%
$2,074,081 Convertible Debenture due November 11, 2002. Interest is due in
monthly installments beginning on January 1, 1998. The Debenture is
Convertible into 4,413,231 shares of Biodynamics common stock. In addition,
the Partnership received warrants to purchase additional shares of stock for
$2,095,991, with a conversion price of $0.26 per share. These warrants
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expire December 31, 2000.
On March 18, 1998, the Partnership advanced Biodynamics $500,000
pursuant to a 9% Promissory Note secured by substantially all of Biodynamic's
assets. Biodynamics has agreed to immediately roll the Note into a 9%
convertible Debenture with the Debenture being convertible into shares of
common stock at $1.35 per share. The Debenture will be executed under the
same terms and conditions as the November 11, 1997 Debenture. Interest for
the first 90 days of the Note and Debenture may be payable by the Company in
cash or shares of common stock at $1.35 per share.
On July 2, 1997, Biodynamics announced that it had settled litigation
with the former owner of its German subsidiary. The settlement agreement
canceled approximately $1.6 million in debt, including accrued interest, due
from Biodynamics to the former owner, which will result in a direct increase
in Biodynamic's equity base.
On September 29, 1997, Biodynamics announced it had received
notification from the NASDAQ Stock Market that its securities would be
delisted from that market as of the close of business September 26, 1997.
Because the delisting occurred before the recapitalization, Biodynamics
believes that the financial reorganization effected November 11, 1997 will
re-qualify it for a listing on the NASDAQ Stock Market.
Russell Cleveland, the President, Director, and principal shareholder of
the Managing General Partner, is a member of the Board of Directors of
Biodynamics as the Partnership's director Designee.
Coded Communications, Inc.
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 ad
additional $1,000,000 subject to certain conditions. This additional
investment of $1,000,000 was made on July 21, 1993, and a further 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. Coded is a
manufacturer of digital transmission systems for mobile fleet operations.
Interest was payable monthly. The debenture was non-callable for three
years and provided for monthly principal installments commencing on October
1, 1995, which installments would have amortized approximately one-half of
the principal with the balance due at maturity on October 1, 1999. At the
option of the Partnership, the Debenture was convertible at any time into
Coded common stock at $1.50 per share.
In connection with Coded's 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
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financing, the Partnership received warrants to purchase 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, Coded began the process
of completing a non-judicial reorganization with the held of a 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 17, 1996, final documentation was completed on a March 1996
agreement with Grupo Information, Satellites and Advertising S.A. de C.V.
("ISA"), the Bridge Lenders, Renaissance Capital Partners II, Ltd. and Coded
(the "September 27, 1996 Agreement"). Pursuant to the terms and conditions,
ISA received approximately 49,000,000 shares of Coded Communications, Inc.
common stock, representing approximately 67% ownership in Coded. 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.
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, and 3)
8,000 shares of Series A Cumulative Convertible Preferred Stock with a face
value of $800,000 (the "Coded Series A Stock"). The Promissory Note is due
in full the earlier of September 27, 1997, or on the sale of DeCom systems,
the Company's wholly owned subsidiary. 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. The Coded Series A Stock pays an 8% dividend, of
which 50% is cash and 50% is common stock of Coded. The coded Series A 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 Coded Series A 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
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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 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.
During the quarter ended March 31, 1997, the Partnership sold 200,006
shares of Coded's common stock for $76,177, recording a loss of $34,977 on
the transactions. In the second quarter, the Partnership sold 170,000 shares
of Coded's stock for $53,633, representing a loss of $40,845. For the six
month period ended June 30, 1997, the Partnership sold 370,006 shares of
common stock having cumulative proceeds of $129,810, and representing a total
loss of $75,822.
On February 19, 1998, Coded announced that Gary Luick resigned as
President and Chief Executive Officer, and Director of Coded. The Company
also announced that Hugo Camou, Chairman of the Board, would be assuming
responsibilities as Chief Executive Officer, and that John Wiggins, Chief
Operating Officer, would become President and take Mr. Luick's place on the
Board.
On January 8, 1998, Coded announced that it had completed a two-year
financial restructuring of its unsecured debt by making a final payment of
$613,000 under the San Diego Credit Settlement Plan. Overall, the Plan
settled $1.65 million dollars and was carried out over a 27-month period,
during which time Coded made all payments as scheduled.
On January 14, 1998, Coded announced that it had established a revolving
line of credit with Comerica Bank for up to $1.75 million, including a
capital equipment credit line for up to $250,000. The rate on the credit
line is prime plus .5% and the line is collateralized by a security interest
in Coded's assets. Proceeds are to be used for working capital.
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Coded's performance has improved, as it has reported eight consecutive
quarters of profitability and its sales volume increased significantly in
1997. For the nine months ended September 30, 1997, Coded reported
$10,481,000 in sales compared to $8,675,000 in sales for the nine months
ended September 30, 1996, and reported operating income of $525,000 for the
nine month period ended September 30, 1997, in comparison to net income of
$454,000 for the nine months ended September 30, 1996.
Vance Arnold, Executive Vice President of the Managing General Partner,
has been designated as the Partnership's Director Designee and serves as an
Advisory Director of the Company.
Consolidated Health Care Associates, Inc.
On December 29, 1992, the Partnership invested $2,500,000 in an 11%
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 an
11% promissory note.
CHCA operates physical therapy rehabilitation centers.
On June 30, 1994, as part of an overall restructuring of the investment,
the Partnership converted its $3,000,000 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
("CHCA Series A") 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, 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 former chairman and
CEO of the Company. The Partnership loaned 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 ("CHCA Series B") 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 shares of CHCA Series B Preferred Stock. The
CHCA Series B 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, CHCA raised additional capital from another investor which
triggered the anti-dilution protection found in the CHCA Series B. The
Partnership chose to partially waive those rights for the transaction and in
consideration received a reduction in the conversion price of the CHCA Series
A from $0.75 to $0.57 per share and with respect to the Series B Preferred a
reduction from $0.33 to $0.25 per share.
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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 provided for interest at a rate of 10%
payable monthly, and was secured by all assets of CHCA, 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.
Effective May 1, 1997, the Partnership and CHCA entered into a new loan
agreement, which canceled the $265.000 multiple advance Promissory Note due
on April 17, 1999 and replaced it with a new installment Note. The new
$264,000 Installment Promissory Note and Security Agreement bears interest at
10% and calls for 23 monthly principal and interest installments of $5,609
beginning on June 15, 1997, together with a final installment of $173,837 due
on June 15, 1999.
On July 10, 1997, the Partnership and CHCA entered into a bridge loan
agreement in the amount of $300,000. This agreement took the form of a
Promissory Note bearing interest at 8% per annum with all principal and
interest due on the outstanding balance of the Note payable in full on or
before November 30, 1997. In exchange for the bridge loan, CHCA agreed to
modify and amend the Series A Preferred and Series B Preferred held by the
Partnership. Pursuant to the modification, the conversion price for the
Series A Preferred was reduced from $0.57 per share to $0.38 per share, and
any and all accumulated dividends accruing on the Series A Preferred are to
be paid to the Partnership in common stock at $0.38 per share. In addition,
any and all accumulated dividends accruing on the Series B Preferred Stock
shall be paid to the Partnership in common stock, at $0.25 per share.
On August 13, 1997, CHCA announced that it had signed a non-binding
letter of intent with Olympus Healthcare Group, Inc. ("Olympus"), a privately
owned, integrated post-acute healthcare services company located in
Westborough, Massachusetts. Pursuant to the letter of intent, Olympus would
acquire substantially all of the operating assets and assume certain
liabilities of CHCA in consideration for $5,000,000 consisting of 175,620
shares of common stock of Olympus and $750,000 cash.
On September 19, 1997, the Partnership agreed to loan CHCA $100,000 in
order to allow CHCA to meet its working capital requirements and enable it to
finalize the Olympus transaction. The September 19 loan was made pursuant to
a Promissory Note calling for interest at 8% per annum with all principal and
interest due on the outstanding balance payable no later than November 20,
1997.
On September 30, 1997, CHCA announced it had signed a revised non-
binding letter of intent with Olympus. Under the revised letter, Olympus
would acquire all of the operating assets and assume certain liabilities of
PTS Rehab, Inc. and Consolidated Rehabilitation Services, Inc., wholly owned
subsidiaries of CHCA, in exchange for 42,553 shares of Olympus common stock
and $1,400,000 cash. CHCA also announced that it would pursue the sale of
the remaining assets of consisting primarily of outpatient facilities
located in Delaware and Pennsylvania.
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<PAGE 17>
On October 7, 1997, the Partnership and CHCA agreed to consolidated the
$264,000 Note, the $300,000 Note, and the $100,000 Note into a new Note
having a principal amount of $678,218 which includes accrued interest thereon
of $14,218. The Partnership also advanced two follow-on loans each in the
amount of $75,000 to CHCA in October 1997. Both of these advances were made
under the terms of an 8% secured Promissory Note. On October 28, 1997, the
Partnership and CHCA agreed to consolidated the $678,218 Promissory Note and
the $150,000 in cash advances made in October 1997, together with accrued
interest thereon of $3,335, into a new secured Promissory Note of $831,553.
The October 28 Note bore interest at 8% per annum, with all the principal and
accrued interest on the outstanding balance due on the earlier of November
27, 1997 or the closing of the sale of the assets.
Pursuant to a Promissory Note dated as of November 11, 1997, bearing
interest at 8% per annum, the Partnership advanced $75,000 to CHCA. Pursuant
to a Promissory Note dated November 14, 1997, bearing interest at 8% thereon,
the Partnership advanced $150,000 to CHCA.
On December 15, 1997, CHCA announced that between October and November
1997, Olympus had negotiated revised terms for the sale, and that on November
20, 1997, CHCA agreed to accept $1,700,000 in cash as the total purchase
price for the proposed transaction. CHCA also announced that an Asset
Purchase Agreement had been executed on November 20, 1997, with the signature
pages held in escrow for release upon completion of agreed upon revised
terms, conditions, and related disclosure schedules. CHCA went on to confirm
that these signature pages were released from escrow on December 10, 1997,
thereby finalizing the Asset Purchase Agreement, and expected the deal to
close following a meeting of shareholders on January 13, 1998.
On December 17, 1997, the Partnership advanced to CHCA $40,000 under the
terms of an 8% Promissory Note to be paid in full on January 15, 1999. On
January 6, 1998, the Partnership and CHCA agreed to modify, renew, extend,
and consolidated the October 28 Promissory Note for $831,553, the $75,000
Promissory Note dated November 11, 1997, the $150,000 Promissory Note dated
November 14, 1997 and the $40,000 Promissory Note dated December 17, 1997,
together with accrued interest thereon of $15,283 into a new Secured
Promissory Note of $1,111,836. The January 6, 1998 Promissory Note bore
interest at 8% per annum with the principal and accrued interest on the
outstanding balance due under the note to be paid in full on the earlier of
January 31, 1998 or the closing of the sale of CHCA's assets.
On January 9, 1998, CHCA announced the completion of an Asset Purchase
Agreement with HealthSouth Holdings, Inc. Under that agreement, HealthSouth
acquired all of the operating assets and assumed certain liabilities of PTS
Rehab Philadelphia, Inc. (consisting of one outpatient clinic located in
Pennsylvania) and Physical Therapy Associates, Inc. (consisting of three
outpatient clinics in Delaware), both wholly owned subsidiaries of CHCA, in
exchange for $800,000 cash.
On January 23, 1998, the Partnership advanced CHCA $65,000 under the
terms of an 8% Promissory Note. On February 1, 1998, the Partnership and
CHCA agreed to modify, renew, extend, and consolidate the January 6
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<PAGE 18>
Promissory Note for $1,111,836 and the $65,000 Note dated January 23,
together with accrued interest thereon of $6,464 into a new Secured
Promissory note of $1,183,301. The January 23, 1998 Promissory Note bears
interest at 8% per annum with the principal and accrued interest on the
outstanding balance due under the Note to be paid in full on the earlier of
May 31, 1998 or the closing of the sale of all or substantially all of the
assets.
On March 6, 1998, the Partnership and Duncan-Smith Co. agreed to loan
CHCA $150,000 pursuant to a Promissory Note secured by all the assets of CHCA
and its remaining subsidiaries. The Note is guaranteed by the PTS Rehab,
Inc. subsidiary, and the guaranty is secured by all the receivables at the
PTS Rehab, Inc. level. Under the Note, interest accrued at 15% per annum,
and all principal and interest is due in full on or before June 1, 1998. The
advances made under the Note will be split 50/50 between the Duncan-Smith Co.
and the Partnership. Goodhue W. Smith, III, Chairman of the Board of CHCA,
is a founding partner of Duncan-Smith. On March 6, 1998, Duncan-smith
advanced CHCA $65,000 pursuant to the Note. On March 17, 1998, the
Partnership advanced $63,000 to CHCA pursuant to the Note.
CHCA is now nearing finalization of the sale of its remaining clinics,
all located in Massachusetts, and is expected to be completed in March 1998.
Upon Closing and final settlement between CHCA and its factoring company, the
Partnership's debt will have a priority lien on all the receivables of CHCA
and its subsidiaries, and the Partnership will be entitled to all proceeds
generated from those receivables until its debt position is fully satisfied.
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 was payable monthly. The debenture was non-callable for three
years and provided for monthly principal installments commencing on October
1, 1995, which installments would have amortized approximately one/half of
the principal with the balance due at maturity on October 1, 1999. At the
option of the Partnership, the Debenture was convertible at any time into IHI
common stock at $3.26 per share. The Partnership had the right to demand
stock registration and certain piggyback, stock registration rights, and
after October 8, 1995, at least one such registration at IHI's expense.
On March 15, 1996, IHI 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 common stock at $4.00 per share. These
warrants were to 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 IHI's common stock leaving a principal
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balance in debentures of $1,060,000. These shares were sold in block sales
and generated a capital gains of approximately $964,000.
During 1997, the Partnership converted its remaining debenture balances
throughout the year into 325,153 shares of common stock for $3,643,309, and
sold the common stock for a gain of $2,589,309. The Partnership has
liquidated its position in this investment.
Scientific Software/Intercomp, Inc.
On October 30, 1992, the Partnership invested $2,500,000 in an 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 an 11% convertible
debenture, designated as Series #B. SSI provides data processing software
for the petroleum industry.
On June 27, 1994, the Partnership converted $1,750,000 of its $2,500,000
in an 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
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 post of a capital restructuring which
provided $5,000,000 to SSI, 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. On February 20, 1998, SSI
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<PAGE 20>
announced that it had entered into a preliminary agreement with Well Service
Technology A/S (WST) of Bergen, Norway, pursuant to which WST will acquire
all the assets and liabilities of SSI, exclusive of the pipeline simulation
division.
SSI continues to incur losses and has had difficulty finding a strategic
partner. As a result, a $500,000 valuation reserve has been established
against the Partnership's Convertible Debenture.
Russell Cleveland, the President, Director, and principal shareholder of
the Managing General Partner, has been designated as the Partnership's
Director Designee and serves as an Advisory Director of SSI.
Tricom Corp.
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.
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.
Interest was payable monthly. The debentures were non-callable for
three years and provided for monthly principal installments commencing on
November 1, 1995 which installments would have amortized approximately
one/half of the principal with the balance due at maturity on November 1,
1999. At the option of the Partnership, the debenture was convertible at any
time into Tricom common stock at $0.50 per share. The Partnership had the
right to demand stock registration and certain piggyback stock registration
rights, and after November 11, 1995, at least one such registration at
Tricom'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 Tricom's common
stock at $1.50 per share, reduced to $1.00 per share should Tricom not
complete an IPO by November 15, 1996.
In the first quarter of 1997, the Partnership, other bridge loan
holders, new investors, and Tricom entered into a tentative agreement to
recapitalize Tricom. In the three months ended June 30, 1997, the
Partnership, in accordance with the plan of reorganization, exchanged its 12%
$1,000,000 Convertible Debenture dated November 19, 1992, its $500,000
Convertible Debenture dated March 26, 1993, its $200,000 12.5% Promissory
Note dated July 1, 1994, its $50,000 12.5% Promissory Note dated December 29,
1994, and the unpaid interest on all of its debt totaling $403,600, for
21,536 shares of Tricom Series A Convertible Preferred Stock, par value $100
per share ($2,153,600). The Preferred Stock is Convertible at the option of
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the holder into common stock at $4.00 per share. A one-time adjustment of
$2.00 per share will be made if Tricom has not raised $2,000,000 in new
equity capital by December 31, 1998. In addition, the Partnership purchased
35,555 shares of common stock for $16,000. The Partnership also exchanged
its $54,000 and $30,000 Notes along with its $150,000 bridge loan for 520,000
shares of common stock, and received warrants to purchase 250,000 shares of
common stock at $2.00 per share.
As of January 27, 1998, Tricom sold Office Communication Systems, Inc.
("OCS"), its wholly owned subsidiary, to AIDCO, Inc. The stock purchase
agreement calls for Tricom to receive $1,350,000 for its ownership interest
in OCS. Of the $1,350,000 sale price, $1,150,000 has been paid to Tricom,
while the remaining $200,000 balance has been deposited into an escrow
account to be held for a period of 12 months from the closing as security for
the indemnification obligations of Tricom pursuant to the stock purchase
agreement.
The $1,350,000 purchase price is subject to two one time adjustments.
First, AIDCO will pay Tricom four times the amount by which the annual
earnings before interest and taxes (EBIT) of OCS during the period from
February 1, 1997 to January 30, 1998 exceeds $340,000. Second, AIDCO is
entitled to reduce the purchase price on a dollar for dollar basis by the
difference between the actual book value calculated as of January 31, 1998
and a stated minimum book value amount of $475,000.
The Partnership has provided a valuation reserve of $1,903,600 on this
investment because OCS, the only income producing subsidiary of Tricom, has
been sold subsequent to year end.
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 competes 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.
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
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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
$41,489,500. As of December 31, 1997, Renaissance III had completed fourteen
investments having an aggregate cost value of $33,148,232 of which twelve are
still active. The Fund 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 basis with
Renaissance III. In 1996, RUSGIT raised investment capital of approximately
$30,789,000. As of December 31, 1997, RUSGIT had made eight investments
having an aggregate cost value of $14,353,750, of which seven are still
active. RUSGIT, like Renaissance III, continues to actively seek investment
opportunities. 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 July
31, 1999 in a multi-story general office building in Dallas, Texas. The use
of such office facilities, including office furniture, phone services,
computer equipment, and files are provided by the Managing General Partner at
its expense pursuant to the Investment Advisory Agreement.
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Item 3. Legal Proceedings.
In 1997, the Partnership filed suit for collection of a $100,000 Note
from U.S. Fax, Inc., ActionFax International, Inc., and Facsimile Science
Corporation ("U.S. Fax Defendants"). The Partnership had an investment in
U.S. Fax, Inc which was previously charged off. The U.S. Fax defendants
filed counterclaims against the Partnership for unspecified actual and
punitive damages from certain business claims including breach of contract
fraud, negligent misrepresentation, conversion and a request for declaratory
relief. The Partnership has denied any and all liability and is vigorously
defending this action.
Item 4. Submission 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 1997.
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, 1997, there were approximately 1,825 beneficial
holders of Limited Partners interest; one holder of a Managing General
Partner Interest; and two Independent General Partners.
DIVIDEND POLICY
The Partnership Agreement provided 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 the 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, and 1997
the distributions to the limited partners were discontinued. In 1997,
$1,000,000 in distributions were made to the limited partners. A the
Partnership's investments continue to be liquidated, and other cash resources
obtained, the Partnership expects to continue such payments in whole or in
<PAGE>
<PAGE 24>
part based upon the cash resources.
Item 6. Selected Financial Data.
The following selected financial data for the five year period ending
December 31, 1997, should be read in conjunction with the Partnership's
Financial Statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7
of this annual Report on Form 10-K for the five years ended December 31,
1997.
<TABLE>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Gross Income
(loss)(including
realized losses) $243,921 $(3,098,478) $(3,349,784) $47,215 $3,200,659
Net unrealized
appreciation
(depreciation) on
investments (10,630,309) 1,049,091 1,443,065 (12,650,369) 10,132,217
Net income
(loss) (11,106,609) (3,000,121) (2,825,200) (13,814,448) 12,309,013
Income (loss) per
Limited Partnership
unit (253) (68) (64) (315) 313
Total assets 14,631,365 26,933,422 29,892,591 33,772,316 50,911,023
Distributions to
partners 1,000,000 - 600,000 3,100,000 2,506,708
Distributions per
Limited Partnership
unit 23 - 14 71 64
</TABLE>
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
<PAGE>
<PAGE 25>
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 does not generally require such for services on the
board of a Portfolio Company.
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 by 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 $12,886,000 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 partners 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 $41,489,500 available for
investment. As of December 31, 1997, Renaissance Capital Growth & Income
Fund III, Inc. had completed fourteen investments having an aggregate cost
value of $33,148,232 of which twelve are still active. The Fund 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
<PAGE>
<PAGE 26>
Partnership. RUSGIT invests primarily on a pari-passu basis with Renaissance
III. In 1996, RUSGIT raised investment capital of approximately $30,789,000.
As of December 31, 1997, RUSGIT had made eight investments having an
aggregate cost value of $14,353,750, of which seven are still active.
RUSGIT, like Renaissance III, continues to actively seek investment
opportunities. 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.
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 requirement 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
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.
As the result of decreasing cash resources in 1995 and 1996, the
distributions to the Limited partners were discontinued. In 1997, $1,000,000
in distributions were made to the limited partners. As the Partnership's
investments continue to be liquidated., and other cash resources obtained,
the Partnership expects to continue such payments in whole or in part based
upon the cash resources.
The accounting records are maintained on a calendar quarter basis with
the fiscal year ending on December 31. Accordingly, quarterly distributions
are 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
<PAGE>
<PAGE 27>
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
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 $234,876,000 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
<PAGE>
<PAGE 28>
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 43,500,000 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.
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.
During 1997, the Partnership made no additional portfolio investments
but made follow-on investments to existing portfolio companies of $3,131,000
and investments in short term government securities of $992,400. Cash
distributions of $1,000 were made to Limited Partners and operations for the
year resulted in a cash deficit of $488,770. Cash was provided from the sale
of stock and from the repayment of principal on investments of $3,773,121 and
$1,000, 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 transactions 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
<PAGE>
<PAGE 29>
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 of 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.
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.
<PAGE>
<PAGE 30>
RESULTS OF OPERATIONS
1997 Compared to 1996
During 1997, the Partnership made no additional portfolio investments
but made follow-on investments of $3,131,000. As a result of prior
investments and these follow-on investments, the Fund's 1997 total income was
a loss of $11,106,609 consisting of the following: (i) interest income of
$745,190; (ii) dividend income of $49,690; (iii) total expenses of
$720,221,(iv) realized losses on investments of $550,959; and (v) unrealized
depreciation on investments of $10,630,309. As a results of converting
debentures to equity investments, and the necessity of reserving interest
accruals, interest income continues to decline. Dividends are down as they
are dependent on the availability of portfolio companies earnings for
distribution. The estimated value of portfolio investments, as determined by
the Managing General Partner, indicate a decrease of $10,630,309 in fair
value during 1997. The Partnership realized a loss of $3,028,448 and $30,000
on the charge of its investments in AmeriShop, Inc. and StarComm Products,
Inc. respectively. These combined losses were reduced to $550,959 after
considering losses on the sale of Coded Communications, Inc. stock of $75,822
and gains on the sale of Industrial Holdings, Inc. stock of $2,583,309.
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 1997 for the quarterly
management fees to the Partnership's investment advisor, the Managing General
Partner, of $411,179 and the Independent General Partners of $65,710. In
addition, the Partnership incurred $91,850 of administrative expenses during
1997. The Partnership reimbursed the Managing General partner $90,476 for
expenses in accordance with the Investment Advisory Agreement.
Distributions in the amount of $1,000,000 were paid to Limited Partners
in 1997.
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 they are dependent on the
availability of portfolio companies earnings for distribution. The estimated
value of portfolio investments, as determined by the Managing General
Partners, 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
<PAGE>
<PAGE 31>
its investment in Prism Group, inc. and US Fax, Inc., respectively. These
combines losses were reduced to $4,054,232 after considering gains on the
sale of Industrial Holdings, Inc. stock. Because of the inherent uncertainty
of valuation, 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 exited, 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
Partners 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.
Item 8. Financial Statements and Supplementary Data.
For the Index to Financial Statements; see "Index to Financial
Statements" on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Part III
Certain information required by Part III is omitted from this Annual
Report on Form 10-K in that the Registrant will file its definitive Proxy
Statement (the "Proxy Statement") for its Annual Meeting of Limited Partners
to be held on May 29, 1998 pursuant to Regulation 14A of the Securities and
Exchange Act of 1934, as amended, not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included in
the Proxy Statement is incorporated herein by reference.
Item 10. Directors and Executive Officers of Registrant
The information required by this Item is incorporated by reference to
the sections entitled "Information Regarding General Partners,""Background
and Experience of Independent General Partners" and "Background and
Experience of Directors and Officers of Renaissance Group" in the Proxy
Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to
the section entitled "Compensation Paid to General Partners" in the Proxy
Statement.
<PAGE>
<PAGE 32>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the sections entitled "Unit Ownership" and "Ownership of Securities of
Managing General Partners" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the section entitled "Certain Relationships and Related Transactions" in the
Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8K
Documents filed as part of this Form 10K
Financial Statements: The financial statements filed as part of this
report are listed in "Index to Financial Statements" on page F-1 hereof.
Financial Schedules:
Not applicable.
Reports on Form 8-K
The Registrant did not file a report on Form 8-K during the fourth
quarter of 1997.
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, 19990, as amended and
restated on September 30, 1991 and March 7, 1994. (1) (2)
(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>
<PAGE 33>
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed
on its behalf by the undersigned, there unto duly authorized.
Date: March 31, 1998
Renaissance Capital Partners II, Ltd. -
(Registrant)
By: Renaissance Capital Group, Inc.
Managing General Partner
By:_____________\s\______________
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 Chairman, President and March 31, 1998
Director of the Managing
General Partner of the
Registrant (Principal
Executive Officer and
Principal Operating Officer)
_______\s\_____
Barbe Butschek Senior Vice President, March 31, 1998
Secretary and Treasurer
Of the Registrant of
The Managing General Partner
Of the Registrant
______\s\_____
Ernest C. Hill Independent General March 31, 1998
Partner of the Registrant
______\s\_______
Thomas W. Pauken Independent General March 31, 1998
Partner of the Registrant
<PAGE>
<PAGE 34>
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Statements of Assets, Liabilities
and Partners' Equity December 31, 1997 and 1996 F-3
Statements of Investments-
December 31, 1997 and 1996 F-4 through F-7
Statements of Operations-
Years ended December 31, 1997, 1996 and 1995 F-8
Statements of Partners' Equity-
Years ended December 31, 1997, 1996 and 1995 F-9
Statements of Cash Flows-
Years ended December 31, 1997, 1996 and 1995 F-10 through F-11
Notes to Financial Statements F-12 through F-17
<PAGE>
<PAGE 35>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Financial Statements
December 31, 1997, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
<PAGE F2>
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, 1997 and 1996, and the related
statements of operations, partners' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. 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 and confirmation of investments owned as
of December 31, 1997 and 1996, by examination of securities held in
safekeeping for the Partnership and correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Renaissance Capital Partners
II, Ltd. as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
February 4, 1998
Dallas, Texas
<PAGE>
<PAGE F3>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Assets, Liabilities and Partners' Equity
December 31, 1997 and 1996
<S> 1997 1996
Assets <C> <C>
Cash and cash equivalents $ 755,755 2,673,170
Short term investments 992,400 -
Investments at fair value,
cost of $22,780,273 in 1997 and
$23,363,737 in 1996 (note 4) 12,829,070 24,042,843
Interest receivable 54,140 114,157
Other asset - 103,252
$ 14,631,365 26,933,422
Liabilities and Partners' Equity
Liabilities:
Accounts payable $ 23,943 57,217
Accounts payable
affiliate (note 3) 120,554 203,362
Total liabilities 144,497 260,579
Partners' equity (note 5):
General partner (197,969) (56,010)
Limited partners
(outstanding units of 43,304.01
in 1997 and 43,434.01 in 1996) 14,684,837 26,728,853
Total partners' equity 14,486,868 26,672,843
Commitments and contingencies
(notes 3 and 4) $14,631,365 $26,933,422
Limited partners' equity per limited
partnership unit $ 339 615
<FN>
<F1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F4>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments
December 31, 1997 and 1996
1997
Interest Due Fair
rate date Cost value
<S> <C> <C> <C> <C>
Eligible Portfolio Investments -
Convertible Debentures and
Notes Receivable
Valued at fair value as
determined by the General
Partners (note 4):
Biodynamics International, Inc.
specialty surgical products:
Convertible debentures 9% 1/11/02 $ 2,074,081 5,135,547
Coded Communications, Inc. -
digital data transmission
equipment manufacturers:
Note receivable 6 03/01/99 311,060 311,060
Consolidated Health Care
Associates, Inc. - physical
therapy rehabilitation
centers (1)
Notes receivable 8 varies 1,096,553 1,096,553
Scientific Software, Inc. -
Software and pipeline
monitoring: (1)
Note receivable 7 04/30/01 1,500,000 1,000,000
Protech, Inc. - telecommunications:
Convertible debenture: 10 09/30/99 67,500 -
5,049,194 7,543,160
</TABLE>
(Continued)
<PAGE>
<PAGE F5>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
1997
Fair
Shares Cost value
<S> <C> <C> <C>
Eligible Portfolio Investments -
Common and Preferred Stock
and Warrants
Valued at fair value as determined
by the General Partners (note 4):
Biodynamics International, Inc. -
specialty surgical products:
Common 547,560 4,654,272 643,383
Warrants to purchase
547,560 shares of
Biodynamics International,
Inc. 547,560 - -
Warrants to purchase
806,396 shares of Biodynamics
International, Inc. 806,396 - -
Coded Communications, Inc. -
digital data transmission
equipment manufacturers:
Series A convertible
preferred 4,445 410,343 289,949
Series B convertible
preferred 46,775 4,244,245 2,998,991
Common 1,014,585 517,025 -
Consolidated Health Care
Associates, Inc. physical
Therapy rehabilitation
Centers: (1)
Series A preferred 1,195,984 1,195,984 -
Series B preferred 500,000 500,000 -
Common 5,159,000 2,500,000 -
Scientific Software, Inc.
Software pipeline
Monitoring:
Common 397,218 305,610 49,652
Total Choice, Inc. - premium
incentive fulfillment company:
Preferred 3,000 300,000 300,000
Common 500 700,000 503,935
<PAGE>
<PAGE F6>
Tricom Corp. - telecommunications
network construction: (1)
Series A convertible preferred 21,536 2,153,600 500,000
Common 555,555 250,000 -
17,731,079 5,285,910
$ 22,780,273 12,829,070
<FN>
<F1>
1 - Interest or dividend payments under the terms of the convertible
debenture, note receivable or preferred stock are delinquent as of December
31, 1997.
</FN>
</TABLE>
<PAGE>
<PAGE F7>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
1996
Interest Due Fair
rate date Cost value
<S> <C> <C> <C> <C>
Eligible Portfolio Investments
Convertible Debentures and Notes
Receivable
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
Notes receivable varies varies 1,728,44 728,448
Biodynamics International, Inc. -
specialty surgical products:
Note receivable 10 12/31/99 374,064 426,598
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
<PAGE>
<PAGE F8>
Tricom Corp. - tele-
Communications 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. - tele-
communications:
Convertible debenture (1) 10 9/30/99 67,500 -
9,290,072 10,903,038
<PAGE>
</TABLE>
<PAGE F9>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Investments, Continued
1996
Fair
Shares Cost Value
<S> <C> <C> <C>
Eligible Portfolio Investments-
Common and Preferred Stock
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
<FN>
<F1>
1 - Interest or dividend payments under the terms of the convertible debenture, note receivable or preferred stock were delinquent
as of December 31, 1996.
<F2>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F10>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Income:
Interest $ 745,190 902,771 1,172,775
Dividends 49,690 34,983 449,816
Commitment, closing and management
fees - 18,000 24,000
794,880 955,754 1,646,591
Expenses (note 3):
General and administrative 309,042 391,163 356,418
Management fees 411,179 559,571 562,063
720,221 950,734 918,481
Operating income 74,659 5,020 728,110
Investment loss:
Net unrealized appreciation
(depreciation) on investments
(note 4) (10,630,309) 1,049,091 1,443,065
Net realized loss on investments (550,959)(4,054,232) 4,996,375)
Investment loss (11,181,268)(3,005,141) (3,553,310)
Net loss $(11,106,609)(3,000,121) (2,825,200)
Limited Partners' share of net loss
$(253.01), $(68.38) and $(64.40)
per unit for 1997, 1996 and
1995, respectively $(10,964,650) (2,970,120) (2,796,948)
General Partner's share of
net loss (141,959) (30,001) (28,252)
Net loss $(11,106,609) (3,000,121) (2,825,200)
<FN>
<F1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F11>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Partners' Equity
Years ended December 31, 1997, 1996 and 1995
General Limited
Partner Partners Total
<S> <C> <C> <C>
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 (26,009) 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 26,672,843
Redemption of 130 limited
partnership units - (79,366) (79,366)
Net loss (141,959) (10,964,650) (11,106,609)
Distributions (note 5) - (1,000,000) (1,000,000)
Balance, December 31, 1997 $(197,969) 14,684,837 14,486,868
<FN>
<F1>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<PAGE F12>
<TABLE>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (11,106,609) (3,000,121) (2,825,200)
Adjustments to reconcile
net loss
to net cash used in
operating activities:
Net unrealized (appreciation)
depreciation on investments 10,630,309 (1,049,091) (1,443,065)
Net realized loss on
investments 550,959 4,054,232 4,996,375
Decrease in other assets 103,252 197,538 -
Increase in interest
receivable (550,599) (351,538) (1,050,368)
Increase (decrease) in accounts
payable (33,274) 57,217 -
Decrease in accounts payable
- affiliate (82,808) (16,127) (142,998)
Net cash used in operating
activities (488,770) (107,890) (465,256)
Cash flows from investing
activities:
Purchase of investments (3,131,000) (605,543) (1,073,132)
Proceeds from sale of
investments 3,773,121 2,267,284 19,210
Repayment of principal on
investments 1,000 651,541 25,000
Investments in short term
investments, net (992,400) - -
Net cash provided by (used in)
investing activities (349,279) 2,313,282 (1,028,922)
Cash flows from financing
activities:
Redemption of limited
partnership units (79,366) - (11,665)
Distributions to limited
partners (1,000,000) (138) (899,862)
Net cash used in financing
activities (1,079,366) (138) (911,527)
Net increase (decrease)
in cash and
cash equivalents (1,917,415) 2,205,254 (2,405,705)
Cash and cash equivalents
at beginning
of the year 2,673,170 467,916 2,873,621
Cash and cash equivalents
at end
of the year $ 755,755 2,673,170 467,916
<FN>
<F1>
Noncash investing transactions:
<F2>
During 1997, 1996 and 1995, $610,616, $932,746 and $838,067, respectively,
of interest receivable was capitalized to convertible debentures, notes
receivable or common stock.
<PAGE>
</FN>
</TABLE>
<PAGE F13>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Statements of Cash Flows, Continued
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 were
accrued as of December 31, 1995.
During 1995, certain investments were exchanged for other
assets totaling $130,790.
See accompanying notes to financial statements.
<PAGE>
<PAGE F14>
RENAISSANCE CAPITAL PARTNERS II, LTD.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(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 43,336.5 during
1997 and 43,434.01 during 1996 and 1995.
(d) ederal Income Taxes
In accordance with Federal income tax regulations, no income taxes are
levied in a partnership, but rather on the individual partners.
<PAGE>
<PAGE F15>
Consequently, no Federal income taxes have been reflected in the accompanying
financial statements.
(e) Short Term Investments
Short term investments represents a government agency security with a
maturity of less than one year. Such investment was valued at quoted market
value.
(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
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
settlements in conformity with generally accepted accounting principles.
Actual results could differ from these estimates.
(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:
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, 1997, 1996 and 1995, $411,179,
$559,571 and $562,063, respectively, for such management fees. For the years
ended December 31, 1997, 1996 and 1995, 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.
<PAGE>
<PAGE F16>
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 $90,476, $176,256 and $290,728 for
the years ended December 31, 1997, 1996 and 1995, 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 1997, 1996 and 1995 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, as defined under the 1940 Act, 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, 1997 and 1996 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:
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.
<PAGE>
<PAGE F17>
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, 1997 and 1996, 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 $12,829,070 and $24,042,843, 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
The financial statements include securities of publicly-held companies
valued at $12,829,070 (88% of total assets) and $24,042,843 (89% of total
assets) as of December 31, 1997 and 1996, respectively, whose values have
been estimated by the Managing General Partner and approved by the
<PAGE>
<PAGE F18>
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, 1997 and 1996, the net unrealized appreciation
(depreciation) associated with investments held by the Partnership was
($9,951,203) and $679,106, 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 annualreturn 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,
1997, 1996 and 1995, 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, the distributions to the limited
partners were discontinued. As the Partnership's investments were liquidated
or other cash resources were obtained, the Partnership reinstated such
payments in whole or in part during 1997 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.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 22,780,273
<INVESTMENTS-AT-VALUE> 12,829,070
<RECEIVABLES> 54,140
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,748,155
<TOTAL-ASSETS> 14,631,365
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 144,497
<TOTAL-LIABILITIES> 144,497
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,983,804
<SHARES-COMMON-STOCK> 43,304
<SHARES-COMMON-PRIOR> 43,434
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 2,650,498
<ACCUMULATED-NET-GAINS> (11,895,235)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9,951,203)
<NET-ASSETS> 14,486,868
<DIVIDEND-INCOME> 49,690
<INTEREST-INCOME> 745,190
<OTHER-INCOME> 0
<EXPENSES-NET> 720,221
<NET-INVESTMENT-INCOME> 74,659
<REALIZED-GAINS-CURRENT> (550,959)
<APPREC-INCREASE-CURRENT> (10,630,309)
<NET-CHANGE-FROM-OPS> (11,106,609)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 312,202
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 687,798
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 130
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (12,302,057)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (11,344,286)
<OVERDISTRIB-NII-PRIOR> 1,725,157
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 411,179
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 720,221
<AVERAGE-NET-ASSETS> 20,579,856
<PER-SHARE-NAV-BEGIN> 615
<PER-SHARE-NII> 1.72
<PER-SHARE-GAIN-APPREC> (257.82)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 19.90
<PER-SHARE-NAV-END> 339
<EXPENSE-RATIO> .035
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
